<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
NM HOLDINGS, INC.
(Name of Registrant as Specified In Its Charter)
Not Applicable
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
4) Proposed maximum aggregate value of transaction:
5) Total Fee Paid:
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
NM HOLDINGS, INC.
FORMERLY KNOWN AS
NUTRITION MEDICAL, INC.
9850 51ST AVENUE NORTH, SUITE 110
MINNEAPOLIS, MINNESOTA 55442
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
NM Holdings, Inc. (the "Company") to be held at the Minneapolis Club at 729
Second Avenue South, Minneapolis, Minnesota, on Tuesday, July 6, 1999, 3:30
p.m. (Minneapolis time).
The attached Notice of Special Meeting and Proxy Statement describe the
formal business to be transacted at the Special Meeting. Following the formal
business portion of the Special Meeting, shareholders will be given the
opportunity to ask questions. At your earliest convenience, please mark, sign
and return the accompanying proxy card in the enclosed postage pre-paid
envelope. We hope you will be able to attend the Special Meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD PROMPTLY. IF YOU ATTEND THE
SPECIAL MEETING, YOU MAY REVOKE SUCH PROXY AND VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD. IF YOU DO NOT ATTEND
THE SPECIAL MEETING, YOU MAY STILL REVOKE SUCH PROXY AT ANY TIME PRIOR TO THE
SPECIAL MEETING BY PROVIDING WRITTEN NOTICE OF SUCH REVOCATION TO RICHARD J.
HEGSTRAND, CHIEF OPERATING OFFICER OF THE COMPANY, AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE COMPANY, 9850 51ST AVENUE NORTH, SUITE 110, MINNEAPOLIS,
MINNESOTA 55442. YOUR PROMPT COOPERATION WILL BE GREATLY APPRECIATED.
Sincerely,
/s/ Richard J. Hegstrand
Richard J. Hegstrand
Chief Operating Officer
Minneapolis, Minnesota
June 15, 1999
<PAGE>
NM HOLDINGS, INC.
FORMERLY KNOWN AS
NUTRITION MEDICAL, INC.
9850 51ST AVENUE NORTH, SUITE 110
MINNEAPOLIS, MINNESOTA 55442
--------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
JULY 6, 1999
--------------------------
To the Shareholders of
NM HOLDINGS, INC.:
Notice is hereby given that a Special Meeting of the Shareholders of NM
Holdings, Inc. (the "Company") will be held at 3:30 p.m. (Minneapolis time)
on July 6, 1999, at the Minneapolis Club at 729 Second Avenue South,
Minneapolis, Minnesota, for the following purposes:
1. To vote on the approval of the Agreement and Plan of Reorganization
dated as of March 25, 1999, as amended on May 7, 1999 (the "Merger
Agreement"), with MJK Holdings, Inc. ("MJK") and NM Merger Co., a newly
formed wholly-owned subsidiary of the Company ("Merger Sub"), pursuant
to which Merger Sub will merge with and into MJK, with MJK as the
surviving corporation, which will then be a wholly-owned subsidiary of
the Company. Details of this transaction and other important
information are set forth in the accompanying Proxy Statement which you
are urged to read carefully.
2. To vote on the approval of an amendment to and restatement of the
Company's Second Restated Articles of Incorporation, as amended, which,
among other things, (a) changes the corporate name of the Company to
"Stockwalk.com Group, Inc," (b) increases the number of authorized shares
of the Company's capital stock to 100,000,000, of which 50,000,000 will
be designated as common stock and 50,000,000 will be undesignated capital
stock, and (c) increases the number of persons who will serve on the
Company's Board of Directors to six, and allows for future changes to
that number by the affirmative vote of a majority of the Board of
Directors.
3. To vote on the approval of an amendment to the Company's 1995 Long-Term
Incentive and Stock Option Plan (the "1995 Plan") increasing to
1,500,000 the maximum number of shares of authorized common stock, $.04
par value, of the Company ("Common Stock") issuable upon exercise of
options or other awards granted or issued under the 1995 Plan.
4. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS THAT AN AFFIRMATIVE VOTE BE CAST FOR
EACH OF THE PROPOSALS LISTED ON THE PROXY CARD.
One purpose of the Special Meeting is to approve a merger transaction
pursuant to which the Company is a constituent corporation. Holders of Common
Stock who do not vote their shares in favor of the Merger Agreement, and who
strictly comply with the provisions of Sections 302A.471 and 302A.473 of the
Minnesota Business Corporation Act (the "MBCA"), have the right to object to
the approval of the Merger Agreement and may make written demand for payment
of the "fair value" of their shares of Common Stock ("Dissenting Shares").
For a description of the rights of holders of Dissenting Shares, see Sections
302A.471 and 302A.473 of the MBCA, a copy of which is attached as Exhibit C
to the Proxy Statement. In addition, a description of the procedures to be
followed in order to obtain payment for Dissenting Shares is set forth under
the caption "Approval of the Merger Agreement--Rights Of Dissenting
Shareholders" in the Proxy Statement.
<PAGE>
Only holders of record of Common Stock at the close of business on June
9, 1999, will be entitled to notice of and to vote at the Special Meeting or
any adjournment thereof.
IT IS IMPORTANT THAT YOUR SHARES OF COMMON STOCK BE REPRESENTED AT THE
SPECIAL MEETING. YOU ARE URGED TO COMPLETE AND SIGN THE ACCOMPANYING PROXY
CARD, WHICH IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY, AND MAIL
IT PROMPTLY IN THE ENCLOSED ENVELOPE. THE PROXY MAY BE REVOKED AT ANY TIME
PRIOR TO EXERCISE. YOUR PROXY WILL NOT BE USED IF YOU ATTEND AND VOTE AT THE
SPECIAL MEETING IN PERSON.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ George E. Kline
George E. Kline
Chief Executive Officer and President
June 15, 1999
IMPORTANT: PLEASE RETURN EACH PROXY CARD SENT TO YOU. THE PROMPT RETURN OF
PROXIES WILL SAVE THE COMPANY THE EXPENSE OF FURTHER REQUESTS FOR PROXIES.
<PAGE>
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
JULY 6, 1999
--------------
This proxy statement is provided in connection with a Special Meeting
(the "Special Meeting") of Shareholders of NM Holdings, Inc. (the "Company"),
which will be held at 3:30 p.m. on July 6, 1999, at the Minneapolis Club at
729 Second Avenue South, Minneapolis, Minnesota, and any adjournment thereof.
The accompanying proxy is solicited by the Board of Directors of the Company.
The Special Meeting has been called to consider and to vote upon the
following three items of business: (1) approval of the Agreement and Plan of
Reorganization dated as of March 25, 1999 (as amended on May 7, 1999) with
MJK Holdings, Inc. and NM Merger Co., a newly formed wholly-owned subsidiary
of the Company (the "Merger Agreement"); (2) approval of an amendment to and
restatement of the Company's Second Restated Articles of Incorporation, as
amended (the "Articles of Incorporation"), which, among other things, (a)
changes the corporate name of the Company to "Stockwalk.com Group, Inc.," (b)
increases the number of authorized shares of the Company's capital stock to
100,000,000, of which 50,000,000 will be designated as common stock and
50,000,000 will be undesignated capital stock, and (c) increases the number
of persons who will serve on the Company's Board of Directors to six, and
allows for future changes to that number by the affirmative vote of a
majority of the Board of Directors; and (3) approval of an amendment to the
Company's 1995 Long-Term Incentive and Stock Option Plan (the "1995 Plan")
increasing to 1,500,000 the maximum number of shares of authorized common
stock, $.04 par value, of the Company ("Common Stock") issuable upon exercise
of options or other awards granted or issued under the 1995 Plan. The Board
of Directors knows of no other matters to be presented for action at the
Special Meeting. If any other matters properly come before the Special
Meeting, however, the persons named in the proxy will vote on such other
matters in accordance with their best judgment.
The Board of Directors recommends that an affirmative vote be cast FOR
each of the proposals listed in the proxy (or voting instructions) card. By
completing and returning the accompanying proxy, the shareholder authorizes
George E. Kline and Richard J. Hegstrand (each with the power to act alone
and with the power of substitution and revocation), as designated on the face
of the proxy, to vote all shares for the shareholder. All returned proxies
that are properly signed and dated will be voted as the shareholder directs.
If no direction is given, executed proxies will be voted FOR each of the
listed proposals. Regardless of the size of your holdings, you are encouraged
to complete and return the proxy or voting instructions card so that your
shares may be voted at the Special Meeting. A proxy may be revoked by a
shareholder at any time before it is voted at the Special Meeting by giving
written notice of revocation to the Chief Operating Officer of the Company at
the Company's principal executive offices at 9850 51st Avenue North, Suite
110, Minneapolis, Minnesota 55442, by execution of a later dated proxy or by
attending and voting at the Special Meeting.
This proxy statement and the accompanying form of proxy are being sent
or given to shareholders beginning on or about June 15, 1999.
Holders of record of the shares of Common Stock at the close of business
on June 9, 1999, will be entitled to vote on all matters at the Special
Meeting. Each share of Common Stock will be entitled to one vote. On June 9,
1999, a total of 1,239,876 shares of Common Stock were outstanding. A
majority of the voting power of the outstanding shares of Common Stock
entitled to vote, represented in person or by proxy, will be required to
constitute a quorum for the Special Meeting. The Merger Agreement must be
approved by the holders of a majority of outstanding shares of Common Stock.
A majority of the shares of Common Stock represented at the Special Meeting
in person or by proxy will be required to approve the amendments to and
restatement of the Articles of Incorporation and the amendment to the 1995
Plan.
<PAGE>
Shares voted as abstentions on any matter will be counted for purposes
of determining the presence of a quorum at the Special Meeting and treated as
unvoted, although present and entitled to vote, for purposes of determining
the approval of each matter as to which a shareholder has abstained. If a
broker submits a proxy that indicates the broker does not have discretionary
authority as to certain shares to vote on one or more matters, those shares
will be counted for purposes of determining the presence of a quorum at the
meeting, but will not be considered as present and entitled to vote with
respect to such matters. Since the Minnesota Business Corporation Act
requires the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote on the proposal to approve the Merger
Agreement, if shareholders whose shares are held in street name by brokers
fail to provide specific instructions with respect to their shares of Common
Stock to their broker or such shareholders explicitly abstain from voting on
such proposals, the effect will be the same as a vote against the approval of
the Merger Agreement. Executed but unmarked proxies will be voted for
approval of the Merger Agreement, for approval of the amendments to and
restatement of the Articles of Incorporation, and for approval of the
amendment to the 1995 Plan.
All expenses in connection with the solicitation of this proxy will be
paid by the Company and are estimated to be approximately $35,000. Officers,
directors and any regular employees of the Company, who will receive no extra
compensation for their services, may solicit proxies by telephone or
electronic transmission.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY................................................................................................... 1
Date, Time and Place of Special Meeting.................................................................. 1
Record Date; Shareholders Entitled to Vote; Quorum....................................................... 1
Purpose of the Special Meeting........................................................................... 1
The Company.............................................................................................. 1
MJK Holdings, Inc........................................................................................ 2
The Merger............................................................................................... 2
Management of the Company and the Surviving Corporation After the Merger............................. 2
Interests of Certain Persons in the Merger........................................................... 3
Closing Conditions................................................................................... 3
Termination of the Merger Agreement.................................................................. 3
Effective Time....................................................................................... 3
Favorable Recommendation of the Company's Board of Directors......................................... 4
Shareholder Approval................................................................................. 4
Rights of Dissenting Shareholders.................................................................... 4
Accounting Treatment................................................................................. 4
Certain Federal Income Tax Consequences.............................................................. 4
Regulatory Approval.................................................................................. 4
Market for Common Stock.................................................................................. 4
Comparative Unaudited Per Common Share Data.............................................................. 5
Selected Consolidated Financial Data of MJK.............................................................. 6
Supplementary Financial Data of MJK...................................................................... 7
Unaudited Pro Forma Combined Financial Information....................................................... 8
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION............................................... 11
THE SPECIAL MEETING....................................................................................... 12
General.................................................................................................. 12
Matters to be Considered................................................................................. 12
Record Date; Shareholders Entitled to Vote; Voting; Quorum............................................... 12
PROPOSAL 1: APPROVAL OF THE MERGER AGREEMENT.............................................................. 13
THE MERGER................................................................................................ 13
Effects of the Merger.................................................................................... 13
Effective Time........................................................................................... 13
Fractional Shares........................................................................................ 14
Background of the Merger; The Company's Reasons for the Merger........................................... 14
Favorable Recommendation of the Company's Board of Directors............................................. 15
MJK's Reasons for the Merger............................................................................. 15
Regulatory Approval...................................................................................... 15
Management of the Company and the Surviving Corporation After the Merger................................. 15
Interests of Certain Persons in the Merger............................................................... 16
Accounting Treatment..................................................................................... 17
Certain Federal Income Tax Consequences.................................................................. 17
THE MERGER AGREEMENT...................................................................................... 19
General.................................................................................................. 19
Certain Representations and Warranties................................................................... 19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Certain Covenants........................................................................................ 20
Limitations on Solicitation of Transactions.............................................................. 21
Certain Conditions to Consummation....................................................................... 22
Termination.............................................................................................. 23
Expenses................................................................................................. 23
RIGHTS OF DISSENTING SHAREHOLDERS......................................................................... 23
CERTAIN INFORMATION CONCERNING THE COMPANY................................................................ 24
Discontinued Operations.................................................................................. 24
Strategic Repositioning of the Company................................................................... 26
Changes in Company Management............................................................................ 26
Legal Proceedings........................................................................................ 26
Employees................................................................................................ 27
Market Price and Dividend Data........................................................................... 27
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 28
General.............................................................................................. 28
Results of Operations................................................................................ 29
Three Months Ended March 31, 1999 and 1998........................................................... 29
Twelve Months Ended December 31, 1998 and 1997....................................................... 29
Twelve Months Ended December 31, 1997 and 1996....................................................... 30
Year 2000............................................................................................ 31
Liquidity and Capital Resources...................................................................... 31
Risk Factors............................................................................................. 32
Control by Certain Shareholders...................................................................... 32
Undesignated Stock................................................................................... 32
Limitations on Broker-Dealer Sales of Common Stock; Applicability of "Penny Stock" Rules; No
Assurance of Qualification for Listing on The Nasdaq National Market and The Nasdaq SmallCap
Market............................................................................................... 32
Dependence Upon Management........................................................................... 33
Speculative Nature of Company's Proposed Operations.................................................. 33
Scarcity of and Competition for Business Opportunities............................................... 34
No Standards for Business Opportunities.............................................................. 34
Reporting Requirements under the Exchange Act........................................................ 34
Lack of Diversification.............................................................................. 34
Change in Control and Management..................................................................... 34
Disadvantages of Blank Check Offerings............................................................... 34
Possible Volatility of Stock Price................................................................... 35
Director Compensation.................................................................................... 35
1995 Plan............................................................................................ 35
1996 Director Plan................................................................................... 35
Executive Compensation................................................................................... 36
Summary Compensation Table........................................................................... 36
Severance Agreement.................................................................................. 36
Current Compensation................................................................................. 37
Stock Options........................................................................................ 37
Security Ownership of Certain Beneficial Owners and Management........................................... 37
CERTAIN INFORMATION CONCERNING MJK........................................................................ 39
General.................................................................................................. 39
Brokerage and Distribution Activities.................................................................... 39
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Principal Transactions............................................................................... 39
Commission Business.................................................................................. 39
Investment Banking Activities........................................................................ 39
Research Activities.................................................................................. 40
Customer Financing................................................................................... 40
Clearing Firm Operations................................................................................. 40
Proposed Internet Brokerage.............................................................................. 41
Business Expansion....................................................................................... 41
Regulation............................................................................................... 41
Uniform Net Capital Rule................................................................................. 41
Competition.............................................................................................. 42
Employees................................................................................................ 42
Legal Proceedings........................................................................................ 42
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 42
General.............................................................................................. 42
Twelve Months Ended March 31, 1999 and March 31, 1998................................................ 44
Twelve months ended March 31, 1998 and March 31, 1997................................................ 45
Twelve Months Ended March 31, 1997 and March 31, 1996................................................ 47
Liquidity and Capital Resources...................................................................... 47
Inflation............................................................................................ 48
Segments............................................................................................. 48
Year 2000............................................................................................ 49
Risk Factors............................................................................................. 50
Uncertain Industry Factors; Economic and Market Conditions........................................... 50
Risks Associated with Investment Banking............................................................. 50
Risks Associated with Principal Transactions......................................................... 51
Extensive Government Regulation; Strict Net Capital Requirements..................................... 51
Small Capitalization Companies....................................................................... 51
Credit Risks......................................................................................... 51
Legal Proceedings.................................................................................... 51
Current and Potential Reforms in the Nasdaq Market................................................... 52
Dependence on Key Personnel.......................................................................... 52
No Dividends......................................................................................... 52
Risks Associated with Management of a Changing Business.............................................. 52
Risks of Systems Failure............................................................................. 53
Risks Associated with Entering New Markets........................................................... 53
Significant Fluctuations in Quarterly Operating Results.............................................. 53
Substantial Competition.............................................................................. 54
Expansion into Internet Trading...................................................................... 54
Early Stage of Development of Online Brokerage Business and Dependence on Online Commerce
and the Internet................................................................................... 55
Rapid Technological Change; Delays in Introduction of New Services and Products...................... 55
Risks Associated with Encryption Technology.......................................................... 55
Future Capital Needs; Uncertainty of Additional Financing............................................ 56
Risks Associated with Acquisitions, Joint Ventures and Other Strategic Relationships................. 56
PROPOSAL 2: AMENDMENT TO AND RESTATEMENT OF THE ARTICLES OF INCORPORATION................................. 57
General.................................................................................................. 57
Purposes and Effects..................................................................................... 57
Board Recommendation; Shareholder Vote Required...................................................... 58
</TABLE>
-----------------------
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROPOSAL 3: AMENDMENT TO 1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN................................... 59
General.................................................................................................. 59
Purposes and Effects..................................................................................... 59
Summary Description...................................................................................... 59
Federal Tax Consequences................................................................................. 61
Options Received and To Be Received by Certain Persons and Groups........................................ 63
Board Recommendation; Shareholder Vote Required.......................................................... 63
OTHER MATTERS............................................................................................. 64
PRINCIPAL ACCOUNTANTS..................................................................................... 64
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS.......................................................... 64
AVAILABLE INFORMATION..................................................................................... 64
FINANCIAL STATEMENTS...................................................................................... F-1
EXHIBIT A (Agreement and Plan of Reorganization).......................................................... A-1
EXHIBIT B (Third Amended and Restated Articles of Incorporation).......................................... B-1
EXHIBIT C (Minnesota Dissenters' Rights Statute).......................................................... C-1
</TABLE>
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT. THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED
INFORMATION CONTAINED IN THIS PROXY STATEMENT AND IN THE EXHIBITS HERETO.
SHAREHOLDERS ARE URGED TO REVIEW THE ENTIRE PROXY STATEMENT CAREFULLY. NM
HOLDINGS, INC. HAS SUPPLIED ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT
RELATING TO NM HOLDINGS, INC. AND NM MERGER CO. INCLUDED HEREIN, AND MJK
HOLDINGS, INC. HAS SUPPLIED ALL INFORMATION IN THIS PROXY STATEMENT RELATING
TO MJK HOLDINGS, INC. AND ITS SUBSIDIARIES INCLUDED HEREIN. EACH OF NM
HOLDINGS, INC. AND MJK HOLDINGS, INC. MAKES NO REPRESENTATION AS TO
INFORMATION CONTAINED HEREIN SUPPLIED BY THE OTHER COMPANY.
DATE, TIME AND PLACE OF SPECIAL MEETING
A Special Meeting (the "Special Meeting") of shareholders of NM
Holdings, Inc., a Minnesota corporation (the "Company"), will be held on July
6, 1999 at 3:30 p.m. (Minneapolis time) at the Minneapolis Club at 729 Second
Avenue South, Minneapolis, Minnesota.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE; QUORUM
Only holders of record of shares of common stock, $.04 par value, of the
Company (the "Common Stock"), on June 9, 1999 (the "Record Date") are
entitled to notice of and to vote at the Special Meeting or at any
adjournment or postponement thereof. As of June 9, 1999, there were 1,239,876
shares of Common Stock outstanding, held of record by approximately 1,044
shareholders. The presence, in person or by proxy, at the Special Meeting of
the holders of a majority of the voting power of the outstanding shares of
the Common Stock is necessary to constitute a quorum at the Special Meeting.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, shareholders will be asked to: (1) approve the
Agreement and Plan of Reorganization dated as of March 25, 1999, as amended
on May 7, 1999 (the "Merger Agreement"), with MJK Holdings, Inc., a Minnesota
corporation ("MJK"), and NM Merger Co., a Minnesota corporation and newly
formed wholly-owned subsidiary of the Company ("Merger Sub"); (2) approve an
amendment to and restatement of the Second Restated Articles of Incorporation
of the Company, as amended (the "Articles of Incorporation"), which, among
other things, (a) changes the corporate name of the Company to "Stockwalk.com
Group, Inc.," (b) increases the number of authorized shares of the Company's
capital stock to 100,000,000, of which 50,000,000 will be designated as
common stock and 50,000,000 will be undesignated capital stock, and (c)
increases the number of persons who will serve on the Company's Board of
Directors to six, and allows for future changes to that number by the
affirmative vote of a majority of the Board of Directors; and (3) approve an
amendment to the Company's 1995 Long-Term Incentive and Stock Option Plan
(the "1995 Plan") increasing to 1,500,000 the maximum number of shares of
authorized Common Stock issuable upon exercise of options or other awards
granted or issued under the 1995 Plan.
THE COMPANY
Prior to December 23, 1998, the Company developed and sold generic
critical care formulas and related delivery equipment and accessories (i.e.,
feeding pumps and plastic disposables) for the hospital, nursing home and
home health care markets, as well as a line of retail private label adult
nutrition products for sale through retail chains. On December 23, 1998, the
Company completed a series of transactions resulting in the sale of
substantially all of its operating assets. The Company does not currently
conduct any active business operations. Since December 23, 1998, the Company
has used its existing cash resources to pursue a business combination with
another entity engaged in other lines of business.
The principal executive offices of the Company are located at 9850 51st
Avenue North, Suite 110, Minneapolis, Minnesota 55442, and the Company's
telephone number is (612) 551-9595. Upon the consummation of the transactions
contemplated by the Merger Agreement, the Company's principal executive
offices will be located at MJK's principal executive offices, 5500 Wayzata
Boulevard, Suite 800, Minneapolis, Minnesota 55416.
-1-
<PAGE>
MJK HOLDINGS, INC.
MJK is a holding company which, through its wholly-owned subsidiary,
Miller, Johnson & Kuehn, Incorporated, offers regional securities brokerage
and investment banking services. Miller, Johnson & Kuehn, Incorporated also
provides securities clearing services for approximately 30 correspondent
brokerage firms. Through its subsidiary, MJK Capital Corporation, MJK engages
in unregulated private finance transactions. MJK has reserved a World Wide
Web site and intends to commence and offer on-line internet securities
trading operations in 1999 through its wholly-owned subsidiary,
Stockwalk.com, Inc.
MJK's executive offices and principal operational facilities are located
at 5500 Wayzata Boulevard, Suite 800, Minneapolis, Minnesota 55416. MJK also
maintains regional retail offices in Minneapolis, Minnesota; St. Paul,
Minnesota; Scottsdale, Arizona; Houston, Texas; Chicago, Illinois;
Clearwater, Florida; and La Jolla, California. MJK's telephone number at its
executive offices in Minneapolis, Minnesota is (612) 542-6000.
THE MERGER
Pursuant to the terms of the Merger Agreement, Merger Sub will merge
with and into MJK, with MJK as the surviving corporation (the "Surviving
Corporation"), which shall then be a wholly-owned subsidiary of the Company.
Upon the approval of the Merger Agreement and the consummation of the
transactions contemplated by the Merger Agreement (the "Merger"), each
outstanding share of common stock, par value $.01, of MJK ("MJK Common
Stock") and Series I Preferred Stock, par value $7.85, of MJK ("MJK Series I
Preferred Stock") will be converted into 3.72382 (the "Exchange Ratio")
shares of Common Stock. Each share of MJK Common Stock or MJK Series I
Preferred Stock owned by MJK, the Company or Merger Sub immediately prior to
the Effective Time will be cancelled and extinguished without any conversion
and no payment will be made with respect thereto. Fractional shares of Common
Stock will not be issued in connection with the Merger.
Based upon the Exchange Ratio and the number of shares of Common Stock,
MJK Common Stock and MJK Series I Preferred Stock outstanding as of the
Record Date, and assuming no change prior to the Effective Time, the
aggregate number of shares of Common Stock issuable to shareholders of MJK
would be 17,974,771 or approximately 93.5% of the Common Stock outstanding
immediately following the consummation of the Merger (approximately 93.0% on
a diluted basis assuming the exercise of all of those outstanding options and
warrants to purchase shares of Common Stock exercisable at a per share
purchase price of $5 or less). See "Approval of the Merger Agreement--The
Merger--Effects of the Merger."
For a complete description of the Merger, see "Approval of the Merger
Agreement."
MANAGEMENT OF THE COMPANY AND THE SURVIVING CORPORATION AFTER THE MERGER
The Company has agreed that, as of the Effective Time, the officers and
all directors of the Company, except George E. Kline, will resign. George E.
Kline, as the remaining Company director, will appoint Eldon C. Miller, David
B. Johnson, Paul R. Kuehn, Stanley D. Rahm, and N. Lee Wesley, each of whom
will serve as director of the Company until the next annual meeting of the
Company's shareholders. Immediately thereafter, the remaining and new
directors of the Company will appoint those individuals serving as officers
of MJK immediately prior to the Effective Time to the same respective
positions with the Company. Biographical information about the new directors
is provided in "Approval of the Merger Agreement--The Merger--Management of
the Company and the Surviving Corporation After the Merger."
MJK will be the Surviving Corporation and will become a wholly-owned
subsidiary of the Company upon consummation of the Merger. As of the
Effective Time, the directors and officers of the Surviving Corporation will
be the persons who served as the directors and officers of MJK immediately
prior to the Effective Time.
See "Approval of the Merger Agreement--The Merger-- Management of the
Company and the Surviving Corporation After the Merger."
-2-
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain individuals who will serve as directors and executive officers
of the Company following the Merger currently have, and upon consummation of
the Merger will have, beneficial ownership of Common Stock. Such directors
and executive officers will be deemed to have such beneficial ownership of
Common Stock (as a percentage of outstanding shares) as follows:
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
OWNED AS OF OWNED AS IF
MAY 28, 1999* MERGER CONSUMMATED
ON MAY 28, 1999*
------------------ -------------------
<S> <C> <C>
David B. Johnson 8.7% 22.7%
George E. Kline 14.1 **
Paul R. Kuehn 2.5 22.3
Eldon C. Miller ** 22.2
Stanley D. Rahm ** 9.4
N. Lee Wesley ** 3.1
------------------
</TABLE>
- -------------------
* Includes shares of Common Stock issuable upon exercise of outstanding
options and warrants.
** Less than 1% of outstanding shares of Common Stock.
For more information, see "Approval of the Merger Agreement--The
Merger--Interests of Certain Persons in the Merger."
CLOSING CONDITIONS
The Merger is subject to the approval of the Merger Agreement by the
holders of a majority of the outstanding shares of Common Stock. The Merger
is also subject to various other closing conditions, including the absence of
any event that would prevent the consummation of the transactions
contemplated by the Merger Agreement, or that would cause any of the
transactions contemplated by such agreement to be rescinded following
consummation of such transactions. See "Approval of the Merger Agreement--The
Merger Agreement--Certain Conditions to Consummation."
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may, under specified circumstances, be terminated
and the transactions abandoned, notwithstanding shareholder approval of the
Merger Agreement. See "Approval of the Merger Agreement--The Merger
Agreement--Termination."
