<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1997 Commission File Number: 0-22247
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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) (Zip Code)
(612) 551-9595
(Issuer's telephone number)
Securities registered under Section 12 (b) of the Exchange Act: NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
(title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No __
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. Yes ___ No _X_
State issuer's revenues for its most recent fiscal year: $4,104,601
On March 24, 1998, and based on the average bid and asked prices as of that
date, the aggregate market value of the voting stock held by non-affiliates
of the Issuer was $2,864,115.
The number of shares outstanding of the registrant's common stock, $.01 par
value, as of March 19, 1998 was 5,456,024 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Shareholders (which will be filed with the Commission before April
30, 1998) (the "Proxy Statement") are incorporated by reference in Part III.
Transitional Small Business Disclosure Format: Yes __ No _X_
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Nutrition Medical, Inc., a Minnesota corporation formed in July 1993
(the "Company" or "Registrant"), develops and sells generic critical care and
disease specific nutrition formulas, as well as related enteral feeding
pumps, delivery sets and feeding tubes for the hospital, nursing home and
home health care markets. The Company's critical care and disease specific
nutrition products are generally manufactured using ingredients, formulas and
processes comparable to those of national brand products. As of December 31,
1997, the Company marketed eight critical care and disease specific nutrition
products, four intact protein formulas and more than thirty related delivery
devices. The Company intends to expand these product lines through internal
development activities.
On January 13, 1997, the Company acquired certain assets from Elan
Pharma, Inc. ("Elan"), a U.S. subsidiary of Ireland-based Elan Corporation,
plc. The products acquired included inventory and fixed assets relating to
the production of the enteral (tube feeding) products (the "Elan Acquired
Products") of Elan, as well as exclusive rights to manufacture and market the
Elan Acquired Products. In exchange for the Elan Acquired Products and
related assets, the Company issued Elan a note in the amount of $3,000,000
(due in seven years along with interest accruing at three percent per annum)
and 855,000 shares of the Company's common stock. Total value of the
transaction, after taking into consideration market interest rates on the
note payable, was approximately $3,428,936.
In September 1997, the Company announced the signing of a distribution
agreement with Nellson Nutraceutical, an Irwindale, California-based
manufacturer of nutritional products. Under the terms of the agreement, the
Company is the exclusive distributor of Nellson's Suppla-Cal-TM- and Hi-Cal
VM-TM- supplemental nutrition bars. The Company intends to continue to
market these products through existing channels.
RECENT DEVELOPMENTS.
During 1996 and 1997, the Company incurred significant expenses related
to the development of a generic infant formula. In January 1998, the Company
announced its decision to suspend further independent development efforts
associated with this project. The Company stated that it plans to seek a
corporate partner or buyer to complete its infant formula development
project. In the absence of such a partner, the Company will suspend further
investment on the project.
Also in January 1998, the Company announced its intention to discontinue
its private label adult nutrition supplement business, which was introduced
in late 1995. Accordingly, the private label adult nutrition business has
been classified as discontinued operation in the Financial Statements
included in this Report. In March 1998, the Company entered into an
agreement with Agrilink Foods, Inc., a New York corporation, pursuant to
which the Company will transfer its private label adult nutrition supplement
business to Agrilink effective May 1, 1998. As part of the agreement, the
Company will receive cash for various marketing and supply-related items and
royalty payments for two years on the sale of these products.
The Company has taken these actions to allow it to focus on its core
clinical nutrition business.
PRODUCTS
Critical care nutrition formulas are used by hospitals and other health
care providers to feed critically ill patients who cannot consume adequate
nutrients orally and consequently require specialized feeding via tubes into
the intestinal tract. The use of critical care nutrition formulas often
continues at home or in a nursing home after a patient is discharged from the
hospital.
The Company's strategy has been to focus on the development and sale of
a core line of generic critical care formulas for patients who are being
treated in intensive care units. Certain of these products contain unique
ingredients or proportions of ingredients to meet the metabolic requirements
of specific patient populations. The Company markets its critical care and
disease specific nutrition products to hospitals and other health care
providers as less expensive, generic alternatives to the established products
offered by major manufacturers. The Company intends to continue developing an
expanded line of critical care nutrition products and to establish itself as
a major supplier of such products in generic form.
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The Elan Acquired Products combined with the Company's existing critical
care and disease specific nutrition formulas provide the capability to market
a full line of formulas and the pumps and disposable administration hardware
used in formula delivery.
BACKGROUND
Critically ill or severely injured patients are often unlikely to
consume adequate nutrients, which can exacerbate a patient's condition, cause
complications and prolong hospital stays. Total enteral nutrition ("TEN")
delivers, often via specialized pumps, formulations of protein,
carbohydrates, fat and vitamins via feeding tubes directly into the patient's
intestinal tract. Unless nearly all of the intestinal tract is missing or
nonfunctional, most patients can be fed via this enteral route. One
application of TEN is in the treatment of critical care patients. The largest
single category of TEN nutrition products used in critical care are products
that contain unique protein sources referred to as "elemental". Unlike
long-term care formulas that contain "whole protein", which must be digested
before it can be absorbed and utilized by the patient, elemental formulas
contain predigested protein that offers immediately available nutrition
because little or no digestion is required. With one exception, all of the
Company's critical care nutrition products are elemental formulas.
The critical care nutrition formula market is currently dominated by a
small number of established manufacturers of national brands, each of which
focuses on particular segments of the market. These manufacturers include
Ross Laboratories, a division of Abbott Laboratories ("Ross Laboratories"),
Novartis, formerly known as Sandoz Corp. ("Novartis"), Nestle Clinical
Nutrition, formerly known as Clintec Nutrition Co. ("Nestle") and McGaw, Inc.
("McGaw"). The Company believes these manufacturers sell their formulas at
substantial profit margins. Meanwhile, the United States health care system
has been under pressure to control costs. As a result, the medical community
and consumers have come to accept lower priced generic drugs and private
label over-the-counter products, and the market for these products has grown
rapidly. The Company believes it is the only company that has addressed the
critical care medical nutrition market with lower cost, generic alternatives
to established brands. The Company generally sells its generic critical care
nutrition formulas under its own label.
The Elan Acquired Products provide the Company with whole-protein
formulas, as well as the pumps and disposable hardware (e.g. feeding tubes
and containers) used to administer formulas. The Elan Acquired Products are
marketed under the Company's label and are generally priced below
competitor's brands.
PRODUCTS
The Company currently has nine critical care and disease specific
nutrition products. With the exception of Gluco-Pro-TM-, each contains
elemental protein sources, which contain predigested protein that offers
immediately available nutrition. In February 1998, the Company launched its
first proprietary critical care formula, Glutasorb-TM-. This formula is the
first high glutamine, ready-to-use elemental diet available in the United
States and, as such, has no specific competing branded product. The
following chart provides information regarding each of the Company's critical
care nutrition products.
<TABLE>
<CAPTION>
PRODUCT NAME DATE INTRODUCED TREATMENT CATEGORY COMPETING BRANDED PRODUCT MANUFACTURER
- ------------ --------------- ------------------ ------------------------- ------------
<S> <C> <C> <C> <C>
L-Emental-TM- May 1994 ICU nutrition Vivonex-Registered Trademark- Novartis
L-Emental-TM- Plus January 1995 ICU nutrition Vivonex Plus-Registered Trademark- Novartis
L-Emental-TM- Hepatic June 1996 Liver Failure Hepatic Aid II-Registered Trademark- McGaw
L-Emental-TM- Pediatric June 1996 Children Vivonex Pediatric-Registered Novartis
Trademark-
Pro-Peptide-TM- November 1994 ICU nutrition Peptamen-Registered Trademark- Nestle
Pro-Peptide-TM- VHN November 1995 Trauma Peptamen VHP-Registered Trademark- Nestle
Pro-Peptide-TM- For Kids May 1997 Children Peptamen Jr.-TM- Nestle
Gluco-Pro-TM- June 1997 Diabetes Choice dm -TM- Mead Johnson
Glutasorb-TM- February 1998 Trauma/ICU nutrition Proprietary N/A
</TABLE>
The Company generally establishes target prices for its critical
care and disease specific nutrition products that are approximately twenty
percent to thirty percent less than the selling prices of competing
established brand name products. At least one competitor in the critical care
nutrition products market has lowered prices to various customers of its
branded products to levels that offset all or part of the price advantage of
the Company's three competitive products.
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The Elan Acquired Products provide the Company with approximately forty
additional products consisting of special intact protein formulas, disposable
administration hardware and the related delivery pumps. The Company has
plans to discontinue approximately twenty of these products, based on market
conditions and product acceptance. In 1997 these products represented an
insignificant portion of the net sales. In addition to the delivery of
critical care formulas, the Elan Acquired products appeal to the larger
long-term care segment of the clinical nutrition market. The pricing strategy
involves special contractual pricing with distributors and package pricing
for large end users. In addition, the enteral feeding delivery pump is
offered as an OEM product to several medical supply companies which directly
compete with the Company.
RESEARCH AND DEVELOPMENT
The product development process begins with a determination by the
Company's management that a market opportunity exists with respect to a
particular product. The Company then contracts with an outside laboratory to
analyze the ingredients of the competitor's product and to formulate the
Company's version of the product. Certain members of the Company's scientific
advisory board consult with the contractors during the development process.
Research and development costs for continuing operations for 1996 and 1997
were $627,000 and $245,000, respectively.
To date, the Company has only developed products for which the Company
believes that no patent has been issued, and expects to continue this
development strategy. The Company has selectively engaged legal counsel to
conduct formal searches for intellectual property rights with respect to its
products in development, in addition to relying on the industry knowledge of
its employees and consultants.
The Company's critical care, disease specific and intact protein
nutrition formulas are not required to undergo clinical testing or obtain FDA
approval.
MANUFACTURING AND DISTRIBUTION
All of the Company's products are manufactured on a contract basis by
third parties. These contract manufacturers are subject to Food and Drug
Administration ("FDA") regulatory requirements for food and medical food
production, and the Company's products undergo quality control testing during
and after the production process. By using third party manufacturers, the
Company is better able to introduce new products that require differing
manufacturing processes. Nevertheless, reliance on contract manufacturers
involves various risks, including those set forth under the heading
"Dependence on Contract Manufacturers" in Exhibit 99.1 hereto.
Critical care nutrition products are shipped from the manufacturer to
the Company's distribution warehouse in Minneapolis, Minnesota. Home
consumers of critical care and nutrition products typically acquire the
Company's products through health care providers.
The Elan Acquired Products are distributed through several distributors
or shipped from the Company's Minneapolis warehouse. The Company expects to
add additional distributors and direct customers as it integrates these
products into its existing customer base and expands marketing efforts.
