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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 MARCH 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
COMMISSION FILE NUMBER 0-22247
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 /X/ No / /
----- ---
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 May 8, 1998
----- -----------------------------
Common Stock, $.01 par value 5,456,024 shares
Transitional Small Business Disclosure Format (Check one): Yes / / No /X/
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NUTRITION MEDICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Statements of Operations (Unaudited) For the Three
Months Ended March 31, 1998 and 1997 2
Balance Sheets (Unaudited) As of March 31, 1998
and December 31, 1997 3
Statements of Cash Flows (Unaudited) For the Three
Months Ended March 31, 1998 and 1997 4
Notes to Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUTRITION MEDICAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 1,417,838 $ 760,783
Cost of goods sold 940,960 495,963
----------- ----------
Gross profit 476,878 264,820
Operating expenses:
Selling, general and administrative 431,272 557,798
Research and development 25,710 117,191
----------- ----------
456,982 674,989
----------- ----------
Operating income (loss) 19,896 (410,169)
----------- ----------
Other income (expense):
Interest expense (54,396) (41,408)
Interest income 17,716 48,669
----------- ----------
(36,680) 7,261
Loss from continuing operations (16,784) (402,908)
----------- ----------
Discontinued operations:
Income (loss) from discontinued operations 65,937 (37,113)
----------- ----------
Net income (loss) $ 49,153 $ (440,021)
----------- ----------
----------- ----------
Loss per share data (basic and diluted):
Loss from continuing operations .00 (.08)
Income (loss) from discontinued operations .01 .00
Net income (loss) per share $ .01 $ (.08)
----------- ----------
----------- ----------
Weighted average number of shares outstanding 5,456,024 5,324,524
</TABLE>
See accompanying notes to financial statements
2
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NUTRITION MEDICAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,981,390 $ 1,647,482
Accounts receivable, less allowance
of $31,300 in 1998 and $31,500 in 1997 1,091,419 1,140,020
Inventories 858,272 1,615,165
Prepaid expenses 32,717 51,401
----------- ----------
Total current assets 3,963,798 4,454,068
Equipment and office furniture, net 1,155,786 1,179,200
----------- ----------
Total assets $ 5,119,584 $ 5,633,268
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 456,145 $ 827,007
Accrued lease costs -- 66,600
Accrued payroll 86,612 158,298
Accrued expenses 373,959 482,044
----------- ------------
Total current liabilities 916,716 1,533,949
Subordinated note payable, including
accrued interest 1,843,330 1,788,934
Shareholders' equity:
Undesignated Preferred Stock, $.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none -- --
Common Stock, $.01 par value:
Authorized shares - 20,000,000 shares
Issued and outstanding shares -
5,456,024--1998; 5,456,024--1997 54,560 54,560
Paid-in capital 8,706,444 8,706,444
Accumulated deficit (6,401,473) (6,450,619)
----------- ----------
Total shareholders' equity 2,359,538 2,310,385
----------- ----------
Total liabilities and shareholders'
equity $ 5,119,584 $ 5,633,268
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements
3
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NUTRITION MEDICAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 49,153 $ (440,021)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 75,829 127,783
Changes in operating assets and liabilities:
Accounts receivable 48,601 (258,850)
Inventories 756,893 (129,390)
Prepaid expenses 18,684 (122,416)
Accounts payable (370,862) 163,778
Accrued liabilities (191,968) 50,123
----------- -----------
Net cash provided by (used in) operating activities 386,330 (608,993)
INVESTING ACTIVITIES
Proceeds from sale of short-term investments -- 1,671,596
Purchase of goodwill -- (58,174)
Purchase of equipment and office furniture (52,442) (8,860)
----------- -----------
Net cash provided by (used in) investing activities (52,422) 1,604,562
Increase in cash 333,908 995,569
Cash at beginning of period 1,647,482 2,553,955
----------- -----------
Cash at end of period $ 1,981,390 $ 3,549,524
----------- -----------
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Purchase of a business:
Issuance of note payable -- $ 1,593,750
Issuance of stock -- 3,206,250
</TABLE>
See accompanying notes to financial statements
4
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NUTRITION MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed financial statements as of March 31, 1998 and for the
three-month periods ended March 31, 1998 and 1997 included in this Form
10-QSB have been prepared by Nutrition Medical, Inc. (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
Annual Report on Form 10-KSB for the year ended December 31, 1997.