EFFECTIVE TIME
The Merger will be consummated and become effective upon the filing of
Articles of Merger with the Minnesota Secretary of State (the "Effective
Time"). Such filing is required by the Minnesota Business Corporation Act
(the "MBCA") in connection with the Merger and will be made as promptly as
practicable after the adoption by the shareholders of the Company of the
Merger Agreement and the satisfaction or waiver of all other conditions to
the Merger, but in no event later than ten business days after all such
conditions have been satisfied or waived, or on such date as may be mutually
agreed by the parties to the Merger Agreement. See "Approval of the Merger
Agreement--The Merger--Effects of the Merger" and "--Effective Time." As used
in this Proxy Statement, the term "Effective Date" shall mean the date on
which the Articles of Merger are filed with the Minnesota Secretary of State.
-3-
<PAGE>
FAVORABLE RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The Board of Directors of the Company (the "Board of Directors") has
determined that the Merger is fair from a financial point of view to, and in
the best interests of, the Company's shareholders. The Board of Directors has
approved the Merger Agreement and recommends that shareholders vote in favor
of the proposal to approve and adopt the Merger Agreement, the amendment to
and restatement of the Articles of Incorporation, and the amendment to the
1995 Plan. See "Approval of The Merger Agreement--The Merger--Background of
the Merger; The Company's Reasons for the Merger," "Amendment to and
Restatement of the Articles of Incorporation," and "Amendment to 1995
Long-Term Incentive and Stock Option Plan."
SHAREHOLDER APPROVAL
Approval of the Merger requires the affirmative vote of the holders of a
majority of the voting power of all outstanding shares of Common Stock. Each
share of Common Stock is entitled to one vote. It is expected that all
167,510 shares of Common Stock beneficially owned by directors and executive
officers of the Company and all 99,550 shares of Common Stock beneficially
owned by directors, executive officers and principal shareholders of MJK as
of the Record Date (approximately 13.5% and 8.0%, respectively, of the total
number of outstanding shares of Common Stock at such date) will be voted in
favor of each of the proposals to be presented at the Special Meeting.
RIGHTS OF DISSENTING SHAREHOLDERS
Under the MBCA, any holder of Common Stock who does not vote such
shareholder's shares in favor of the Merger Agreement and who strictly
complies with the provisions of Sections 302A.471 and 302A.473 of the MBCA,
the full text of which is attached as Exhibit C to this Proxy Statement, has
the right to object to the approval and adoption of the Merger Agreement, and
may make written demand for payment of the "fair value" of such shareholder's
shares of Common Stock. See "Approval of the Merger Agreement--Rights of
Dissenting Shareholders."
ACCOUNTING TREATMENT
The Merger will be accounted for as a business combination utilizing the
reverse acquisition method with MJK being the accounting acquiror under
generally accepted accounting principles. As such, the Merger will be treated
as an acquisition using the purchase method of accounting with no change in
the recorded amount of MJK's assets and liabilities. The assets and
liabilities of the Company that are acquired as a result of the Merger will
be recorded at their fair market values.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger will qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). It is not expected that the Merger will result in any
federal income tax consequences to shareholders of the Company other than
shareholders exercising dissenters' rights under the MBCA. The material tax
issues affecting dissenting shareholders are discussed under "Approval of the
Merger Agreement--The Merger--Certain Federal Income Tax Consequences."
REGULATORY APPROVAL
The Company and MJK each believe that no regulatory approvals are or
will be required in connection with the Merger.
MARKET FOR COMMON STOCK
On May 7, 1999, the Company received a determination from a Nasdaq Listing
Qualification Panel (the "Panel") that the Common Stock would be delisted
from trading on The Nasdaq SmallCap Market effective as of the close of
trading on the same date. In its decision, the Panel noted that the Company's
current status as a "shell" corporation with no active business operations
did not provide investors sufficient information to determine the potential
-4-
<PAGE>
of an investment in the Company. The Common Stock is currently trading on the
Over The Counter Bulletin Board under the symbol, "NMED." In its order, the
Panel invited the Company to apply for initial listing of its securities upon
the consummation of the Merger. In light of the Panel's invitation to apply
for listing upon consummation of the Merger, the Company and MJK intend to
proceed with the consummation of the Merger and apply for listing of the
Common Stock issued to MJK shareholders in connection with the Merger, on The
Nasdaq National Market System. For a discussion of the risks related to the
delisting of the Common Stock on The Nasdaq SmallCap Market, see "Approval of
the Merger Agreement--Certain Information Concerning the Company--Risk
Factors."
COMPARATIVE UNAUDITED PER COMMON SHARE DATA
The following table presents selected comparative unaudited per share
data with respect to the Common Stock on an historical and a pro forma
combined basis, and with respect to MJK Common Stock on an historical and a
pro forma equivalent basis, giving effect to the Merger as a business
combination utilizing the reverse acquisition method for accounting and
financial reporting purposes. Such pro forma data assume that the Merger had
been effective on April 1, 1998 for the book value per share data, the
dividends declared and net earnings per share data. The historical per share
data set forth in the following table are derived from and should be read in
conjunction with the historical consolidated financial statements of the
Company and MJK, including the notes thereto as set forth elsewhere in this
Proxy Statement. The per share data set forth below are presented for
informational purposes only and are not necessarily indicative of the results
of the future operations of the combined entity or the actual results that
would have been achieved had the Merger been consummated on the date
indicated above.
<TABLE>
<CAPTION>
Common Stock MJK Common Stock
---------------------------- ----------------------------
Pro Forma Pro Forma
Historical Combined Historical Equivalent
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Book value per share:
March 31, 1999 $ 2.10 $ .55 $ 1.65 $ .40
Cash dividends per share:
Year ended March 31, 1999 -- -- -- --
Net earnings per share from
continuing operations:
Year ended March 31, 1999 (.04) .08 .30 .08
</TABLE>
-5-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF MJK
The following table summarizes certain selected historical consolidated
financial data of MJK which should be read in conjunction with the financial
statements of MJK, and the notes thereto, set forth elsewhere in this Proxy
Statement. The financial data for the two years ended March 31, 1999 have
been derived from the audited financial statements of MJK. The financial data
for the three years ended March 31, 1997 have been derived from the audited
financial statements of Miller, Johnson & Kuehn, Incorporated, a wholly-owned
subsidiary of MJK.
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 55,590,323 $ 47,092,587 $ 32,607,318 $ 26,944,124 $ 15,739,384
Net income $ 1,272,586 $ (1,224,268) $ 190,103 $ 525,153 $ 296,666
Earnings per share $ 0.30 $ (0.29) $ 0.05 $ 0.12 $ 0.08
Weighted average shares outstanding 4,255,971 4,255,971 4,195,795 4,189,122 3,605,971
Cash dividend declared $ -- $ -- $ -- $ -- $ 22,000
Cash dividend declared per common $ -- $ -- $ -- $ -- $ 0.01
share
BALANCE SHEET DATA:
Total assets $ 322,352,850 $ 272,616,174 $ 181,042,041 $ 124,632,601 $ 44,829,749
Secured demand notes receivable,
collateralized by securities $ 9,675,000 $ 10,475,000 $ 8,980,000 $ 6,295,000 $ 2,845,000
Notes payable $ 4,538,114 $ 1,252,521 $ 1,121,558 $ -- $ --
Shareholders' equity $ 7,011,144 $ 1,358,258 $ 2,582,526 $ 2,392,424 $ 1,889,079
Shares outstanding
(Common) 4,255,971 4,255,971 4,255,971 4,255,971 3,855,971
(Series I Preferred) 558,000 -- -- -- --
(Other preferred) -- -- -- -- 44,000
Book value per common share $ 1.65 $ 0.32 $ 0.61 $ 0.56 $ 0.49
</TABLE>
-6-
<PAGE>
SUPPLEMENTARY FINANCIAL DATA OF MJK
The following table summarizes certain selected unaudited quarterly
financial data of MJK, which are derived from the audited consolidated
financial statements of MJK. In the opinion of MJK, the quarterly statement
of operations information reflects all adjustments necessary for a fair
presentation of the results of such applicable quarterly periods. The
financial data set forth below are presented for informational purposes only
and are not necessarily indicative of the results of future operations of MJK.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1998 1998 1998 1999
-------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 13,662,387 $ 13,832,950 $ 13,989,816 $ 14,105,170
Income before income taxes $ 501,811 $ 762,710 $ 873,188 $ 119,425
Net income $ 392,315 $ 442,310 $ 499,768 $ (61,807)
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1997 1997 1997 1998
-------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 10,776,229 $ 10,915,452 $ 11,664,330 $ 13,736,576
Income before income taxes $ (74,512) $ (175,383) $ (775,719) $ (797,654)
Net income $ (41,512) $ (95,383) $ (525,719) $ (561,654)
</TABLE>
-7-
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables set forth the unaudited pro forma financial
information of the Company (the "Unaudited Pro Forma Financial Statements"),
which consists of (i) the unaudited consolidated pro forma balance sheet of
the Company as of March 31, 1999, giving effect to the Merger on such date,
and (ii) the unaudited consolidated pro forma statement of operations of the
Company for the twelve months ended March 31, 1999, giving effect to the
Merger as if such transaction had occurred on April 1, 1998.
The Unaudited Pro Forma Financial Statements and the related notes are
provided for illustrative purposes only and are not necessarily indicative of
the balance sheet and statement of operations that would have been reported
had the Merger occurred on the dates indicated, nor do they represent a
forecast of the financial position at any future period. The statements are
based on estimates and assumptions set forth below and in the accompanying
notes, which include pro forma adjustments. The Unaudited Pro Forma Financial
Statements and the related notes should be read in conjunction with the
historical financial statements and related notes of the Company and MJK
which are included elsewhere in this Proxy Statement.
BASIS OF PRESENTATION
The Merger will be accounted for using the reverse purchase method of
accounting. Since the Company will issue new shares of Common Stock in
exchange for outstanding shares of MJK capital stock, the current
shareholders of the Company are expected to retain approximately 6.5% of all
of the outstanding shares of Common Stock. In applying Generally Accepted
Accounting Principles ("GAAP"), the Merger will be accounted for as a reverse
acquisition by MJK. Under GAAP, the Merger will be deemed to be equivalent,
for accounting purposes, to MJK's issuance of its capital stock in exchange
for the fair market value of the assets and liabilities of the Company. As a
result, no goodwill will be recorded, and the assets of MJK and its
subsidiaries will continue to be recorded at their historic values.
The unaudited consolidated pro forma statement of operations data
included herein is based on the historical year ended December 31, 1998
audited statement of operations of the Company, adjusted to coincide with the
March 31, 1999 year end results of MJK, which is deemed to be the "acquiror"
under the reverse purchase method of accounting. The Company's statement of
operations results for the year ended March 31, 1999 were derived by adding
the results from continuing operations for the three month period ended March
31, 1999 to, and deducting the results from continuing operations for the
three month period ended March 31, 1998 from, the Company's statement of
operations results for the year ended December 31, 1998. All Company
operating results prior to December 23, 1998 relate to discontinued
operations and have been excluded from the accompanying unaudited
consolidated pro forma statement of operations in accordance with Securities
and Exchange Commission guidelines. Please refer to the Company's audited
financial statements set forth elsewhere in this Proxy Statement for
information regarding the results of operations related to the Company's
discontinued operations.
-8-
<PAGE>
NM HOLDINGS, INC.
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Unadjusted Adjustment Adjusted
Statement of for Pro Forma Statement of
Operations MJK Holdings, Inc. Adjustments Operations
-------------- ------------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Profits on principal transactions $ -- $ 15,063 $ 120 (1) $ 15,183
Interest 19 15,410 -- 15,429
Commissions -- 9,888 -- 9,888
Profits on investment banking activities -- 8,389 -- 8,389
Clearing fees -- 3,105 -- 3,105
Other -- 3,735 -- 3,735
-------------- ------------------- ------------- -------------
Total revenues: 19 55,590 120 55,729
Expenses:
Employee compensation and benefits -- 26,987 -- 26,987
Clearing fees -- 2,890 -- 2,890
Occupancy and equipment rental -- 3,285 -- 3,285
Communication -- 5,251 -- 5,251
Interest -- 11,806 -- 11,806
Other operating expenses 68 3,113 -- 3,181
-------------- ------------------- ------------- -------------
Total expenses: 68 53,332 -- 53,400
-------------- ------------------- ------------- -------------
Income (loss) from continuing operations (49) 2,258 120 2,329
Income taxes -- (985) (31)(2) (1,016)
-------------- ------------------- ------------- -------------
Net income (loss) from continuing operations $ (49) $ 1,273 $ 89 $ 1,313
============== =================== ============= =============
Net income (loss) per common share:
Basic $ (0.04) $ 0.08
Diluted $ (0.04) $ 0.08
Weighted average number of shares outstanding:
Basic 1,307,079 17,155,549
Diluted 1,307,079 17,276,953
</TABLE>
(1) Represents the increase in market value of the shares of common stock
of GalaGen Inc. (the "GalaGen Common Stock") held by the Company, in
conformity with GAAP for trading securities held for resale by
broker/dealers, which is consistent with the accounting policies of
MJK.
(2) Represents the tax expenses associated with the revenue arising from
the GAAP treatment of the increase in the market value of the shares of
GalaGen Common Stock held by the Company, offset by the tax benefit
derived by utilization of the Company's loss from continuing operations
for the period.
-9-
<PAGE>
NM HOLDINGS, INC.
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Unadjusted Adjustment Adjusted
Balance for MJK Pro Forma Balance
March 31, 1999 Holdings, Inc. Adjustments March 31, 1999
---------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 1,939 $ 3,201 $ 155 (3) $ 5,295
Cash - Special reserve account -- 73,130 -- 73,130
Receivables from customers -- 139,911 -- 139,911
Receivables from brokers and dealers -- 69,617 -- 69,617
Receivable from clearing organization -- 733 -- 733
Secured demand notes receivable,
collateralized by securities -- 9,675 -- 9,675
Trading securities owned, at market -- 15,266 618 (1) 15,884
Furniture, equipment, and leasehold
improvements, net 1 2,201 -- 2,202
Investment in GalaGen Inc. 618 -- (618)(1) --
Other assets 36 8,619 -- 8,655
---------------- ------------ ------------ -------------
Total assets $ 2,594 $ 322,353 $ 155 $ 325,102
================ ============ ============ =============
LIABILITIES
Short-term borrowings $ -- $ 33,900 $ -- $ 33,900
Payable to customers -- 203,314 -- 203,314
Payable to brokers and dealers -- 43,389 -- 43,389
Payable to clearing broker -- 9,975 -- 9,975
Trading securities sold but not yet
purchased, at market -- 812 -- 812
Notes payable -- 4,538 -- 4,538
Liabilities subordinated to claims of
general creditors -- 9,675 -- 9,675
Other liabilities 23 9,739 -- 9,762
---------------- ------------ ------------ -------------
Total liabilities 23 315,342 -- 315,365
---------------- ------------ ------------ -------------
STOCKHOLDERS' EQUITY
Common stock 49 43 677 (2)(3)(4) 769
Preferred stock -- 4,380 (4,380)(2)(4) --
Paid-in capital 8,814 2,540 (2,434)(2)(3)(4) 8,920
Accumulated other comprehensive income 120 -- (120)(4) --
Retained (deficit) earnings (6,412) 48 6,412 (4) 48
---------------- ------------ ------------ -------------
Total stockholders' equity 2,571 7,011 -- 9,737
---------------- ------------ ------------ -------------
Total liabilities and stockholders' equity $ 2,594 $ 322,353 $ -- $ 325,102
================ ============ ============ =============
</TABLE>
(1) Represents the reclassification of the shares of GalaGen Common Stock
held by the Company as trading securities, which is consistent with the
accounting policies of MJK.
(2) Represents the acquisition of 13,250 shares of Common Stock upon the
exercise of certain options at an aggregate exercise price of $53,000
and the sale by MJK after March 31, 1999 of 13,000 shares of MJK Series
I Preferred Stock for an aggregate purchase price of $102,050.
(3) Represents adjustments in connection with the issuance of shares of
Common Stock associated with the Merger.
(4) Reflects the recapitalization of the Company, the elimination of the
Company's retained deficit and accumulated other comprehensive income
balance, and the elimination of MJK Common Stock and the MJK Series I
Preferred Stock, each in accordance with the GAAP guidelines regarding
purchase adjustments associated with accounting for a reverse
acquisition.
-10-
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION
Certain information contained in this Proxy Statement which does not
relate to historical financial information may be deemed to constitute
forward looking statements. The words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project,"
"believe" or similar expressions identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 (as
amended). This Proxy Statement contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of each of the Company, Merger
Sub and MJK, and the effect of the Merger. Because such statements are
subject to risks and uncertainties, actual results may differ materially from
historical results and those presently anticipated or projected. The
Company's shareholders are cautioned not to place undue reliance on such
statements, which speak only as of the date hereof. Among the factors that
could cause actual results in the future to differ materially from any
opinions or statements expressed with respect to future periods are those
described in "Approval of the Merger Agreement--Certain Information Regarding
the Company--Risk Factors" and "Approval of the Merger Agreement--Certain
Information Regarding MJK--Risk Factors." Neither the Company nor MJK
undertakes any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
-11-
<PAGE>
THE SPECIAL MEETING
GENERAL
This Proxy Statement is being furnished to shareholders of the Company
in connection with the solicitation of proxies by the Board of Directors of
the Company for use at the Special Meeting to be held on July 6, 1999 at 3:30
p.m. (Minneapolis time) at the Minneapolis Club at 729 Second Avenue South,
Minneapolis, Minnesota, and at any adjournment or postponement thereof.
MATTERS TO BE CONSIDERED
At the Special Meeting, the holders of record of Common Stock as of June
9, 1999, the record date, will: (1) consider and vote upon a proposal to
approve the Merger Agreement; (2) consider and vote upon a proposal to
approve an amendment to and restatement of the Articles of Incorporation
which, among other things, (a) changes the corporate name of the Company to
"Stockwalk.com Group, Inc.," (b) increases the authorized shares of the
Company's capital stock to 100,000,000 shares, of which 50,000,000 will be
designated as common stock and 50,000,000 will be undesignated capital stock,
and (c) increases the number of persons who will serve on the Company's Board
of Directors to six, and allows for future changes to that number by the
affirmative vote of a majority of the Board of Directors; and (3) consider
and vote upon a proposal to approve an amendment to the 1995 Plan increasing
to 1,500,000 the maximum number of shares of authorized Common Stock issuable
upon exercise of options or other awards granted or issued under the 1995
Plan. The Board of Directors of the Company knows of no other matters to be
presented for action at the Special Meeting. If any other matters properly
come before the Special Meeting, however, the persons named in the proxy will
vote on such matters in accordance with their best judgment.
RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE; VOTING; QUORUM
The Company has fixed June 9, 1999 as the record date (the "Record
Date") for the determination of the holders of Common Stock entitled to
notice of and to vote at the Special Meeting. Only holders of record of
Common Stock on the Record Date will be entitled to notice of and to vote at
the Special Meeting or at any adjournment or postponement thereof. As of the
Record Date, there were 1,239,876 shares of Common Stock outstanding, held of
record by approximately 1,044 shareholders. Each holder of record of Common
Stock on the Record Date is entitled to cast one vote per share of Common
Stock on all matters properly submitted for the vote of Company shareholders,
exercisable in person or by properly executed proxy, at the Special Meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Common Stock is necessary to constitute
a quorum at the Special Meeting.
-12-
<PAGE>
PROPOSAL 1:
APPROVAL OF THE MERGER AGREEMENT
THE MERGER
THE FOLLOWING INFORMATION DESCRIBES THE MATERIAL ASPECTS OF THE MERGER.
THIS DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE EXHIBITS HERETO, INCLUDING THE MERGER AGREEMENT,
WHICH IS ATTACHED TO THIS PROXY STATEMENT AS EXHIBIT A AND IS INCORPORATED
HEREIN BY REFERENCE. ALL SHAREHOLDERS ARE URGED TO READ EXHIBIT A IN ITS
ENTIRETY. SEE ALSO "--THE MERGER AGREEMENT."
EFFECTS OF THE MERGER
Upon consummation of the Merger, Merger Sub will be merged with and into
MJK, MJK will continue as the surviving corporation (the "Surviving
Corporation"), and the separate existence of Merger Sub will cease. At the
Effective Time, (1) all shares of Merger Sub outstanding immediately prior to
the Effective Time held by the Company will be converted into one share of
common stock, $.01 par value, of the Surviving Corporation ("Surviving
Corporation Common Stock"), (2) each share of MJK Common Stock and MJK Series
I Preferred Stock outstanding immediately prior to the Effective Time (other
than shares owned by the Company, Merger Sub or MJK) will be converted into
3.72382 shares of Common Stock (the "Exchange Ratio"), subject to adjustments
for, among other things, stock dividends by either the Company or MJK
occurring after the date of the Merger Agreement, and (3) each share of MJK
Common Stock or MJK Series I Preferred Stock owned by MJK, the Company or
Merger Sub immediately prior to the Effective Time will be canceled and
extinguished without any conversion thereof. Following the Merger, the
Surviving Corporation will be a wholly-owned subsidiary of the Company.
All shares of MJK Common Stock and MJK Series I Preferred Stock
converted into shares of Common Stock in the Merger will no longer be
outstanding and will automatically be canceled and retired and will cease to
exist at the Effective Time. No fractional shares of Common Stock will be
issued, and, in lieu thereof, a cash payment will be made as described below
under "--Fractional Shares."
As of May 28, 1999, there were 4,255,971 shares of MJK Common Stock
outstanding and 571,000 shares of MJK Series I Preferred Stock outstanding.
Based upon the Exchange Ratio and the number of shares of Common Stock, MJK
Common Stock and MJK Series I Preferred Stock outstanding as of the Record
Date, and assuming no change prior to the Effective Time, the aggregate
number of shares of Common Stock issuable to shareholders of MJK would be
17,974,771 or approximately 93.5% of the Common Stock outstanding immediately
following the consummation of the Merger (approximately 93.0% on a diluted
basis assuming the exercise of all of those outstanding options and warrants
to purchase shares of Common Stock exercisable at a per share purchase price
of $5 or less). The current Company shareholders will own approximately 6.5%
of the outstanding shares of Common Stock immediately following the Merger
(approximately 7.0% on a diluted basis). As a result, the MJK shareholders
receiving shares of Common Stock pursuant to the Merger would have the
ability to control the election of the Company's entire Board of Directors
and the affairs of the Company, including, but not limited to, all
fundamental corporate transactions such as acquisitions, mergers,
consolidations and the sale of substantially all of the Company's assets.
EFFECTIVE TIME
If the Merger Agreement is adopted by the requisite vote of the
shareholders of the Company and all of the other conditions described under
"--The Merger Agreement--Certain Conditions to Consummation" are satisfied or
waived (to the extent permitted by the Merger Agreement), then, unless the
Merger Agreement is previously terminated, the Merger will be consummated and
become effective at the time the Articles of Merger are filed with the
Minnesota Secretary of State. For purposes of this Proxy Statement,
"Effective Date" shall mean the date the Articles of Merger are filed with
the Minnesota Secretary of State.
The Merger Agreement provides that the Company and MJK will cause the
Effective Time to occur as promptly as practicable after the adoption by the
shareholders of the Company of the Merger Agreement and the satisfaction or
-13-
<PAGE>
waiver (to the extent permitted by the Merger Agreement) of the other
conditions described under "--The Merger Agreement--Certain Conditions to
Consummation," but in no event later than ten business days after all such
conditions have been satisfied or waived, or on such date as may be mutually
agreed by the parties thereto. There can be no assurance that all conditions
to the Merger will be satisfied. The Merger Agreement may be terminated prior
to the Effective Date by either the Company or MJK in certain circumstances,
whether before or after adoption of the Merger Agreement by the shareholders
of the Company. See "--The Merger Agreement --Termination."
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Common Stock
will be issued in exchange for shares of MJK Common Stock and MJK Series I
Preferred Stock, and such fractional share interests will not entitle the
owner thereof to vote or to any rights of a shareholder of the Company. In
lieu thereof, the Company will pay to the owner thereof cash equal to the pro
rata market price of a share of Common Stock based on the closing sales price
of the Common Stock on the Effective Date as reported on the Over The Counter
Bulletin Board as published by THE WALL STREET JOURNAL.
BACKGROUND OF THE MERGER; THE COMPANY'S REASONS FOR THE MERGER
Prior to December 23, 1998, the Company developed and sold generic
critical care formulas and related delivery equipment and accessories (i.e.,
feeding pumps and plastic disposables) for the hospital, nursing home and
home health care markets, as well as a line of retail private label adult
nutrition products for sale through retail chains. On December 23, 1998, the
Company completed a series of transactions resulting in the sale of
substantially all its operating assets. The Company does not currently
conduct any active business operations. Since December 23, 1998, the Company
has used its existing cash resources to pursue a business combination with
another entity engaged in other lines of business.
The Company's and MJK's business relationship began in mid-1995, when
Miller, Johnson & Kuehn, Incorporated (now a wholly-owned subsidiary of MJK)
assisted the Company with two private financing transactions. In September
1996, Miller, Johnson & Kuehn, Incorporated acted as underwriter for the
Company's initial public offering. Following the Company's public offering,
Miller, Johnson & Kuehn, Incorporated acted as a market maker in the Common
Stock. In connection with its role as a market maker, Miller, Johnson &
Kuehn, Incorporated became aware of the Company's stated intention to pursue
new business opportunities following the sale of all of its operating assets.
Prior to February 1999, Miller, Johnson & Kuehn, Incorporated suggested
potential business partners to the Company that might be interested in the
Company's status as a public company.
On February 5, 1999, David B. Johnson, Executive Vice President of MJK,
met with George E. Kline, Chairman of the Company, to discuss a transaction
whereby MJK would become a public entity by entering into a business
combination transaction with the Company. At this meeting, Mr. Johnson
expressed his belief that developing trends in the securities brokerage
industry required MJK to have better access to capital markets, and that a
business combination transaction with the Company could facilitate such
access. Mr. Kline and Mr. Johnson then discussed the framework of a potential
business combination transaction. Mr. Kline and Mr. Johnson agreed to explore
further the possibility of a business combination between the Company and MJK.
After the February meeting, Mr. Johnson reviewed his discussions with
Mr. Kline with a limited number of MJK's senior officers and MJK's Board of
Directors. MJK's Board of Directors indicated its support for the objectives
and opportunities to enhance shareholder value and decided to continue to
explore the possibility of a transaction. Mr. Kline received similar feedback
from the Company's Board of Directors.
On February 9, 1999, Mr. Johnson and Eldon C. Miller, Chairman and Chief
Executive Officer of MJK, met with Mr. Kline to discuss a number of important
aspects of a possible transaction, including relative ownership of the
Company after the potential transaction and the Company's listing status with
NASDAQ. Thereafter, Mr. Johnson and Mr. Kline continued telephone discussions
on a number of other important aspects of a possible business combination
transaction.
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On March 2, 1999, the parties and their respective counsel met to
discuss the principal terms of a potential merger transaction, including the
exchange ratio required to exchange shares of MJK Common Stock to shares of
Common Stock. The parties instructed their respective legal counsel to
negotiate the other terms of the proposed transaction. The negotiations were
announced to the public on March 17, 1999. Following approval of the Merger
Agreement by the respective Board of Directors, the parties executed the
Merger Agreement on March 25, 1999.
FAVORABLE RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The Board of Directors has determined that the terms and conditions of
the Merger are fair from a financial point of view to the Company's
shareholders and in the best interests of the Company.
THE BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS
THAT SHAREHOLDERS VOTE IN FAVOR OF THE PROPOSAL TO APPROVE AND ADOPT THE
MERGER AGREEMENT. The directors intend to vote all shares of Common Stock
under their control in favor of such proposal.
MJK'S REASONS FOR THE MERGER
The decision of the MJK Board of Directors to enter into the Merger
Agreement is based upon its conclusion that the Merger affords MJK an
opportunity to access capital markets for the development of its on-line
internet brokerage business and will provide greater liquidity for the MJK
shareholders.
REGULATORY APPROVAL
The Company and MJK each believe that no regulatory approvals are or
will be required in connection with the Merger.
MANAGEMENT OF THE COMPANY AND THE SURVIVING CORPORATION AFTER THE MERGER
Pursuant to the Merger Agreement, the officers and all directors of the
Company, except George E. Kline, will, as of the Effective Time, resign.
George E. Kline, as the remaining Company director, will appoint Eldon C.