MARKETING
The Company employs its own inside sales personnel to market its
critical care nutrition products. These sales personnel target, via
telephone, the dietary and pharmaceutical departments of hospitals and
nursing homes. This approach reduces the Company's selling costs by
eliminating travel expenses and allowing its sales personnel to contact and
service a larger number of potential and actual customers. The Company also
uses direct mail and trade shows to further promote its products. In
addition, the Veteran's Administration and state and county hospitals have
annual bids for clinical nutrition products, and the Company actively
participates in these bids.
The Company markets the Elan Acquired Products through distributors and
through independent outside salespeople who visit customer sites to promote
awareness and provide training and support as required. In addition, the
Company utilizes its existing inside sales force to target customers of these
products, as well as potential purchasers of the Suppla-Cal-TM- and Hi-Cal
VM-TM- bars.
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Pump manufacturers frequently supply enteral feeding pumps to customers
at no charge in return for the opportunity to supply, on an exclusive basis,
the related formulas and administration hardware. This strategy was employed
by Elan in the marketing of the Elan Acquired Products. The Company employed
this strategy in 1997 and expects to continue this strategy in the future to
attract new customers.
COMPETITION
Competition in the critical care nutrition products market primarily
consists of three companies that have established brands in the specialty
markets in which the Company has chosen to compete. These companies,
Novartis, Nestle and McGaw, each market their specialty products through
sales personnel who generally use traditional in-person sales calls rather
than the telemarketing approach historically employed by the Company.
Although Ross Laboratories is the dominant manufacturer in the United States
adult TEN market (which includes the critical care nutrition market), Ross
Laboratories has focused on whole protein products that do not compete
directly with the Company's critical care elemental protein formulas, but
rather with several formulas acquired from Elan. 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.
Competitors in the enteral pump and delivery device market include
Nestle and Novartis. However, the market leaders are Ross Laboratories and
Sherwood Medical, which together control approximately 75 percent of the pump
and disposables market.
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 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.
In its pump and delivery device product categories, the Company is also
subject to FDA regulations regarding Class II medical devices. These
regulations involve more stringent tracking, testing and documentation
standards. Failure to comply with FDA 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.
EMPLOYEES
The Company currently has 22 full-time employees, engaged in sales,
marketing, quality control and general corporate and administrative
functions. The Company does not have an agreement with any labor union and
the Company believes its relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters are located at 9850 51st Avenue
North, Minneapolis, Minnesota, 55442, in an office/warehouse complex
consisting of approximately 9,500 square feet. The Company's current lease
expires on November 30, 2001. Monthly rent, which includes the Company's pro
rata share of taxes, utilities and common area charges, is $6,900. In
addition, the Company rents, on an as-needed basis, public warehouse space to
store inventory. The Company considers the facilities adequate and suitable
for the purposes they currently serve. Future growth, however, may
necessitate additional office space.
TEM 3. LEGAL PROCEEDINGS.
In August 1995, the Company was named as a defendant in a patent
infringement lawsuit brought by Novartis, formerly Sandoz, 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
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patents were issued subsequent to the Company's introduction of L-Emental
Plus. The Company responded with a counterclaim 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
Office will issue the two patents under review. Although the scope of the
patents was narrowed, the Company expects that the litigation, which was
stayed pending this determination, will resume, 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. 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
infringement lawsuit brought by Nestle 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. 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 4. SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1997, no matter was submitted to a
vote of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has traded on the Nasdaq Small Cap Market
System under the symbol NMED since September 26, 1996. As of March 25, 1998,
there were approximately 69 holders of record of the Company's common stock.
The quotations shown below represent inter-dealer sale prices as reported by
the Nasdaq Small Cap Market System, without retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
1997 High Low
---------------------------- ----- -----
<S> <C> <C>
First Quarter 4 1/4 3 3/8
Second Quarter 3 3/4 2
Third Quarter 3 3/8 2
Fourth Quarter 2 5/8 1
<CAPTION>
1996 High Low
---------------------------- ----- -----
<S> <C> <C>
Third Quarter (since the
September 26, 1996 initial 4 1/4 3 1/2
public offering)
Fourth Quarter 4 5/8 3 5/8
</TABLE>
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to declare any dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain any earnings for
use in the operation and expansion of its business.
In Exchange for the Elan Acquired Products and related assets acquired
from Elan on January 13, 1997, the Company issued Elan a note in the amount
of $3,000,000 (due in seven years along with interest accruing at three
percent per annum) and 855,000 shares of the Company's common stock. The
issuance of shares of common stock did not involve a public offering and
therefore was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, (the "Securities Act"). Elan
subsequently transferred such shares to Elan International Services, Ltd., a
corporation owned and controlled by Elan's parent Elan Corporation, PLC.
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REPORT OF SALES OF SECURITIES AND USE OF PROCEEDS THEREFROM
The Company had an initial public offering that commenced September 26,
1996 and terminated with the sale of 1,437,500 shares of its common stock,
par value $.01, at a price of $3.50 per share. All shares registered with
the Securities and Exchange Commission in connection with the Company's
initial public offering were sold. The managing underwriter for the public
offering was Miller, Johnson & Kuehn, Incorporated. Total net proceeds from
the offering were as follows:
<TABLE>
<S> <C>
Gross Proceeds $ 5,031,250
Less:
Underwriting discounts & commissions 503,125
Expenses paid to or for underwriters 93,591
Other expenses 197,534
-----------
Total Expenses* 794,250
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Net proceeds from offering $ 4,237,000
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USE OF PROCEEDS*
Purchase and installation of equipment $ 303,000
Research and Development 479,000
Sales and Marketing 1,319,000
Temporary Investments (U.S. Treasury Bills) 1,500,000
Working Capital 636,000
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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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act, and Section 21E of
the Securities Exchange Act of 1934, as amended. When used in this Form
10-KSB 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-KSB.
GENERAL
The Company develops and sells nutrition products marketed as
cost-effective, generic alternatives to equivalent national brand products.
Initial development focused on branded generic 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 December 31, 1997, the Company had developed
eight such products. Critical care nutrition products are generally purchased
by a relatively large customer base, which typically places orders in
relatively small quantities.
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On January 13, 1997, the Company purchased a line of products from Elan
Pharma, Inc. consisting of intact protein formulas, enteral pumps and the
related disposable delivery hardware. 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. A significant portion of the Company's growth in 1997 was
attributable to revenues provided from the addition of these products.
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 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 discussed in Note 1 to the financial statements included in this
Report, the Company has discontinued its private label adult nutrition
supplement business, which had been introduced in late 1995. In 1997, this
product line represented 35 percent of gross sales but only approximately 6.8
percent of gross profit. The results of operations of this product line are
shown as discontinued operations, separated from continuing operations in all
periods for which a statement of operations is presented.
The Company also announced in January 1998 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. These costs represent a significant portion
of the increased operating costs incurred in 1997, as compared to 1996. The
Company has taken these actions to allow it to focus on its core clinical
nutrition business.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales from continuing operations for the year ended
December 31, 1997 totaled $4,104,601 compared to $1,224,871 for the same
period of 1996, an increase of 235 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 January 1997 as a result of the acquisition from Elan.
This growth is attributable to the addition of new customers and growth in
orders from existing customers, combined with a greater number of products
available for sale in the 1997 period.
GROSS PROFIT. Gross profit from continuing operations for the year
ended December 31, 1997 increased to $1,293,158, compared to $685,431 in the
same period of 1996. As a percentage of sales, however, gross profit
decreased from 56 percent in 1996 to 31.5 percent in 1997. 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. In addition, profit margins
were depressed in early 1997 due to costs related to the integration of the
Elan Acquired Products into the Company's existing operations. Gross profit
margins are expected to improve slightly in 1998 as integration-related costs
are less likely to occur.
SELLING GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses from continuing operations for the year ended December 31, 1997
increased 126 percent to $2.5 million, from $1.1 million in the same period
of 1996. The expense increase relates to the overall staffing and related
expenditures required to support the growth in sales by the Company and the
addition of new products. As noted above, the Company incurred charges of
$300,000 in 1997 for sales and marketing efforts related to the Company's
private label infant formula development project. Selling, general and
administrative expenses, expressed as a percentage of net sales, were 62
percent and 92 percent for the years ended December 31, 1997 and 1996,
respectively. 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.
RESEARCH AND DEVELOPMENT. Research and development costs from
continuing operations for the year ended December 31, 1997 increased 156
percent to $627,000 from $245,000 incurred in same period of 1996. The
increase is attributable to higher costs associated with new products under
development in 1997, particularly costs related to the development of a
generic, national brand equivalent infant formula product, which has been
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discontinued. Research and development costs in 1998 are expected to drop to
1996 levels as a result of this change.
GOODWILL. Goodwill amortization of $1.8 million, of which $1.6 million
was written off in the fourth quarter of 1997, based upon the Company's
assessment of impaired value, represents all of the goodwill recorded at the
time of the acquisition of the Elan Acquired Products.
OTHER EXPENSES. Interest income for the year ended December 31, 1997
increased to $125,969 from $83,932 in the same period of 1996, as remaining
funds from the Company's initial public offering were invested for a full
year, compared with three months in 1996. Interest expense in 1997
represents interest on a note payable to Elan Pharma, Inc. issued as partial
consideration for the Elan Acquired Products.
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales from continuing operations for the year ended
December 31, 1996 totaled $1,224,871 compared to $745,245 for the same period
of 1995, an increase of 64 percent. The growth in sales is the result of
increases in orders to existing customers and the addition of new customers,
as well as a larger number of products available for sale in the 1996 period.
GROSS PROFIT. Gross profit from continuing operations for the year
ended December 31, 1996 increased to $685,431, compared to $423,401 in the
same period of 1995. As a percentage of sales, gross profit remained
relatively stable at 56 percent in 1996, compared with 56.8 percent in 1995.
SELLING GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses from continuing operations for the year ended December 31, 1996
remained flat at $1.1 million. As a percentage of sales, these expenses
decreased from 148 percent in 1995 to 92 percent in 1996. The percentage
decrease is primarily 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.
RESEARCH AND DEVELOPMENT. Research and development costs from
continuing operations increased 61 percent to $245,000 for the year ended
December 31, 1996 when compared with the $152,157 incurred in the comparable
1995 period. The increase is attributable to higher costs associated with
new products under development, particularly costs related to development of
a generic, national brand equivalent infant formula product.
DISCONTINUED OPERATIONS
As discussed above, the Company announced in January 1998 its intention
to discontinue its private label adult nutrition supplement business and has
signed an agreement to transfer the business to Agrilink Foods, Inc. This
segment of the Company's business, active since late 1995, generated revenues
of $2.2 million, $1.2 million and $96,000 in 1997, 1996 and 1995,
respectively. Gross profits from this business were $95,000, $166,000 and
$11,000 in 1997, 1996 and 1995, respectively, while operating losses for the
same periods were $(365,000), $(158,000) and $(144,000), respectfully. The
Company expects that any gain/loss on disposal of operation will be
insignificant and, accordingly, no amount was recorded in 1997 as a part of
discontinued operations.