The condensed financial statements presented herein as of March 31,
1998 and for the three-month periods ended March 31, 1998 and 1997 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. Discontinued Operations
The Company announced in January 1998 its intention to discontinue
its private label adult nutrition supplement business and signed an agreement
(the "Agrilink Agreement") to transfer the business to Agrilink Foods, Inc.
("Agrilink") effective May 1, 1998. Pursuant to the terms of the Agrilink
Agreement, the Company transferred its private label supplement business
customer list and unused labels to Agrilink in return for cash plus royalty
payments on adult nutrition supplement products sold to such customers for
the next two years. This segment of the Company's business, active since late
1995, generated revenues of approximately $453,000 in the first quarter of
1997 and $773,000 for the same period of 1998. In the three-month period
ended March 31, 1997, the operating losses from the discontinued operations
were approximately $37,000 compared to a gain of $66,000 for the same period
of 1998.
5
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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 marketed as
cost-effec tive alternatives to equivalent national brand products. Initial
development focused on formulas for the critical care nutrition market. These
products are sold to hospitals and other health care facilities to feed
critically ill patients who cannot consume adequate nutrients orally and
consequently require specialized feeding via tubes into the intestinal tract.
As of March 31, 1998, the Company had developed nine such products. Critical
care nutrition products are generally purchased by a relatively large
customer base, which typically places orders in relatively small quantities.
On January 13, 1997, the Company purchased a line of products from
Elan Pharma, Inc. ("Elan") consisting of intact protein formulas, enteral
pumps and the related disposable delivery hardware (the "Elan Acquired
Products"). These products appeal to the larger long-term care segment of
the clinical nutrition market, while providing a wider range of products that
may be offered to hospitals and home health care facilities.
In the fourth quarter of 1997, the Company completed a review of
cash flows expected to be derived from the Elan Acquired Products. Based
upon this review and analysis, the Company
6
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concluded that the intangible asset received in the acquisition was impaired
and, as a result, took a charge of $1.5 million to operations in 1997,
thereby reducing goodwill from the acquisition to zero. As a result, no
goodwill amortization charges were incurred during the first quarter of 1998.
In January 1998 the Company announced that it was discontinuing its
efforts to develop and market a generic national brand equivalent infant
formula. In 1997, the Company incurred an estimated $300,000 in sales and
marketing related costs and an equivalent amount in research and development
costs related to this project. As a result, research and development costs
are lower in the first quarter of 1998, compared to the same period of 1997.
The Company also an nounced, in January 1998, its intention to discontinue
its private label adult nutrition supplement business. The Company has taken
these actions to allow it to focus on its core clinical nutrition business.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NET SALES. Net sales from continuing operations for the three
months ended March 31, 1998 totaled $1,417,838 compared to $760,783 for the
same period of 1997, an increase of 86 percent. The growth in sales is the
result of increases in sales of products offered in both periods, as well as
new products introduced in mid-January 1997 as a result of the acquisition
from Elan. This growth is further attributable to the addition of new
customers, growth in orders from existing customers and a greater number of
products available for sale in the 1998 period.
GROSS PROFIT. Gross profit from continuing operations for the three
months ended March, 31, 1998 increased to $476,878 compared to $264,820 for
the same period of 1997. As a percentage of sales, however, gross profit
decreased from 35 percent in 1997 to 34 percent in 1998. The decrease in
gross profit as a percentage of sales is primarily the result of change
within the product mix due to the Elan Acquired Products, which have a lower
profit margin than the critical care formulas.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses from continuing operations for the three months ended
March 31, 1998 decreased 23 percent to $431,272 from $557,798 in the same
period of 1997. The decrease in sales and marketing expense is primarily the
result of the discon tinuation of the development of infant formula. In
addition, in 1998 there was no amortization charges associated with goodwill
resulting from the acquisition from Elan as the entire outstanding balance of
goodwill was charged to opera tions in December 1997. Expressed as a
percentage of net sales, selling, general and administrative expenses were 30
percent and 73 percent for the three months ended March 31, 1998 and 1997,
respectively. In addition to the reasons for the decline in costs discussed
above, the percentage decrease is the result of economies of scale arising
from the relatively fixed nature of certain of the Company's selling, general
and administrative expenses, which have increased slowly in comparison to the
increase in overall sales.