Miller, David B. Johnson, Paul R. Kuehn, Stanley D. Rahm, and
N. Lee Wesley, each of whom will serve as directors of the Company until
the next annual meeting of the Company's shareholders. Biographical
information about the new directors is set forth below.
ELDON C. MILLER founded Miller, Johnson & Kuehn, Incorporated in
December 1980, and has served as Chairman of the Board of Directors and
as Chief Executive Officer of the Company and Miller, Johnson & Kuehn,
Incorporated since inception. Prior to forming Miller, Johnson & Kuehn,
Incorporated, Mr. Miller was a Vice President of Miller & Schroeder
Municipals, Inc. for more than seven years.
DAVID B. JOHNSON has served as Executive Vice President and as a
Director of Miller, Johnson & Kuehn, Incorporated since Miller, Johnson
& Kuehn, Incorporated purchased certain assets of McClees Investments,
Inc. in July 1989 and as Executive Vice President and Director of MJK
since inception. Mr. Johnson served as Senior Vice President of McClees
Investments, Inc. from January 1987 to June 1989. Prior to January 1987,
Mr. Johnson acted as Senior Vice President of Miller, Johnson & Kuehn,
Incorporated for more than five years.
PAUL R. KUEHN has served as President and as a Director of Miller,
Johnson & Kuehn, Incorporated since Miller, Johnson & Kuehn,
Incorporated purchased certain assets of McClees Investments, Inc. in
July 1989 and as President and Director of MJK since inception. Mr.
Kuehn acted as President of McClees Investments, Inc. from February 1988
to July 1989. Prior to 1988, Mr. Kuehn was Senior Vice President of
Marketing for Craig Hallum, Inc. for more than 17 years.
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<PAGE>
STANLEY D. RAHM has served as Treasurer and as a Director of Miller,
Johnson & Kuehn, Incorporated and MJK since inception. Prior to 1981,
Mr. Rahm was a Vice President of Miller & Schroeder Municipals, Inc. for
seven years.
N. LEE WESLEY has been a private investor for more than five years.
Since late 1996, Mr. Wesley has controlled the general partner of
Standard Mill Limited Partnership, a Minnesota limited partnership that
owns the Hyatt Whitney Hotel. The Hyatt Whitney Hotel is a 98 room luxury
hotel managed by Hyatt Corporation located in downtown Minneapolis,
Minnesota. Mr. Wesley is also a director of the National Eye Research
Foundation.
MJK currently expects that, after the Effective Time, the executive
officers of MJK will be appointed as executive officers of the Company with
duties substantially similar to those that such executive officers are
currently performing.
MJK will be the Surviving Corporation and will become a wholly-owned
subsidiary of the Company upon consummation of the Merger. As of the
Effective Time, the directors and officers of the Surviving Corporation will
be the persons who were the directors and officers of MJK immediately prior
to the Effective Time. MJK currently expects that, after the Effective Time,
it will retain all of the executive officers of MJK who will then serve as
executive officers of the Surviving Corporation with duties substantially
similar to those that such executive officers are currently performing.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of May 28, 1999 and as adjusted to give effect
to the Merger as if such transaction had occurred on such date, by those
individuals who will serve as directors and by the directors and executive
officers of the Company (as a group) following the Merger. See "--Management
of the Company and the Surviving Corporation After the Merger." Shares of
Common Stock subject to options or warrants currently exercisable or
exercisable within 60 days from the date hereof are deemed outstanding for
computing the percentage of the person holding such options, but are not
deemed outstanding for computing the percentage of any other person:
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Merger Owned Following Merger
--------------------------- ---------------------------
Shares to be
Person Number Percent Issued Number Percent
- --------------------------------- ------------ ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
David B. Johnson (1)............. 109,757 8.7% 4,252,669 4,362,426 22.7%
George E. Kline (2).............. 178,250 14.1 -- 178,250 *
Paul R. Kuehn (3)................ 31,207 2.5 4,252,669 4,283,876 22.3
Eldon C. Miller (4).............. 7,902 * 4,252,669 4,260,571 22.2
Stanley D. Rahm (4).............. 7,902 * 1,802,124 1,810,026 9.4
N. Lee Wesley.................... 5,000 * 591,566 596,566 3.1
All persons who will serve as 341,018 25.8% 15,990,718 16,331,536 84.6%
directors and executive officers
following the Merger as a group
(eight persons)...................
</TABLE>
* Less than 1%.
(1) Includes 86,050 shares of Common Stock owned by Mr. Johnson's wife,
Betty Johnson. Also includes warrants to purchase 11,461 shares and 528
shares of Common Stock at a purchase price of $5.40 per share, which
were issued in connection with private placements on August 31, 1995
and September 12, 1995, respectively. Also includes a warrant to
purchase 11,718 shares of Common Stock at a purchase price of $16.80
per share, which was issued in connection with the Company's initial
public offering of stock on September 26, 1996 (the "IPO").
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<PAGE>
(2) Includes 22,500 shares owned by Brightstone Fund IV; 37,500 shares
owned by Brightstone Fund VI; 27,500 shares owned and 3,750 shares
issuable pursuant to warrants held by Brightstone Fund VII; and 5,000
shares issuable pursuant to a warrant held by Brightstone Capital LLC.
George E. Kline, Chairman of the Board, Chief Executive Officer,
President and a director of the Company, and James A. Bernards serve as
the members of Brightstone Capital LLC, the general partner of all of the
Brightstone entities referenced above. By virtue of this position, Messrs.
Kline and Bernards may be deemed to have voting and investment control over
the shares owned by such Brightstone entities, and thus beneficial
ownership of those shares. Messrs. Kline and Bernards disclaim any
beneficial ownership of such shares, and under a written agreement with
Mr. Bernards, Mr. Kline has no voting or investment control over such
shares and will not receive any other economic benefit from such shares.
Also includes 10,750 shares held by Venture Management Profit Plan & Trust,
of which Mr. Kline is the sole trustee and beneficiary, and 7,500 shares
issuable pursuant to currently exercisable options issued under the 1995
Plan, and 3,750 shares issuable pursuant to currently exercisable options
issued under the Company's 1996 Non-Employee Director Stock Option Plan.
(3) Includes warrants to purchase 11,461 shares and 528 shares of Common
Stock at a purchase price of $5.40 per share, which were issued in
connection with private placements on August 31, 1995 and September 12,
1995, respectively. Also includes a warrant to purchase 11,718 shares
of Common Stock at a purchase price of $16.80 per share, which was
issued in connection with the IPO.
(4) Includes warrants to purchase 3,820 shares and 176 shares of Common
Stock at a purchase price of $5.40 per share, which were issued in
connection with private placements on August 31, 1995 and September 12,
1995, respectively. Also includes a warrant to purchase 3,906 shares of
Common Stock at a purchase price of $16.80 per share, which was issued
in connection with the IPO.
The persons described in the foregoing table intend to vote their
respective shares of Common Stock in favor of the proposal to approve the
Merger Agreement.
ACCOUNTING TREATMENT
The Merger will be accounted for as a business combination utilizing the
reverse acquisition method with MJK being the accounting acquiror under
generally accepted accounting principles. As such, the Merger will be treated
as an acquisition using the purchase method of accounting with no change in
the recorded amount of MJK's assets and liabilities. The assets and
liabilities of the Company that are acquired as a result of the Merger will
be recorded at their fair market values.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Company and MJK expect that the Merger will be treated as a tax-free
reorganization within the meaning of the Code, and that no income, gain or
loss will be recognized by the Company or its shareholders as a result of the
consummation of the Merger other than shareholders exercising dissenters'
rights under the MBCA. Such dissenting shareholders of the Company may be
subject to state and federal taxation as described below. It is a condition
to the consummation of the Merger that MJK and the Company shall have
received an opinion by counsel or independent certified accountants to the
effect that, among other things, the Merger qualifies as a reorganization
under Section 368(a) of the Code (the "Federal Tax Opinion"). Unlike a ruling
from the Internal Revenue Service (the "Service"), an opinion of counsel is
not binding on the Service and there can be no assurance, and none is hereby
given, that the Service will not take a position contrary to one or more of
the positions reflected therein or that the Federal Tax Opinion will be upheld
by the courts if challenged by the Service.
Under currently existing provisions of the Code, the Treasury
Regulations promulgated thereunder, applicable judicial decisions and
administrative rulings, all of which are subject to change, the federal
income tax consequences described below are expected to arise in connection
with the exercise of dissenters' rights. Due to the complexity of the Code,
the following discussion is limited to the material federal income tax
aspects of the Merger for a Company shareholder who properly exercises his or
her dissenters' rights under the MBCA, who is a citizen or resident of the
United States and who, on the date of disposition of such holder's shares of
Common Stock, holds such shares as a capital asset. The general tax
principles discussed below are subject to retroactive changes that may result
from subsequent amendments to the Code. The following discussion does not
address the material federal income tax aspects of the Merger for any
dissenting shareholder who is not a citizen or resident of the United States.
The following discussion does not address potential foreign, state, local and
other tax consequences, nor does it address taxpayers
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<PAGE>
subject to special treatment under the federal income tax laws, such as life
insurance companies, tax-exempt organizations, S corporations, trusts, and
taxpayers subject to the alternative minimum tax. In addition, the following
discussion may not apply to dissenting shareholders who acquired their shares
upon the exercise of employee stock options or otherwise as compensation. The
Company has not requested the Service to rule or issue an opinion on the
federal income tax consequences of the Merger. ALL SHAREHOLDERS ARE URGED TO
CONSULT THEIR
OWN TAX ADVISORS REGARDING THE FEDERAL, FOREIGN, STATE, AND LOCAL TAX
CONSEQUENCES OF THE DISPOSITION OF THEIR SHARES IN THE MERGER.
For federal income tax purposes, the exchange of Common Stock for cash
pursuant to the Merger will be treated as a distribution in redemption of
Common Stock from each holder of the Company's Common Stock who properly
exercises dissenter's rights, subject to the provisions of Section 302 of the
Code. Under the rules of Section 302, the determination of whether the
exchange of Common Stock for cash pursuant to the exercise of dissenter's
rights has the effect of a distribution of a dividend will be made, on a
shareholder by shareholder basis, by comparing the proportionate, percentage
interest of a shareholder after the Merger with the proportionate, percentage
interest of such shareholder before such transaction. In making this
comparison, there must be taken into account (a) any other shares of Common
Stock actually owned by such shareholder, and (b) any such shares considered
to be owned by such shareholder by reason of the constructive ownership rules
set forth in Section 318 of the Code. These constructive ownership rules
apply in certain specified circumstances to attribute ownership of shares of
a corporation from the shareholder actually owning the shares, whether an
individual, trust, partnership or corporation, to certain members of such
individual's family or to certain other individuals, trusts, partnerships or
corporations. Under these rules, a shareholder is also considered to own any
shares with respect to which the shareholder holds stock options.
Under applicable Service guidelines, such a redemption involving a
holder of a minority interest in the Company whose relative stock interest in
the Company is minimal, who exercises no control over the affairs of the
Company and who experiences a reduction in the shareholder's proportionate
interest in the Company, both directly and by application of the foregoing
constructive ownership rules, generally will not be deemed to have resulted
in a distribution of a dividend under the rules set forth in Section
302(b)(1) of the Code. Accordingly, the federal income tax consequences to
the Company's shareholders who exercise dissenters' rights will generally be
as follows:
(a) Assuming that the shares of Common Stock exchanged by a dissenting
shareholder for cash in connection with the Merger are capital assets
in the hands of the dissenting shareholder at the Effective Date (and
the exchange does not result in a distribution of a dividend under
Section 302 of the Code), such dissenting shareholder may recognize a
capital gain or loss by reason of the consummation of the Merger.
(b) The capital gain or loss, if any, will be long-term with respect to
shares of Common Stock held for more than twelve (12) months as of the
Effective Date, and short-term with respect to such shares held for
twelve (12) months or less.
(c) The amount of capital gain or loss to be recognized by each dissenting
shareholder will be measured by the difference between the amount of
cash received by such dissenting shareholder in connection with the
exercise of dissenters' rights and such dissenting shareholder's
adjusted tax basis in the Common Stock at the Effective Date.
(d) An individual's long-term capital gain is subject to federal income tax
at a maximum rate of 20%, while any capital loss can be offset only
against other capital gains plus $3,000 of other income in any tax year
($1,500 in the case of a married individual filing a separate return).
Capital losses in excess of these limits can be carried forward to
future years.
(e) A corporation's long-term capital gain is subject to federal income tax
at a maximum rate of 35%, while any capital loss can be offset only
against other capital gains in any tax year, subject to the carryback
and carryforward rules of the Code.
Cash payments made pursuant to the Merger will be reported to the extent
required by the Code to dissenting shareholders and the Service. Such amounts
will ordinarily not be subject to withholding of U.S. federal income tax.
However, backup withholding of such tax at a rate of 31% may apply to certain
dissenting shareholders by reason of
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<PAGE>
the events specified in Section 3406 of the Code and the Treasury Regulations
promulgated thereunder, which include failure of a dissenting shareholder to
supply the Company or its agent with such dissenting shareholder's taxpayer
identification number. Accordingly, Company dissenting shareholders (or other
payees) will
be asked to provide the dissenting shareholder's taxpayer identification
number (social security number in the case of an individual, or employer
identification number in the case of other dissenting shareholders of the
Company) on a Form W-9 and to certify that such number is correct.
Withholding may also apply to Company dissenting shareholders who are
otherwise exempt from such withholding, such as a foreign person, if such
person fails to properly document its status as an exempt recipient. Each
dissenting shareholder of the Company, and, if applicable, each other payee,
should complete and sign a Form W-9 to provide the information and
certification necessary to avoid backup withholding, unless an applicable
exemption exists and is proved in a manner satisfactory to the Company.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE FOR GENERAL
INFORMATION ONLY. EACH HOLDER OF SHARES OF COMMON STOCK IS URGED TO CONSULT
HIS OR HER OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO
SUCH SHAREHOLDER OF THE TRANSACTION (INCLUDING THE APPLICABILITY AND EFFECT
OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS).
THE MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE
MERGER AGREEMENT. THIS DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT INCLUDED AS
EXHIBIT A TO THIS PROXY STATEMENT AND INCORPORATED HEREIN BY REFERENCE. ALL
SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY. SEE ALSO
"--THE MERGER."
GENERAL
The Merger Agreement provides that, upon the satisfaction or waiver of
certain conditions, Merger Sub will be merged with and into MJK, MJK will
continue as the Surviving Corporation, and the separate existence of Merger
Sub will cease. Pursuant to the Merger Agreement, at the Effective Time, (1)
all shares of Merger Sub outstanding held by the Company will be converted
into one share of Surviving Corporation Common Stock, (2) each share of MJK
Common Stock and MJK Series I Preferred Stock outstanding (other than shares
owned by the Company, Merger Sub or MJK) will be converted into 3.72382
shares of Common Stock, subject to adjustments for, among other things, stock
dividends by either the Company or MJK occurring after the date of the Merger
Agreement, and (3) each share of MJK Common Stock or MJK Series I Preferred
Stock owned by MJK, the Company or Merger Sub will be canceled and
extinguished without any conversion thereof. Following the Merger, the
Surviving Corporation will be a wholly-owned subsidiary of the Company.
All shares of MJK Common Stock and MJK Series I Preferred Stock
converted into shares of Common Stock in the Merger will no longer be
outstanding and will automatically be canceled and retired and will cease to
exist at the Effective Time. No fractional shares of Common Stock will be
issued, and, in lieu thereof, a cash payment will be made in an amount equal
to the pro rata market price of a share of Common Stock based on the closing
sales price of the Common Stock on the Effective Date as reported on the Over
The Counter Bulletin Board as published by THE WALL STREET JOURNAL.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
each of the Company and MJK relating to, among other things, the following
matters (which representations and warranties are subject, in certain cases,
to specified exceptions): (a) the due organization, power and standing of,
and similar corporate matters with respect to, the Company, MJK and
subsidiaries of MJK; (b) the authorization, execution, delivery and
performance by, and enforceability of the Merger Agreement against, the
Company and MJK; (c) the absence of any provision of such party's articles or
bylaws or any agreements, governmental authorizations, laws, regulations or
orders in conflict with such party's authorization, execution, delivery or
performance; (d) the absence of any public body, court or authority's
authorization, consent or approval required for the consummation of the
Merger by the Company, Merger Sub and MJK;
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<PAGE>
(e) the capital structure and the authorization and validity of the
outstanding shares of capital stock of the Company, Merger Sub and MJK; (f)
the absence of certain changes or events with respect to the Company and MJK;
(g) the absence of certain undisclosed liabilities of the Company and MJK;
(h) the absence of pending or threatened actions against such party with
respect to the Merger; (i) the absence of claims for brokerage commissions,
finders' fees, investment advisory fees or similar compensation based upon
arrangements made by or on behalf of the Company, MJK or any subsidiary of
MJK with respect to the Merger; (j) real property used or occupied by the
Company, MJK and MJK subsidiaries; (k) title (including leasehold title) of
the Company, MJK and MJK subsidiaries to, and the absence of liens against,
certain properties and assets; (l) the filing of tax returns, the absence of
tax audits, the payment of taxes and related tax matters by the Company, MJK
and subsidiaries of MJK; (m) certain material contracts to which the Company,
MJK or any subsidiary of MJK is a party and the absence of defaults and
breaches with respect thereto; (n) the rights in certain intellectual
property of the Company and MJK; (o) employee relations and certain other
matters related to employees of the Company, MJK and MJK subsidiaries; (p)
certain employee benefit plans and matters arising under the Employee
Retirement Income Security Act of 1974, as amended; (q) insurance policies of
the Company, MJK and MJK subsidiaries and certain matters related thereto;
(r) certain transactions with affiliates of the Company, MJK and MJK
subsidiaries; (s) compliance with applicable laws and possession of necessary
permits by the Company, MJK and MJK subsidiaries; (t) Year 2000 compliance by
the Company, MJK and MJK subsidiaries; and (u) material disclosure by the
Company and MJK.
The Company has also made certain additional representations and
warranties to MJK relating to, among other things, the following matters
(which representations and warranties are subject, in certain cases, to
specified exceptions): (a) the filing of reports and other documents with the
Commission, the material compliance of such documents with Commission rules
and regulations and the accuracy of the information contained therein; (b)
the material compliance of this Proxy Statement with certain laws and the
accuracy of the information contained therein; and (c) the authorization and
validity of the shares of Common Stock to be issued pursuant to the Merger
Agreement.
MJK has also made certain additional representations and warranties to
the Company relating to, among other things, the following matters (which
representations and warranties are subject, in certain cases, to specified
exceptions): (a) broker dealer license and NASD membership; (b) the accuracy
of the information contained in and certain other matters with respect to
MJK's financial statements; (c) the filing of reports with the NASD, the
material compliance with Commission and NASD rules and the accuracy of the
information contained therein; and (d) the ownership of and certain other
matters with respect to MJK subsidiaries.
CERTAIN COVENANTS
Pursuant to the Merger Agreement, the Company has agreed that, prior to
the Effective Date, except as expressly contemplated or permitted by the
Merger Agreement or as otherwise consented to by MJK, the Company will not
(a) amend or propose to amend the Articles of Incorporation or its bylaws
except for the amendments to the Articles of Incorporation described
elsewhere in this Proxy Statement; (b) issue, sell or grant any of its equity
securities or securities convertible into or exchangeable for its equity
securities, or grants, warrants, options or other rights to acquire its
equity securities; (c) reclassify, subdivide or otherwise change outstanding
shares of capital stock of the Company whether by stock dividend, reverse
stock split, distribution of securities convertible into Company capital
stock or otherwise; (d) acquire (by merger, exchange, consolidation,
acquisition of stock or assets or otherwise) any corporation, partnership,
joint venture or other business organization or division or assets thereof;
(e) default in its obligations under any material debt, contract or
commitment which default results in the acceleration of obligations due
thereunder; (f) enter into or propose to enter into, or modify or propose to
modify, any agreement, arrangement, or understanding with respect to any of
the foregoing matters; or (g) conduct its business other than in the ordinary
course on an arm's length basis and in accordance in all material respects
with all applicable laws, rules and regulations and the Company's past custom
and practice.
Pursuant to the Merger Agreement, MJK has agreed that, prior to the
Effective Date, except as expressly contemplated or permitted by the Merger
Agreement or as otherwise consented to by the Company, MJK will not (a) amend
its articles or bylaws; (b) split, combine or reclassify any outstanding
shares of capital stock of MJK; (c) declare, set aside, make or pay any
dividend or distribution in cash, stock, property or otherwise with respect
to the capital stock of MJK; (d) default in its obligations under any
material debt, contract or commitment which default results in the
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<PAGE>
acceleration of obligations due thereunder, except for such defaults arising
out of the Merger Agreement for which consents, waivers or modifications are
required to be obtained pursuant to the Merger Agreement; (e) conduct its
business other than in the ordinary course on an arm's length basis and in
accordance in all material respects with all applicable laws, rules and
regulations and MJK's past custom and practice; (f) issue or sell any
additional shares of, or options, warrants, conversions, privileges or rights
of any kind to acquire any shares of, any of its capital stock, except as
otherwise provided in a schedule delivered pursuant to the Merger Agreement;
or (g) acquire (by merger, exchange, consolidation, acquisition of stock or
assets or otherwise) any corporation, partnership, joint venture or other
business organization or division or material assets thereof.
The Company and MJK have also agreed (a) to use reasonable efforts and
cooperate to make all legally- required filings and take all other actions
necessary, proper or advisable to consummate the Merger; (b) to afford each
other reasonable access to certain books, papers and records; (c) to
cooperate to facilitate contacts with third parties; (d) to take certain
actions relating to the preparation and distribution of this Proxy Statement;
(e) not to knowingly take any action which would disqualify the Merger as a
"reorganization" that would be tax-free to the shareholders of the Company
and MJK pursuant to Section 368(a) of the Code; (f) to cooperate regarding
certain matters with respect to press releases and public announcements; (g)
to use all reasonable efforts to list on The Nasdaq SmallCap Market the
shares of Common Stock to be issued in connection with the Merger, and to
change its current trading symbol for Common Stock; (h) to call and hold
meetings of their respective shareholders for the purpose of voting upon the
Merger Agreement and the Merger and, in the case of the Company, the
amendments to and restatement of the Articles of Incorporation described
elsewhere in this Proxy Statement; (i) subject to the fiduciary duties and
legal obligations of the respective Boards of Directors, to recommend
approval of the Merger Agreement, the Merger and, in the case of the Company,
the amendments to and restatement of the Articles of Incorporation described
elsewhere in this Proxy Statement, and use all reasonable efforts to obtain
approvals thereof from their respective shareholders; (j) to reasonably
cooperate with each other in obtaining the Federal Tax Opinion; and (k) to
give prompt notice to each other with respect to certain events and
determinations and discovery of certain information.
The Company has also agreed (a) to provide to MJK copies of all reports
and other documents filed under the Securities Act or the Securities Exchange
Act of 1934, as amended (the "Exchange Act") with the Commission by it
between the date of the Merger Agreement and the Effective Date within two
(2) days after the date such reports or other documents are filed with the
Commission; (b) after the Effective Date, to use reasonable efforts to file
all reports and data with the Commission necessary to permit the shareholders
of MJK and the Company who may be deemed "underwriters" (within the meaning
of Rule 145 under the Securities Act) to sell Common Stock received by them
in connection with the Merger pursuant to Rules 144 and 145(d) promulgated
under the Securities Act if they would otherwise be so entitled; and (c)
after the Effective Date, to use reasonable efforts to file with the
Commission reports, statements, and other materials required by the federal
securities laws on a timely basis.
Pursuant to the Merger Agreement, the Company and MJK have each agreed
to maintain the confidential nature of certain information provided to it by
the other party.
LIMITATIONS ON SOLICITATION OF TRANSACTIONS
Pursuant to the Merger Agreement, the Company and MJK have each agreed
that neither such party nor such party's officers, directors or agents shall,
directly or indirectly, encourage, solicit or initiate discussions or
negotiations with, or engage in negotiations or discussions with, or provide
non-public information to, any corporation, partnership, person or other
entity or groups concerning any merger, sale of capital stock, sale of
substantial assets or other business combination, except, in the case of MJK,
any such transaction pursuant to which (a) MJK is the surviving corporation
in such transaction, and (b) the shareholders of MJK immediately preceding
such transaction will own at least 51% of the outstanding shares after giving
effect to such transaction; provided that either party may engage in such
discussion in response to an unsolicited proposal from an unrelated party if
such party's Board of Directors determines, in good faith, after consultation
with counsel, that the failure to engage in such discussions may constitute a
breach of the fiduciary or legal obligations of such Board of Directors. The
Company and MJK have each agreed to promptly advise the other party if it
receives a proposal or inquiry with respect to the matters described above.
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<PAGE>
CERTAIN CONDITIONS TO CONSUMMATION
Pursuant to the Merger Agreement, each party's respective obligations to
effect the Merger are subject to the fulfillment, or waiver, at or prior to
the Effective Date of various conditions, including the following: (a) no
injunction or other order entered by a state or federal court of competent
jurisdiction shall have been issued and remain in effect which would prohibit
or make illegal the consummation of the Merger; (b) there shall have been no
law, statute, rule or regulation, domestic or foreign, enacted or promulgated
which would prohibit or make illegal the consummation of the Merger; (c) MJK
shall have received the Federal Tax Opinion; (d) the Common Stock to be
issued in connection with the Merger shall have been approved for listing on
The Nasdaq SmallCap Market; (e) all consents and approvals necessary to
consummate the Merger shall have been obtained; (f) there shall not be
threatened, instituted or pending any action or proceeding before any court
or governmental authority or agency, domestic or foreign, relating to and
materially adversely affecting the Merger (nor shall there be any action
taken, or any statute, rule, regulation, judgment, order or injunction
proposed, enacted, entered, enforced, promulgated, issued or deemed
applicable to the Merger by any federal, state or other court, government or
governmental authority or agency, which could reasonably be expected to
result, directly or indirectly, in any such consequence); (g) each of the MJK
shareholders shall have executed and delivered to the Company an investment
representation letter; and (h) there shall not have occurred any general
suspension of trading on the New York Stock Exchange, The Nasdaq National
Market or The Nasdaq SmallCap Market, any suspension of trading in the Common
Stock, any general bank moratorium or closing, or any war, national emergency
or other event affecting the economy or securities trading markets generally
that would make completion of the Merger impossible. The parties have agreed
to waive the foregoing condition that the Common Stock be approved for
listing on the Nasdaq SmallCap Market.
The obligation of the Company to effect the Merger is also subject to
the fulfillment or waiver of the following conditions: (a) the
representations and warranties of MJK set forth in the Merger Agreement shall
have been true and correct as of the date of the Merger Agreement, and,
except to the extent such representations and warranties are made as of a
specified date, shall be true and correct as of the Effective Date as if made
at and as of the Effective Date, except where the failure to be true and
correct would not have, or would not reasonably be expected to have, a
material adverse effect on MJK; (b) MJK shall in all material respects have
performed each obligation and agreement and complied with each covenant to be
performed and complied with by it hereunder at or prior to the Effective
Date; (c) MJK shall have furnished to the Company a certificate of the chief
executive officer and the chief financial officer of MJK, dated as of the
Effective Date, in which such officers shall certify that, to their best
knowledge, the preceding conditions set forth in this paragraph have been
fulfilled; (d) MJK shall have furnished to the Company certain copies of
documents and certificates; (e) the Merger Agreement, the Merger and the
Articles of Incorporation as amended by the proposed amendments described
elsewhere in this Proxy Statement shall have been approved by the requisite
vote of the shareholders of the Company; and (f) within five (5) days prior
to mailing this Proxy Statement to the shareholders of the Company, the
Company shall have received a written opinion in a form reasonably acceptable
to the Company from an investment banking firm reasonably acceptable to the
Company to the effect that the Merger is fair from a financial point of view
to the holders of Common Stock prior to the Effective Date. The parties have
agreed to waive the foregoing condition regarding the foregoing written
fairness opinion of the investment banking firm.