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 will initiate formal communications with all of its
significant suppliers by mid-1998 to determine the extent to which these
suppliers are vulnerable to Year 2000 issues. There is no guarantee that the
systems of other companies on which the Company relies for manufacturing and
distributing its products will be
8
<PAGE>
converted in a timely manner. Delays in necessary conversions 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. On September 26, 1996, the Company's 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 197,500 shares. 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's principal source of
cash and working capital had been from the private placement of its common
stock, through which the Company received approximately $2,800,000 in net
proceeds.
In connection with the above described activities and results of
operations, the Company's net cash used by operations in the year ended
December 31, 1997, excluding the Elan Acquired Products, totaled $2.2
million, compared with $1.1 million in 1996. Cash and cash equivalents as of
December 31, 1997 totaled $1,647,482. Accounts receivables increased during
1997 by approximately $785,000 due to sales increases and some extended sales
terms. Inventories, not including those received in the Elan acquisition,
have increased by approximately $655,000, offset by an increase of
approximately $557,000 in accounts payable. The increased inventory reflects
increased levels of sales activities. Inventories are expected to decline as
the transfer of the adult nutrition supplement business to Agrilink,
scheduled for May 1998, concludes.
The Company made additions to equipment in 1997, primarily for the
packaging of infant formula products. These assets are expected to be sold
because the Company is no longer pursuing the development of infant formula
products. No additional significant capital expenditures are expected over
the next few quarters.
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
potential 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 development 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.
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements are included as a separate section
following the signature page to this Form 10-KSB:
Report of Independent Auditors
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for the years ended December 31, 1997 and 1996
Statement of Changes in Shareholders' Equity for the years ended December
31, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997 and 1996
Notes to Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No changes in accountants or disagreements between the Company and its
accountants regarding accounting principles or financial statement
disclosures have occurred within the twenty-four months prior to date of the
Issuer's most recent financial statements.
9
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.
The information required by Item 9 is incorporated by reference to the
sections entitled "Election of Directors", "Executive Officers" and "Section
16(a) Beneficial Ownership Reporting Compliance in the Company's Definitive
Proxy Statement for its 1998 Annual Meeting of Shareholders (the "Proxy
Statement"), which will be filed with the Securities Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, within 120 days of the end of the Company's fiscal year ended
December 31, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 10 is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 11 is incorporated by reference to the
section entitled "Voting Securities and Principal Holders Thereof" in the
Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
10
<PAGE>
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
A) EXHIBITS
The following exhibits are included with this Annual Report on Form
10-KSB (or incorporated by reference) as required by Item 601 of Regulation
S-B:
<TABLE>
<CAPTION>
<C> <S>
Exhibit No. Description
----------- -----------
1.1(a) Form of Underwriting Agreement and Warrant
2.1(c) Asset Purchase Agreement dated January 13, 1997 by and
between the Company and Elan Pharma, Inc.
2.2 Asset Purchase Agreement with an effective date of May 1,
1998, executed by and between the Company and Agrilink
Foods, Inc.*
3.1 Second Restated Articles of Incorporation of the Company,
as amended
3.2(b) Second Restated Bylaws of Nutrition Medical, Inc.
4.1(a) Specimen Form of the Company's Common Stock Certificate
4.2 Promissory Note Dated January 13, 1997 by the Company in
favor of Elan Pharma, Inc.
10.1(d) 1995 Long-Term Incentive and Stock Option Plan, as amended
10.2(a) 1996 Non-Employee Director Stock Option Plan
10.3(a) Purchasing Agreement, dated October 15, 1995, by and between
the Company and VHA, Inc.; Trademark License Agreement,
dated October 15, 1995, by and between the Company and VHA,
Inc.; Memorandum of Understanding, dated April 17, 1995,
between the Company and VHA, Inc.
10.4(d) Executive Employment Agreement, dated October 1, 1996, by
and between the Company and William L. Rush
10.6(a) Employment Agreement, dated September 1, 1994, by and
between the Company and Joseph F. Coffey
10.8(a) Office Lease, dated October 15, 1993, by and between the
Company and the 308 Corporation
10.9(a) Lease Agreement, dated February 22, 1996, by and between the
Company and Caliber Development Corporation
23 Consent of independent auditors
24 Powers of Attorney (set forth on the Signature Page hereof)
27 Financial Data Schedule (EDGAR only)
99.1 Cautionary Statement
99.2 Press Release dated January 28, 1998 announcing the
discontinuation of certain operations
99.3 Press Release dated March 19, 1998 announcing the agreement
with Agrilink Foods, Inc.
</TABLE>
________________
(a) Incorporated by reference to the exhibit of the same number to the
Registrant's previously filed Form SB-2 Registration Statement
effective September 26, 1996 (Reg. No. 333-9999).
(b) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-QSB filed on November 13, 1996
(File No. 333-9999).
(c) Incorporated by reference to the exhibit of the same number to the
Registrant's Form 8-K filed on January 23, 1997 (File number 333-9999).
(d) Incorporated by reference to the exhibit of the same number to the
Registrants Annual Report on Form 10-KSB filed on March 31, 1997.
* Confidential information has been omitted from such Exhibit and filed
separately with the Commission pursuant to a confidential treatment request
under Rule 24b-2.
B) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K for the quarter ended
December 31, 1997.
11
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Nutrition Medical, Inc.
By: /s/ William L. Rush
----------------------------------------
William L. Rush, Chief Executive Officer
Date: March 26, 1998
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated. Each person whose signature to this report on
Form 10-KSB appears below hereby constitutes and appoints William L. Rush and
Anwar H. Bhimani, and each of them, as his true and lawful attorney-in-fact
and agent, with full power of substitution, to sign on his behalf
individually and in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments to this report on Form
10-KSB, and any and all instruments or documents filed as part of or in
connection with this report on Form 10-KSB or the amendments thereto and each
of the undersigned does hereby ratify and confirm all that said
attorney-in-fact and agent, or his substitutes, shall do or cause to be done
by virtue hereof.
<TABLE>
<S> <C> <C>
By: /s/ William L. Rush Chairman of the Board, Date: March 26, 1998
---------------------------- Chief Executive Officer,
William L. Rush President and Director
(Principal Executive Officer)
By: /s/ Anwar H. Bhimani Chief Financial Officer and Date: March 26, 1998
---------------------------- Secretary
Anwar H. Bhimani (Principal Financial Officer)
By: /s/ Kenneth L. Evenstad Director Date: March 26, 1998
----------------------------
Kenneth L. Evenstad
By: /s/ George E. Kline Director Date: March 26, 1998
----------------------------
George E. Kline
By: /s/ Lawrence A. Lehmkuhl Director Date: March 26, 1998
----------------------------
Lawrence A. Lehmkuhl
</TABLE>
12
<PAGE>
FINANCIAL STATEMENTS
NUTRITION MEDICAL, INC.
YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE>
Nutrition Medical, Inc.
Financial Statements
Years ended December 31, 1997 and 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 1
Financial Statements
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statement of Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Nutrition Medical, Inc.
We have audited the accompanying balance sheets of Nutrition Medical, Inc. as
of December 31, 1997 and 1996 and the related statements of operations,
shareholders' equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nutrition Medical, Inc. at
December 31, 1997 and 1996 and the results of its operations and its cash
flows for each of the years then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
February 20, 1998
<PAGE>
Nutrition Medical, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,647,482 $2,553,955
Short-term investments - 1,671,596
Accounts receivable, less allowance of $31,500
in 1997 and $81,000 in 1996 1,140,020 356,240
Inventories 1,615,165 460,115
Prepaid expenses 51,401 34,039
------------------------
Total current assets 4,454,068 5,075,945
Equipment and office furniture, net 1,179,200 132,369
------------------------
Total assets $5,633,268 $5,208,314
------------------------
------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $827,007 $269,037
Accrued lease costs 66,600 75,000
Accrued payroll 158,298 80,554
Accrued expenses 482,044 84,487
------------------------
Total current liabilities 1,533,949 509,078
Subordinated note payable, including accrued interest 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--1997;
4,593,024--1996 54,560 45,930
Paid-in capital 8,706,444 6,943,287
Accumulated deficit (6,450,619) (2,289,981)
------------------------
Total shareholders' equity 2,310,385 4,699,236
------------------------
Total liabilities and shareholders' equity $5,633,268 $5,208,314
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Nutrition Medical, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------------------
<S> <C> <C>
Net sales $4,104,601 $1,224,871
Cost of goods sold 2,811,443 539,440
------------------------
Gross profit 1,293,158 685,431
Operating expenses:
Selling, general and administrative 2,538,184 1,120,787
Research and development 627,438 245,280
Goodwill amortization (and write-off) 1,853,936 -
------------------------
5,019,558 1,366,067
------------------------
Operating loss (3,726,400) (680,636)
Other income (expense):
Interest expense (195,184) (4,075)
Interest income 125,969 83,932
------------------------
(69,215) 79,857
------------------------
Loss from continuing operations (3,795,615) (600,779)
Discontinued operations:
Loss from discontinued operations (365,023) (158,233)
------------------------
Net loss $(4,160,638) $(759,012)
------------------------
------------------------
Loss per share data (basic and diluted):
Loss from continuing operations $(.70) $(.14)
Loss from discontinued operations (.07) (.04)
------------------------
Net loss per share $(.77) $(.18)
------------------------
------------------------
Weighted average number of shares outstanding 5,422,525 4,325,384
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Nutrition Medical, Inc.