7
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RESEARCH AND DEVELOPMENT. Research and development costs from
continuing operations for the three-month period ended March 31, 1998
decreased 78 percent to $25,710 from $117,191 incurred in same period of
1997. The decrease is primarily the result of the discontinuation of the
development of infant formula in 1998. Research and development costs are
expected to remain relatively flat during the remainder of 1998 with
potential increases toward the end of the year as development activities in
the core critical care nutrition business increase.
OTHER EXPENSES. Other expenses for the three-month period ended
March 31, 1998 increased to $36,680 from an income of $7,261 for the same
period of 1997. The Company had a higher balance invested in short term
investments in 1997 resulting from proceeds received in its 1996 public stock
offering. In addi tion, the note payable to Elan was outstanding for the
entire quarter in 1998 resulting in higher interest expense for the period.
DISCONTINUED OPERATIONS
As discussed above, the Company transferred its private label adult
nutrition supplement business to Agrilink Foods, Inc. effective May 1, 1998.
This segment of the Company's business, active since late 1995, generated
revenues of approximately $453,000 in the first quarter of 1997 and $773,000
for the same period of 1998. In the three-month period ended March 31, 1997
the operating losses from the discontinued operations were approximately
$37,000 compared to a gain of $66,000 for the same period of 1998.
YEAR 2000 ISSUE
The Company has initiated an internal review to determine if any
computer programs used by the Company have time-sensitive software that
recognize a date using "00" as the year 1900 rather than the year 2000 ("Year
2000 Issue"). If the review determines that some computer programs have such
time-sensitive program exposures, the Company will take steps to modify its
programs to address these potential problems. Since the Company utilizes
third party contract manufacturers and current generation off-the-shelf
software for its contact management and accounting systems, the Company
expects its exposure risk to be minimal.
The Company expects to initiate formal communications with all of
its signifi cant suppliers by mid-1998 to determine the extent to which these
suppliers are vulnerable to the Year 2000 Issue. There is no guarantee that
the systems of other companies on which the Company relies for manufacturing
and distributing its products will be converted in a timely manner. Delays
in necessary conver sions by these suppliers could have an adverse effect on
the operations of the Company and its ability to continue to service the
needs of its customers.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has incurred net losses and negative
cash flows from operations. The Company raised capital used in operations
through a public offering of its common stock in 1996 in which the Company
sold 1,437,500 shares of its common stock
8
<PAGE>
at $3.50 per share. Net proceeds to the Company, after deducting all
offering costs, totaled $4.24 million. Unused funds are invested in U.S.
Treasury backed funds with maturities ranging under three months. Prior to
the initial public offering, the Company had raised approximately $2.8
million through the private placement of its common stock.
The Company's net cash provided by operations for the three-month
period ended March 31, 1998, totaled $386,000, compared with cash used in
operations of $609,000 for the same period of 1997. Cash and cash
equivalents as of March 31, 1998 totaled $1,981,000. Accounts receivable
decreased during the three-month period ended March 31, 1998 by approximately
$48,600 due to improvement in collections. Inventories decreased by
approximately $757,000, offset by a decrease of approximately $371,000 in
accounts payable. The inventory and accounts payable decrease are
attributable to the discontinuation of the private label adult nutrition
supplement business announced in January of 1998, and the disposition, in the
ordinary course of business, of the related inventory.
The Company made additions to equipment in 1998, primarily for the
place ment of leased pumps with customers who purchase tubing and
accessories. Capital expenditures over the balance of 1998 is expected to be
stable and not exceed, on a quarterly basis, amounts spent in the first
quarter.