The obligation of MJK to effect the Merger is also subject to the
fulfillment or waiver of the following conditions: (a) the representations
and warranties of the Company set forth in the Merger Agreement shall have
been true and correct as of the date of the Merger Agreement, and, except to
the extent such representations and warranties are made as of a specified
date, shall be true and correct as of the Effective Date as if made at and as
of the Effective Date, except where the failure to be true and correct would
not have, or would not reasonably be expected to have, a material adverse
effect on the Company; (b) the Company shall in all material respects have
performed each obligation and agreement and complied with each covenant to be
performed and complied with by it hereunder at or prior to the Effective
Date; (c) the Company shall have furnished to MJK a certificate of the chief
executive officer and the chief financial officer of the Company, dated as of
the Effective Date, in which such officers shall certify that, to their best
knowledge, the preceding conditions set forth in this paragraph have been
fulfilled; (d) the Company shall have furnished to MJK copies of certain
documents and certificates; (e) the Merger Agreement and the Merger shall
have been approved by the requisite vote of the shareholders of MJK; and (f)
each of the officers and non-continuing directors of the Company immediately
prior to the Effective Time shall deliver duly executed resignations from
their positions with the Company effective immediately after the Effective
Time.
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TERMINATION
Pursuant to the Merger Agreement, the Merger Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Date,
notwithstanding the approval of the Merger Agreement by the shareholders of
the Company, (a) by mutual consent of MJK and the Company, if the board of
directors of each such party so determines by vote of a majority of the
members of its entire board; (b) by either MJK or the Company, if there has
been a material misrepresentation, breach of warranty or breach of covenant
on the part of the other in the representations, warranties and covenants set
forth in the Merger Agreement, or if any of the conditions to such party's
obligation to consummate the Merger shall have become impossible to satisfy
as a result of no negligent or willful action by such party; (c) by either
MJK or the Company, if (i) the Merger and the Merger Agreement are not duly
approved by the shareholders of each of MJK or the Company, or (ii) the
Articles of Incorporation as proposed to be amended as discussed elsewhere in
this Proxy Statement are not approved by the shareholders of the Company; (d)
by either MJK or the Company if the Effective Date is not on or before July
15, 1999, or such later date as MJK and the Company may mutually agree
(unless the failure to consummate the Merger by such later date shall be due
to the action or the failure to act of the party seeking to terminate the
Merger Agreement in breach of such party's obligations under the Merger
Agreement); or (e) by either the Company or MJK in their respective sole
discretion based upon its due diligence investigation, if the results of such
due diligence investigation, in either party's reasonable judgment, (i)
causes the other party's value to be materially less than it would have been
in the absence of such information or (ii) reveals any event, condition or
occurrence (not previously disclosed in the Merger Agreement or the schedules
attached thereto) that materially adversely affects the financial condition,
assets, operating results, business condition or prospects of the other
party, by providing such other party with written notice thereof on or before
the date of this Proxy Statement.
EXPENSES
Under the Merger Agreement, all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated
thereby are to be paid by the party incurring such costs and expenses.
RIGHTS OF DISSENTING SHAREHOLDERS
Under the MBCA, the holders of Common Stock are entitled to certain
dissenters' rights with respect to the Merger. The following is a summary of
the rights of the shareholders of the Company who dissent from the Merger.
The summary does not purport to be complete and is qualified in its entirety
by reference to Sections 302A.471 and 302A.473 of the MBCA (the "Minnesota
Dissenters' Rights Statute"), a copy of which is attached as Exhibit C hereto.
Under the MBCA, shareholders have the right to dissent from the Merger
and, subject to certain conditions provided for under Minnesota law, are
entitled to receive payment for the fair value of their shares of Common
Stock immediately prior to the Merger. Assuming shareholder approval of the
Merger Agreement, shareholders will be bound by the terms of the Merger
Agreement unless they dissent by complying with all of the requirements of
the Minnesota Dissenters' Rights Statute. Any shareholder contemplating
exercising the right to demand such payment should carefully review the
Minnesota Dissenters' Rights Statute, and in particular the procedural steps.
A SHAREHOLDER WHO FAILS TO COMPLY PRECISELY WITH THESE PROCEDURAL
REQUIREMENTS WILL LOSE THE RIGHT TO DISSENT.
Set forth below, to be read in conjunction with the full text of the
Minnesota Dissenters' Rights Statute, is a summary of the procedures relating
to the exercise of dissenters' rights by shareholders of the Company.
Any shareholder who wishes to dissent must deliver to the Company, prior
to the vote on the Merger Agreement, a written notice of intent to demand
payment for such shareholder's shares if the Merger is effectuated. In
addition, such shareholder must not vote his or her shares of Common Stock in
favor of the Merger Agreement. A shareholder who fails to deliver the notice
on time or who votes in favor of the Merger Agreement will not have any
dissenters' rights. If a shareholder returns a signed proxy but does not
specify a vote AGAINST approval of the Merger Agreement or a direction to
abstain, the proxy will be voted for approval of the Merger Agreement, which
will have the effect of waiving such shareholders' dissenters' rights.
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<PAGE>
If the Merger Agreement is approved by the Company's shareholders, the
Company is required to deliver a written dissenters' notice to all of its
shareholders who gave timely notice of intent to demand payment and who did
not vote in favor of the Merger Agreement. The notice must (a) state where
the payment demand and certificates of certificated shares must be sent in
order to obtain payment and the date by which they must be received; (b)
inform shareholders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received; (c) supply a
form for demanding payment and requiring the dissenting shareholder to
certify the date on which such shareholder acquired his or her shares of
Common Stock; and (d) be accompanied by a copy of the Minnesota Dissenters'
Rights Statute.
In order to receive fair value for the shares of Common Stock, a
shareholder who is sent the dissenters' notice described above must demand
payment within 30 days following the date of notice, deposit such
shareholder's certificates representing shares of Common Stock and complete
other information as required by such notice. A shareholder who demands
payment and deposits such shareholder's certificates representing shares of
Common Stock as requested by the dissenters' notice retains all other rights
of a shareholder of the Company until such rights are canceled by the
consummation of the Merger. The Company may restrict the transfer of
uncertificated shares from the date of the demand for payment until the
Merger is consummated; however, the holder of uncertificated shares retains
all other rights of a shareholder of the Company until those rights are
canceled by the consummation of the Merger.
Except for shares of Common Stock acquired by a dissenter after the date
of the first announcement to the public of the transaction from which such
dissenter dissents, upon the consummation of the Merger, or upon receipt of
the payment demand (whichever is later), the Company must pay each dissenter
who complies with the foregoing requirements the amount the Company estimates
to be the fair value of the dissenter's shares of Common Stock plus accrued
interest. The payment must be accompanied by certain financial information
concerning the Company, a statement of the Company's estimate of the fair
value of the shares, an explanation of the method used to reach the estimate,
a brief description of the procedure to be followed to demand supplemental
payment and a copy of the Minnesota Dissenters' Rights Statute.
If a dissenting shareholder believes the amount remitted by the Company
is less than fair value for the shares of Common Stock plus interest, the
dissenter may notify the Company in writing of the dissenter's own estimate
of the fair value of the dissenter's shares and the amount of interest due,
and may demand payment of the dissenter's estimate, by following the
procedures set forth in the Minnesota Dissenters' Rights Statute.
CERTAIN INFORMATION CONCERNING THE COMPANY
The Company was incorporated under the laws of the State of Minnesota in
July 1993, under the name "Nutrition Medical, Inc." On December 22, 1998, the
Company's shareholders approved a proposal to change the Company's name from
Nutrition Medical, Inc. to "NM Holdings, Inc." The Company's executive
offices are located at 9850 51st Avenue North, Suite 110, Minneapolis,
Minnesota 55442.
Prior to December 23, 1998, the Company developed and sold generic
critical care formulas and related delivery equipment and accessories (i.e.,
feeding pumps and plastic disposables) for the hospital, nursing home and
home health care markets, as well as a line of retail private label adult
nutrition products for sale through retail chains. On December 23, 1998, the
Company completed a series of transactions resulting in the sale of
substantially all of its operating assets. The Company does not currently
conduct any active business operations. Since December 23, 1998, the Company
has used its existing cash resources to pursue a business combination with
another entity engaged in other lines of business.
DISCONTINUED OPERATIONS
The Company's original core business consisted of developing and
marketing a line of clinical nutrition products to hospitals and other
healthcare facilities as a cost-effective alternative to brand-name products.
In late 1995, the Company diversified its core business through the
development and marketing of a private label adult nutrition supplement
product line for sale to retail chains, using the retailers' proprietary
store-brand labels. In addition, in 1996 the Company commenced development of
a generic infant formula product for distribution through these retail
chains.
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<PAGE>
In January 1997, the Company attempted to augment its clinical
nutrition product line by acquiring from Elan Pharma, Inc. ("Elan"), a United
States subsidiary of Ireland-based Elan Corporation PLC., a line of enteral
(feeding tube) pumps, related plastic disposables and nutrition formula
products (the "Elan Product Line"). In exchange for the Elan Product Line,
the Company issued to Elan a $3 million subordinated promissory note and
213,750 shares of Common Stock.
During 1996 and 1997, the Company incurred significant expenses related
to the development of the generic infant formula product. Unable to
successfully complete a marketable product, the Company announced in January
1998 its decision to suspend further development efforts of its generic
infant formula product. Also, the Company announced in January 1998 its
intention to discontinue its private label adult nutrition product business.
Although the revenues generated from these products continued to grow, the
development and maintenance of a retail distribution network for these
products required a disproportionate amount of working capital. As a result,
the Company did not maintain competitive profit margins. On May 1, 1998, the
Company transferred to Agrilink Foods, Inc., a New York corporation
("Agrilink"), its private label adult nutrition business in return for (a)
cash in an amount equal to the Company's cost for the inventory and labels
used in such business, (b) cash in the amount of $18,000 for the Company's
label development costs, and (c) royalty payments on private label adult
nutrition products sold by Agrilink for the two-year period commencing May 1,
1998.
Since its inception, the Company also incurred losses in its core
critical care nutrition business. Although the gross margins from its
critical care nutrition business were competitive, the Company had to
increase sales to cover its fixed operating expenses. In an attempt to
broaden its market presence, the Company developed several new critical care
products and acquired the Elan Product Line, as described above. Company
management concluded that although revenues increased, the Elan Product Line
lacked the desired synergy with the Company's critical care formulas.
Management also concluded that the Company's inability to successfully
integrate the Elan Product Line rendered the Company's financial performance
objectives unattainable. Additionally, the Company experienced increased
competition from larger organizations and faced the risk of product
obsolescence due to the limited amount of available research and development
funding. The patent infringement lawsuits described in "--Legal Proceedings"
below also adversely affected the Company's ability to market its product
lines effectively.
In addition, Company management believed that the Company had
insufficient cash to adequately exploit new product development opportunities
and aggressively pursue marketing strategies required to achieve growth in
the applicable markets. Furthermore, the Company had accumulated net losses
in excess of $6 million since inception. Company management did not foresee
an end to these continued losses if the Company continued in its current
direction and businesses.
In light of the foregoing, the Board of Directors determined that it was
in the best interest of the Company and its shareholders to discontinue the
Company's critical care nutrition business operations. The Board of Directors
believed that the Company could maximize shareholder value by selling the
assets comprising the Company's current businesses and using the proceeds to
settle outstanding debt incurred from the Elan Product Line purchase and to
pursue an acquisition transaction with another entity engaged in other lines
of business.
In July 1998, the Company entered into an agreement to sell its pumps
and plastic disposables assets to ZEVEX, Inc. ("ZEVEX"). In September 1998,
the Company entered into an agreement to sell its critical care nutrition
product assets to GalaGen Inc. ("GalaGen"). Both transactions closed on
December 23, 1998, subsequent to shareholder approval received at the
Company's annual meeting of shareholders on December 22, 1998. In conjunction
with the ZEVEX sale, the Company entered into an agreement with Elan whereby,
in exchange for substantially all of the proceeds from the ZEVEX sale and a
warrant to acquire 50,000 shares of Common Stock for $3.50 per share, Elan
canceled the outstanding balance of the subordinated promissory note, and the
Company redeemed the 213,750 shares of Common Stock issued to Elan in January
1997.
As a result of the ZEVEX and GalaGen transactions and the settlement
with Novartis described in "--Legal Proceedings," the Company currently has
no products or product-related patents or trademarks.
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<PAGE>
STRATEGIC REPOSITIONING OF THE COMPANY
The following discussion of the Company's proposed business activities
is purposefully general and is not meant to limit the Company's discretion to
search for and consummate potential business opportunities.
The Company believes that the sale of substantially all its assets and
product lines, its reduction in liabilities through the cancellation of the
Elan subordinated promissory note, and the reduction in the number of shares
outstanding through the reacquisition of Common Stock issued to Elan has
positioned the Company as an attractive business partner for an entity
seeking a strategic combination with a publicly traded corporation. Company
management and the Board of Directors believe that such a combination will
serve the interests of the Company's shareholders better than a liquidation
of the Company and distribution of its assets to shareholders. If the Merger
Agreement is approved by the shareholders, it is the Board of Directors'
intention to complete the Merger. If for any reason the Merger is not
consummated, it is the Board of Directors' intention to pursue alternative
business combinations with other entities, using the Company's cash resources
(approximately $1.9 million as of May 31, 1999) together with other
resources. The consummation of any such alternative transaction may require
additional debt or equity financing. However, the Company has no current plan
to obtain additional financing and no assurance can be given that such
financing will be available to acquire a particular business.
Since December 23, 1998, the Company's principal activity has been the
investigation of potential acquisitions and the termination of the Company's
discontinued operations. Day-to-day operations are administered on an
as-needed basis by Richard J. Hegstrand, a consultant and the Company's
acting Chief Operating Officer. The Company's Chief Executive Officer, George
E. Kline, along with the Board of Directors, are overseeing the business
acquisition process.
As a result of the strategic repositioning of the Company, under the
rules of The Nasdaq Stock Market the Company is deemed to be a "shell"
corporation, whose sole purpose is to locate and consummate one or more
acquisition transactions with other entities. As a result, the Common Stock
was delisted from the Nasdaq SmallCap Market on May 7, 1999. See "--Market
Price and Dividend Data." The Common Stock currently trades on the Over The
Counter Bulletin Board under the symbol, "NMED."
CHANGES IN COMPANY MANAGEMENT
Effective August 31, 1998, William L. Rush resigned as a director,
Chairman of the Board, Chief Executive Officer and President of the Company.
Since September 1, 1998, George E. Kline has served as Chairman of the Board.
On December 23, 1998, the Board of Directors appointed George E. Kline as
Chief Executive Officer and President, effective January 1, 1999. In
addition, Hilding C. Nelson resigned as a director of the Company effective
March 31, 1999. Lawrence Lehmkuhl has also agreed to resign as a director of
the Company on the Effective Date.
LEGAL PROCEEDINGS
In August 1995, the Company was named as a defendant in a patent
infringement lawsuit brought by Novartis Nutrition ("Novartis"), formerly
Sandoz Nutrition Corporation, in the United States District Court for the
District of Minnesota. The complaint asserted that one of the Company's
products, L-Emental-TM- Plus, infringed on two patents held by Novartis, and
Novartis asked 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 December 15, 1998, the Company entered into a Settlement and Mutual
Release with Novartis whereby Novartis agreed to release all claims against
the Company, and the Company paid Novartis $450,000 and agreed to discontinue
production of its L-Emental-TM- Plus product. The Company recognized a charge
to discontinued operations in December 1998 of $513,816 relating to the
settlement payment and the write-off of the related product inventory.
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 asserted that one of the
Company's products, Pro-Peptide-TM- For Kids, infringes on a patent held by
Nestle. Additional litigation against the Company was filed but not served by
Nestle. Through a settlement agreement effective October 6, 1998, the parties
resolved all
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<PAGE>
outstanding claims between the parties. In connection with the
settlement, the Company agreed to reformulate its product Pro-Peptide-TM- For
Kids and to change its marketing for its product Pro-Peptide-TM- VHN.
EMPLOYEES
As of December 31, 1998, the Company had two full-time employees engaged
in general corporate and administrative functions. The Company currently has
no full-time employees.
MARKET PRICE AND DIVIDEND DATA
On May 7, 1999, the Company received a determination from a Nasdaq
Listing Qualification Panel (the "Panel") that the Common Stock would be
delisted from trading on The Nasdaq SmallCap Market effective as of the close
of trading on the same date. In its decision, the Panel noted that the
Company's current status as a "shell" corporation with no active business
operations did not provide investors sufficient information to determine the
potential of an investment in the Company. The Common Stock is currently
trading on the Over The Counter Bulletin Board under the symbol, "NMED." In
its order, the Panel invited the Company to apply for initial listing of its
securities upon the consummation of the Merger. In light of the Panel's
invitation to apply for listing upon consummation of the Merger, the Company
and MJK intend to proceed with the consummation of the Merger and intend to
apply for listing of the Common Stock issued to MJK shareholders in
connection with the Merger, on The Nasdaq National Market System. For a
discussion of the risks related to the delisting of the Common Stock on the
Nasdaq SmallCap Market, see "Risk Factors."
The following table sets forth the range of high and low per share bid
prices as reported by The Nasdaq SmallCap Market beginning on September 26,
1996 until May 7, 1999, the date the Common Stock was delisted from the
Nasdaq SmallCap Market. These quotations reflect inter-dealer prices, without
retail markup, markdown, or commission and may not reflect actual
transactions. On June 10, 1998, the Company effected a one-for-four reverse
stock split (the "Reverse Stock Split") in response to a Nasdaq SmallCap
Market listing requirement that the Common Stock maintain a minimum bid price
of $1.00 per share. Unless otherwise noted, all share numbers and per share
prices contained in this Proxy Statement reflect the Reverse Stock Split.
<TABLE>
<CAPTION>
YEAR QUARTER HIGH LOW
---------------- -------------------------------- ------------ -----------
<S> <C> <C> <C>
1997 First $ 16.0000 $ 15.0000
1997 Second 15.0000 8.0000
1997 Third 13.5000 8.0000
1997 Fourth 10.5000 4.0000
1998 First 5.5000 2.0000
1998 Second 3.5000 0.9375
1998 Third 1.7500 0.8750
1998 Fourth 1.2500 0.6250
1999 First 9.6250 1.1880
1999 Second* 18.0000 8.1250
</TABLE>
- ---------------------
* For the period commencing on April 1, 1999 and ending May 7, 1999.
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to declare any dividends in the foreseeable future.
On March 17, 1999, the date the Company and MJK announced they had entered
into negotiations regarding a potential business combination transaction,
each of the highest, lowest and last reported sale price per share of Common
Stock was $3.50. On March 24, 1999, the last full day of trading prior to the
announcement by the Company that it had entered into the Merger Agreement,
the highest, lowest and last
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<PAGE>
reported sale price per share of Common Stock were $5.00, $4.50 and $4.9375,
respectively. On May 7, 1999, the date the Common Stock was delisted from the
Nasdaq SmallCap Market, the last reported sale price per share of Common
Stock was $16.0625. On June 7, 1999, the last reported sale price per share
of Common Stock on the Over The Counter Bulletin Board was $11.9688. This
quotation reflects inter-dealer prices, without retail markup, markdown or
commission and may not reflect actual transactions. SHAREHOLDERS ARE URGED TO
OBTAIN A CURRENT MARKET QUOTATION FOR THEIR SHARES.
On March 17, 1999, the date of the announcement of negotiations between
the Company and MJK with respect to the Merger Agreement, Miller, Johnson &
Kuehn, Incorporated, which had served as a market maker in the Common Stock,
ceased effecting solicited trades in the Common Stock, and thereafter has
only processed unsolicited trades in the Common Stock on an agency basis.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Prior to December 23, 1998, the Company developed and sold generic
critical care nutrition formula products and related delivery equipment and
accessories for the hospital, nursing home and home health care markets, as
well as private label adult nutrition products for sale through retail
chains. In January 1998, the Company announced its intention to discontinue
its private label adult nutrition business due to continued losses. Since its
inception, the Company also incurred losses in its critical care nutrition
business. Company management believed that the continued operation of the
Company's critical care nutrition business was not viable due to the lack of
synergy between its critical care products and the Elan-acquired feeding pump
and plastic disposables business. Furthermore, the Company was experiencing
increased competition from larger organizations and faced the risk of product
obsolescence due to the limited amount of available research and development
funding. Certain patent infringement lawsuits also adversely affected the
Company's ability to market its product lines effectively.
In light of the foregoing, the Board of Directors determined that it was
in the best interest of the Company and its shareholders to discontinue the
Company's critical care nutrition business operations. The Board of Directors
believed that the Company could maximize shareholder value by selling the
assets comprising the Company's current businesses and using the proceeds to
settle outstanding debt incurred from the purchase of the pump and plastic
disposables business from Elan, and pursue the acquisition of other
businesses. On December 23, 1998, the Company closed a sale transaction with
ZEVEX pursuant to which the Company sold all of its assets used in its pump
and plastic disposables business, and a sale transaction with GalaGen
pursuant to which the Company sold all of its assets used in its critical
care business. The Company does not currently conduct any active business
operations. Since December 23, 1998, the Company has used its existing cash
resources to pursue a business combination with another entity engaged in
other lines of business.
The Company believes that the sale of its product lines, its reduction
in liabilities through the cancelation of the Elan subordinated promissory
note, and the reduction in the number of shares outstanding through the
reacquisition of the Common Stock issued to Elan has positioned the Company
as an attractive business partner for an entity seeking a strategic
combination with a publicly traded corporation. Company management and the
Board of Directors believe that such a combination will serve the interests
of the Company's shareholders better than a liquidation of the Company and
distribution of its assets to shareholders. If the Merger Agreement is
approved by the shareholders, it is the Board of Directors' intention to
complete the Merger. If for any reason the Merger is not consummated, it is
the Board of Directors' intention to pursue alternative business combinations
with other entities, using the Company's available cash resources
(approximately $1.9 million as of May 31, 1999) together with other
resources. The consummation of any such alternative transaction may require
additional debt or equity financing. However, the Company has no current plan
to obtain additional financing and no assurance can be given that such
financing will be available to acquire a particular business.
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<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
CONTINUING OPERATIONS
The loss from Company continuing operations totaled $41,977 as of March
31,1999, and consists of recurring administrative expenses incurred in the
period, offset by interest income earned in the same period.
DISCONTINUED OPERATIONS
The Company discontinued all operations in 1998. All pre-disposal
activity associated with these operations in the 1998 period has been
segregated and reported in a single line item "Loss from discontinued
operations" in the Company's Statements of Operations.
Sales included in discontinued operations for the three months ended
March 31, 1998 totaled $2.2 million. During this period, the Company incurred
direct and indirect expenses of approximately $2.15 million, resulting in net
income of the $49,000 or $.04 per share, based on average outstanding shares
of 1.4 million.
TWELVE MONTHS ENDED DECEMBER 31, 1998 AND 1997
CONTINUING OPERATIONS
The loss from continuing operations totaled $6,658 as of December 31,
1998, and consists of recurring administrative expenses incurred in the
period after the December 23, 1998 sale of the Company's product lines,
offset by interest income earned in the same period. The Company expects that
the loss from continuing operations will total less than $150,000 in the year
ended December 31, 1999, with a disproportionate amount of the loss occurring
in the first quarter of 1999.
DISCONTINUED OPERATIONS
The Company discontinued all operations in 1998. All pre-disposal
activity associated with these operations has been segregated and reported in
a single line item "Loss from discontinued operations" in the Company's
Statements of Operations. Also reported as a separate line item is the "Gain
on disposal of discontinued operations" in the 1998 period, representing the
net realized gain on the sale and disposal of these operations.
LOSS FROM DISCONTINUED OPERATIONS
The following discussion compares major components that comprise the
loss from discontinued operations in each period presented (see footnote 4 in
the Company's audited financial statements included elsewhere in this Proxy
Statement).
SALES. Sales included in discontinued operations for the year ended
December 31, 1998, totaled $4,926,765 compared to $6,317,722 for the same
period of 1997, a decrease of $1,390,957 or 22%. The decrease is the result
of the discontinuance of the Company's private label adult nutrition business
in May 1998. The Company's critical care product lines, disposed of in late
December 1998, generated comparable sales in 1998 when compared to the prior
year.
GROSS PROFIT. The overall gross profit in the year ended December 31,
1998, decreased slightly from $1,387,694 in the year ended December 31, 1997,
to $1,303,147, while increasing as a percentage of sales from 22% in 1997 to
26.4% in 1998. The majority of the $84,547 decrease in gross profit is
attributable to the decrease in sales of the lower margin private label adult
nutrition business. The decrease in sales of the lower margin private label
adult nutrition business in the 1998 period resulted in the increase of the
gross profit, as a percentage of sales, when compared to the 1997 period.
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OPERATING EXPENSES. Selling, general and administrative expenses
decreased $1,185,444 in the year ended December 31, 1998, from the comparable
period in 1997. The decrease is the result of the Company's cost reductions
(principally payroll related) associated with the discontinued operations and
lower legal costs in the 1998 period. Research costs decreased $561,623 from
$642,020 in 1997 to $80,397 in 1998 as a result of the Company's decision in
January 1998 to discontinue the development of a generic infant formula. In
December 1998, the Company settled a patent infringement lawsuit with
Novartis whereby the Company agreed to pay Novartis $450,000 and discontinue
production and sale of the L-Emental-TM- Plus critical care product,
resulting in a write-off of $63,816 in inventory. The Company incurred total
goodwill amortization of $1.8 million in the year ended December 31, 1997,
which included a $1.6 million write-off of the remaining goodwill associated
with the January 1997 acquisition of the Elan pump and plastic disposables
product line. As a result of this write-off there were no goodwill
amortization charges in the comparable 1998 period.
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS
The Company reported a net gain on the disposal of discontinued
operations of $1,320,053 in the year ended December 31, 1998. Included in the
gain are the sales of the Company's product lines offset by losses incurred
on the disposal of other assets and the write-downs of other assets to net
realizable value.
TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
DISCONTINUED OPERATIONS
The Company discontinued all operations in 1998. As a result, all
previous pre-disposal activity associated with Company operations for the
applicable reporting periods has been segregated and reported in a single
line item "Loss from discontinued operations" in the Company's Statements of
Operations.
LOSS FROM DISCONTINUED OPERATIONS
The following discussion compares major components that comprise the
loss from discontinued operations in each period presented (see footnote 4 in
the Company's audited financial statements included elsewhere in this Proxy
Statement).
NET SALES. Net sales from continuing operations for the year ended
December 31, 1997, totaled $6,317,722 compared to $1,224,871 for the same
period of 1996, an increase of 416%. The growth is the result of increases in
sales of products offered in both periods, new products developed by the
Company plus those feeding pump and plastic disposables products introduced
in January 1997 as a result of the acquisition of the feeding pump and
plastic disposables products from Elan, and the addition of new customers and
growth in orders from existing customers.
GROSS PROFIT. Gross profit from continuing operations for the year ended
December 31, 1997, increased to $1,387,694, compared to $685,431 in the same
period of 1996. As a percentage of sales, however, gross profit decreased
from 56% in 1996 to 22% in 1997. The decrease in gross profit as a percentage
of sales is primarily the result of the addition of pump and plastic
disposables sales and sales of private label adult nutrition products, all
which have a lower profit margin than the critical care formulas. In
addition, profit margins decreased in early 1997 due to costs related to the
integration of the pump and plastic disposables product line into the
Company's existing operations.
OPERATING EXPENSES. Selling, general and administrative expenses for the
year ended December 31, 1997, increased 171% to $2.98 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 including expenses of
$300,000 in 1997 for sales and marketing efforts related to the Company's
private label infant formula development project. Research and development
costs for the year ended December 31, 1997, increased 162% to $642,000 from
$245,000 incurred in the same period of 1996. The increase is attributable to
costs associated with new products under development in 1997, particularly
costs related to the development of a generic, national brand equivalent
infant formula product. Goodwill amortization totaled $1.8 million in the
year ended December 31, 1997,
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$1.6 million of which was written off in the fourth quarter. The write-off
was based on the Company's assessment of impaired value of the goodwill
recorded at the time of the acquisition of the pump and plastic disposables
product line.
YEAR 2000
The Company currently has no active business operations. Nevertheless,
the Company is addressing the issues associated with computing difficulties
that may affect existing computer systems as a result of programming code
malfunctions in distinguishing 21st century dates from 20th century dates
(the "Year 2000" issue). The Year 2000 issue is a pervasive problem affecting
many information technology systems and embedded technologies in all
industries. The Company has reviewed its internal financial and other process
control systems in order to assess and remediate Year 2000 concerns.