Statement of Shareholders' Equity
<TABLE>
<CAPTION> COMMON STOCK
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 3,105,524 $ 31,055 $2,581,612 $(1,530,969) $1,081,698
Issuance of Common Stock at $2.50 per share in
June 1996 50,000 500 124,500 - 125,000
Issuance of Common Stock at $3.50 per share in
September 1996, net of offering costs 1,437,500 14,375 4,222,675 - 4,237,050
Value of warrants granted for services performed - - 14,500 - 14,500
Net loss - - - (759,012) (759,012)
-------------------------------------------------------------------
Balance at December 31, 1996 4,593,024 45,930 6,943,287 (2,289,981) 4,699,236
Issuance of Common Stock to purchase
Elan product line 855,000 8,550 1,754,887 - 1,763,437
Stock options exercised 8,000 80 8,270 - 8,350
Net loss - - - (4,160,638) (4,160,638)
-------------------------------------------------------------------
Balance at December 31, 1997 5,456,024 $ 54,560 $8,706,444 $(6,450,619) $2,310,385
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Nutrition Medical, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,160,638) $ (759,012)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization (and goodwill write-off) 1,853,936 -
Depreciation 331,854 25,600
Reserve for bad debts (49,500) 81,000
Value of options and warrants granted for
services performed - 14,500
Changes in operating assets and liabilities:
Accounts receivable (734,280) (315,895)
Inventories (655,050) (102,011)
Prepaid expenses (17,362) (28,310)
Accounts payable 557,970 (44,773)
Accrued interest 195,184 -
Accrued liabilities 466,901 41,529
--------------------------
Net cash used in operating activities (2,210,985) (1,087,372)
INVESTING ACTIVITIES
Sale (purchase) of short-term investments 1,671,596 (1,671,596)
Purchase of a business (71,749) -
Purchase of equipment and office furniture (303,685) (76,374)
--------------------------
Net cash provided by (used in) investing activities 1,296,162 (1,747,970)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 8,350 4,362,050
Payments on notes payable - (100,000)
--------------------------
Net cash provided by financing activities 8,350 4,262,050
--------------------------
(Decrease) increase in cash (906,473) 1,426,708
Cash at beginning of year 2,553,955 1,127,247
--------------------------
Cash at end of year $ 1,647,482 $2,553,955
--------------------------
--------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Purchase of a business:
Issuance of subordinated debt $ 1,593,750 $ -
Issuance of stock 1,763,437 -
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements
December 31, 1997
1. NATURE OF OPERATIONS
Nutrition Medical, Inc. (the "Company") develops and sells branded generic
critical care nutrition products for the hospital/nursing home market, as
well as private label nutrition products for sale through retail chains. The
Company's products are manufactured using ingredients, formulas and processes
comparable to those of national brand products. The Company currently has nine
critical care nutrition products and intends to continue to expand its
existing product lines. In early 1998, the Company announced its intention to
discontinue its private label nutrition products. Accordingly, the results of
operations of the segment have been classified as discontinued operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash
equivalents are available-for-sale, are carried at cost which approximates
market and consist of money market funds.
SHORT-TERM INVESTMENTS
Short-term investments are comprised of U.S. Treasury debt securities and are
classified as available-for-sale. At December 31, 1996, the Company's cost of
short-term investments approximated market value, with no resulting
unrealized gains and losses recognized. Realized gains and losses and
declines in value judged to be other than temporary are included in
investment income along with interest and dividends.
INVENTORIES
Inventories are valued at the lower of cost or market by the first-in,
first-out (FIFO) method.
EQUIPMENT AND OFFICE FURNITURE
6
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements
December 31, 1997
Equipment and office furniture are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets
ranging from three to seven years.
7
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial reporting
and tax bases of assets and liabilities.
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment of the product.
Provisions for estimated returns and allowances are accrued for at the time
of sale.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board Opinion No. 25 ("APB
25") and related interpretations in accounting for its plans. Under APB 25,
when the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
8
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
9
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount.
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, EARNINGS PER SHARE. Statement 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to
the Statement 128 requirements.
3. ACQUISITION
On January 13, 1997, (the "Closing Date"), the Company executed an Asset
Purchase Agreement (the "Agreement") whereby the Company acquired certain
assets from Elan Pharma, Inc. ("Elan"), a U.S. subsidiary of Ireland-based
Elan Corporation, plc. The assets purchased include inventory and fixed
assets relating to the production of the enteral (tubal feeding) products
(the "Acquired Products") of Elan as well as exclusive rights to manufacture
and market the Acquired Products. In exchange for the Acquired Products and
related assets, the Company issued Elan a subordinated promissory note in the
amount of $3,000,000 (due in seven years along with interest accruing at
three percent per annum) and 855,000 shares of the Company's common stock.
The Agreement contains provisions which restrict Elan's ability to vote or
sell the shares of common stock. Total value of the transaction was
$3,428,936 after taking into consideration market interest rates on the note
payable, a discounted valuation for the common stock due to restrictions, and
$71,749 in acquisition expenses associated with the purchase.
10
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
3. ACQUISITION (CONTINUED)
The Agreement contains a provision for the forgiveness of up to 100% of the
promissory note based on the Company's future stock performance. The
principal amount of the promissory note may be reduced on the fourth through
seventh anniversaries of the closing date. The amount of the reduction will
be determined by multiplying the number of shares sold by Elan during the
respective year by one-half of the difference between the average sales price
less $5 (year four), $6 (year five), $7 (year six) and $8 (year seven). A
similar reduction, using an eight dollar threshold will be applied to shares
remaining unsold at the end of the seventh anniversary of the closing date.
Based upon management's estimates of asset values, taking into consideration
market values and condition of the assets, as well as the estimated future
cash flows from the Acquired Products, the following represents the
allocation of the purchase price to the acquired assets, with the excess of
the purchase price over the assets allocated to goodwill:
<TABLE>
<CAPTION>
<S> <C>
Inventory $ 500,000
Manufacturing equipment 600,000
Leased pumps 475,000
Goodwill 1,853,936
----------
$3,428,936
----------
----------
</TABLE>
Pro forma results of operations, as if the acquisition had taken place on
January 1, 1996, for the twelve month period ended December 31, 1996 are shown
below. Pro forma results are not necessarily indicative of the results to be
expected for the full year or the results that would have been achieved if the
acquisition had actually taken place on that date.
11
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
3. ACQUISITION (CONTINUED)
Pro Forma Statement of Operations
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
TWELVE-MONTH
PERIOD ENDED
DECEMBER 31,
1996
------------
<S> <C>
Net sales $7,285
Gross profit 2,324
Loss from continuing operations (1,134)
Discontinued operations (158)
Net loss (1,292)
Loss per share data: (0.25)
Loss from continuing operations (0.22)
Loss from discontinued operations (0.03)
Net loss per share (0.25)
</TABLE>
Pro forma results for the twelve-month period ended December 31, 1997 are not
shown since the impact would not have been materially different from report
results.
Sales from Elan products dropped significantly in 1997 due to a number of
factors. A number of Elan products were discontinued during 1997 and sales
expectations through distributors did not meet Company expectations. As a
result, the Company's market share of such products declined significantly
during 1997. The Company took steps to stop the decline in its sales and
market share in this product line, but management does not expect sales to
recover to pre-1997 levels in the foreseeable future. Management reviewed an
analysis of the undiscounted cash flows from the acquired business and
concluded that the carrying value of goodwill had been impaired. As a result,
the carrying value of goodwill on December 31, 1997 of approximately $1.5
million was written down to zero and the expense charged to continuing
operations.
12
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
3. ACQUISITION (CONTINUED)
In addition, the Company also wrote down the value of equipment for packaging
infant formula $60,000. This amount was determined by comparing the carrying
value of the equipment with the price the equipment would demand if sold as
used equipment in the secondary market.
4. DISCONTINUED OPERATIONS
In January 1998, the Company announced its intention to discontinue its
private label adult nutrition supplement business, which was introduced in
late 1995.
The decision to discontinue the private label adult nutrition supplement
business was primarily due to low margins generated in this business and the
high level of working capital needed to support this business. In 1997, this
product line represented 35% of gross sales but only approximately 6.8% of
gross profit, while at the same time requiring approximately $1.0 million in
working capital to support its operations.
This segment of the Company's business generated revenues of $2,213,000 and
$1,777,000 in 1997 and 1996, respectively. Gross margins in this business
were $95,000 and $166,000 in 1997 and 1996, respectively, while operating
losses for the same periods were $365,023 and $158,000. At December 31, 1997,
the Company had approximately $840,000 of accounts receivable and inventory
on hand associated with the private label adult nutrition supplement
business. The Company expects any gain (loss) on disposal of operations to be
insignificant given current sales orders.
In March 1998, the Company entered into an agreement with Agrilink Foods,
Inc., under which the Company will transfer its private label adult nutrition
supplement business to Agrilink effective May 1, 1998. As a part of this
agreement, the Company will be receiving cash for various marketing and
supply related items and royalty payments for two years on the sale of these
products.
13
<PAGE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-----------------------
<S> <C> <C>
Raw materials $ 292,032 $ 72,403
Work in progress 63,313 -
Finished goods 1,259,820 387,712
-----------------------
$1,615,165 $460,115
-----------------------
-----------------------
</TABLE>
6. EQUIPMENT AND OFFICE FURNITURE
Equipment and office furniture consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-----------------------
<S> <C> <C>
Equipment and office furniture:
Computer equipment $ 153,855 $106,925
Office furniture 104,443 64,564
Equipment, including pumps at customer sites 1,303,268 11,392
-----------------------
1,561,566 182,881
Less accumulated depreciation 382,366 50,512
-----------------------
$1,179,200 $132,369
-----------------------
-----------------------
</TABLE>
14
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------------------
<S> <C> <C>
Subordinated note payable, with a stated interest rate of
3% and interest imputed at 12%, due January 2004 $1,593,750 $ -
Accrued interest at the imputed 12% rate 195,184 -
----------------------
$1,788,934 $ -
----------------------
----------------------
</TABLE>
In January 1997, the Company entered into a subordinated promissory note with
Elan as a result of the acquisition of certain assets of Elan. Principal and
interest associated with this note are due January 2004. This note is secured
by the assets of the Company. For further discussion of the acquisition see
Note 3.
8. LEASES
The Company entered into an agreement, commencing October 6, 1996, to lease
an office and warehouse facility in Minneapolis, Minnesota. The lease
terminates on November 30, 2001, and requires the Company to pay its
proportionate share of real estate taxes and operating expenses. The
agreement allows for a five year renewal and a termination option after three
years in the event the landlord is unable to provide additional space for the
Company.
Future minimum lease rental payments required under leases in excess of one
year as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $103,065
1999 69,545
2000 69,360
2001 65,664
--------
$307,634
--------
--------
</TABLE>
15
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
Total rent expense under operating leases for the years ended December 31,
1997 and 1996 was $90,383 and $48,989, respectively.
16
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
9. INCOME TAXES
At December 31, 1997 and 1996, the Company had net operating loss
carryforwards for tax purposes of approximately $3,601,000 and $2,040,000,
respectively. These net operating loss carryforwards are available to offset
future taxable income through 2012 subject to limitations under Section 382
of the Internal Revenue Code due to changes in the equity ownership of the
Company.
Significant components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,440,000 $ 816,000
Goodwill write-off 692,000 -
Depreciation 32,000 -
Inventory reserve 258,000 14,000
Accounts receivable allowance 13,000 32,000
Accrued professional fees 80,000 -
Other accrued expenses 22,000 11,000
---------------------------
2,537,000 873,000
Deferred tax liabilities:
Depreciation - (12,000)
---------------------------
- (12,000)
---------------------------
Net deferred income tax assets 2,537,000 861,000
Valuation allowance (2,537,000) (861,000)
---------------------------
Net deferred income taxes $ - $ -
---------------------------
---------------------------
</TABLE>
10. CAPITAL STOCK
STOCK AUTHORIZATION
In July 1996, the Company increased the authorized shares of capital stock to
25,000,000, including 20,000,000 shares of common stock and 5,000,000 shares
of undesignated preferred stock.
17
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
10. CAPITAL STOCK (CONTINUED)
INITIAL PUBLIC OFFERING
In September 1996, the Company sold 1,437,500 shares of common stock in an
initial public offering from which the Company received net proceeds of
$4,237,000. In connection with the initial public offering, the Company sold
to the underwriter, for a nominal price, a five-year warrant to purchase up
to 125,000 shares of common stock exercisable at $4.20 per share.