As discussed in Part II, Item 1, the Company was named as a
defendant in two patent infringement lawsuits. It is not possible at this
time to predict the outcome of these lawsuits, including whether the Company
will have to cease selling the products in question, or to estimate the
amount or range of poten tial loss, if any.
The Company expects that the existing cash balances will be
sufficient to fund operations of the Company through 1998. 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 develop ment activities. There can be no assurance that
the Company will not be required to raise additional capital before the end
of 1998, or any time thereafter, or that such capital will be available on
acceptable terms, or at all.
9
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1995, the Company was named as a defendant in a patent
infringe ment lawsuit brought by Novartis Nutrition, formerly Sandoz
Nutrition Corpora tion, in the United States District Court for the District
of Minnesota. The complaint asserts that one of the Company's products,
L-Emental-TM- Plus, infringes on two patents held by Novartis 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 responded with a counter claim seeking a declaration of invalidity,
unenforceability, non-infringement and inventorship of the subject patents. A
court order stayed the litigation pending a reexamination by the United
States Patent and Trademark Office of both patents. On August 13, 1997, the
Company received notification that the United States Patent and Trademark
Office will issue the two patents under review. Although the scope of the
patents was narrowed, the litigation, which was stayed pending this
determination, has resumed, and the Company intends to continue to vigorously
defend against the claim. Sales of L-Emental Plus constituted $298,000, or 40
percent, $497,000, or 41 percent, and $431,000, or 10.5 percent of the
Company's net sales in 1995, 1996 and 1997, respectively. Net sales of
L-Emental Plus in the first quarter of 1998 were $52,000. 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.
In November 1997, the Company was named as a defendant in a patent
in fringement lawsuit brought by Nestl Clinical Nutrition ("Nestl") in the
United States District Court for the Northern District of Illinois. The suit
asserts that one of the Company's products, Pro-Peptide-TM- For Kids,
infringes on a patent held by Nestle 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. The Company intends to vigorously defend
against the claim. Sales of Pro-Peptide For Kids, introduced in May 1997,
constituted $134,000, or three percent, of the Company's net sales in 1997.
In the first quarter of 1998, sales of Pro-Peptide For Kids were $53,000. It
is not possible at this time to predict the outcome of the lawsuit, including
whether the Company will have to cease selling Pro-Peptide For Kids, or to
estimate the amount or range of potential loss, if any. To date, no
injunction has been issued.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
REPORT OF SALES OF SECURITIES AND USE OF PROCEEDS THEREFROM
The Company had an initial public offering (Securities Act
Registration number 333-9999) that commenced September 26, 1996 and
terminated with the sale of 1,437,500 shares of
10
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its common stock, par value $.01, at a price of $3.50 per share. Total net
proceeds from the offering were $4,237,000. Such proceeds are being used as
follows:
USE OF PROCEEDS*
<TABLE>
<S> <C>
Purchase and installation of equipment $ 355,000
Research and Development 479,000
Sales and Marketing 1,521,000
Temporary Investments (U.S. Treasury Bills) 1,800,000
Working Capital 82,000
-----------
Total $ 4,237,000
-----------
</TABLE>
*None of such payments were made to the Company's directors and officers or
their respective associates, beneficial owners of ten percent or more of the
Company's common stock or affiliates of the Company.
ITEM 5. OTHER INFORMATION
The Company announced in January 1998 its intention to discontinue
its private label adult nutrition supplement business and signed an agreement
(the "Agrilink Agreement") to transfer the business to Agrilink Foods, Inc.
("Agrilink") effective May 1, 1998. Pursuant to the terms of the Agrilink
Agreement, the Company transferred its private label supplement business
customer list and unused labels to Agrilink in return for cash plus royalty
payments on adult nutrition supplement products sold to such customers for
the next two years.
On April 1, 1998 the Company received notice from the Nasdaq Stock
Market (SM) that the Company's common stock are not in compliance with the
new minimum bid price requirement of $1.00 per share, pursuant to NASD
Marketplace Rule 4310 (c) (04), which became effective February 23, 1998.