The Company's information technology ("IT") systems consist of computer
hardware systems and software supplied by third parties. The Company utilizes
current generation off-the-shelf software for its contact management and
accounting systems. As a result, the Company expects its exposure to be
minimal since such software has been determined by the Company to be Year
2000 compliant.
The Company's assessment of internal systems includes a review of
non-information technology ("non-IT" systems) (systems that contain embedded
technology in process control equipment containing microprocessors or other
similar circuitry). This assessment includes a review of the Company's
internal equipment and facilities (including building maintenance, security,
electrical, lighting, fire protection, telephone, heating and cooling
systems). Based on this review, the Company believes that its non-IT systems
and equipment are Year 2000 compliant.
The Company's current plans, as previously discussed, involve the
pursuit of new investment opportunities. Due diligence with any potential
acquisition candidate will include a review of any Year 2000 exposure.
The Company incurred less than $1,000, in incremental costs, to address
the Year 2000 issue during 1998. Since the Company has not yet consummated a
business acquisition, the Company is unable to estimate Year 2000 compliance
costs that may arise from such business acquisition opportunities.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has incurred losses and negative cumulative
cash flows from operations. On September 26, 1996, the Company's initial
public offering was declared effective and, in a transaction that closed on
October 1, 1996, the Company sold 359,375 shares of Common Stock at $14.00
per share, including an over-allotment of 49,375 shares. After deducting all
offering costs, net proceeds to the Company totaled $4.24 million. Prior to
the initial public offering, the Company's principal source of cash and
working capital had been from the private placement of the Company's common
stock, through which the Company received approximately $2.8 million in net
proceeds. In connection with activities and results of discontinued
operations described above, the Company's net cash provided by operations in
the year ended December 31, 1998, totaled $25,602, compared with cash used in
operations totaling $2.2 million in 1997. Net cash provided by investing
activities consisting of the sale of business operations totaled $262,293.
Cash and cash equivalents as of December 31, 1998, totaled $1,935,368. As of
May 31, 1999, cash and cash equivalents totaled $1,970,451. All unused funds
are invested in U.S. Treasury-backed funds with maturities generally ranging
under three months.
Management is unable to assess the Company's future liquidity and
capital requirements due to the Company's stated desire to enter into
different business opportunities. There can be no assurance that the Company
will not be required to raise additional capital before the end of 1999, or
any time thereafter, or that such capital will be available on acceptable
terms, or at all, in order to successfully consummate business transactions.
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<PAGE>
RISK FACTORS
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, particularly, in some
instances, if the Merger is not consummated.
CONTROL BY CERTAIN SHAREHOLDERS
Directors and executive officers of the Company beneficially own
approximately 13.5% of the outstanding Common Stock. Directors, executive
officers and certain principal shareholders of MJK beneficially own
approximately 8.0% of the outstanding Common Stock. As a result, such
directors, officers and certain principal shareholders of the Company and MJK
may have the ability to effectively control the election of the Company's
entire Board of Directors and the affairs of the Company, including, but not
limited to, all fundamental corporate transactions such as acquisitions,
mergers, consolidations and the sale of substantially all of the Company's
assets.
Based upon the Exchange Ratio and the number of shares of Common Stock,
MJK Common Stock and MJK Series I Preferred Stock outstanding as of the
Record Date, and assuming no change prior to the Effective Time, the
aggregate number of shares of Common Stock issuable to shareholders of MJK
would be 17,974,771 or approximately 93.5% of the Common Stock outstanding
immediately following the consummation of the Merger (approximately 93.0% on
a diluted basis assuming the exercise of all of those outstanding options and
warrants to purchase shares of Common Stock exercisable at a per share
purchase price of $5 or less). The current Company shareholders will only own
approximately 6.5% of the outstanding shares of Common Stock immediately
following the Merger (approximately 7.0% on a diluted basis). As a result,
the MJK shareholders receiving shares of Common Stock pursuant to the Merger
would have the ability to control the election of the Company's entire Board
of Directors and the affairs of the Company, including, but not limited to,
all fundamental corporate transactions such as acquisitions, mergers,
consolidations and the sale of substantially all of the Company's assets.
UNDESIGNATED STOCK
Prior to the shareholders' approval of the amendment and restatement to
the Articles of Incorporation (as discussed elsewhere in this Proxy
Statement), the Company's authorized capital consists of 6,250,000 shares of
capital stock, of which 5,000,000 shares are designated as Common Stock and
1,250,000 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 MBCA. 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 of Directors.
LIMITATIONS ON BROKER-DEALER SALES OF COMMON STOCK; APPLICABILITY OF
"PENNY STOCK" RULES; NO ASSURANCE OF QUALIFICATION FOR LISTING ON THE
NASDAQ NATIONAL MARKET AND THE NASDAQ SMALLCAP MARKET
Effective May 7, 1999, the Common Stock was delisted from trading on The
Nasdaq SmallCap Market. In a press release dated May 10, 1999, the Company
indicated that it intended to reapply for initial listing of the Common Stock
upon consummation of the Merger. The Company must comply with the applicable
requirements for initial inclusion on The Nasdaq SmallCap Market. To qualify
for initial listing on The Nasdaq SmallCap Market, common and preferred stock
must have a minimum bid price of $4.00. All companies listed on The Nasdaq
SmallCap 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 providing
certain shareholder voting rights. A company applying for listing on The
Nasdaq SmallCap Market must meet three additional requirements: (a) the
company must have either net tangible assets of more than $4 million, a
market capitalization of $50 million or net income of $750,000; (b) the
company must have a public float of 1 million shares;
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and (c) the market value of such public float must be more than $5 million.
Additionally, the company must have a minimum of 300 round lot shareholders
and there must be at least three market makers in the company's common stock.
Failure by a company to comply with these requirements may result in the
company's common stock not qualifying for listing on The Nasdaq SmallCap
Market. If the Company intends to qualify for listing on the Nasdaq National
Market, the Company must comply with certain initial listing requirements
that are more stringent than the comparable initial listing requirements for
the Nasdaq SmallCap Market. Failure by the Company to comply with the Nasdaq
National Market initial listing requirements may result in the Company not
qualifying for listing on the Nasdaq National Market. In such event, the
Company may qualify for listing on the Nasdaq SmallCap Market, provided the
Company complies with the initial listing requirements for the Nasdaq
SmallCap Market described above.
Federal regulations promulgated under the Securities Exchange Act of
1934, as amended (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 that 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 the Common Stock is listed on The Nasdaq SmallCap
Market, and 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.
While the Common Stock is excluded from The Nasdaq SmallCap Market,
trading, if any, in shares of the Common Stock is 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: (a)
obtaining financial and investment information from the investor; (b)
obtaining a written suitability questionnaire and purchase agreement signed
by the investor; (c) providing the investor with a written identification of
the shares being offered and in what quantity; and (d) delivering to the
investor a written statement setting forth the basis on which the
broker-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, the application of the
comprehensive Penny Stock Rules may make it more difficult for broker-dealers
to sell the Common Stock and purchasers of shares of Common Stock may have
difficulty in selling such shares in secondary trading markets.
DEPENDENCE UPON MANAGEMENT
The ability of the Company to consummate the Merger or to identify and
evaluate suitable other business opportunities and consummate another
business combination transaction if the Merger is not consummated is
substantially dependent upon certain key management personnel, particularly
George E. Kline. The loss of such key management personnel could have a
material adverse effect on the Company's ability to consummate the Merger or
to identify and evaluate suitable other business opportunities and consummate
another business combination transaction.
SPECULATIVE NATURE OF COMPANY'S PROPOSED OPERATIONS
The success of the Company's proposed plan of operation will depend to a
great extent on the operations, financial condition and management of MJK, if
the Merger is consummated. However, if the Merger is not consummated, Company
management intends to seek business combinations with entities having
established operating histories. There can be no assurance that the Company
will be successful in locating candidates meeting such criteria. In the event
the Company completes a business combination transaction, the success of the
Company's operations may be dependent upon management of the successor entity
and numerous other factors beyond the Company's control.
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SCARCITY OF AND COMPETITION FOR BUSINESS OPPORTUNITIES
The Company is an insignificant participant in the business of seeking
business combination transactions with other entities. A large number of
established and well financed entities, including venture capital firms, are
active in mergers and acquisitions of business entities that may be desirable
candidates for a strategic combination with the Company. Such competitors may
have significantly greater financial resources, technical expertise and
managerial capabilities than the Company. Consequently, the Company may be at
a competitive disadvantage in identifying possible business combination
opportunities, if the Merger is not consummated, and successfully completing
a business combination transaction.
NO STANDARDS FOR BUSINESS OPPORTUNITIES
There can be no assurance that the Company will be successful in
consummating the Merger, or identifying and evaluating suitable other
business opportunities or consummating another business combination
transaction if the Merger is not consummated. There is no assurance that the
Board of Directors will be able to negotiate a business combination on terms
favorable to the Company. The Company has not established a specific length
of operating history or a specified level of earnings, assets, net worth or
other criteria that it will require a target business opportunity to have
achieved, and without which the Company will not consider a business
combination with such entity. Accordingly, the Company may enter into a
business combination with an entity having losses, limited or no potential
for earnings, limited assets, no significant operating history, negative net
worth or other negative characteristics.
REPORTING REQUIREMENTS UNDER THE EXCHANGE ACT
The Exchange Act requires companies subject thereto to provide certain
information about significant acquisitions, including certified financial
statements for the acquired company or entity, covering one or two years
depending on the size of the acquisition. The time and additional costs that
may be incurred by some target entities to prepare such statements may
significantly delay or preclude consummation of an otherwise desirable
acquisition by the Company. Acquisition prospects that do not have or are
unable to obtain the required audited financial statements may not be
appropriate for acquisition so long as the reporting requirements of the
Exchange Act are applicable.
LACK OF DIVERSIFICATION
The Company's proposed operations may result in the Company engaging in
a business combination with only one business opportunity entity.
Consequently, the Company's activities may be limited to those engaged in by
the business opportunity which the Company acquires. The Company's inability
to diversify its activities into a number of areas may subject the Company to
economic fluctuations within a particular business or industry and therefore
increase the risks associated with the Company's operations.
CHANGE IN CONTROL AND MANAGEMENT
A business combination transaction involving the issuance of Common
Stock may result in shareholders of a business opportunity entity obtaining a
controlling interest in the Company. Any such business combination may
require Company management to sell or transfer all or a portion of their
shares of Common Stock, or resign as directors and officers of the Company.
The resulting change in control of the Company could result in the removal of
one or more Company officers and directors and a corresponding reduction in
or elimination of their participation in the future affairs of the Company.
In addition, the issuance of shares of Common Stock in connection with a
business combination transaction would result in the reduction in percentage
of shares of Common Stock owned by present shareholders of the Company. As
described elsewhere in this Proxy Statement, the consummation of the Merger
would be expected to result in the occurrence of many such effects.
DISADVANTAGES OF BLANK CHECK OFFERINGS
The Company may enter into a business combination transaction with an
entity that desires to establish a public trading market for its shares. An
issuance of the Company's shares of Common Stock in connection with such a
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business combination transaction may be subject to applicable federal and
state laws regarding the issuance of "blank check" stock. The consequences of
such laws include, but are not limited to, time delays of the registration
process, significant expenses incurred in connection with such an offering,
and comprehensive disclosure regarding the Company's business, management and
financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE
If the Merger is consummated, the market price of the Common Stock may
be highly volatile and could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new software, services or products by the Company or its
competitors, changes in financial estimates by securities analysts or other
events or factors, many of which are beyond its control. In addition, the
stock market has experienced significant price and volume fluctuations that
have particularly affected the market prices of equity securities of many
technology and service companies and that often have been unrelated to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price for a company's securities,
securities class action litigation often has been instituted. Such litigation
could result in substantial costs and a diversion of management attention and
resources, which could have a material adverse effect on the Company's
business, financial condition and operating results.
DIRECTOR COMPENSATION
Directors of the Company receive no compensation other than authorized
expense reimbursement and stock options granted under the 1995 Plan or the
1996 Non-Employee Director Stock Option Plan (the "1996 Director Plan")
described below.
1995 PLAN
As of December 31, 1998, options to purchase 194,063 shares of common
stock had been granted under the 1995 Plan, at a weighted average exercise
price of $3.85. On December 23, 1998, the Board of Directors approved option
grants of 60,000 and 15,000 to Messrs. Kline and Lehmkuhl, respectively,
under the 1995 Plan. In addition, Mr. Nelson, who resigned as a director
effective March 31, 1999, was granted 7,500 options. Of the aforementioned
option grants, Messrs. Kline and Nelson exercised 60,000 and 7,500 options,
respectively, on March 31, 1999.
1996 DIRECTOR PLAN
The shareholders of the Company adopted the 1996 Director Plan in August
1996. The 1996 Director Plan provides for an automatic grant of non-qualified
stock options to purchase 3,750 shares of Common Stock to non-employee
directors on the date such individuals are first appointed directors of the
Company, and an automatic grant of options to purchase an additional 1,875
shares of Common Stock on the day after each subsequent annual meeting of the
Company's shareholders. The exercise price for such shares of Common Stock is
equal to the fair market value of the Common Stock on the date of grant. The
options granted upon appointment to the Board of Directors vest and become
exercisable as to 50% of the shares on the date of grant, and an additional
25% vest on each of the first and second anniversary dates of such grant, if
the holder remains a director of the Company on these respective dates. The
options granted in connection with subsequent annual meetings vest and become
exercisable as to 100% of the shares six months after the date of such grant
if the holder remains a director of the Company on such date. The Company has
reserved 25,000 shares of its common stock for issuance under the 1996
Director Plan.
On December 23, 1998, automatic grants of 1,875 each were made to
Messrs. Kline and Lehmkuhl under the 1996 Director Plan. In addition, Mr.
Nelson, who resigned as a director effective March 31, 1999, was granted
3,750 options. Of the aforementioned option grants, Mr. Nelson exercised
1,875 options on March 31, 1999.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information for 1998, 1997 and
1996 concerning the compensation of the Company's former President and Chief
Executive Officer (the "Named Executive Officer") for services rendered
during those years. No other executive officer of the Company received
aggregate annual salary and bonus compensation of more than $100,000 during
1998.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ----------------------- ----------------------
Name and Securities Underlying All Other
Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)
- ------------------------ ------- ----------- ------------ ----------------------- ----------------------
<S> <C> <C> <C> <C> <C>
William L. Rush 1998 63,577 (1) -- -- 122,799(2)
President and Chief 1997 95,000 -- -- 2,118(3)
Executive Officer 1996 95,000 20,000 25,000 451(4)
</TABLE>
- ----------------------------
(1) Mr. Rush resigned as a director, Chairman of the Board, Chief Executive
Officer and President of the Company effective August 31, 1998.
(2) Includes (a) imputed income in the amount of $2,686 arising from
premiums paid by the Company with respect to disability insurance for
Mr. Rush and the term life insurance portion of a split dollar value
life insurance policy, the proceeds of which are payable to a
beneficiary designated by Mr. Rush; and (b) $120,113 paid to Mr. Rush
pursuant to the Separation Agreement and General Release dated October
9, 1998, entered into by Mr. Rush and the Company in connection with
Mr. Rush's resignation from the Company effective August 31, 1998.
(3) Consists of imputed income arising from premiums paid by the Company
with respect to disability insurance for Mr. Rush and the term life
insurance portion of a split dollar value life insurance policy, the
proceeds of which are payable to a beneficiary designated by Mr. Rush.
(4) Consists of imputed income arising from premiums paid by the Company
with respect to disability insurance for Mr. Rush.
SEVERANCE AGREEMENT
In connection with Mr. Rush's resignation on August 31, 1998, the
Company and Mr. Rush entered into a Separation Agreement and General Release
dated October 9, 1998 (the "Severance Agreement"). Pursuant to the terms of
the Severance Agreement, (a) Mr. Rush received a cash payment of $95,000 in
lieu of the payments to which Mr. Rush previously was entitled under the
terms of his employment agreement dated as of October 1, 1996, with the
Company (the "Employment Agreement"); (b) Mr. Rush retained an option to
purchase 25,000 shares of Common Stock at an exercise price of $14.00 per
share, which option was initially granted pursuant to the Employment
Agreement, 12,500 shares of which vested on April 1, 1998, and 12,500 shares
of which vested upon execution of the Severance Agreement, and which will
expire on August 31, 2000, with respect to any shares for which the option
has not been exercised on or prior to such date; (c) the Company transferred
its beneficiary rights under the keyman life insurance policy procured by the
Company in Mr. Rush's name to a designee of Mr. Rush's choice; (d) the
Company granted Mr. Rush the right to collect $4,000 of the cash surrender
value of the split dollar value life insurance policy procured by the Company
in Mr. Rush's name; (e) the Company agreed to pay Mr. Rush a lump sum payment
of $17,642 in lieu of any and all other benefits to which Mr. Rush was
entitled under the terms of the Employment Agreement; and (f) the Company
paid Mr. Rush $3,471.16 for his accrued and unpaid vacation.
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CURRENT COMPENSATION
Upon his resignation as President and Chief Executive Officer of the
Company, Mr. Rush entered into a consulting agreement with the Company
pursuant to which he will provide, for a fee of $200 per hour, consulting
services in the manner and at such times as requested by the Company.
Pursuant to the terms of his consulting agreement, Mr. Rush is required to
report to the Chief Operating Officer of the Company. Payments to Mr. Rush
under the consulting agreement for services through December 31, 1998,
totaled $7,050. Mr. Hegstrand is also providing services to the Company
pursuant to a consulting agreement. Pursuant to the terms of his consulting
agreement, Mr. Hegstrand receives a fee of $75 per hour and reports to the
Company's Board of Directors.
STOCK OPTIONS
No stock option grants were made to the Named Executive Officer during
the fiscal year ended December 31, 1998.
To date, the Named Executive Officer has not exercised any options to
purchase shares of Common Stock. The following table sets forth the number
and aggregate dollar value of all unexercised options held by the Named
Executive Officer on March 31, 1999, at which time the closing per-share sale
price of the Common Stock as reported on The Nasdaq SmallCap Market was
$9.625.
<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
March 31, 1999 March 31, 1999
--------------------------------- --------------------------------
Name Exercisable Nonexercisable Exercisable Nonexercisable
- ---------------------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
William L. Rush 25,000 -- (1) --
</TABLE>
(1) None of the Named Executive Officer's stock options were in the money
as of March 31, 1999. The exercise price per share of all of the Named
Executive Officer's stock options is $14.00.
On December 23, 1998, Mr. Hegstrand received an option to purchase
22,500 shares of Common Stock at an exercise price per share of $1.20.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of May 28, 1999, by (a) each person
known by the Company to be the beneficial owner of more than 5% of
outstanding Common Stock, (b) each director, (c) the Named Executive Officer,
and (d) all executive officers and directors as a group. In addition, shares
of Common Stock subject to options or warrants currently exercisable or
exercisable within 60 days from the date hereof (the "Currently Exercisable
Options") are deemed outstanding for computing the percentage of the person
holding such options, but are not deemed outstanding for computing the
percentage of any other person. Unless otherwise indicated, each of the
following persons has sole voting and investment power with respect to the
shares of Common Stock set forth opposite their respective names:
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<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Percent
Beneficial Owner Owned of Class
---------------------------------------- ------------------- ------------------
<S> <C> <C>
William L. Rush (1)..................... 70,500 5.6%
11730 50th Place North
Plymouth, MN 55442
Lawrence A. Lehmkuhl (2)................ 35,510 2.8%
134 Dellwood Avenue
Dellwood, MN 55110
George E. Kline (3)..................... 178,250 14.2%
Brightstone Capital
4750 IDS Center
Minneapolis, MN 55402
Brightstone Funds (4)................... 96,250 7.7%
Venture Management
4750 IDS Center
Minneapolis, MN 55402
Betty L. Johnson (5).................... 109,759 8.7%
Miller, Johnson & Kuehn, Incorporated
5500 Wayzata Boulevard, Suite 800
Minneapolis, MN 55416
Certain directors, officers and shareholders 161,768 13.4%
of MJK as a group (six persons) (7)
All Company directors and officers as a
group (3 persons) (6)................... 236,260 18.0%
</TABLE>
- -------------------------
(1) Includes 25,000 shares issuable pursuant to Currently Exercisable
Options.
(2) Includes 26,250 shares issuable pursuant to Currently Exercisable
Options.
(3) Includes 22,500 shares owned by Brightstone Fund IV; 37,500 shares
owned by Brightstone Fund VI; 27,500 shares owned and 3,750 shares
issuable pursuant to warrants held by Brightstone Fund VII; and 5,000
shares issuable pursuant to a warrant held by Brightstone Capital.
George E. Kline, Chairman of the Board, Chief Executive Officer,
President and a director of the Company, and James A. Bernards serve as
the members of Brightstone Capital LLC, the general partner of all of the
Brightstone entities referenced above. By virtue of this position, Messrs.
Kline and Bernards may be deemed to have voting and investment control
over the shares owned by such Brightstone entities, and thus beneficial
ownership of those shares. Messrs. Kline and Bernards disclaim any
beneficial ownership of such shares, and under a written agreement with Mr.
Bernards, Mr. Kline has no voting or investment control over such shares
and will not receive any other economic benefit from such shares. Also
includes 10,750 shares held by Venture Management Profit Plan & Trust, of
which Mr. Kline is the sole trustee and beneficiary, and 11,250 shares
issuable pursuant to Currently Exercisable Options.
(4) These shares are also included in beneficial ownership of Mr. Kline.
See footnote 3 above.
(5) Includes 23,707 shares issuable pursuant to warrants held by David B.
Johnson.
(6) Includes 68,750 shares issuable pursuant to Currently Exercisable
Options.
(7) Includes shares owned by, and shares issuable pursuant to the exercise
of warrants held by, David B. Johnson, Betty L. Johnson, Eldon C.
Miller, Stanley D. Rahm, Paul R. Kuehn and N. Lee Wesley.
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<PAGE>
CERTAIN INFORMATION CONCERNING MJK
GENERAL
MJK is a holding company incorporated in the State of Minnesota on June
9, 1997. MJK offers regional securities brokerage and investment banking
services through its wholly-owned subsidiary, Miller, Johnson & Kuehn,
Incorporated. At May 28, 1999, MJK had 285 employees located in seven states.
MJK Clearing Services, a division of Miller, Johnson & Kuehn, Incorporated,
also serves as clearing agent for approximately 30 brokerage firms located
throughout the United States. MJK Capital Corporation, another wholly-owned
subsidiary of MJK engages in unregulated private finance transactions. MJK is
a Minnesota corporation with its executive offices located at 5500 Wayzata
Boulevard, Suite 800, Minneapolis, Minnesota 55416. Its telephone number is
(612) 542-6000.
The broker-dealer and investment banking activities of MJK are conducted
through Miller, Johnson & Kuehn, Incorporated and its division Juran & Moody.
MJK deals in securities of, and is a market maker in, equity securities and
fixed income securities, principally government bonds and certificates of
deposit. At May 28, 1999, MJK had 199 retail sales representatives and 20
institutional sales representatives in seven office locations in Minnesota,
Arizona, Illinois, Texas, Florida and California.
MJK's operating results are sensitive to many factors outside the
control of MJK, including volatility of securities prices and interest rates,
trading volume of securities, income and capital gains tax legislation and
demand for investment banking services. Economic conditions in the regions in
which MJK operates also affect operating results.
BROKERAGE AND DISTRIBUTION ACTIVITIES
PRINCIPAL TRANSACTIONS
Miller, Johnson & Kuehn, Incorporated is a dealer in corporate equity
and corporate and government fixed income securities and recognizes profits
or losses on transactions in, or fluctuations in the value of, securities
held in inventory. Internal guidelines have been established and are
periodically reviewed limiting the size and risk of inventories maintained.
These inventories require the commitment of substantial capital and expose
MJK to the risk of a loss if market prices of the securities held in
inventory decrease. General market conditions, interest rates and the
financial prospects for issuers of such securities may affect the market
price of securities held in inventory.
COMMISSION BUSINESS
As a securities broker, Miller, Johnson & Kuehn, Incorporated also acts
as agent in the purchase and sale of debt and equity securities and options.
Miller, Johnson & Kuehn, Incorporated charges a brokerage commission when
acting as agent for the purchaser or seller of a security. If the security is
listed on an exchange, the transaction is generally effected through a floor
broker who is unaffiliated with Miller, Johnson & Kuehn, Incorporated. If the
security is traded in the OTC market, transactions are generally effected
with a market maker in the security. In addition to the foregoing, Miller,
Johnson & Kuehn, Incorporated and MJK Capital Corporation also earn
commissions and/or fees from transactions involving various other financial
products. Miller, Johnson & Kuehn, Incorporated's Scottsdale, Arizona office
is one of the leading brokers of participations in jumbo certificates of
deposit issued by federally guaranteed banks and savings institutions.
INVESTMENT BANKING ACTIVITIES
Miller, Johnson & Kuehn, Incorporated also provides investment banking
services to clients in planning to meet their financial needs and advising
them on the most advantageous means of raising capital or debt. Such plans
are sometimes implemented by managing or co-managing public offerings of
securities or by arranging private placements of securities with
institutional or individual investors. The corporate finance department
coordinates the distribution of managed and co-managed corporate
underwritings, accepts invitations to participate in competitive or
negotiated underwritings managed by other investment banking firms, and
allocates and merchandises Miller, Johnson & Kuehn,
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<PAGE>
Incorporated's underwriting positions to the firm, to institutional clients
and to other broker-dealers. Miller, Johnson & Kuehn, Incorporated is among
the leaders in its region in the origination, syndication and distribution of
securities of emerging growth companies and fixed income securities for
municipalities and state and local agencies. For the year ended March 31,
1999, Miller, Johnson & Kuehn, Incorporated originated approximately $317.6
million in tax exempt and taxable municipal, state and local debt offerings
and placed approximately $21.0 million in offerings of equity securities for
emerging companies. Participation in corporate and municipal underwritings
can expose Miller, Johnson & Kuehn, Incorporated to material risk since the
possibility exists that securities they have committed to purchase cannot be
sold at the initial offering price. Federal and state securities laws and
regulations also affect the activities of underwriters and placement agents
and impose substantial potential liabilities in offerings of securities. In
addition to public offerings and private placements, Miller, Johnson & Kuehn,
Incorporated also provides other consulting services including appraising
corporate securities, arranging and evaluating mergers and acquisitions and
advising clients with respect to financing plans and related matters.
RESEARCH ACTIVITIES
Miller, Johnson & Kuehn, Incorporated has a research department which
provides analysis, investment recommendations and market information with an
emphasis on emerging growth companies located in the Upper Midwest region of
the United States. At March 31, 1999, Miller, Johnson & Kuehn, Incorporated
employed four securities analysts. Miller, Johnson & Kuehn, Incorporated also
purchases certain research products from independent research organizations
to supplement their internal research activities.
CUSTOMER FINANCING
A significant portion of Miller, Johnson & Kuehn, Incorporated's
services is derived from net interest income, the major portion of which
relates to loans made to customers secured by customer accounts. Customer's
transactions are effected on either a cash or margin basis. Purchases on a
cash basis require full payment by the designated settlement date, generally
the third business day following the transaction date. Miller, Johnson &
Kuehn, Incorporated is at risk in the event a customer fails to settle a
trade and the value of the security declines subsequent to the transaction
date. When a purchase is made on a margin basis, Miller, Johnson & Kuehn,
Incorporated loans a part of the purchase price to customers and takes the
risk that a market decline could reduce the value of the collateral securing
the margin loan below the amount of the customer's indebtedness and that the
customer might be unable to repay the unsecured indebtedness. Interest is
charged at a floating rate on amounts borrowed by customers to finance
purchases on margin. The rate charged is dependent on the average net debit
balance in the customer's accounts and the activity level in the accounts.
Customers will at times accumulate credit balances in their accounts.
Such balances result from payment of dividends, interest or principal on
securities held for such customers, from funds received in connection with
sales of a customer's securities and from cash deposits made by customers
pending investment. Pending investment of such funds or reimbursement upon
the customer's request, Miller, Johnson & Kuehn, Incorporated uses available
credit balances to lend funds to customers purchasing securities on margin.