11. STOCK OPTIONS AND WARRANTS
The Company has two stock option plans that include both incentive stock
options and non-qualified stock options to be granted (the "Plans") to
directors, officers, employees, consultants and others. As of December 31,
1997, the maximum number of shares of common stock reserved under the Plans
is 900,000 shares. The Board of Directors establishes the terms and
conditions of all stock option grants, subject to the Plans and applicable
provisions of the Internal Revenue Code.
The following table summarizes activity under the Plans:
<TABLE>
<CAPTION>
WEIGHTED
SHARES PLAN OPTIONS OUTSTANDING AVERAGE
AVAILABLE -------------------------------- EXERCISE PRICE
FOR GRANT INCENTIVE NON-QUALIFIED PER SHARE
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 122,500 109,000 268,500 $1.18
Additional shares reserved 400,000 - - -
Granted (295,750) 166,000 129,750 2.99
Canceled 19,500 (14,500) (5,000) 1.40
----------------------------------------
Balance at December 31, 1996 246,250 260,500 393,250 1.97
Exercised - (1,000) (7,000) 1.04
Granted (139,000) 116,500 22,500 2.97
Canceled 120,500 (115,500) (5,000) 2.34
----------------------------------------
Balance at December 31, 1997 227,750 260,500 403,750 2.13
----------------------------------------
----------------------------------------
</TABLE>
18
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about the stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.50 327,250 3 years $1.15 313,500 $1.10
2.00 - 4.25 337,000 9 years 2.30 105,549 3.36
-------- --------
664,250 6 years 1.73 419,049 1.64
-------- --------
-------- --------
</TABLE>
Options outstanding under the Plans expire at various dates during the period
from November 1998 through December 2006. The number of options exercisable
as of December 31, 1997 and 1996 were 419,049 and 301,200, respectively, and
are exercisable at a weighted average price of $1.64 and $1.22 per share,
respectively. The weighted average fair value of options granted during the
years ended December 31, 1997 and 1996 was $1.93 and $1.14 per share,
respectively.
In connection with the issuance of common stock at $1.35 per share from
February through September 1995, the Company granted warrants to purchase a
total of 152,107 shares of common stock. The warrants are exercisable at
$1.35 per share and expire at various dates through September 2000.
The Company has elected to following Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement
123"), requires use of option valuation models that were not developed for
use in valuing employee stock options.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of Statement 123. The
fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996: risk-free interest rate of
19
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
6.0% for both years; and dividend yield of 0% for both years; volatility
factor of the
20
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
expected market price of the Company's common stock of .71 and .33,
respectively, and a weighted average expected life of the option of 7 and 4
years, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options
have characteristics significantly different from those of traded options,
and because change in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Pro forma net loss $(4,248,128) $(825,404)
Pro forma net loss per common share - basic $(.78) $(.19)
and diluted
</TABLE>
The pro forma effect on net loss of 1997 and 1996 is not representative of
the pro forma effect on net loss in future years because it does not take
into consideration pro forma compensation expense related to grants made
prior to 1995.
12. CONTINGENCY
In August 1995, the Company was named as a defendant in a patent infringement
lawsuit brought by Novartis, formerly Sandoz Nutrition. 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
preventing the Company from selling the product, as well as damages of an
unspecified amount. The Company responded with a counterclaim seeking a
declaration of invalidity, unenforceability, non-infringement and
inventorship of the subject patents. On August 13, 1997, the Company received
21
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
notification that the United States Patent and Trademark Office will issue
the two patents
22
<PAGE>
Nutrition Medical, Inc.
Notes to Financial Statements (continued)
12. CONTINGENCY (CONTINUED)
under review. Though the patents were narrowed, the Company expects that the
litigation which was stayed pending this determination will resume, and the
Company intends to continue to vigorously defend against the claim. Sales of
L-Emental Plus constituted $497,000, or 40.5% and $431,000, or 10.5% of the
Company's net sales in 1996 and 1997, respectively. It is not possible at
this time to predict the outcome of the lawsuit, including whether the
Company will have to cease selling L-Emental Plus, or to estimate the amount
or range of potential loss if any.
In November 1997, the Company was named as a defendant in a patent
infringement lawsuit brought by a division of Nestle Clinical Nutrition. The
complaint asserts that one of the Company's products, Pro-Peptide 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. Sales of Pro-Peptide for Kids
constituted $134,000 or 3% of the Company's net sales in 1997. 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.
The Company has accrued in the fourth quarter for the expected litigation
costs associated with the two lawsuits based on management's estimate of
costs to defend against these lawsuits.
13. MAJOR CUSTOMERS
Two customers account for net aggregated revenues, expressed as percentages
of total sales from continuing operations as follows:
<TABLE>
<CAPTION>
SALES % OF SALES
---------------------------------------
<S> <C> <C>
Customer A $504,500 12.3%
Customer B $452,500 11.0%
</TABLE>
23
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.2 Asset Purchase Agreement with an effective date of May 1, 1998, executed by and between the Company and Agrilink
Foods, Inc.*
3.1 Second Restated Articles of Incorporation of the Company, as amended
4.2 Promissory Note Dated January 13, 1997 by the Company in favor of Elan Pharma, Inc.
23 Consent of independent auditors
24 Powers of Attorney (set forth on the Signature Page hereof)
27 Financial Data Schedule (EDGAR only)
99.1 Cautionary Statement
99.2 Press Release dated January 28, 1998 announcing the discontinuation of certain operations
99.3 Press Release dated March 19, 1998 announcing an agreement with Agrilink Foods, Inc.
</TABLE>
- ---------------
* Confidential information has been omitted from such Exhibit and filed
separately with the Commission pursuant to a confidential treatment
request under Rule 24b-2.
13
<PAGE>
EXHIBIT 2.2
AGREEMENT
This Agreement is made as of the 1st day of May, 1998 (the "Effective
Date") by and between NUTRITION MEDICAL, INC., a Minnesota corporation,
(hereinafter referred to as the "Seller"), with offices at 9850 51st Avenue
N., Minneapolis, MN 55442, and AGRILINK FOODS, INC., a New York corporation
(hereinafter called the "Buyer") with offices at 90 Linden Place, Rochester,
NY 14625.
WHEREAS, Seller and Buyer are in the retail adult liquid nutritional
supplement products business;
WHEREAS, Seller desires to transfer the retail adult liquid nutritional
supplement products portion of its business (the "Business") to Buyer;
WHEREAS, Buyer and Seller desire to enter into this Agreement under the
terms of which Seller will sell the Business to Buyer and Buyer will purchase
the Business from Seller, all subject to the provisions herein below set
forth.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements contained herein and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties do
hereby agree as follows:
SECTION 1. SALE OF PROPERTY
SECTION 1.1. Seller shall at the Closing (as hereinafter defined), for
the consideration provided in Section 2 hereof, convey, sell, transfer,
assign and deliver to Buyer, and Buyer shall at the Closing purchase from
Seller, the following:
(a) INVENTORY. Finished goods or bright stock inventory of the
Business as of the Effective Date; provided, however, that (i)
such inventory shall not exceed 2500 cases in total, (ii) such
inventory shall not exceed three
<PAGE>
(3) months worth of product for any one (1) customer of Seller,
and (iii) such inventory shall have remaining shelf life dating
of twelve (12) months or more.
(b) LABELS. Unused labels of the Business as of the Effective Date;
provided, however, that (i) Buyer shall not purchase labels
except for customers of Seller as of the Effective Date and (ii)
Buyer shall not purchase labels for customers of Seller who will
change to the Curtice Burns Foods formula for product.
SECTION 1.2. RETAINED ASSETS AND BUSINESS.
(b) Seller shall retain the accounts receivable of the Business as of
the Effective Date which Seller shall collect for its own
account.
(c) Seller shall retain it business of selling adult nutritional
supplement products to its international customers and Seller
shall retain all of its current business except for the Business
specifically sold hereunder.
SECTION 2. PURCHASE PRICE; PAYMENTS
SECTION 2.1 PURCHASE PRICE AND PAYMENT. Buyer shall pay to Seller at
the Closing the following:
(b) Cash for the inventory purchased under Section 1.1(a) equivalent
to Seller's cost for such inventory.
(b) Cash for the labels purchased under Section 1.1(b) equivalent to
Seller's cost for such labels.
2
<PAGE>
(c) Cash in the amount of Eighteen Thousand Dollars ($18,000) for
Seller's label development costs.
SECTION 3. CLOSING
SECTION 3.1. PLACE OF CLOSING. The Closing under this Agreement and
all deliveries to be made at the Closing shall take place at the law firm of
Harris Beach & Wilcox, LLP, 130 East Main Street, Rochester, New York, or at
such other place or in such other manner (including by facsimile) as the
parties may agree, on the Effective Date.
SECTION 4. REPRESENTATIONS AND WARRANTIES
SECTION 4.1. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer
represents and warrants to Seller as follows:
(b) Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of New York and has
full corporate power to purchase the Business and to enter into
and perform its obligations under this Agreement.
(c) Neither the execution nor the performance of this Agreement will:
(i) Violate any judgment, writ, injunction, decree or order of
any court or other governmental authority relating to
Buyer;
(ii) Violate any indenture, contract, other commitment or
restriction to which Buyer is a party or by which it is
bound;
(iii) Be in conflict with, or result in or constitute a
breach or default (or an occurrence which by the passage of
time and/or the giving of notice would constitute a breach
or default), on the part of
3
<PAGE>
Buyer, under any such indenture, contract, other commitment
or restriction;
(iv) Result in the creation of imposition of any lien, charge or
encumbrance of any nature whatsoever upon the Property.
(d) The execution and delivery of this Agreement have been duly and
validly authorized and approved by proper corporate action of
Buyer, and this Agreement, when executed and delivered, will
constitute a valid and binding obligation of Buyer, enforceable
in accordance with its terms, subject however, to the application
of laws affecting creditors' rights generally and the
availability of equitable remedies.
SECTION 4.2. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby
represents and warrants to the Buyer as follows:
(b) Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Minnesota and has
full corporate power to sell and assign the Business and to enter
into and perform its obligations under this Agreement.
(c) Seller has full power and authority to carry on its business in
the manner heretofore carried on by it, and Seller is not in
violation of any laws, regulations or orders applicable to the
operations of its business in any manner which would or could
result in Buyer not being permitted to continue to operate said
business after the Closing hereunder.
4
<PAGE>
(d) Neither the execution nor the performance of this Agreement will:
(i) Violate any judgment, writ, injunction, decree or order of
any court or other governmental authority relating to
Seller;
(ii) Violate any indenture, contract, other commitment or
restriction to which Seller is a party or by which it is
bound;
(iii) Be in conflict with, or result in or constitute a
breach or default (or an occurrence which by the passage of
time and/or the giving of notice would constitute a breach
or default), on the part of Seller, under any such
indenture, contract, other commitment or restriction;
(iv) Result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon the Property.