The Company will be provided 90 calendar days, which period expires July 1,
1998, to regain compli ance with this standard. The Company may regain
compliance if its common stock trades at or above the minimum requirement for
at least 10 consecutive trade days. If the Company's common stock does not
regain compliance within the 90 day period, it is likely that the Company's
common stock will be delisted from the Nasdaq Stock Market (SM). Additional
information regarding such a delisting may be found in Exhibit 99.1, included
with this Quarterly Report on Form 10-QSB, under the heading "Limitations On
Broker-Dealer Sales Of Company Common Stock; Applicability Of 'Penny Stock'
Rules; No Assurance Of Continued Quotation On The Nasdaq Stock Market'.
Effective May 1, 1998, Kenneth L. Evenstad, a director of the
Company since May 1995, resigned his position on the Company's Board of
Directors.
11
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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.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Asset Purchase Agreement by and between the Company and Agrilink
Foods, Inc. (incorporated by reference to Exhibit 2.2 of the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997).
27 Financial Data Schedule
99.1 Cautionary Statement
</TABLE>
b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended
March 31, 1998.
12
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NUTRITION MEDICAL, INC.
Dated: May 13, 1998 By: /s/ Anwar H. Bhimani
-----------------------
Anwar H. Bhimani
Chief Financial Officer
13
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Asset Purchase Agreement by and between the Company and Agrilink
Foods, Inc. (incorporated by reference to Exhibit 2.2 of the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1997).
27 Financial Data Schedule
99.1 Cautionary Statement
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1981390
<SECURITIES> 0
<RECEIVABLES> 1121619
<ALLOWANCES> 30200
<INVENTORY> 858272
<CURRENT-ASSETS> 3963798
<PP&E> 1613985
<DEPRECIATION> 458199
<TOTAL-ASSETS> 5119584
<CURRENT-LIABILITIES> 916716
<BONDS> 1843330
0
0
<COMMON> 54560
<OTHER-SE> 2359538
<TOTAL-LIABILITY-AND-EQUITY> 5119584
<SALES> 1417838
<TOTAL-REVENUES> 1417838
<CGS> 940960
<TOTAL-COSTS> 456982
<OTHER-EXPENSES> 36680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54396
<INCOME-PRETAX> (16784)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16784)
<DISCONTINUED> 65937
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49153
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</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
quality and 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 or quality 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.
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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 historically 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 have resulted in indeterminable lost
sales of the Company's competing products, and other competitors may adopt
the same strategy. The market for the clinical nutrition products acquired
from Elan Pharma, Inc. ("Elan") in January 1997 is expected to be extremely
price competitive and often involves the need to offer package pricing of
products. 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.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS
The Company believes that its future operating results may be subject to
substantial quarterly fluctuations because its large OEM pump customer may
order large quantities at irregular intervals. In addition, the gross profit
as a percentage of sales on the sale of products acquired from Elan
substantially is less than the gross profit percentage on the Company's
critical care and clinical 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.
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CUSTOMER CONCENTRATION
Although the Company's experience with its customer base is limited, the
Company may incur concentration issues with large distributors and OEM
customers for its clinical nutrition products, including the products
acquired from Elan. There can be no assurance that orders from such customers
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 1998, under certain
circumstances the Company may require substantial additional funds before the
end of 1998 to meet its working capital requirements in connection with the
introduction of new products. In order to meet this possible need, and to
meet possible needs after 1998, 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 existing
shareholders, and 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 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.
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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 is currently subject to two suits 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.
COMPETITION
Competition in the clinical 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.
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 and medical device 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.
<PAGE>
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.
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. With the addition of the products acquired from
Elan, the Company will be subject to FDA regulations regarding Class 2
medical devices. These regulations involve more stringent tracking, testing
and documentation standards. 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 44% of the Company's 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
<PAGE>
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 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.
LIMITATIONS ON BROKER-DEALER SALES OF COMPANY COMMON STOCK; APPLICABILITY OF
"PENNY STOCK" RULES; NO ASSURANCE OF CONTINUED QUOTATION ON THE NASDAQ STOCK
MARKET.
Federal regulations promulgated under the Exchange Act regulate the
trading of so-called "penny stocks" (the "Penny Stock Rules"), which are
generally defined as any security not listed on a national securities
exchange or The Nasdaq Stock Market ("Nasdaq"), priced at less than $5.00 per
share and offered by an issuer with limited net tangible assets and revenues.