Excess customer credit balances are invested in short-term securities in
accordance with applicable regulations and are segregated for the exclusive
benefit of customers. Miller, Johnson & Kuehn, Incorporated generates net
interest income from the positive interest rate spread between the rate
earned from margin lending and alternative short-term investments and the
rate paid on customer credit balances.
Miller, Johnson & Kuehn, Incorporated is a member of the Securities
Investor Protection Corporation ("SIPC"), which insures customer accounts up
to specified limits in the event of liquidation of the firm. Additionally,
the firm maintains insurance coverage in order to insure customer accounts to
specified amounts in excess of SIPC coverage.
CLEARING FIRM OPERATIONS
Miller, Johnson & Kuehn, Incorporated serves as clearing agent for
approximately 30 correspondent brokerage firms through its MJK Clearing
Services division. As a clearing agent, Miller, Johnson & Kuehn, Incorporated
provides transaction execution, account maintenance, including extension of
credit, and record keeping services for customers
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<PAGE>
of its introducing brokers. The correspondent brokerage firms are responsible
to MJK for all transactions in their customer accounts.
PROPOSED INTERNET BROKERAGE
MJK is presently developing a cost-effective, secure online brokerage
service. MJK expects its online brokerage operation will allow it to offer
automated order placement, portfolio tracking and related market information,
news and other information services 24 hours a day, seven days a week by
means of the Internet and direct modem access. MJK expects to develop a
proprietary transaction processing technology that will enable it to offer
highly automated, easy-to-use and cost-effective services. Further, MJK
expects that its technology will be adopted to provide information and
transaction processing services related to other aspects of electronic
commerce, such as the processing of bond and certificate of deposit
transactions, insurance transactions and electronic cash transfers.
MJK intends to provide its customers with the ability to place orders
for stock trades and other investment transactions directly, and at a lower,
more predictable transaction cost than traditional full-commission brokerage
firms. The services being developed is expected to feature an easy-to-use
graphical user interface, the ability to create "personalized environments"
reflecting users' individual needs and interests, accessibility from
virtually anywhere at any time via multiple gateways, unbundled services for
cost-effective pricing, and highly secure services through the use of
encryption and authentication technology. MJK expects to begin
offering Internet brokerage services through its wholly-owned subsidiary
Stockwalk.com, Inc., in 1999.
BUSINESS EXPANSION
With the objective of expanding MJK's core business, MJK intends to
pursue alliances with (a) Internet access and service providers, (b) Internet
software providers, (c) providers of home and online banking services, (d)
financial advisors and money managers, (e) electronic commerce and currency
companies, and (f) other companies either requiring an efficient operation or
wanting to offer new services to their established customer bases. MJK
intends that these alliances will increase its core customer base, trading
volume and operational efficiency and will enhance brand name recognition. To
date, MJK has concentrated principally on securing alliances or pursuing
acquisitions of discount brokerage firms or online brokerage firms. MJK has
no current agreements with respect to any potential acquisitions or alliances.
REGULATION
The securities industry is subject to comprehensive regulation by
federal and state governments, the various securities and commodities
exchanges and self-regulatory bodies. The regulations cover all aspects of
the securities business including sales methods, trade practices among
broker-dealers, uses and safekeeping of customers' funds and securities,
capital levels of securities firms, record keeping and the conduct of
employees. Violations of these rules and regulations can result in censure,
fines, suspensions and revocation of the right to do business.
UNIFORM NET CAPITAL RULE
As a broker-dealer and a member of the NASD, Miller, Johnson & Kuehn,
Incorporated is subject to the Uniform Net Capital Rule (the "Rule")
promulgated by the Commission. The Rule is designed to measure the general
financial integrity and liquidity of a broker-dealer and the minimum net
capital deemed necessary to meet the broker-dealer's continuing commitments
to its customers. The Rule provides for two methods of computing net capital,
and Miller, Johnson & Kuehn, Incorporated has adopted what is generally
referred to as the alternative method. Minimum net capital is defined under
this method to be equal to 2% of customer debit balances, as defined. In
computing net capital, various adjustments are made to exclude assets which
are not readily convertible into cash and to provide a conservative valuation
of the assets such as a company's trading securities. Failure to maintain the
required net capital may subject a firm to suspension or expulsion by the
NASD, the Commission and other regulatory bodies and may ultimately require
its liquidation. At all times, Miller, Johnson & Kuehn, Incorporated has
maintained net capital at or above the required levels.
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<PAGE>
COMPETITION
Miller, Johnson & Kuehn, Incorporated encounters intense competition in
its business and competes directly with other firms, many of which have
substantially greater capital and other resources. Miller, Johnson & Kuehn,
Incorporated encounters competition from banks, insurance companies and
financial institutions in many elements of its business. In addition,
legislative proposals in recent years have expanded competition by banks in
areas traditionally provided only by securities and money management teams.
Additionally, competition among securities firms for successful sales
representatives is significant.
EMPLOYEES
At May 28, 1999, MJK had approximately 285 full-time employees, 282 of
whom were employed by Miller, Johnson & Kuehn, Incorporated. None of MJK's
employees are represented by a collective bargaining unit.
LEGAL PROCEEDINGS
Miller, Johnson & Kuehn, Incorporated is a defendant or respondent in
various civil actions and arbitrations incidental to its business involving
alleged violations of federal and state securities laws and other laws. While
the outcome of any litigation or arbitration is uncertain, management, based
in part upon consultation with legal counsel as to certain of the pending
actions or proceedings, believes that the resolution of all such matters
would not have a material adverse effect on MJK's consolidated financial
condition.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
MJK, through its principal subsidiary, Miller, Johnson & Kuehn,
Incorporated, a Minneapolis, Minnesota- based regional broker-dealer, engages
primarily in principal transactions, commission business, investment banking
activities, and customer financing. In addition, Miller, Johnson & Kuehn,
Incorporated acts as a fully-disclosed clearing broker for approximately 30
brokerage firms and has commenced development of an online brokerage service.
MJK, a Minnesota corporation, was incorporated on June 9, 1997, to serve as
the holding company of Miller, Johnson and Kuehn, Incorporated and another
wholly-owned subsidiary, MJK Capital Corporation, whose unregulated private
finance transaction activities are immaterial to MJK's financial information
on a consolidated basis. Prior to the establishment of MJK, Miller, Johnson &
Kuehn, Incorporated operated independently, conducting activities comparable
to those conducted by Miller, Johnson & Kuehn, Incorporated thereafter.
Because MJK's financial information on a consolidated basis represents
primarily the prior business operations of Miller, Johnson & Kuehn,
Incorporated and the present business operations of MJK and Miller, Johnson &
Kuehn, Incorporated, these entities are collectively referred to as "MJK"
hereinafter in this section.
MJK's business is highly competitive and sensitive to many factors
beyond the control of MJK, including the volatility and price level of
securities markets, the volume, size and timing of securities transactions,
the level and volatility of interest rates, local and national economic
conditions and demand for services and investment products. In addition, a
significant portion of MJK's expenses, including salaries, benefits,
occupancy and communications, as well as legal expenses incurred in
connection with customer complaints typically predicated on investment
losses, are relatively fixed and do not vary with market activity.
Consequently, MJK's revenue and net income have been and may continue to be
subject to fluctuations.
During the three most recent completed calendar years, the equity
markets in the United States have experienced an unprecedented rise, spurring
record levels of transaction volume and capital market activity. These
conditions have led to record results in many sectors of the financial
services industry.
The following table summarizes the changes in MJK's primary revenue
sources and expenses for each of the three most recent fiscal years ended
March 31, 1999:
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<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease) from Prior 12 Month Period
ended for the year ended March 31
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Revenues: 1999 1998 1997
----------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Commissions $ 848 9% $ 5,110 130% $ 1,198 44%
Profits on principal transactions 4,429 42 779 8 (681) -6
Investment banking (1,267) -13 1,940 25 784 11
Interest income 1,903 14 4,357 48 3,663 67
Clearing fee income 1,203 63 1,117 142 218 100
Other income 1,381 59 1,183 101 481 70
--------- --------- ----------
Total Revenues: $ 8,497 18% $ 14,486 44% $ 5,663 21%
========= ========= ==========
Expenses:
Compensation and benefits 1,037 4% 8,213 46% 929 6%
Clearing 1,415 96 725 97 97 15
Communication 1,313 33 1,640 71 643 39
Occupancy and equipment rental (96) -3 1,416 72 914 87
Interest 779 7 3,601 48 2,997 68
Other operating expenses (32) -1 938 43 718 48
--------- --------- ----------
Total Expenses: $ 4,416 9% $ 16,533 51% $ 6,298 24%
========= ========= ==========
</TABLE>
- -----------------------
The following are descriptions of MJK's principal sources of revenues:
COMMISSIONS. Commission revenues are generated through securities
transactions for individual and institutional investors in which MJK acts as
an agent. Commissions are received on exchange transactions, mutual funds,
insurance products, options, and Over the Counter securities in which MJK
does not make a market.
PRINCIPAL TRANSACTIONS. MJK actively engages in trading as a principal
in Over the Counter equity and fixed income securities. When transactions are
executed on a principal basis, MJK, in lieu of commissions, marks up or marks
down securities and records the income as principal transaction revenues. MJK
buys, sells and maintains an inventory of securities in order to "make a
market" in that security, exposing MJK to more risk than agency transactions.
Revenues from principal transactions, including trading profits and losses,
depend upon the general trend in prices, the level of activity in the
securities markets, the skills of employees engaged in market making, and the
size of inventories. MJK typically makes a dealer market in approximately 50
equity securities.
INVESTMENT BANKING. MJK's corporate finance department manages,
co-manages and participates in the underwriting of corporate equity and debt
securities. MJK specializes in providing financing to emerging growth and
development stage companies through private placements and underwritings.
During the fiscal year ended March 31, 1999 and March 31, 1998, MJK completed
22 and 11 private placements, respectively. Through MJK's syndicate
department, MJK coordinates the distribution of public and private
underwritings and accepts invitations to participate in competitive or
negotiated underwritings managed by other investment banking firms. During
the fiscal year ended March 31, 1999, MJK participated in 11 such offerings.
MJK's fixed income underwriting department negotiates, underwrites and
participates in taxable and tax-exempt offerings of municipalities and
corporate clients. During the fiscal year ended March 31, 1999, MJK raised
approximately $317.6 million in connection with 192 completed offerings. MJK
also participated in 35 municipal syndications.
INTEREST INCOME. MJK derives interest income primarily from the
financing of customer margin loans, interest on short-term investments held
as collateral in compliance with Rule 15c3-3 under the Exchange Act, and
fixed income security inventories carried for resale to customers. Customer
transactions are effected on either a cash or margin basis. In a margin
transaction, interest is charged to the customer on the amount loaned to
purchase securities. The loan is collateralized by securities held in the
customer's account. Generally speaking, Rule 15c3-3 requires that the excess
of
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<PAGE>
the aggregate customer funds on hand as opposed to customer loans owed by
customers be segregated in a separate account maintained for the exclusive
benefit of customers. MJK recognizes the interest on these funds as revenue.
CLEARING FEES. In addition to clearing its own trades, MJK has
agreements with approximately 30 other broker-dealers to provide clearing
services on a fully disclosed basis. Under the terms of these agreements, MJK
carries and clears customer security accounts and performs the following
services: (i) the preparation and mailing of monthly statements; (ii) the
settlement of contracts and transactions in securities between the
correspondent and its customers; (iii) the custody and safekeeping of
securities and cash, and handling of margin accounts, dividends, exchanges,
rights offerings and tender offers; and (iv) the execution of customer orders
which were placed on various exchanges. Customer transactions are recorded on
a settlement date basis, which is generally three business days after the
trade date. MJK is exposed to risk of loss on these transactions in the event
that the customer, broker or correspondent firm is unable to meet the terms
of their contracts, in which case MJK may have to purchase or sell financial
instruments at prevailing prices. These agreements require varying cash
deposits by the correspondent firms as a means of mitigating such events.
Customer securities transactions are on either a cash or margin basis. MJK
seeks to control the risks associated with customer margin activities by
requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. Required margin levels are monitored
daily and, pursuant to guidelines, customers may be required to deposit
additional collateral, or reduce margined positions, when necessary.
OTHER INCOME. In addition to the revenue sources mentioned above, MJK
receives income incidental to the transaction revenue, including safekeeping,
payment for order flow, and service fees on investment company positions. MJK
also receives income for consulting and advisory services. During the fiscal
year ended March 31, 1999, MJK received advisory fee income of approximately
$698,000 for services provided to approximately 150 municipalities and
government units.
TWELVE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Total revenues for the year ended March 31, 1999 were $55.6 million, an
increase of $8.5 million or 18 percent from the year ended March 31, 1998.
Total revenues increased primarily as a result of increases in commissions,
profits on principal transactions, interest income, and clearing fees,
partially offset by a decrease in investment banking revenue.
REVENUES. Commission revenue for the year ended March 31, 1999 was $9.9
million, an increase of $.8 million or 9 percent from the year ended March
31, 1998. This increase was primarily the result of an increase in equity
transaction commissions, including equity transactions in which MJK acted as
agent, and in sales of mutual funds by MJK's retail sales force.
Profits on principal transactions for the year ended March 31, 1999 were
$15.0 million, an increase of $4.4 million or 42 percent from the year ended
March 31, 1998. The majority of this increase was derived from spreads earned
in connection with equity transactions and certificate of deposit sales.
Investment banking revenue for the year ended March 31, 1999 was $8.4
million, a decrease of $1.3 million or 13 percent from the year ended March
31, 1998. This decrease is primarily related to a reduction in underwritten
equity offering revenue from approximately $2.4 million in 1998 to
approximately $1.6 million in 1999.
Interest income for the year ended March 31, 1999 was $15.4 million, an
increase of $1.9 million or 14 percent from the year ended March 31, 1998.
This increase was primarily the result of growth in the number of customer
accounts and their corresponding debit balances, partially offset by the
reduction of several large margin account balances in late 1998.
Clearing fee income for the year ended March 31, 1999 was $3.1 million,
an increase of $1.2 million or 63 percent from the year ended March 31, 1998,
reflecting growth in the correspondent clearing business. During the year
ended March 31, 1999, the number of firms utilizing MJK's clearing services
increased to 31, up from 22 for the year ended March 31, 1998.
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<PAGE>
Other income for the year ended March 31, 1999 was $3.7 million, an
increase of $1.4 million or 59 percent from the year ended March 31, 1998.
These results reflect increases in advisory fees derived from MJK's fiscal
advisory business, as well as fees related to various financial consulting
services provided by MJK.
EXPENSES. Total expenses for the year ended March 31, 1999 totaled $53.3
million, an increase of $4.4 million or 9 percent from the year ended March
31, 1998. MJK's non-interest expense totaled $41.5 million, an increase of
$3.6 million or 10 percent from the year ended March 31, 1998, which was
primarily attributable to increased clearing-related fees related to the
increase in correspondent clearing business, as well as
communications-related costs.
Despite the increases in commission and principal transaction revenue
during the year ended March 31, 1999, MJK's compensation and benefit expense
remained relatively consistent, increasing only $1.0 million from the year
ended March 31, 1998, to $27.0 million. Expenses related to personnel
additions throughout MJK, particularly within MJK's clearing services
division, were partially offset by a lower average bonus payout during the
year and expiration of certain specific term bonuses.
Clearing fees expenses for the year ended March 31, 1999 totaled $2.9
million, an increase of $1.4 million or 96 percent from the year ended March
31, 1998, which was attributable to the growth in MJK's clearing services
business in 1999. During the year ended March 31, 1999, MJK's clearing
services department processed 476,989 tickets, compared to 341,623 tickets
processed for the year ended March 31, 1998, an increase of 40 percent.
Expenses related to MJK's communication activities for the year ended
March 31, 1999 totaled $5.3 million, an increase of $1.3 million or 33
percent from the year ended March 31, 1998. Improvements in MJK's wide area
network, increases in volume-related changes with MJK's service bureau, and
the addition of various data services to the installed base represented a
significant portion of the increase. MJK will continue to bolster its
technological resources to accommodate the expansion of the clearing services
business and the development of its internet trading service.
Occupancy expense for the year ended March 31, 1999 was $3.3 million, a
decrease of $.1 million or 3 percent from the year ended March 31, 1998.
Other operating expenses for the year ended March 31, 1999 were $3.1
million, a negligible decrease from the year ended March 31, 1998. The
decrease is attributable principally to reduced legal expenses related to
customer complaints and legal proceedings.
Interest expense for the year ended March 31, 1999 was $11.8 million, a
slight increase of $.8 million or 7 percent from the year ended March 31,
1998.
TWELVE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
MJK's total revenue for the year ended March 31, 1998 was $47.1 million,
representing a $14.5 million or 44 percent increase from total revenue for
the year ended March 31, 1997. The largest portion of the increase was
attributable to MJK's acquisition of the Juran & Moody business as well as an
increase in margin debits. Net loss for the year ended March 31, 1998 was
$1.2 million or $0.29 per share, compared to net income of $.2 million or
$0.05 per share for the year ended March 31, 1997. Results for the year ended
March 31, 1998 were adversely affected by significant pretax charges related
to legal expenses and legal proceedings.
REVENUES. Commission revenue for the year ended March 31, 1998 was $9.0
million, an increase of $5.1 million or 130 percent from the year ended March
31, 1997. This increase primarily reflected the growth in equity markets and
increased sales of mutual fund products. Approximately $2 million of the
increase in commissions was directly related to the acquisition of the Juran
& Moody business and the recognition of a full-year of revenues for the year
ended March 31, 1998 as opposed to three months for the year ended March 31,
1997.
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<PAGE>
Profits on principal transactions for the year ended March 31, 1998
totaled $10.6 million, an increase of $.8 million or 8 percent from the year
ended March 31, 1997. Like commission revenues, these profits were favorably
impacted by the Juran & Moody business as well as strong growth in
certificate of deposit sales.
Investment banking revenues for the year ended March 31, 1998 totaled
$9.7 million, an increase of $1.9 million or 25 percent from the year ended
March 31, 1997. The increase was primarily driven by market share gains on
municipal underwriting deals, as well as an increase in commissions related
to over-the-counter municipal bond transactions in which MJK acts as an
agent. Increased merger and acquisition fees also contributed to this
increase. Spreads earned on underwritings of fixed income products for the
year ended March 31, 1998 were $7.2 million, an increase of $3.1 million or
77% from the year ended March 31, 1997, reflecting primarily the addition of
Juran and Moody employees. This increase partially offset an approximate 33%
decline in MJK equity investment banking revenue to $2.4 for the year ended
March 31, 1998 from $3.7 million for the year ended March 31, 1997.
Interest income for the year ended March 31, 1998 was $13.5 million, an
increase of $4.4 million or 48 percent from the year ended March 31, 1997.
This increase was primarily the result of substantial growth in customer
margin receivables and higher average levels of fixed income inventories.
Clearing fee income for the year ended March 31, 1998 totaled $1.9
million, an increase of $1.1 million or 142 percent from the year ended March
31, 1997, as a result of growth in MJK's clearing services business. MJK
increased the number of clearing services clients to 22 in the year ended
March 31, 1998 from nine in the year ended March 31, 1997.
Other income for the year ended March 31, 1998 equaled $2.4 million, an
increase of $1.2 million or 101 percent from the year ended March 31, 1997.
This increase resulted primarily from increases in fees related to MJK's
fiscal advisory business, as well as increases in other non-product revenue.
EXPENSES. Total expenses for the year ended March 31, 1998 were $48.9
million, an increase of $16.5 million or 51 percent from the year ended March
31, 1997. MJK's non-interest expense for the year ended March 31, 1998 was
$37.9 million, an increase of $12.9 million, or 52 percent, from the year
ended March 31, 1997, which increase reflected increased expenses related to
growth in MJK's business operations and increased legal expenses and
proceedings settlements.
Employee compensation and benefits for the year ended March 31, 1998
totaled $26.0 million, an increase of $8.2 million or 46 percent from the
year ended March 31, 1997. This increase was primarily due to increases in
revenue-based broker compensation, specific-term bonuses, and salaries
related to new sales personnel in the branch offices and administrative
support personnel.
Clearing fees for the year ended March 31, 1998 were $1.5 million, an
increase of $.7 million or 97 percent from the year ended March 31, 1997.
During the year ended March 31, 1998, MJK's clearing services department
processed 341,623 tickets, compared to 145,306 tickets processed for the year
ended March 31, 1997, an increase of 135 percent.
Investment in the technology infrastructure of MJK's offices, along with
the addition and expansion of several of the former Juran & Moody, Inc.
retail offices during the year ended March 31, 1998, contributed to an
increase in occupancy expense for such period to $3.4 million, an increase of
$1.4 million, or 72 percent, from the year ended March 31, 1997. Related to
this technology investment were increases in data services, which, along with
volume increases in market data quotes, were reflected in the 71 percent
($1.6 million) increase in communication expense.
Other operating expenses for the year ended March 31, 1998 totaled $3.1
million, an increase of $.9 million, or 43 percent from the year ended March
31, 1997, due primarily to increased legal and professional fees.
Interest expense for the year ended March 31, 1998 was $11.0 million, an
increase of $3.6 million or 48 percent from the year ended March 31, 1997.
This increase was primarily attributable to increased business.
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TWELVE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
MJK's total revenue for the year ended March 31, 1997 was $32.6 million,
representing a $5.7 million or 21 percent increase from the year ended March
31, 1996. Total revenue increased primarily as a result of increases in
commissions, interest income, and clearing fees, partially offset by a
decrease in profits on principal transactions. Revenues also increased in
part from the business operations acquired from Juran & Moody in January 1997.
REVENUES. Commission revenue for the year ended March 31, 1997 was $3.9
million, an increase of $1.2 million or 44 percent from the year ended March
31, 1996, reflecting favorable equity markets and strong sales of mutual fund
products.
Investment banking fees for the year ended March 31, 1997 was $7.7
million, an increase of $.8 million or 12 percent from the year ended March
31, 1996. The increase was generally attributable to investment banking fees
generated by former Juran & Moody business operations.
Interest income for the year ended March 31, 1997 was $9.1 million, an
increase of $3.7 million or 67 percent from the year ended March 31, 1996.
This increase was a result of growth in customer margin receivables and
higher average levels of fixed income inventories.
EXPENSES. Total expenses for the year ended March 31, 1997 were $32.4
million, an increase of $6.3 million or 24 percent from the year ended March
31, 1996. MJK's non-interest expense was $25.0 million, an increase of $3.3
million or 15 percent from the year ended March 31, 1996.
Employee compensation and benefits for the year ended March 31, 1997
totaled $17.7 million, a slight increase of $.9 million or 6 percent from the
year ended March 31, 1996.
Occupancy expense for the year ended March 31, 1997 was $2.0 million, an
increase of $.9 million or 87 percent from the year ended March 31, 1996.
Investment in the technology infrastructure of MJK's offices, along
with the addition and expansion of several retail offices, contributed to
this increase. Communication expense for the year ended March 31, 1997 was
$2.3 million, an increase of $.6 million or 39 percent from the year ended
March 31, 1996, due primarily to increased use of data processing services
and quotation services related to the technology investment.
Other operating expenses for the year ended March 31, 1997 totaled $2.2
million, an increase of $.7 million or 48 percent from the year ended March
31, 1996, due primarily to increases in promotional costs and additional
legal costs incurred in connection with the Juran & Moody acquisition.
Interest expense for the year ended March 31, 1997 was $7.4 million, an
increase of $3.0 million or 68 percent to $4.4 million from the year ended
March 31, 1996, as the level of customer deposits increased to approximately
$118 million at March 31, 1997 as compared to approximately $70 million at
March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
MJK's assets consist primarily of cash and assets readily convertible
into cash. Securities inventories are stated at market value and are
generally readily marketable. Customer margin loans are collateralized by
securities and have floating interest rates. Other receivables and payables
with customers and other brokers and dealers usually settle within three days
following the date of transaction. MJK's operations are financed by its
equity capital, bank lines of credit, proceeds from sales of securities,
non-interest bearing liabilities such as checks and drafts payable, payables
to customers and employee compensation payable. Due to the liquid nature of
MJK's balance sheet, the fluctuations in cash flows from financing activities
are directly related to operating activities.
As a securities broker-dealer, Miller, Johnson & Kuehn, Incorporated is
required by Commission regulations to meet certain liquidity and capital
standards. At March 31, 1999, MJK had net capital, as defined in the
Commission's Uniform Net Capital Rule (Rule 15c3-1), of $11.2 million, which
exceeded the minimum net capital requirements by $8.0 million. At March 31,
1999, MJK's regulatory capital consisted of shareholder's equity of
approximately $7.0
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million and approximately $9.7 million of customer securities collateralizing
liabilities subordinated to claims of general creditors.
MJK's margin loans to customers as of March 31, 1999 are generally
equivalent to 1998 levels. Margin loans to customers totaled approximately
$139.9 million as of March 31, 1999, compared to approximately $142.0 million
as of March 31, 1998. MJK regularly reviews the credit quality of these
margin loans.
MJK's securities inventories consist principally of corporate equity and
debt securities and municipal and government debt obligations. Inventories
are maintained generally to provide product and liquidity for MJK's customers
rather than for firm investment or market speculation purposes, and therefore
experience relatively high turnover. At March 31, 1999, approximately $.3
million of debt inventories were aged over 30 days. MJK's trading inventories
do not contain a significant amount of securities that derive their value
from other investment products (I.E., derivative securities).
In the ordinary course of business, MJK may hold high-yield debt
obligations that are either unrated or rated below investment grade. At March
31, 1999 MJK held approximately $2.4 million of such securities in inventory.
Consistent with MJK's inventory pricing policy, these securities are recorded
on a market-value basis with unrealized gains and losses recognized in
current earnings.
At March 31, 1999, MJK had approximately $60 million in committed credit
agreements, of which $33.9 million was utilized. Of this amount,
approximately $9.9 million was collateralized by customers' margin
securities. An additional amount equal to approximately $24 million was
secured by firm-owned securities and customer securities collateralizing
liabilities subordinated to claims of general creditors. MJK also has various
notes payable, of $4,538,114 of which $938,000 is secured by furniture and
fixtures. Management believes that current capital, funds from operations,
current credit lines and other available resources will be sufficient to
finance MJK's business for the foreseeable future.
MJK recently announced that it intended to commence Internet brokerage
operations. In March and April of 1999, MJK privately raised $4,482,350
through the issuance of 571,000 shares of preferred stock, the proceeds of
which will be used for working capital and to fund startup costs associated
with the Internet brokerage business. MJK believes that existing capital will
be sufficient to fund such growth.
INFLATION
MJK's net assets consist primarily of cash, securities inventories and
receivables less liabilities. These net assets are generally liquid in nature
and turn over rapidly and thus are not significantly affected by inflation.
However, to the extent that inflation affects MJK's costs, such costs may not
be readily recoverable in the price of its services.
Concern over inflation is one of the factors influencing the Federal
Reserve's interest rate increases. Actions by the Federal Reserve could cause
rates to change, which could have an unpredictable impact on the markets in
general and MJK's financial results in particular.
SEGMENTS
MJK's reportable segments are as follows: clearing services, retail
sales, investment banking and other. The clearing services segment consists
of clearing services provided on a fully-disclosed basis to approximately 30
other broker-dealers. The retail segment consists of various retail branch
locations which conduct security transactions for individual and
institutional investors. The investment banking segment consist of the
management, co-management and participation by MJK in the underwriting of
corporation equity and debt securities. Other consists of general corporate,
administrative support functions and net gains or losses on the investment
account.
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YEAR 2000
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
information technology ("IT") systems to malfunction in the Year 2000 and may
lead to significant business delays in the U.S. and internationally. The Year
2000 problem has the potential to impact the securities industry since
information is moved to and from the exchanges and trading partners on a
real-time basis from computer system to computer system with little human
interaction. In addition to potential problems from computer systems,
potential problems could arise from equipment with embedded chips, such as
vaults, elevators and other non-IT systems.
MJK has defined a Year 2000-compliant system as one capable of correct
identification, manipulation and calculation when processing data in
connection with the year change from December 31, 1999 to January 1, 2000. A
Year 2000-compliant system is also capable of correct identification,
manipulation and calculation using leap years both alone and in conjunction
with other dates.