(e) The execution and delivery of this Agreement have been duly and
validly authorized and approved by proper corporate
action of Seller, and this Agreement, when executed and
delivered, will constitute a valid and binding obligation
of Seller, enforceable in accordance with its terms,
subject however, to the application of laws affecting
creditors' rights generally and the availability of
equitable remedies.
(f) Seller had good, marketable and insurable title to and
rightful possession of all property and assets being
transferred to Buyer, free and clear of all liens and
encumbrances.
5
<PAGE>
SECTION 5. FURTHER AGREEMENTS
SECTION 5.1. SUPPLY. Buyer agrees for a period of seven (7) months
after the Effective Date to offer current customers of the Seller the option
of purchasing product produced for Buyer by O-AT-KA, which currently produces
product for Seller for customers of the Business. Seller grants Buyer a
non-exclusive license to use Seller's formulas for the production of such
product by O-AT-KA, through December 31, 1998, the end of such seven-month
period. Buyer agrees to indemnify and hold harmless Seller for any claims
relating to any product produced for Buyer by O-AT-KA after the Effective
Date.
SECTION 5.2. ROYALTY. In addition to the purchase price and payment
under Section 2.1, Buyer agrees to pay a royalty payment of $(*) per case on
all case sales to customers of the Business as of the Effective Date made
during the two (2) year period commencing on the Effective Date. Such
royalty payment shall be paid on a quarterly basis within twenty-five (25)
days after the end of each calendar quarter.
SECTION 5.3. BROKERS. Buyer agrees to honor Seller's existing broker
relationships through December 31, 1998, and acknowledges that commissions
are between (*)% and (*)%. Notwithstanding the foregoing, Seller
acknowledges that Buyer is not assuming such broker relationships.
SECTION 5.4. BEST EFFORTS. Seller shall use its reasonable best
efforts to transfer its retail and food service customers to Buyer.
SECTION 5.5. NO SOLICITATION. Buyer shall not solicit or accept
orders from any current customer of Seller (other than any customers who is
currently also a customer of Buyer) prior to the Effective Date, without the
prior written consent of Seller.
(*) Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
6
<PAGE>
SECTION 5.6. SUPPLY TO SELLER (INTERNATIONAL). Buyer shall supply
Seller with adult nutrition supplements for international customers of Seller
at $(*) per case for regular product and $(*) per case for plus product, FOB
plant and upon such further terms as Buyer and Seller shall agree; provided,
however, that Buyer may reasonably adjust such prices, beginning January 1,
1999, to reflect market conditions and costs. Seller shall be responsible
for labels for any product produced pursuant to this Section 5.6
SECTION 5.7. SUPPLY TO SELLER (CRITICAL CARE NUTRITION PRODUCTS). For
a period of three (3) years after the Effective Date, Buyer shall supply
Seller with critical care nutritional products at prices generally consistent
with current market pricing, subject to reasonable adjustment to reflect
market conditions and costs, and upon such further terms as the parties shall
agree.
SECTION 5.8. NON-COMPETE. Seller and William L. Rush agree to enter
into covenants not to compete with Buyer in the retail adult liquid
nutritional supplement products business in North America for a period of
three (3) years after the Effective Date, without the prior written consent
of Buyer.
SECTION 6. GENERAL PROVISIONS
SECTION 6.1. NOTICES. Any notice or other communication required or
permitted to be given to Buyer under this Agreement shall be deemed to have
been given upon deposit in the United States mail, first class postage
prepaid, or registered mail. Any notice or other communication required or
permitted to be given to Seller under this Agreement shall be deemed to have
been given upon deposit in the United States mail, first class postage
prepaid, or registered mail.
(*) Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
7
<PAGE>
SECTION 6.2. MERGER; AMENDMENTS. This Agreement embodies all of the
representations, warranties, agreements and conditions in relation to the
subject matter hereof, and no representations, warranties, understanding or
agreements, oral or otherwise, in relation thereto exist between the parties
except as herein expressly set forth. This Agreement may not be amended or
terminated orally but only by an instrument in writing duly executed by the
parties hereto.
SECTION 6.3. PARTIES. This Agreement and the various rights and
obligations arising hereunder shall inure only to the benefit of and be
binding upon the parties hereto and their respective heirs, successors and
assigns.
SECTION 6.4. INVALIDITY. The invalidity or enforceability of any term
or provision of this Agreement or the application of such term or provision
to any person or circumstance shall not impair or affect the remainder of
this Agreement, and its application to other persons and circumstances, and
the remaining terms and provisions hereof shall not be invalidated but shall
remain in full force and effect.
SECTION 6.5. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York
without reference to principles of conflict of laws.
SECTION 6.6. WAIVER. No waiver shall be deemed to be made by any
party of any of its rights hereunder unless the same shall be in writing, and
each waiver, if any, shall be a waiver only with respect to the specific
instance involved and shall in no way impair the rights of the waiving party
or the obligations of the other parties in any other respect at any other
time.
8
<PAGE>
SECTION 6.7. COUNTERPARTS. This Agreement may be executed by the
parties in two or more counterparts, each of which shall be considered an
original.
SECTION 6.8. CAPTIONS. The captions in this Agreement are for
convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
duly authorized officers of both Seller and Buyer as of the day and year
first above written.
NUTRITION MEDICAL, INC.
By: /s/ William L. Rush
----------------------------------------
AGRILINK FOODS, INC.
By: /s/ Ben Frega
----------------------------------------
9
<PAGE>
EXHIBIT 3.1
ARTICLES OF AMENDMENT
OF
SECOND RESTATED ARTICLES OF INCORPORATION
OF
NUTRITION MEDICAL, INC.
The undersigned, Richard J. Hegstrand, Chief Financial Officer of
Nutrition Medical, Inc., a Minnesota Corporation, hereby certifies that the
following resolution was duly adopted by the board of directors of the
corporation pursuant to Chapter 302A of the Minnesota Business Corporation
Act on December 2, 1996, and that such resolution has not been subsequently
modified or rescinded:
REGISTERED ADDRESS CHANGE
RESOLVED, that Article 2 of the Second Restated Articles of
Incorporation of the corporation is hereby amended in its entirety to read as
follows:
ARTICLE 2. REGISTERED OFFICE
The address of the registered office of the corporation in Minnesota is
9850 51st Avenue North, Suite 110, Minneapolis, Minnesota 55442.
IN WITNESS WHEREOF, the undersigned, the Chief Financial Officer of
Nutrition Medical, Inc., being duly authorized on behalf of Nutrition
Medical, Inc., has executed this document as of February 28, 1997.
/s/ Richard J. Hegstrand
-------------------------------
Richard J. Hegstrand
Chief Financial Officer
<PAGE>
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 restated 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 the 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
authorize 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.
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<PAGE>
EXHIBIT 4.2
NON-NEGOTIABLE SUBORDINATED PROMISSORY NOTE
$3,000,000.00 Minneapolis, Minnesota
January 13, 1997
FOR VALUE RECEIVED, Nutrition Medical, Inc., a Minnesota corporation
("Maker"), promises to pay to Elan Pharma Inc., a Massachusetts corporation
("Payee"), in lawful money of the United States of America, the principal sum
of Three Million Dollars ($3,000,000), subject to reduction as provided
herein, together with interest in arrears on the unpaid principal balance at
an annual rate equal to three percent (3%) in the manner provided below.
Interest shall be calculated on the basis of a year of 365 or 366 days, as
applicable, and charged for the actual number of days elapsed.
This Note has been executed and delivered pursuant to and in accordance with
the terms and conditions of the Asset Purchase Agreement, dated as of January
13, 1997, by and between Maker and Payee (the "Agreement"), and is subject to
the terms and conditions of the Agreement, which are, by this reference,
incorporated herein and made a part hereof. Capitalized terms used in this
Note without definition shall have the respective meanings set forth in the
Agreement.
1. REDUCTION OF PRINCIPAL AMOUNT AND PAYMENTS
1.1 REDUCTION OF PRINCIPAL AMOUNT
The principal amount of the Note will be reduced, if applicable, as of the
fourth, fifth, sixth and seventh anniversaries of the Closing Date by amounts
calculated as follows:
(a) by a dollar amount equal to the number of Shares sold by Payee during
the fourth year after the Closing Date multiplied by one half of a sum equal
to: (i) the average per share sales price for the Shares sold less (ii) Five
Dollars ($5.00);
(b) by a dollar amount equal to the number of Shares sold by Payee during
the fifth year after the Closing Date multiplied by one half of a sum equal
to: (i) the average per share sales price for the Shares sold less (ii) Six
Dollars ($6.00);
(c) by a dollar amount equal to the number of Shares sold by Payee during
the sixth year after the Closing Date multiplied by one half of a sum equal
to: (i) the average per share sales price for the Shares sold less (ii) Seven
Dollars ($7.00);
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<PAGE>
(d) by a dollar amount equal to the number of Shares sold by Payee during
the seventh year after the Closing Date multiplied by one half of a sum equal
to: (i) the average per share sales price for the Shares sold less (ii) Eight
Dollars ($8.00); and
(e) by a dollar amount equal to the number of Shares held by Payee on the
seventh anniversary of the Closing Date multiplied by one half of a sum equal
to: (i) the stock price for a share of the common stock of the Maker on the
seventh anniversary of the Closing Date calculated as the average of the
closing prices for a share of the common stock of the Maker for the thirty
(30) days on which the stock was traded immediately preceding the seventh
anniversary of the Closing Date as reported for the market or exchange on
which the common stock was traded less (ii) Eight Dollars ($8.00).
(f) if there shall be any change in the shares of the Maker's common
stock through merger, consolidation, reorganization, recapitalization, stock
dividend (of whatever amount), stock split or other change in the corporate
structure, appropriate adjustments shall be made in the dollar amount to be
deducted from amounts set forth in paragraphs 1.1(a)(ii), (b)(ii), (c)(ii),
(d)(ii) and (e)(ii).
For purposes of calculating any reductions, Payee will forward to Maker on
each anniversary date for which there is an applicable deduction its
calculation of the reduction and documentation to substantiate its sales
price for each sale. The sales price for purposes of the calculation shall be
the gross sales price before brokers' or other sales commissions and taxes or
other sales charges.
1.2 PRINCIPAL AND INTEREST
The principal amount of this Note shall be due and payable in full in a
single payment on January 12, 2004. Interest on the unpaid principal balance
of this Note shall be accrued annually and be added to the principal amount
of this Note on each anniversary of the date of this Note, including the
seventh anniversary.
1.3 MANNER OF PAYMENT
Payment of the principal on this Note shall be made by check at 2 Thurber
Road, Smithfield, Rhode Island, or at such other place in the United States
of America as Payee shall designate to Maker in writing or by wire transfer
of immediately available funds to a bank account in the United States
designated by Payee in writing. If payment of principal on this Note is due
on a day which is not a Business Day, such payment shall be due on the next
succeeding Business Day, and such extension of time shall be taken into
account in calculating the amount of interest payable under this Note.