In addition, equity securities listed on Nasdaq which are priced at less than
$5.00 per share are deemed penny stocks for the limited purpose of Section
15(b)(6) of the Exchange Act. Therefore, if, during the time in which the
Common Stock is quoted on the Nasdaq Small Cap Market, the Common Stock is
priced below $5.00 per share, trading of the Common Stock will be subject to
the provisions of Section 15(b)(6) of the Exchange Act, which make it
unlawful for any broker-dealer to participate in a distribution of any penny
stock without the consent of the Commission if, in the exercise of reasonable
care, the broker-dealer is aware of or should have been aware of the
participation of a previously sanctioned person. In such event, it may be
more difficult for broker-dealers to sell the Common Stock and purchasers of
shares of Common Stock may experience difficulty in selling such shares in
the future in secondary trading markets.
The Company's Common Stock is currently listed on the Nasdaq Small Cap
Market. On August 22, 1997, the Securities and Exchange Commission (the
"SEC") approved a number of proposed changes to the Nasdaq listing
requirements to be effective February 22, 1998. Common and preferred stock
must have a minimum bid price of $1. All companies listed on the Nasdaq Small
Cap Market must meet specific corporate governance requirements, including
distributing annual and interim reports, maintaining a minimum of two
independent directors, holding an annual shareholder
<PAGE>
meeting, meeting quorum requirements, soliciting proxies, reviewing conflicts
of interest, obtaining shareholder approval for certain corporate actions and
having certain shareholder voting rights. A company listed on the Nasdaq
SmallCap Market must also have (i) either net tangible assets of over $2
million, a market capitalization of $35 million or net income of $500,000,
(ii) a public float of 500,000 shares and (iii) the market value of such
public float must be over $4 million. The Company must have a minimum of 300
round lot shareholders and there must be at least two market makers in the
Company's Common Stock. Since January 28, 1998, the Company's Common Stock
has had a closing bid price below $1. As of December 31, 1997, the Company's
net tangible assets were above $2 million. Should the Company's Common Stock
remain below $1 or should the Company incur losses in excess of $310,000 in
the first two quarters of 1998, the Company would no longer be in compliance
with Nasdaq requirements. Failure by the Company to be in compliance with
the requirements or to file a plan acceptable to Nasdaq for meeting such
requirements may result in the delisting of the Company's Common Stock from
the Nasdaq Small Cap Market. Should the Common Stock be suspended from
trading privileges as a result of the Company's failure to comply with
applicable requirements, the Company, prior to re-inclusion, must comply with
the requirements prior to continued listing. However, should the Common Stock
be terminated from trading privileges on the Nasdaq Small Cap Market, the
Company, prior to re-inclusion, must comply with the applicable requirements
for initial inclusion on the Nasdaq Small Cap Market, which are more
stringent than the requirements for continued listing. There can be no
assurance that the Common Stock will continue to be listed on the Nasdaq
Small Cap Market.
In the event that the Common Stock is delisted from the Nasdaq Small Cap
Market and the Company fails other relevant criteria, trading, if any, in
shares of Common Stock would be subject to the full range of the Penny Stock
Rules. Under Exchange Act Rule 15g-8, broker-dealers must take certain steps
prior to selling a penny stock, which steps include: (i) obtaining financial
and investment information from the investor; (ii) obtaining a written
suitability questionnaire and purchase agreement signed by the investor;
(iii) providing the investor a written identification of the shares being
offered and in what quantity; and (iv) deliver to the investor a written
statement setting forth the basis on which the broker or dealer approved the
investor's account for the transaction. If the Penny Stock Rules are not
followed by a broker-dealer, the investor has no obligation to purchase the
shares. Accordingly, delisting from the Nasdaq Small Cap Market and the
application of the comprehensive Penny Stock Rules may make it more difficult
for broker-dealers to sell the Common Stock, purchasers of shares of Common
Stock may have difficulty in selling such shares in the future in secondary
trading markets and the per share price of such stock would likely be greatly
reduced.