Not all of MJK's systems are compliant under the above definition;
however, MJK is addressing the issues with this problem in the following
manner.
In the first stage, MJK prepared an inventory of all IT and non-IT
systems, as well as equipment that could have embedded chips, whether or not
critical to the operation of the business. MJK also compiled a listing of
material relationships with third parties. These relationships include
various exchanges, clearing houses, banks, telecommunications companies and
public utilities. This stage of the Year 2000 process is complete. MJK
continues to review various areas of the business to identify any items
overlooked in the initial inventories.
In stage two, results from the inventory discussed above are being
assessed to determine the Year 2000 impact and what actions need to be taken
to obtain Year 2000 compliance. For MJK's internal systems, actions needed
range from obtaining vendor certification of Year 2000 compliance,
remediation of internal systems or replacement of systems and equipment that
cannot be remediated. As of March 31, 1999, this stage is substantially
complete with respect to internal systems with the major outstanding items
being receipt of vendor certifications and installation of Year 2000 upgrades
for certain non-critical systems. MJK has determined a course of action for
remediation or replacement of all critical internal systems. MJK is surveying
and obtaining information about Year 2000 readiness of its material
third-party relationships. Contingency plans will be developed for those
third parties who cannot satisfactorily demonstrate Year 2000 compliance.
The third stage includes the repair, replacement or retirement of
systems. This stage of the Year 2000 process is ongoing and is dependent upon
the availability of upgrades from MJK's IT vendors, technician time to
implement the upgrades and notification from other third parties of Year 2000
compliance. MJK has been upgrading its packaged software. Desktop system
updates are complete and upgrade of the communications infrastructure is
ongoing. The primary financial system used for financial reporting purposes
for MJK was replaced during the year ended March 31, 1998 to prepare for Year
2000 as well as to derive other benefits from the financial reporting system.
MJK's primary operational system is the Securities Industry Software ("SIS")
application, which provides both front and back office services to
correspondents, customers and internal users. MJK has participated in
numerous testing sessions with SIS and has found no material weaknesses.
Periodic testing will continue throughout the 1999 calendar year. MJK is also
heavily dependent upon the power and telecommunications infrastructure within
the United States and would be subject to business interruptions as a result
of the failure of those systems. Additionally, MJK would experience
disruption in certain of its businesses if the various exchanges, clearing
houses or banks used by MJK reported a system failure. MJK is communicating
with these third parties in order to obtain assurances regarding Year 2000
readiness.
The fourth stage of the implementation process includes testing all of
the changes implemented individually and integrating those changes with all
of MJK's systems and those of its customers and trading partners. Testing
takes on various forms depending on the type of change implemented. Each
upgrade, to the extent economically feasible, is run through a test
environment before it is implemented. It is then tested to see how well it
integrates into MJK's overall IT environment. MJK is also engaging in
point-to-point testing with various exchanges, clearing houses and utilities.
All of MJK's correction and testing activities are targeted towards
participating in the Tier I securities industry test being
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coordinated by the Securities Industry Association, which began in March
1999. As of March 31, 1999, MJK was not employing any independent
verification processes of its systems' tests.
MJK expects to incur additional costs during the year ending March 31,
2000 for the implementation of the additional software, as well as costs to
remediate and replace other systems. These costs will be funded out of
working capital and substantially all will be expensed. The costs for
remediation of systems are not expected to exceed $.5 million. The budgeted
expenditures include compensation and benefits for IT and other operational
staff, consulting services, software purchases and other remediation costs.
Despite MJK's best efforts to ready its systems and infrastructure for
the Year 2000, there are many factors outside of MJK's control that could
affect readiness for the Year 2000. If these types of issues occur and remain
unresolved, MJK could be required to implement a contingency plan for Year
2000 compliance. While MJK has not completely finalized its contingency
plans, MJK will select from several alternative plans including remediation
of SIS, installation of other third party vendor software or some combination
of alternatives.
Contingency plans related to MJK's financial systems, embedded chip
technology and third-party relationships are not yet complete. Substantial
completion of these plans is expected by September 1999 with continual
refinement to the plans ongoing until all of MJK's critical systems and all
critical third-party relationships have demonstrated Year 2000 compliance.
The potential impact of the Year 2000 problem on the securities industry
as a whole could be material, as virtually every aspect of the sales of
securities and processing of transactions will be affected. Due to the size
of the task facing the securities industry and the interdependent nature of
securities transactions, MJK may be adversely affected by this problem,
depending on whether it and the entities with which it does business address
this issue successfully.
RISK FACTORS
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 MJK. For purposes of this subsection,
"MJK" shall also include Miller, Johnson & Kuehn, Incorporated.
UNCERTAIN INDUSTRY FACTORS; ECONOMIC AND MARKET CONDITIONS
The securities business is, by its nature, subject to various risks,
particularly in volatile or illiquid markets, including the risk of losses
resulting from the underwriting or ownership of securities, customer fraud,
employee errors and misconduct, failures in connection with the processing of
securities transactions and litigation. MJK's business and its profitability
are affected by many factors, including the volatility and price level of the
securities markets; the volume, size and timing of securities transactions;
the demand for investment banking services; the level and volatility of
interest rates; the availability of credit; legislation affecting the
business and financial communities; and the economy in general. Markets
characterized by low trading volumes and depressed prices generally result in
reduced commissions and investment banking revenues as well as losses from
declines in the market value of securities positions. Moreover, since a
portion of MJK's revenues are derived from underwriting initial public
offerings ("IPOs") and bond financings, any decline in the overall IPO or
bond market, among other factors, could have a material adverse effect on the
operations of MJK.
RISKS ASSOCIATED WITH INVESTMENT BANKING
MJK's investment banking activities subject MJK's capital to certain
risks. Such risks include market, credit and liquidity risks, which risks
arise primarily when underwritten securities cannot be resold, for any
reason, at anticipated price levels. Further, under applicable securities
laws and court decisions with respect to underwriters' liability and
limitations on indemnification by issuers, an underwriter may be exposed to
substantial securities liability arising out of public and private offerings
of equity and debt instruments.
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RISKS ASSOCIATED WITH PRINCIPAL TRANSACTIONS
As a market maker, MJK uses its capital to maintain substantial
inventories of long and/or short positions in securities in order to engage
in principal transactions with customers as well as with other
broker-dealers. These securities are marked-to-market with resulting
unrealized gains and losses reported as revenue or losses from principal
transactions. The maintenance of such positions exposes MJK to the
possibility of significant losses when market prices of the securities
comprising such positions change.
EXTENSIVE GOVERNMENT REGULATION; STRICT NET CAPITAL REQUIREMENTS
MJK's business, and the securities industry generally, are subject to
extensive regulation at both the federal and state levels. In addition,
self-regulatory organizations, such as the NASD, require strict compliance
with their rules and regulations. Among other things, these regulatory
authorities impose restrictions on sales methods, trading practices, use and
safekeeping of customer funds and securities, record keeping and the conduct
of principals and employees. The extensive regulatory framework applicable to
broker-dealers, the purpose of which is to protect customers and the
integrity of the securities markets, imposes significant compliance burdens
on MJK. Failure to comply with any of the laws, rules or regulations of any
independent, state or federal regulatory authority could result in a fine,
injunction, suspension or expulsion from the industry, which could have a
material adverse impact upon MJK. The Commission and the NASD also have
stringent provisions with respect to net capital requirements applicable to
the operation of securities firms. A significant operating loss or any charge
against the net capital of MJK could adversely affect its ability to operate,
expand or, depending upon the magnitude of the loss or charge, maintain its
present level of business. Furthermore, amendments to existing statutes and
regulations or the adoption of new statutes and regulations could require MJK
to alter its methods of operation at costs which could be substantial.
SMALL CAPITALIZATION COMPANIES
A large portion of Miller, Johnson & Kuehn, Incorporated's business
focuses on the underwriting, brokerage and trading of securities of small
capitalization companies, a segment of the securities industry which may be
subject to greater risks than the securities industry as a whole and,
consequently, may be marketable to only a limited segment of the investing
public. Miller, Johnson & Kuehn, Incorporated believes that certain small
capitalization companies have significant potential for growth, although such
companies generally have limited product lines, markets, market shares and
financial resources and their securities may trade less frequently and in
more limited volume than those of more established companies. Additionally,
in recent years, the stock market has experienced a high degree of price and
volume volatility for the securities of many small capitalization companies.
In particular, small capitalization companies that trade in the
over-the-counter markets have experienced wide price fluctuations not
necessarily related to the operating performance of such companies.
CREDIT RISKS
Miller, Johnson & Kuehn, Incorporated clears all transactions for MJK
customers and for a number of other brokerage firms on a fully disclosed
basis. The firm also lends funds to its customers and customers of its
correspondent firms. These loans are made to customers on a secured basis,
with the firm maintaining collateral in the form of saleable securities, cash
or cash equivalents. Pursuant to the terms of agreements, in the event that
customers or a correspondent firm, if any, fail (a) to pay for their
purchases, (b) to supply securities that they have sold on a customer's
behalf, (c) to repay funds they have borrowed, or (d) to satisfy any customer
obligations, Miller, Johnson & Kuehn, Incorporated would be obligated for any
resulting losses.
LEGAL PROCEEDINGS
Many aspects of MJK's business involve substantial risks of potential
liability and regulatory enforcement by state and federal regulators. In
recent years, there also has been an increasing incidence of litigation or
arbitration involving participants in the securities industry. Underwriters
and agents are subject to substantial potential liability for material
misstatements and omissions in prospectuses and other communications with
respect to underwritten offerings of securities. Claims by dissatisfied
customers for fraud, unauthorized trading, suitability, churning,
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mismanagement and breach of fiduciary duty are regularly made against
broker-dealers. There can be no assurance that any such proceedings will not
have a material adverse legal or economic effect on MJK. Moreover, as a
result of increased publicity regarding legal proceedings against
broker-dealers and the resulting heightened public awareness of such matters,
it is possible that certain legal proceedings which can be settled or
otherwise resolved without a material adverse economic effect on MJK, could
generate adverse publicity which in turn could have a material adverse effect
on MJK's operations.
CURRENT AND POTENTIAL REFORMS IN THE NASDAQ MARKET
The Nasdaq market has come under intense scrutiny in the media and
political arenas during the past few years and has been the subject of
Commission investigations into its operations. Concerns have been raised with
respect to the size of the spreads between the price paid by investors
purchasing Nasdaq-listed securities and the dealers who process the
transactions. Concerns also have been raised with respect to microcap fraud,
whether Nasdaq's listing requirements are sufficiently stringent and whether
the NASD, the trade organization controlling the Nasdaq market, carefully
polices Nasdaq-listed companies. In response, the NASD has begun to boost its
internal compliance and monitoring programs, including establishing a
separate regulatory unit, NASD Regulation, Inc. ("NASDR"). More specifically,
the NASDR has been hiring numerous new enforcement aides to better monitor
trading activities among dealers and to scrutinize companies' compliance with
applicable listing standards, and heightening its overall monitoring of small
capitalization companies.
The effects of Nasdaq reform on the operations of brokerage firms,
especially those specializing in the securities of small capitalization
companies, cannot be fully anticipated. The cost of compliance with any new
rules, regulations and procedures instituted by the NASDR could be
significant. Increased compliance costs or the inability to attain or
maintain the listing of underwriting clients on the Nasdaq system, or a
combination thereof, could adversely affect the financial performance of MJK.
DEPENDENCE ON KEY PERSONNEL
For the foreseeable future, MJK will place substantial reliance upon the
personal efforts and abilities of Eldon C. Miller, Chairman of the Board and
Chief Executive Officer, Paul R. Kuehn, President, and David B. Johnson,
Executive Vice President. The loss of services of any of them likely would
have a material adverse effect on the business, operations, revenues and/or
prospects of MJK. Key man life insurance on certain members of MJK's
management presently would be utilized to fund at least partially the
repurchase of their common shares on death. The success of MJK is also
dependent upon its ability to retain and hire additional highly skilled
personnel. Competition among broker-dealers for experienced personnel is
intense. There can be no assurance that MJK will be able to retain such
personnel or hire and retain additional qualified and skilled personnel.
NO DIVIDENDS
MJK intends to retain all earnings in the foreseeable future for MJK's
continued growth and does not expect to declare or pay any cash dividends in
the foreseeable future. Moreover, MJK's ability to pay dividends in the
future may be restricted by its brokerage subsidiaries' obligations to comply
with the net capital rules applicable to broker-dealers.
RISKS ASSOCIATED WITH MANAGEMENT OF A CHANGING BUSINESS
MJK has experienced substantial changes in and expansion of its business
and operations and expects to continue to experience periods of rapid change
in connection with its intended development of offering electronic and
Internet brokerage services. MJK's past expansion has placed, and any future
expansion would place, significant demands on MJK's administrative,
operational, financial and other resources. MJK expects operating expenses
and staffing levels to increase substantially in the future. In particular,
MJK intends to hire a significant number of additional skilled personnel,
including persons with experience in both the computer and brokerage
industries, and, in particular, persons with Series 7 or other broker-dealer
licenses. Competition for such personnel is intense, and there can be no
assurance that MJK will be able to attract or retain additional highly
qualified senior managers and technical
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persons in the future. MJK also expects to expend resources with respect to
future expansion of its accounting and internal management systems and the
implementation of a variety of new systems and procedures. In addition, MJK
expects that future expansion will continue to challenge MJK's ability to
hire, train, motivate and manage its associates. If MJK's revenues do not
increase in proportion to its operating expenses, MJK's management systems do
not expand to meet increasing demands, MJK fails to attract and retain
qualified personnel, or MJK's management otherwise fails to manage MJK's
expansion effectively, there would be a material adverse effect on MJK's
business, financial condition and operating results.
RISKS OF SYSTEMS FAILURE
The rapid growth in the use of MJK's services has strained its ability
to adequately expand technologically. The haste required in acquiring new
equipment and applications may result in less rigorous testing and validation
of hardware and software, which could lead to performance problems. In
addition, MJK will rely on a number of third parties to process its
transactions, all of which will need to expand the scope of the operations
they perform for MJK. Any backlog caused by a third party's inability to
expand at the rate necessary to meet MJK's needs could have a material
adverse effect on MJK's business, financial condition and operating results.
As trading volume increases, MJK may have difficulty hiring, training and
integrating qualified personnel at the necessary pace, and the shortage of
licensed personnel could cause a backlog in the processing of orders
requiring review, exposing MJK not only to unsatisfied customers, but also
potentially to liability for transactions that were ordered but not executed
on a timely basis.
MJK's online broker service will receive and process trade orders
principally through the Internet, online services and touch-tone telephone.
This method of trading is heavily dependent on the integrity of the
electronic systems supporting it. Orders placed from the close of the stock
markets one day until the opening the next business day must be processed
through MJK's system in a short period of time prior to the opening of the
stock markets. Heavy stress will be placed on MJK's systems during peak
trading times that could cause MJK's systems to operate at unacceptably low
speed or fail. Any significant degradation or failure of MJK's systems or any
other systems in the trading process (e.g., online service providers, record
keeping and data processing functions performed by third parties and
third-party software such as Internet browsers), even for a short time, could
cause customers to suffer delays in trading. Such delays could cause
substantial losses for customers and could subject MJK to claims or
litigation from customers for losses.
RISKS ASSOCIATED WITH ENTERING NEW MARKETS
One element of MJK's strategy is to enter new markets. No assurance can
be given that MJK will be able to successfully enter the online brokerage
business and adapt its proprietary processing technology to provide
information and transaction processing services in other markets or that, if
successful with such adaptation, it will compete successfully. MJK plans,
subject to regulatory approval, to establish investment banking operations,
raising public and private equity capital for companies over the Internet and
other electronic media. In addition, MJK's strategy is to pursue
opportunities to increase MJK's customer base and the transaction value and
number of products and services offered to MJK's customers. There can be no
assurance that MJK will be successful in its pursuit of these opportunities
or that such pursuit will not divert management attention or inefficiently
utilize MJK's resources.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
MJK anticipates significant fluctuations in future quarterly operating
results that may be caused by many factors, including the following: the
timing of introductions or enhancements of online brokerage services and
products by MJK or its competitors; market acceptance of online brokerage
services and products; the pace of development of the market for online
equity and debt offerings commerce; changes in trading volume in the
securities markets; trends in the securities markets; changes in pricing
policies by MJK or its competitors; changes in strategy; the success of or
costs associated with acquisitions, joint venture or other strategic
relationships; changes in key personnel; seasonal trends; the extent of
international expansion; the mix of international and domestic sales; changes
in the level of operating expenses to support projected growth; and general
economic conditions.
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Due to the foregoing factors, quarterly revenue and operating results
may be difficult to forecast, and MJK believes that period-to-period
comparison of its operating results will not necessarily be meaningful and
should not be relied upon as any indication of future performance. It is
likely that MJK's future quarterly operating results from time to time will
not meet the expectations of securities analysts or investors, which may have
an adverse effect on the market value of MJK Common Stock.
SUBSTANTIAL COMPETITION
The general financial success of companies within the securities
industry over the past several years has strengthened existing competitors.
Management believes that such success will continue to attract new
competitors to the industry, such as banks, software development companies,
insurance companies, providers of online financial and information services
and others, as such companies expand their product lines. Commercial banks
and other financial institutions have become a competitive factor in the
securities industry by offering their customers certain corporate and
individual financial services traditionally provided by securities firms. The
current trend toward consolidation in the commercial banking industry could
further increase competition in all aspects of MJK's business. Commercial
banks generally are expanding their securities activities, as well as their
activities relating to the provision of financial services. While it is not
possible to predict the type and extent of competitive services that
commercial banks and other financial institutions ultimately may offer or
whether administrative or legislative barriers will be repealed or modified,
brokerage firms such as MJK may be adversely affected by such competition or
legislation. To the extent MJK's competitors are able to attract and retain
customers on the basis of the convenience of one-stop shopping, MJK's
business or its ability to grow could be adversely affected.
The market for internet brokerage services is new, rapidly evolving and
intensely competitive, and MJK expects competition to continue and intensify
in the future. MJK will encounter direct competition from other brokerage
firms providing either touch-tone telephone or online brokerage services, or
both. Discount brokerage firms generally effect transactions for their
customers on an "execution only" basis, without offering other services such
as portfolio valuation, investment recommendations and research. These
competitors include such discount brokerage firms as Charles Schwab & Co.,
Inc. ("Charles Schwab"), E*Group, Inc. ("E*Trade"). Fidelity Brokerage
Services, Inc., Waterhouse Securities, Inc., Quick & Reilly, Inc. ("Quick &
Reilly"), Pacific Brokerage Services, Inc., National Discount Brokers (a
subsidiary of Sherwood Securities Corp.), Lombard Institutional Brokerage,
Inc., firms owned by TransTerra Co. (including All- American Brokers, also
known as eBroker) and PC financial network (a division of Donaldson, Lufkin &
Jenrette Securities Corporation), among others. MJK also encounters
competition from established full-commission national brokerage firms such as
Dean Witter Reynolds Inc., Payne Webber Incorporated, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and Smith Barney, Inc., and
regional brokerage firms, such as Dain Rauscher Wessels. In addition, MJK
competes with financial institutions, mutual fund sponsors and other
organizations, some of which provide electronic brokerage services.
There are virtually no barriers to entry in the internet market in which
MJK expects to operate. Many of MJK's competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than MJK. In addition, many of these competitors offer a wider
range of services and financial products than MJK, and thus may be able to
respond more quickly to new or changing opportunities, technologies and
customer requirements. Many current and potential competitors also have
greater name recognition and more extensive customer bases that could be
leveraged, thereby gaining market share to MJK's detriment. Such competitors
may be able to undertake more extensive promotional activities, offer more
attractive terms to customers than MJK and adopt more aggressive pricing
policies, possibly even sparking a price war in the brokerage business.
Moreover, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to enhance
their services and products. For example, Charles Schwab's One-Source mutual
fund service and similar, more complete services may discourage potential
customers from using MJK's brokerage services. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share.
EXPANSION INTO INTERNET TRADING
MJK intends to expand its operations into retail internet trading. MJK
has no experience in this relatively new area of the securities industry, and
there can be no assurance that MJK will be able to expand its operations
successfully.
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Moreover, the proposed expansion of MJK's operations may materially increase
MJK's operating expenses and could adversely affect MJK's brokerage
operations and profits.
EARLY STAGE OF DEVELOPMENT OF ONLINE BROKERAGE BUSINESS AND DEPENDENCE
ON ONLINE COMMERCE AND THE INTERNET
The market for electronic brokerage services, particularly over the
Internet, is at an early stage of development and is rapidly evolving. As is
typical for new and rapidly evolving industries, demand and market acceptance
for recently introduced services and products are subject to a high level of
uncertainty. With respect to MJK, this uncertainty is compounded by the risks
that consumers will not adopt online commerce and that an appropriate
infrastructure necessary to support increased commerce on the Internet will
fail to develop, in each case, to a sufficient extent and within an adequate
time frame to permit MJK to succeed.
Sales of many of MJK's Internet services and products will depend upon
the adoption of the Internet by consumers as a widely-used medium for
commerce and communication. The Internet may not prove to be a viable
commercial marketplace because of inadequate development of the necessary
infrastructure, such as a reliable network backbone, or timely development of
complementary services and products, such as high speed modems and high speed
communication lines. The Internet has experienced, and is expected to
continue to experience, significant growth in the number of users and amount
of traffic. There can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed on it by this continued
growth. In addition, the Internet could lose it viability due to delays in
the development or adoption of new standards and protocols to handle
increased levels of Internet activity or due to increased governmental
regulation. Moreover, critical issues concerning the commercial use of the
Internet (including security, reliability, cost, ease of use, accessibility
and quality of service) remain unresolved and may negatively affect the
growth of Internet use or the attractiveness of commerce and communication on
the Internet. Because global commerce and online exchange of information on
the Internet and other similar open wide area networks are new and evolving,
there can be no assurance that the Internet will prove to be a viable
commercial marketplace. If critical issues concerning the commercial use of
the Internet are not favorably resolved, if the necessary infrastructure is
not developed, or if the Internet does not become a viable commercial
marketplace, MJK's business, financial condition and operating results may be
materially adversely affected.
RAPID TECHNOLOGICAL CHANGE; DELAYS IN INTRODUCTION OF NEW SERVICES AND
PRODUCTS
The information and financial services and communications industries are
characterized by rapid technological change, changes in customer
requirements, frequent new service and product introductions and
enhancements, and emerging industry standards. The introduction of services
or products embodying new technologies and the emergence of new industry
standards and practices can render existing brokerage services obsolete.
MJK's future success will depend, in part, on its ability to develop leading
technologies, enhance its existing services and products, develop new
services and products that address the increasingly sophisticated and varied
needs of its prospective customers, and respond to technological advances and
emerging industry standards and practices on a timely and cost-effective
basis. The development of new services and products or enhanced version of
existing services and products entails significant technical risks. There can
be no assurance that MJK will be successful in effectively implementing and
using new technologies, adapting its services and products to emerging
industry standards, developing, introducing and marketing service and product
enhancements, or new services and products, or that it will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these services and products, or that its new
service and product enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. If MJK is unable, for technical or
other reasons, to develop and introduce new services and products or
enhancements of existing services and products in a timely manner in response
to changing market conditions or customer requirements, or if new services
and products do not achieve market acceptance, MJK's business, financial
condition and operating results will be materially adversely affected.
RISKS ASSOCIATED WITH ENCRYPTION TECHNOLOGY
A significant barrier to online commerce and communication is the secure
transmission of confidential information over public networks. MJK intends to
rely on encryption and authentication technology, including public
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key cryptography technology licensed from third parties, to provide the
security and authentication necessary to effect secure transmission of
confidential information. There can be no assurance that advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments will not result in a compromise or breach of technologies to be
used by MJK to protect customer transaction data. If any such compromise of
MJK's security were to occur, it could have a material adverse effect on
MJK's business, financial condition and operating results.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
MJK expects that it will raise additional funds in order to support more
rapid expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
respond to unanticipated requirements. If additional funds are raised through
the issuance of equity securities, the percentage ownership of the
shareholders of MJK will be reduced, shareholders may experience additional
dilution in net book value per share, or such equity securities may have
rights, preferences or privileges senior to those of the holders of MJK
Common Stock. There can be no assurance that additional financing will be
available when needed on terms favorable to MJK, if at all. If adequate funds
are not available on acceptable terms, MJK may be unable to develop or
enhance its services and products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, any of which
could have a material adverse effect on MJK's business, financial condition
and operating results.
RISKS ASSOCIATED WITH ACQUISITIONS, JOINT VENTURES AND OTHER STRATEGIC
RELATIONSHIPS
While MJK has no current agreements with respect to any potential
acquisitions, MJK may make acquisitions. Acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations and
products, diversion of management's attention to other business concerns,
amortization of acquired intangible assets and potential loss of key
employees of acquired companies. No assurance can be given as to the ability
of MJK to consummate any acquisitions or integrate successfully any
operations, personnel, services or products that might be acquired in the
future, and the failure of MJK to do so could have a material adverse effect
on MJK's business, financial condition and operating results.
MJK intends to establish a number of strategic relationships with online
service providers and software and information service providers. There can
be no assurance that any such relationships will be successful or profitable,
or that MJK will develop any new such relationships.
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PROPOSAL 2:
AMENDMENT TO AND RESTATEMENT OF THE ARTICLES OF INCORPORATION
GENERAL
Article 1 of the Articles of Incorporation currently provides that the
name of the Company is "NM Holdings, Inc." Article 3 of the Articles of
Incorporation, currently provides for 6,250,000 authorized shares of the
Company, par value $.04 per share, of which 1,250,000 are undesignated
preferred stock. While there is no provision of the Articles of Incorporation
currently governing the number of directors of the Company, the Company's
bylaws provide for a number of directors of at least three, but no more than
five, with changes outside of that range requiring shareholder approval.
In connection with the consummation of the Merger, the Board of
Directors has approved an amendment to and restatement of the Articles of
Incorporation, a copy of which articles of incorporation as so amended and
restated (the "Restated Articles") is attached to this Proxy Statement as
Exhibit B. The principal changes made to the Articles of Incorporation by the
Restated Articles include (a) changing the corporate name of the Company to
"Stockwalk.com Group, Inc.," (b) increasing the number of authorized shares
of the Company to 100,000,000, of which 50,000,000 will be designated as
Common Stock and 50,000,000 will be undesignated capital stock, and (c)
increasing the number of persons who will serve on the Company's Board of
Directors to six, and allowing for future changes to that number by the
affirmative vote of a majority of the Board of Directors.
If the Restated Articles are approved by the Company's shareholders,
the Restated Articles would become the current articles of incorporation of
the Company upon the consummation of the Merger. If the Merger Agreement is
not approved by the Company's shareholders, or if the Merger Agreement is
otherwise terminated or the Merger is not consummated, the Restated Articles
would not be adopted and the Articles of Incorporation, as previously
amended, will remain in effect.
PURPOSES AND EFFECTS
The Board of Directors believes that the corporate name of the Company
should be changed to reflect the Company's intention to operate the business
of MJK after the Merger.
Except for shares to be issued upon consummation of the Merger and the
shares reserved for issuance under the 1995 Plan and the 1996 Director Plan,
the Company has no agreements or understandings concerning the issuance of
any additional shares of Common Stock. However, if all of the holders of MJK
Common Stock and MJK Series I Preferred Stock receive shares of Common Stock
upon consummation of the Merger, the present number of authorized but
unissued shares of Common Stock would be inadequate to allow for all such
issuances. In addition, the Board of Directors believes that the increased
authorization of shares is advisable at this time so that shares will be
available in the future on a timely basis if such need arises in connection
with stock split or dividends, financings, acquisitions or other corporate
purposes. This will enable the Company to take advantage of market
conditions, the availability of favorable financing, and opportunities for
acquisitions without the delay and expense associated with convening an
additional special shareholders' meetings.