"Business Day" means any day other than a Saturday, Sunday or legal holiday
in the State of Minnesota.
-2-
<PAGE>
1.4 PREPAYMENT
Maker may, without premium or penalty, at any time and from time to time,
prepay all or any portion of the outstanding principal balance due under this
Note, provided that each such prepayment is accompanied by accrued interest
on the amount of principal prepaid calculated to the date of such prepayment.
If all or any portion of this Note is prepaid, a calculation of the
reductions of the principal amount of the Note shall nevertheless be made
pursuant to Section 1.1, above, and on the seventh anniversary of this Note,
Payee shall reimburse Maker for the total amount of the reductions (but such
reimbursement shall not exceed the amount of the Note prepaid or otherwise
payable by the Maker).
1.5 RIGHT OF SET-OFF
Maker shall have the right to withhold and set-off against any amount due
hereunder the amount of any claim for indemnification or payment of damages
to which Maker may be entitled under the Agreement.
2. DEFAULTS
2.1 EVENTS OF DEFAULT
The occurrence of any one or more of the following events with respect to
Maker shall constitute an event of default hereunder ("Event of Default"):
(a) If Maker shall fail to pay when due any payment of principal on this
Note and such failure continues for fifteen (15) days; PROVIDED, HOWEVER,
that the exercise by Maker in good faith of its right of set-off pursuant to
Section 1.5 above, whether or not ultimately determined to be justified,
shall not constitute an Event of Default.
(b) If Maker fails to perform any other material obligation under the
Agreement and such failure continues for thirty (30) days after Payee
notifies Maker thereof in writing.
(c) If, pursuant to or within the meaning of the United States
Bankruptcy Code or any other federal or state law relating to insolvency or
relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary
case or proceeding; (ii) consent to the entry of an order for relief against
it in an involuntary case; (iii) consent to the appointment of a trustee,
receiver, assignee, liquidator or similar official; (iv) make an assignment
for the benefit of its creditors; or (v) admit in writing its inability to
pay its debts as they become due.
(d) If a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that (i) is for relief against Maker in an involuntary
case, (ii)
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<PAGE>
appoints a trustee, receiver, assignee, liquidator or similar official for
Maker or substantially all of Maker's properties, or (iii) orders the
liquidation of Maker, and in each case the order or decree is not dismissed
within one hundred twenty (120) days.
(e) The Maker shall make a Disposition of the Acquired Business.
2.2 NOTICE BY MAKER
Maker shall notify Payee in writing within ten (10) days after the occurrence
of any Event of Default of which Maker acquires knowledge.
2.3 REMEDIES
Upon the occurrence of an Event of Default hereunder (unless all Events of
Default have been cured or waived by Payee), Payee may, at its option, (i) by
written notice to Maker, declare the entire unpaid principal balance of this
Note, together with all accrued interest thereon, immediately due and payable
regardless of any prior forbearance, and (ii) exercise any and all rights and
remedies available to it under applicable law, including, without limitation,
the right to collect from Maker all sums due under this Note. Maker shall pay
all reasonable costs and expenses incurred by or on behalf of Payee in
connection with Payee's exercise of any or all of its rights and remedies
under this Note, including, without limitation, reasonable attorneys' fees.
If payment of all or any portion of this Note is accelerated or otherwise
collected by Payee pursuant to this Section 2.3 prior to the date on which
the principal amount of this Note would have been payable absent an Event of
Default, a calculation of the reductions of the principal amount of the Note
shall nevertheless be made pursuant to Section 1.1, above, and on the seventh
anniversary of this Note, Payee shall reimburse Maker for the total amount of
the reductions (but such reimbursement shall not exceed the amount of the
Note collected by Seller, or otherwise payable by, the Maker).
3. SUBORDINATION
(a) Anything in this Note to the contrary notwithstanding, the obligations
of the Maker in respect of the principal, interest, fees and charges on this
Note shall be subordinate and junior in right of payment, to the extent and in
the manner hereinafter set forth, to all Debt. For purposes of this paragraph
3, "Debt" shall mean (i) all indebtedness for money borrowed, including,
without limitation, principal, interest accruing before and after any
Insolvency Event as defined below, premiums, penalties, fees or expenses, and
regardless of whether direct or indirect, now existing or hereafter arising,
absolute or contingent, secured or unsecured, or long or short term, under any
agreement entered into by the Maker after the date of this Note under which the
Maker incurs or guarantees any indebtedness for money borrowed, and (ii)
renewals, extensions, refundings, deferrals, restructurings, amendments and
modifications of the
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<PAGE>
items described in (i) above; up to a maximum amount of Five Million
Dollars ($5,000,000).
(b) In the event that the Maker makes a general assignment for the
benefit of creditors; or an order, judgment or decree is entered adjudicating
the Maker bankrupt or insolvent; or any order for relief with respect to the
Maker is entered under the Federal Bankruptcy Code; or the Maker petitions or
applies to any tribunal for the appointment of a custodian, trustee, receiver
or liquidator of the Maker or of any substantial part of the assets of the
Maker, or commences any proceeding relating to the Maker under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction; or any such petition or
application is filed, or any such proceeding is commenced, against the Maker
and either (i) the Maker by any act indicates its approval thereof, consent
thereto or acquiescence therein or (ii) such petition, application or
proceeding is not dismissed within one hundred twenty (120) days
(collectively referred to as an "Insolvency Event"), or upon any acceleration
of Debt, then:
(i) the holders of Debt shall be entitled to receive payment in full in
cash of all principal, premium, interest, fees and charges then due on all
Debt (including interest, fees and charges accruing thereon after the
commencement of any such proceedings) before the Payee is entitled to receive
any payment on account of principal, interest or other amounts due (or past
due) upon this Note, and the holders of Debt shall be entitled to receive for
application in payment thereof any payment or distribution of any kind or
character, whether in cash, property or securities or by set-off or
otherwise, which may be payable or deliverable in any such proceedings in
respect of this Note; and
(ii) any payment or distribution of assets of the Maker, of any kind or
character, whether in cash, property or securities, to which the Payee would
be entitled except for the provisions of this paragraph 3(b) shall be paid or
delivered by the Maker directly to the holders of all Debt in the manner
provided in paragraph 3(e) below, for application in payment thereof until
all Debt (including interest, fees and charges accrued thereon after the date
of commencement of such proceedings) shall have been paid in full in cash.
(c) Any amendment or modification of the terms of paragraph 3 of this
Note shall not be effective against any person or entity who was a holder of
Debt prior to or at the time of such amendment or modification unless such
holder of Debt so consents.
(d) The holders of Debt may, at any time, in their discretion, renew,
amend, extend or otherwise modify the terms and provisions of Debt so held or
exercise any of their rights under the Debt including, without limitation, the
waiver of defaults thereunder and the amendment of any of the terms or
provisions thereof (or any notice evidencing
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<PAGE>
or creating the same), all without notice to or assent from the Payee. No
compromise, alteration, amendment, renewal or other change of, or waiver,
consent or other action in respect of any liability or obligation under or in
respect of, any terms, covenants or conditions of the Debt (or any instrument
evidencing or creating the same), whether or not such release is in
accordance with the provisions of the Debt (or any instrument evidencing or
creating the same), shall in any way alter or affect any of the subordination
provisions of this Note.
(e) If, notwithstanding the provisions of paragraph 3 of this Note, any
payment or distribution of any character (whether in cash, securities or
other property) or any security shall be received by the Payee in
contravention of this paragraph 3 before all the Debt shall have been paid in
full in cash, such payment, distribution or security shall be held in trust
for the benefit of, and shall be immediately paid over or delivered or
transferred to, the holders of Debt or their duly appointed agents for
application of payment according to the priorities of such Debt and ratably
among the holders of any class of Debt. Such payments received by the Payee
and delivered to the holders of the Debt shall be deemed not to be a payment
on this Note for any reason whatsoever and the indebtedness under this Note
shall remain as if such erroneous payment had never been paid by the Maker or
received by the Payee. In the event of the failure of the Payee to endorse or
assign any such payment, distribution or security, each holder of any Debt is
hereby irrevocably authorized to endorse or assign the same.
(f) No present or future holder of Debt shall be prejudiced in its right
to enforce the provisions of paragraph 3 of this Note by any act or failure
to act on the part of the Maker.
(g) If any payment or distribution to which Payee would otherwise have
been entitled but for the provisions of this paragraph 3 shall have been
applied, pursuant to the provisions of this paragraph 3, to the payment of
Debt, then and in such case and to such extent, the Payee (A) shall be
entitled to receive from the holders of such Debt at the time outstanding any
payments or distributions received by such holders of Debt in excess of the
amount sufficient to pay all Debt in full (whether or not then due and
whether such payment was in cash or such other form of consideration
acceptable to the holders of Debt in their sole discretion), (B) following
payment in full of the Debt (whether in cash or such other form of
consideration acceptable to the holders of Debt in their sole discretion),
shall be entitled to receive any and all further payments or distributions
applicable to Debt, and (C) following payment in full of the Debt (whether in
cash or such other form of consideration acceptable to the holders of Debt in
their sole discretion), shall be subrogated to the rights of the holders of
the Debt to receive distributions applicable to the Debt, in each case until
this Note shall have been paid in full in cash or such other consideration
acceptable to the Payee in its sole discretion. If the Payee has been
subrogated to the rights of the holders of Debt due to the operation of this
paragraph 3(g), the Maker agrees to take all such reasonable actions as are
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<PAGE>
requested by Payee in order to cause Payee to be able to obtain payments from
the Maker with respect to such subrogation rights as soon as possible.
(h) The provisions of this paragraph 3 are solely for the purpose of
defining the relative rights of the holders of Debt, on the one hand, and the
Payee on the other, against the Maker and its assets, and nothing herein is
intended to or shall impair, as between the Maker and the Payee, the
obligations of the Maker which are absolute and unconditional, to pay to the
holder the principal and interest on this Note as and when they become due
and payable in accordance with their terms, or is intended to or will affect
the relative rights of Payee and creditors of the Maker other than the
holders of the Debt, nor, except as provided in this paragraph 3, will
anything herein or therein prevent Payee from exercising all remedies
otherwise permitted by applicable law upon default under this Note, subject
to the rights, if any, under this paragraph 3 of the holders of Debt in
respect of cash, property or securities of the Maker received upon the
exercise of any such remedy and subject to this paragraph 3.
4. MISCELLANEOUS
4.1 WAIVER
The rights and remedies of Payee under this Note shall be cumulative and not
alternative. No waiver by Payee of any right or remedy under this Note shall
be effective unless in a writing signed by Payee. Neither the failure nor any
delay in exercising any right, power or privilege under this Note will
operate as a waiver of such right, power or privilege and no single or
partial exercise of any such right, power or privilege by Payee will preclude
any other or further exercise of such right, power or privilege or the
exercise of any other right, power or privilege. To the maximum extent
permitted by applicable law, (a) no claim or right of Payee arising out of
this Note can be discharged by Payee, in whole or in part, by a waiver or
renunciation of the claim or right unless in a writing, signed by Payee; (b)
no waiver that may be given by Payee will be applicable except in the
specific instance for which it is given; and (c) no notice to or demand on
Maker will be deemed to be a waiver of any obligation of Maker or of the
right of Payee to take further action without notice or demand as provided in
this Note. Maker hereby waives presentment, demand, protest and notice of
dishonor and protest.
4.2 NOTICES
Any notice required or permitted to be given hereunder shall be given
accordance with Section 11.05 of the Agreement.
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<PAGE>
4.3 SEVERABILITY
If any provision in this Note is held invalid or unenforceable by any court
of competent jurisdiction, the other provisions of this Note will remain in
full force and effect. Any provision of this Note held invalid or
unenforceable only in part or degree will remain in full force and effect to
the extent not held invalid or unenforceable.
4.4 GOVERNING LAW
This Note will be governed by the laws of the State of Minnesota without
regard to conflicts of laws principles.
4.5 PARTIES IN INTEREST
This Note shall bind Maker and its successors and assigns. This Note shall
not be assigned or transferred by Payee other than to a business in which
Payee owns more than one half of the equity and one half of the voting rights
without the express prior written consent of Maker, except by operation of
law. Payee shall promptly notify Maker of any such assignment, and the rights
of the assignee shall be subject to all the rights of Maker under the
Agreement.
4.6 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Note are provided for convenience only and
will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of
this Note unless otherwise specified.
All words used in this Note will be construed to be of such gender or number
as the circumstances require. Unless otherwise expressly provided, the words
"hereof" and "hereunder" and similar references refer to this Note in its
entirety and not to any specific section or subsection hereof.
IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date
first stated above.
NUTRITION MEDICAL, INC.
By: /s/ William L. Rush
------------------------------
Title: President and Chief Executive Officer
-------------------------------------------
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<PAGE>
EXHIBIT 23
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-36619) pertaining to the 1995 Long-Term Incentive and Stock
Option Plan and 1996 Non-Employee Director Stock Option Plan of Nutrition
Medical, Inc. of our report dated February 20, 1998 with respect to the
financial statements of Nutrition Medical, Inc. included in the Annual Report
on Form 10-KSB for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1997
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,647,482
<SECURITIES> 0
<RECEIVABLES> 1,171,520
<ALLOWANCES> 31,500
<INVENTORY> 1,615,165
<CURRENT-ASSETS> 4,454,068
<PP&E> 1,561,566
<DEPRECIATION> 382,366
<TOTAL-ASSETS> 5,633,268
<CURRENT-LIABILITIES> 1,533,949
<BONDS> 1,788,934
0
0
<COMMON> 54,560
<OTHER-SE> 2,255,825
<TOTAL-LIABILITY-AND-EQUITY> 5,633,268
<SALES> 4,104,601
<TOTAL-REVENUES> 4,104,601
<CGS> 2,811,443
<TOTAL-COSTS> 2,811,443
<OTHER-EXPENSES> 5,019,558
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198,184
<INCOME-PRETAX> (4,160,638)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,795,615)
<DISCONTINUED> (365,023)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,160,638)
<EPS-PRIMARY> (0.77)
<EPS-DILUTED> (0.77)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1996
FINANCIAL STATEMENTS RESTATED FOR DISCONTINUED OPERATIONS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,553,955
<SECURITIES> 1,671,596
<RECEIVABLES> 437,240
<ALLOWANCES> 81,000
<INVENTORY> 460,115
<CURRENT-ASSETS> 5,075,945
<PP&E> 182,881
<DEPRECIATION> 50,512
<TOTAL-ASSETS> 5,208,314
<CURRENT-LIABILITIES> 509,078
<BONDS> 0
0
0
<COMMON> 45,930
<OTHER-SE> 4,653,306
<TOTAL-LIABILITY-AND-EQUITY> 5,208,314
<SALES> 1,224,871
<TOTAL-REVENUES> 1,224,871
<CGS> 539,440
<TOTAL-COSTS> 539,440
<OTHER-EXPENSES> 1,366,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,075
<INCOME-PRETAX> (759,012)
<INCOME-TAX> 0
<INCOME-CONTINUING> (600,779)
<DISCONTINUED> (158,233)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (759,012)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</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.
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. 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.
<PAGE>
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.
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.
<PAGE>
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 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
<PAGE>
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.
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 41% 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
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.
<PAGE>
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 theNasdaq 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 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, 1997, 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.
<PAGE>
EXHIBIT 99.2
NUTRITION [LOGO] MEDICAL
FOR IMMEDIATE RELEASE
WEDNESDAY, JANUARY 28, 1998
NUTRITION MEDICAL, INC. PROVIDES DIRECTION
ON FOURTH QUARTER EARNINGS OUTLOOK
AND ANNOUNCES STRATEGIC REALIGNMENT
MINNEAPOLIS, JANUARY 28 - Nutrition Medical, Inc. (Nasdaq: NMED) today
announced that financial results for the fourth quarter ended December 31,
1997 will fall below those of the previous quarter. While net sales are
expected to be slightly below published estimates, the per share net loss is
expected to be significantly higher, in the range of $.52 to $.55.
The Company noted that a substantial portion of the loss is the result
of a one-time charge of approximately $1.5 million to write off goodwill from
the acquisition of assets from Elan Pharma, Inc. in the first quarter of
1997. The write-off removes certain intangible assets from the balance sheet
and eliminates related non-cash amortization charges, which in 1997 totaled
$336,000.
The Company also reported that, after a careful review, analysis and
consultation with its board of directors, it has commenced a strategic
internal realignment intended to grow its core clinical nutrition business
and potentially create a solid path to profitability. The plan entails
several components and affects virtually every portion of the business,
including the Company's infant formula development activities. The Company
stated that it plans to seek a corporate partner or buyer to complete its
infant formula development project. In the absence of such a partner, the
Company will suspend further investment on the project.
"Regulatory requirements and associated costs have exceeded our initial
expectations," commented William L. Rush, president and chief executive
officer. "This has forced us to reevaluate the project and how it fits within
our corporate objectives."
The Company also announced a plan that will significantly restructure
its adult nutrition supplement (retail) business by the end of the second
quarter of 1998. The adult
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<PAGE>
Nutrition Medical, Inc.
January 28, 1998
Page 2
nutrition supplement division represented approximately 35 percent of the
Company's total sales in 1997 and contributed approximately 1.3 percent of
the gross profit.
"The adult nutrition business represents a disproportionate burden on
corporate resources relative to the returns generated by the product line,"
said Rush. "We have taken steps that will ultimately result in either the
discontinuation of all but the most profitable of current accounts, the sale
or licensing of the formulas, or the complete phase-out of the business."
Estimated expenses of $200,000 related to the restructuring will be
recognized in the fourth quarter of 1997.
Rush concluded, "Given our current resources, we believe that a greater
emphasis on our clinical nutrition business will increase the likelihood of
profitability and help build a stronger base from which to expand future
operations. We are optimistic that a sharper focus, a solid market presence
and overall fiscal strength will ultimately create greater tangible value for
our shareholders."
This news release contains forward-looking statements that involve risks
and uncertainties, including risks associated with regulatory approvals and
other risks described from time to time in reports filed by Nutrition Medical
with the Securities and Exchange Commission, including but not limited to its
most recent Quarterly Report on Form 10-QSB.
Nutrition Medical, Inc., based in Minneapolis, develops and markets a
line of more than 50 clinical nutrition products for hospitals and nursing
homes, as well as a line of private-label adult nutrition supplements which
are sold nationally through retail chains. The Company focuses primarily on
niches within the human nutrition industry that have not traditionally had
access to cost-effective "brand alternatives".
Contact: William L. Rush, president and chief executive officer (612)
577-3201 or Anwar H. Bhimani, chief financial officer, (612) 577-3235.
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<PAGE>
EXHIBIT 99.3
NUTRITION [LOGO] MEDICAL
FOR IMMEDIATE RELEASE
THURSDAY, MARCH 19, 1998
NUTRITION MEDICAL, INC. TO TRANSFER RETAIL
BUSINESS TO AGRILINK
MINNEAPOLIS, MARCH 19 - Nutrition Medical, Inc. (Nasdaq: NMED) and
Agrilink Foods, Inc., a wholly-owned subsidiary of Pro-Fac Cooperative, Inc.
(Nasdaq: PFACP) announced today that they have signed an agreement for
Agrilink to acquire Nutrition Medical's private label adult nutrition formula
business. Under the terms of the agreement, Nutrition Medical will transfer
its retail accounts to Agrilink's largest business unit, Curtis Burns Foods,
and receive royalty payments for two years on sales to these customers.
Nutrition Medical will also receive payment for portions of existing product
and packaging inventories. The transaction is expected to close by May 1,
1998.
"This agreement represents the successful culmination of our previously
announced evaluation and restructuring of our business units and provides
benefits to all parties," said William L. Rush, president and chief executive
officer of Nutrition Medical. "Agrilink's considerable experience in the
adult nutrition supplement industry will provide a seamless transition for
our customers, all of whom will continue to receive the highest levels of
service and product quality. In addition, Agrilink has been an important
manufacturing partner for our critical care formula division and, as part of
the transaction, they have agreed to continue manufacturing certain of our
critical care formulas for another three years. Finally, the swift
completion of this transaction enables us to refocus our energies and
resources on greater market penetration within our core clinical nutrition
business."
"We're very pleased to enter into this agreement with Nutrition
Medical," says Curtis Burns president Ben Frega, "and to continue the
expansion of our nutritional drink business. Aseptic growth is an important
component to our strategic plan and this new business is further evidence of
our commitment to this category."
Nutrition Medical, Inc., based in Minneapolis, develops and markets a
line of clinical nutrition products for hospitals and other health care
facilities. The Company
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<PAGE>
Nutrition Medical and Agrilink
March 19, 1998
Page Two
focuses primarily on niches within the human nutrition industry that have not
traditionally had access to cost-effective "brand alternatives".
Agrilink Foods processes and markets a variety of product lines of
regional branded, private label and foodservice products in facilities
throughout the United States. Pro-Fac Cooperative is an agricultural
marketing cooperative that consists of over 600 members, processes fruits,
vegetables and popcorn through Agrilink. Curtis Burns is Agrilink's largest
business unit, with plant facilities located in Michigan, New York, Georgia
and Texas.
Contacts: NUTRITION MEDICAL, William L. Rush, president and chief
executive officer, (612) 577-3201, or Anwar H. Bhimani, chief financial
officer, (612) 577-3235. AGRILINK FOODS, Bea Slizewski, vice president
corporate communications, (716) 264-3189.
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