Unless required by law, the Articles of Incorporation or the rules of
any stock exchange on which the shares may in the future be listed, the Board
of Directors will be able to provide for the issuance of the additional
shares without further action by the Company's shareholders and no further
authorization by the shareholders will be sought prior to such issuance. If
the Common Stock qualifies for listing on the Nasdaq National or SmallCap
Market, under existing regulations of the NASD approval by a majority of the
holders of the shares of Common Stock would be required prior to the original
issuance of additional shares in certain circumstances, including (a) in
connection with certain stock plans, (b) in connection with certain
acquisitions if the number of shares of Common Stock to be issued (including
securities convertible into or exercisable for shares of Common Stock) is or
will be equal to or in excess of 20% of the number of shares outstanding
before the issuance of such Common Shares, or (c) if the issuance would
result in a change in control of the Company.
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Although not designed or intended for such purposes, the effect of the
proposed increase in the authorized shares might be to render more difficult
or to discourage a merger, tender offer, proxy contest or change in control
of the Company and the removal of management, which holders of Common Stock
might otherwise deem favorable. The authority of the Board of Directors to
issue shares might be used to create voting impediments or to frustrate an
attempt by another person or entity to effect a takeover or otherwise gain
control of the Company because the issuance of additional shares would dilute
the voting power of the shares then outstanding. Shares could also be issued
to purchasers who would support the Board of Directors in opposing a takeover
bid which the Board of Directors determines not to be in the best interests
of the Company and its shareholders. The overall effect of the ability of the
Board of Directors to issue additional shares may be to delay or prevent
attempts by other persons or entities to acquire control of the Company
without negotiations with the Board of Directors.
There are presently no provisions in the Articles of Incorporation
governing the number of persons serving on the Company's Board of Directors.
The bylaws of the Company presently provide for between three and five
directors, with changes outside of such range requiring shareholder approval.
In connection with the consummation of the Merger, the Company has agreed
that a total of six individuals will be appointed to the Board of Directors,
thus requiring a change to the Company's governing instruments. The proposed
amendment to the Articles of Incorporation will increase the size of the
Board as necessary to allow for all of the agreed-upon individuals to serve
as directors and to comply with NASD Marketplace Rule 4310(c)(25)(B). In
addition, permitting the Board of Directors to make further changes in the
size of the Board in the future will allow the Board to do so on a timely
basis if the Board determines such changes to be desirable in the interest of
corporate governance, without the delay and expense associated with convening
an additional special shareholders' meeting.
BOARD RECOMMENDATION; SHAREHOLDER VOTE REQUIRED
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RESTATED ARTICLES. The
directors intend to vote all shares of Common Stock under their control in
favor of such proposal. The affirmative vote of a majority of the shares of
Common Stock entitled to vote and present, in person or by proxy, at the
Special Meeting is required for the approval of the Restated Articles.
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PROPOSAL 3:
AMENDMENT TO 1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN
GENERAL
The 1995 Plan currently provides for a maximum of 200,000 shares of
authorized Common Stock issuable upon exercise of options or other awards
granted or issued under the 1995 Plan. The Board of Directors has approved an
amendment to the 1995 Plan, to be effective upon approval of the Company's
shareholders, changing to 1,500,000 the maximum number of shares of
authorized Common Stock issuable upon exercise of options or other awards
granted or issued under the 1995 Plan. The amendment would also replace the
outdated reference to shares of $.01 par value stock with shares of $.04 par
value stock, as described more fully in "-- Summary Description" below. If
the amendment is approved by the Company's shareholders, Section 2 of the
1995 Plan would be amended to read as follows:
Section 2. STOCK SUBJECT TO PLAN. Subject to the provisions of Section
16 hereof, the stock to be subject to options or other awards under the
Plan shall be the Company's authorized common shares, par value $.04 per
share (the "Common Shares"). Such Common Shares may be either authorized
but unissued shares, or issued shares which have been reacquired by the
Company. Subject to adjustment as provided in Section 16 hereof, the
maximum number of shares on which options may be exercised or other
awards issued under this Plan shall be 1,500,000 shares. If an option or
award under the Plan expires, or for any reason is terminated or
unexercised with respect to any shares, such shares shall again be
available for options or awards thereafter granted during the term of
the Plan.
PURPOSES AND EFFECTS
The Company adopted the 1995 Plan in March 1995. The 1995 Plan provides
for the grant of stock option awards to the Company's executive officers,
other employees, directors and consultants.
Of the maximum 200,000 shares of authorized Common Stock on which
options may be exercised or other awards issued under the 1995 Plan, as of
May 28, 1999, the Company had 7,562 shares of authorized Common Stock still
available. The Company believes that options and other awards are an
important element of compensation in attracting skilled executives, other key
employees, non-employee directors, consultants and independent contractors,
and in motivating and retaining these persons by providing them with a means
to acquire a proprietary interest in the Company. Without an increase in the
number of shares available for issuance under the 1995 Plan, the Company
would be unable to offer such persons options and other awards to motivate
maximum efforts for the success of the Company's business.
SUMMARY DESCRIPTION
PURPOSE. The purpose of the 1995 Plan is to aid in maintaining and
developing personnel capable of assuming the future success of the Company,
to offer such personnel additional incentives to put forth maximum efforts
for the success of the business and to afford them an opportunity to acquire
a proprietary interest in the Company.
ADMINISTRATION. The Compensation Committee has been designated by the
Board of Directors to administer the 1995 Plan. The Compensation Committee
has full authority to determine when and to whom awards will be granted or
issued and the type, amount, form of payment and other terms and conditions
of each award, consistent with the provisions of the 1995 Plan. Subject to
the provisions of the 1995 Plan, the Compensation Committee may accelerate
the time at which an option or other award may be exercised, or amend or
modify the terms and conditions of an outstanding award. The Compensation
Committee has full authority to interpret the 1995 Plan and establish rules
and regulations for the administration of the 1995 Plan. The Compensation
Committee's determinations of the foregoing matters, unless otherwise
disapproved by the Board of Directors, shall be final and conclusive. In the
absence of Compensation Committee action, the Company's Board of Directors
may determine when and to whom awards shall be granted or issued, and the
type, amount, form of payment and other terms and conditions of each award,
consistent with the provisions of the 1995 Plan.
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ELIGIBILITY. Any full or part-time employee of the Company and its
subsidiaries is eligible to be selected by the Compensation Committee to
receive "Incentive Stock Options" within the meaning of Section 422 of the
Internal Revenue Code of 1986 (the "Code") under the 1995 Plan. Full or
part-time employees, non-employee directors, consultants and independent
contractors to the Company or one of its subsidiary or affiliates are
eligible to be selected by the Compensation Committee to receive options
which do not qualify as Incentive Stock Options and awards.
The number and type of awards that will be granted in the future under
the 1995 Plan are not determinable as the Compensation Committee will make
such determinations in its discretion.
NUMBER AND DESCRIPTION OF SHARES. The 1995 Plan originally provided for
the issuance of up to 500,000 shares of Common Stock, subject to adjustment
by the Compensation Committee in the event of a change in such shares through
merger, consolidation, reorganization, recapitalization, dividend in the form
of stock, stock split or other change in the corporate structure of the
Company. In August 1996, the Company's shareholders adopted an amendment to
the 1995 Plan increasing to 800,000 the number of such shares which may be
issued under the 1995 Plan. Upon the effecting of the Reverse Stock Split
(see "Approval of the Merger Agreement--Certain Information Concerning the
Company--Market Price and Dividend Data"), the Committee adjusted the number
and type of shares issuable under the 1995 Plan to 200,000 shares of
authorized Common Stock (equal to 16.3% of the shares issued and outstanding
as of May 28, 1999). If the presently proposed amendment to the 1995 Plan is
adopted by the shareholders, the number of shares of authorized Common Stock
issuable under the 1995 Plan would be increased to 1,500,000 (equal to 7.8%
of the shares which, assuming the Merger is consummated, would have been
issued and outstanding as of May 28, 1999 after giving effect to the Merger
on that date).
Shares of Common Stock subject to options and other awards under the
1995 Plan which are not used or are forfeited because the option or other
award expires or for any reason is terminated or unexercised with respect to
any shares, may again be used for options or other awards under the 1995
Plan. The shares of Common Stock issued under the 1995 Plan may be authorized
but unissued shares or issued shares which have been reacquired by the
Company.
TYPES OF AWARDS AND CERTAIN TERMS AND CONDITIONS. The types of awards
that may be granted under the 1995 Plan are stock options, stock appreciation
rights, restricted stock or performance awards. The 1995 Plan provides that
all awards are to be evidenced by written agreements containing the terms and
conditions of the awards. The Board of Directors may not alter or impair any
option or other award theretofore granted without the consent of the holder.
Options and other awards will not be transferable other than by will or by
the laws of descent and distribution. Except as otherwise provided in an
option or other award agreement, during the lifetime of a participant, an
option or other award may be exercised only by the participant to whom such
award is granted. The Compensation Committee may determine whether all or any
part of the shares of Common Stock acquired upon exercise of any option or
other award granted under the 1995 Plan shall be subject to restrictions on
transferability or any other restrictions. Awards may be granted for no cash
consideration or for such minimal cash consideration as may be required by
law. Generally, the consideration to be received by the Company for the grant
of awards under the 1995 Plan will be the participant's past, present or
expected future contributions to the Company.
STOCK OPTIONS. Incentive Stock Options and non-qualified options may be
granted under the 1995 Plan; provided, however, that to the extent the fair
market value (determined at the time the Incentive Stock Option is granted)
of the Common Stock with respect to which all Incentive Stock Options are
exercisable for the first time by an employee during any calendar year (under
all plans described in subsection (d) of Section 422 of the Code of his or
her employer corporation and its parent and subsidiary corporations) exceeds
$100,000, such options shall be treated as options that do not qualify as
Incentive Stock Options. The Compensation Committee will determine the
exercise price of any Incentive Stock Option or non-qualified option granted
under the 1995 Plan, but in no event will the exercise price be less than
100% or 85%, respectively, of the fair market value of the Common Stock on
the date of grant. Stock options will be exercisable at such times as the
Compensation Committee determines; provided, however, that the term of any
option may not extend more than ten years from the date of grant. Further, if
at the time an option is otherwise to be granted pursuant to the 1995 Plan
the optionee owns directly or indirectly (within the meaning of Section
424(d) of the Code) shares of Common Stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company or its
parent or subsidiary corporations, if any (within the meaning of Section
422(b)(6) of the Code), then any Incentive Stock Option to be granted to such
optionee pursuant to the 1995 Plan shall satisfy the requirements
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of Section 422(c)(5) of the Code, and the option price shall not be less than
110% of the fair market value of the shares of Common Stock, and such option
by its terms shall not be exercisable after the expiration of five years from
the date such option is granted. Stock options may be exercised by payment in
full of the exercise price in cash or, at the discretion of and as specified
by the Compensation Committee, by delivery of certificates for shares of
Common Stock already owned by the optionee having a fair market value as of
the date of grant equal to the full purchase price of the shares, a
promissory note, or a combination of cash, the optionee's promissory note and
such shares. The Compensation Committee may grant restoration options when a
participant pays the exercise price or tax withholding upon exercise of an
option by using shares of Common Stock. The reload option would be for up to
that number of shares surrendered or withheld.
STOCK APPRECIATION RIGHTS. The Compensation Committee may grant stock
appreciation rights ("SARs") exercisable at such times, at such price and
subject to such conditions or restrictions as the Compensation Committee may
determine. Upon exercise of an SAR by a holder, the holder is entitled to
receive the excess of the fair market value of one share of Common Stock on
the date of exercise over the per share exercise price in respect of which
the SAR was granted. The payment may be made in cash or shares of Common
Stock, or any combination thereof, as determined by the Compensation
Committee.
RESTRICTED STOCK. The Compensation Committee may grant shares of
restricted stock subject to such forfeiture and transfer restrictions and
other such restrictions and terms and conditions as the Compensation
Committee may impose, including a specified period of time during which the
grantee must remain in the continuous employment of the Company in order for
the forfeiture and transfer restrictions to lapse. Shares of restricted stock
granted under the 1995 Plan will be evidenced by stock certificates, which
will be held by the Company, and the grantee shall have voting and dividend
rights with respect to such shares. The Compensation Committee has the right
to waive all or any part of the restrictions applicable to any or all
outstanding restricted stock.
PERFORMANCE AWARDS. A performance award will entitle the holder to
receive payments upon the achievement of specified performance goals. The
Compensation Committee will determine the terms and conditions of a
performance award, including the performance goals to be achieved during the
performance period, the length of the performance period and the amount and
form of payment of the performance award. A performance award may be
denominated or payable in cash, shares of Common Stock or other securities,
or other awards or property.
DURATION, TERMINATION AND AMENDMENT. Unless earlier discontinued by the
Board of Directors, the 1995 Plan shall terminate and no awards may be
granted under the 1995 Plan after January 1, 2005. The 1995 Plan permits the
Board of Directors to amend or discontinue the 1995 Plan at any time, except
that prior shareholder approval will be required for any amendment to the
1995 Plan that would (a) increase the maximum number of shares issuable under
the 1995 Plan, (b) decrease the minimum price for options or other awards
granted under the 1995 Plan, (c) extend the maximum term of options granted
under the 1995 Plan, or (d) modify the eligibility requirements for
participation in the 1995 Plan.
FEDERAL TAX CONSEQUENCES
The following is a summary of the principal federal income tax
consequences generally applicable to awards under the 1995 Plan.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The grant of an option or
SAR is not expected to result in any taxable income for the recipient. The
holder of an Incentive Stock Option generally will have no taxable income
upon exercising the Incentive Stock Option (except that a liability may arise
pursuant to the alternative minimum tax), and the Company will not be
entitled to a tax deduction when an Incentive Stock Option is exercised. Upon
exercising a non-qualified stock option, the optionee must recognize ordinary
income equal to the excess of the fair market value of the shares of Common
Stock acquired on the date of exercise over the exercise price, and the
Company will be entitled at that time to a tax deduction for the same amount.
Upon exercising an SAR, the amount of any cash received and the fair market
value on the exercise date of any shares of Common Stock received are taxable
to the recipient as ordinary income and deductible by the Company. The tax
consequence to an optionee upon a disposition of shares acquired through the
exercise of an option will depend on how long the shares have been held and
upon whether such
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shares were acquired by exercising an Incentive Stock Option or by exercising
a non-qualified stock option or SAR. Generally, there will be no tax
consequence to the Company in connection with disposition of shares acquired
under an option, except that the Company may be entitled to a tax deduction
in the case of a disposition of shares acquired under an Incentive Stock
Option before the applicable Incentive Stock Option holding periods set forth
in the Code have been satisfied.
OTHER AWARDS. With respect to other awards granted under the 1995 Plan
that are payable either in cash or shares of Common Stock that are either
transferable or not subject to substantial risk of forfeiture, the holder of
such an award must recognize ordinary income equal to the excess of (a) the
cash or the fair market value of the shares of Common Stock received
(determined as of the date of such receipt) over (b) the amount (if any) paid
for such shares of Common Stock by the holder of the award, and the Company
will be entitled at that time to a deduction for the same amount. With
respect to an award that is payable in shares of Common Stock that are
restricted as to transferability and subject to substantial risk of
forfeiture, unless a special election is made pursuant to the Code, the
holder of the award will not recognize any taxable income at the time of
receipt of the restricted Common Stock. At the time the restricted shares
become transferable or not subject to a substantial risk of forfeiture
(whichever occurs earlier), the recipient will recognize ordinary income
equal to the excess of (i) the fair market value of the shares of Common
Stock received (determined as of the first time the shares become
transferable or not subject to substantial risk of forfeiture, whichever
occurs earlier) over (ii) the amount (if any) paid for such shares of Common
Stock by the holder, and the Company will be entitled at that time to a tax
deduction for the same amount.
SATISFACTION OF TAX OBLIGATIONS. Under the 1995 Plan, the Compensation
Committee may permit participants receiving or exercising awards, subject to
the discretion of the Compensation Committee and upon such terms and
conditions as it may impose, to surrender shares of Common Stock (either
shares received upon the receipt or exercise of the award or shares
previously owned by the participant) to the Company to satisfy federal and
state tax obligations. In addition, the Compensation Committee may grant,
subject to its discretion, a cash bonus to a participant in order to provide
funds to pay all or a portion of federal and state taxes due as a result of
the exercise or receipt of (or lapse of restrictions relating to) an award.
The amount of any such bonus will be taxable to the participant as ordinary
income, and the Company will have a corresponding deduction equal to such
amount (subject to the usual rules concerning reasonable compensation).
-62-
<PAGE>
OPTIONS RECEIVED AND TO BE RECEIVED BY CERTAIN PERSONS AND GROUPS
The following table sets forth the amount of options received under the
1995 Plan as of May 28, 1999, by (a) the Named Executive Officer, (b) all
current executive officers as a group, (c) all current directors who are not
executive officers as a group, (d) each associate of any of such directors or
executive officers, (e) each other person who received 5 percent of the
options or rights under the 1995 Plan, and (f) all employees, including all
current officers who are not executive officers, as a group:
<TABLE>
<CAPTION>
PERSONS AND GROUPS OPTIONS RECEIVED
-------------------------------------------------------- ------------------------------
<S> <C>
William L. Rush
(former President and Chief Executive Officer).......... 25,000
All current executive officers as a
group (2 persons) (1)................................... 100,000
All current directors (other than current executive
officers) as a group (1 person) (2)..................... 22,500
Anwar H. Bhimani........................................ 12,500
Thomas Coleman (3)...................................... 18,750
All employees (other than current executive officers) as
a group (4)............................................. 110,375
All non-employees as a group (5)........................ 78,313
</TABLE>
- --------------------
(1) Includes 67,500 options received by George E. Kline, 60,000 of which
have been exercised, and 32,500 options received by Richard J.
Hegstrand, 10,000 of which have expired or otherwise been canceled.
(2) Includes 22,500 options received by Lawrence Lehmkuhl.
(3) Includes 8,750 previously-exercised options.
(4) Includes 250 previously-exercised options, and 85,125 options which
have expired or otherwise been canceled.
(5) Includes 29,500 previously-exercised options, and 23,625 which have
expired or otherwise been canceled.
The number and type of awards that will be granted in the future under
the 1995 Plan to the above-described persons and groups are not determinable
as the Compensation Committee will make such determinations in its
discretion. However, if the shareholders approve both the amendment to the
1995 Plan and the Merger, and the Merger is subsequently consummated, the
Company and MJK expect to make a grant shortly thereafter for 25,000 shares
of Common Stock to a recently-hired employee of MJK.
BOARD RECOMMENDATION; SHAREHOLDER VOTE REQUIRED
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE 1995
PLAN. The directors intend to vote all shares of Common Stock under their
control in favor of such proposal. The affirmative
-63-
<PAGE>
vote of a majority of the shares of Common Stock entitled to vote and
present, in person or by proxy, at the Special Meeting is required for the
approval of the amendment to the 1995 Plan.
OTHER MATTERS
As of this date, the Board of Directors does not know of any business to
be brought before the Special Meeting other than as specified above. However,
if any matters properly come before the Special Meeting, it is the intention
of the person named in the enclosed proxy to vote such proxy in accordance
with their judgment on such matters.
PRINCIPAL ACCOUNTANTS
Ernst & Young LLP has served as the principal accountants for the
Company and MJK since the inception of the Company and MJK, respectively.
Representatives of Ernst & Young LLP will attend the Special Meeting.
They will have the opportunity to make a statement if they desire to do so,
and will be available to answer appropriate questions that may be asked by
shareholders.
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Because the Company delayed its 1998 Annual Meeting of Shareholders and
is unable to set a date for the 1999 annual meeting, the date by which
proposals of shareholders must be received by the Company for inclusion in
the Company's proxy materials relating to its 1999 Annual Meeting of
Shareholders has not been determined. The Company intends to provide such
date to its shareholders at a later date in its Quarterly Report on Form 10-Q
or some other appropriate filing.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934 and, in accordance therewith, files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copies
made at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and the Commission's regional
offices at Seven World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can also be obtained from the Public Reference
Section of Commission at its Washington, D.C. address at prescribed rates.
The Commission also maintains a Web site address, http://www.sec.gov.
-64-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
NM HOLDINGS, INC.:
NM HOLDINGS, INC. UNAUDITED FINANCIAL STATEMENTS
Statements of Operations -- Three Months Ended March 31, 1999 and 1998...... F-2
Balance Sheets -- March 31, 1999 and December 31, 1998...................... F-3
Statements of Cash Flows -- Three Months Ended March 31, 1999 and 1998...... F-4
Notes to Financial Statements............................................... F-5
NM HOLDINGS, INC. AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors.............................................. F-6
Balance Sheets -- December 31, 1998 and 1997................................ F-7
Statements of Operations -- Years Ended December 31, 1998 and 1997.......... F-8
Statement of Shareholders' Equity........................................... F-9
Statements of Cash Flows -- Years Ended December 31, 1998 and 1997.......... F-10
Notes to Financial Statements............................................... F-11
MJK HOLDINGS, INC.:
MJK HOLDINGS, INC. AUDITED FINANCIAL STATEMENTS
Reports of Independent Auditors............................................. F-25
Statements of Financial Condition -- March 31, 1999 and March 31, 1998...... F-27
Statements of Income -- Years Ended March 31, 1999, 1998, and 1997.......... F-28
Statement of Shareholders' Equity........................................... F-29
Statements of Cash Flows -- Years Ended March 31, 1999, 1998, and 1997...... F-30
Notes to Financial Statements............................................... F-31
</TABLE>
F-1
<PAGE>
NM HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------------- -------------
<S> <C> <C>
Investment income ............................ $ 17,534 $ --
Administrative expenses ...................... (59,511) --
--------------- -------------
Loss from continuing operations .............. (41,977) --
Loss from discontinued operations ............ -- (440,021)
--------------- -------------
Net loss ..................................... $ (41,977) $ (440,021)
=============== =============
Loss per share data (basic and diluted):
Loss from continuing operations .......... $ (.04) --
Loss from discontinued operations ........ -- $ (.33)
--------------- -------------
Net loss per share ........................... $ (.04) $ (.33)
=============== =============
Weighted average number of shares
outstanding .............................. 1,152,145 1,331,131
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
NM HOLDINGS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 1,939,275 $ 1,935,368
Net assets of discontinued operations ............................. 7,905 --
Prepaid expenses .................................................. 28,283 6,547
--------------- ---------------
Total current assets ................................................. 1,975,463 1,941,915
Investment in GalaGen Inc. ........................................... 617,675 498,125
Equipment and office furniture, net .................................. 745 6,102
--------------- ---------------
Total assets ......................................................... $ 2,593,883 $ 2,446,142
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 23,344 $ --
Accrued payroll ................................................... -- 4,690
Net liabilities of discontinued operations ........................ -- 58,658
--------------- ---------------
Total current liabilities ............................................ 23,344 63,348
Shareholders' equity:
Undesignated Preferred Stock, $.04 par value:
Authorized shares - 1,250,0000
Issued and outstanding shares - none............................ -- --
Common Stock, $.04 par value:
Authorized shares - 5,000,000 shares
Issued and outstanding shares - 1,226,626 - 1999;
1,150,251 - 1998............................................... 49,065 46,010
Paid-in capital ................................................... 8,813,552 8,706,435
Accumulated other comprehensive income ............................ 119,550 --
--------------- ---------------
Accumulated deficit ............................................... (6,411,628) (6,369,651)
Total shareholders' equity ........................................... 2,570,539 2,382,794
--------------- ---------------
Total liabilities and shareholders' equity ........................... $ 2,593,883 $ 2,446,142
=============== ===============
</TABLE>
See accompanying notes
F-3
<PAGE>
NM HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (41,977) $ 49,153
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation ................................................... 1,002 75,829
Changes in operating assets and liabilities:
Accounts receivable .......................................... -- 48,601
Inventories .................................................. -- 756,893
Prepaid expenses ............................................. (21,736) 18,684
Accounts payable ............................................. 23,344 (370,862)
Accrued liabilities .......................................... (4,690) (191,968)
-------------- --------------
Net cash provided by (used in) operating activities ................. (44,057) 386,330
INVESTING ACTIVITIES
Sale (purchase) of equipment and office furniture ................... 4,355 (52,422)
Decrease in net liabilities of discontinued operations .............. (66,563) --
-------------- --------------
Net cash used in investing activities ............................... (62,208) (52,422)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock .............................. 110,172 --
-------------- --------------
Net cash provided by financing activities ........................... 110,172 --
-------------- --------------
Increase in cash .................................................... 3,907 333,908
Cash at beginning of period ......................................... 1,935,368 1,647,482
-------------- --------------
Cash at end of period ............................................... $ 1,939,275 $ 1,981,390
============== ==============
</TABLE>
See accompanying notes
F-4
<PAGE>
NM HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed financial statements as of March 31, 1999 and for the
three-month periods ended March 31, 1999 and 1998 included in this proxy have
been prepared by NM Holdings, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the financial statement and
related notes thereto included in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998.
The condensed financial statements presented herein as of March 31, 1999
and for the three-month periods ended March 31, 1999 and 1998 are unaudited,
but in the opinion of management, reflect all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of financial
position, results of operations and cash flows for the periods presented. The
results of operations for any interim period are not necessarily indicative
of results for the full year.
2. NATURE OF OPERATIONS
NM Holdings, Inc., as a result of the disposition of its nutrition
business operations in December 1998, currently operates as a public shell
corporation. The Company intends to use its existing cash resources, together
with debt or equity financing that may be available, to pursue the potential
acquisition of other business opportunities. Prior to the December 1998
disposition, the Company, operating under the name Nutrition Medical, Inc.,
focused on the development and marketing of a line of branded generic
critical care nutrition products for the hospital/nursing home market, as
well as private label nutrition products for sale through retail chains.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT IN MARKETABLE SECURITIES
The Company's investment in marketable securities, which is comprised of
common stock received in December 1998 relating to the sale of the Company's
critical care nutrition formula product line to GalaGen Inc., is classified
as available-for-sale. Available-for-sale securities are carried at fair
value, with unrealized gains and losses, net of taxes, recorded as a
component of Shareholders' Equity in the account "Accumulated other
comprehensive income."
4. MERGER WITH MJK HOLDINGS, INC.
On March 25, 1999, the Company entered into an agreement with MJK
Holdings, Inc. pursuant to which the Company and MJK Holdings, Inc. will
merge with and into a newly formed, wholly owned acquisition subsidiary of
the Company. MJK Holdings, Inc. is the parent company of Miller, Johnson &
Kuehn, Incorporated a brokerage/clearing firm located in Minneapolis,
Minnesota. Company shareholders will retain an approximate 6.4% interest in
the merged entity. The closing of the transaction is subject to various
closing conditions, including, but not limited to, the approval of the
Company's shareholders.
F-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
NM Holdings, Inc.
We have audited the accompanying balance sheets of NM Holdings, Inc.,
formerly known as Nutrition Medical, Inc., as of December 31, 1998 and 1997
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 NM Holdings, Inc., formerly
known as Nutrition Medical, Inc., at December 31, 1998 and 1997 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
Minneapolis, Minnesota
March 1, 1999
F-6
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 1,935,368 $ 1,647,482
Accounts receivable, less allowance of $-0- in 1998 and $31,500 in 1997 ... -- 1,140,020
Inventories ............................................................... -- 1,615,165
Prepaid expenses .......................................................... 6,547 51,401
-------------- --------------
Total current assets ........................................................ 1,941,915 4,454,068
Investment in GalaGen Inc. .................................................. 498,125 --
Equipment and office furniture, net ......................................... 6,102 1,179,200
-------------- --------------
Total assets ................................................................ $ 2,446,142 $ 5,633,268
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................................... $ -- $ 827,007
Accrued lease costs ....................................................... -- 66,600
Accrued payroll ........................................................... 4,690 158,298
Accrued expenses .......................................................... -- 482,044
Net liabilities of discontinued operations ................................ 58,658 --
-------------- --------------
Total current liabilities ................................................... 63,348 1,533,949
Subordinated note payable, including accrued interest ....................... -- 1,788,934
Shareholders' equity:
Undesignated Preferred Stock, $.04 par value:
Authorized shares - 1,250,0000
Issued and outstanding shares - none ................................. -- --
Common Stock, $.04 par value:
Authorized shares - 5,000,000 shares
Issued and outstanding shares - 1,150,251 - 1998;
1,364,006 -1997 ...................................................... 46,010 54,560
Paid-in capital ........................................................... 8,706,435 8,706,444
Accumulated deficit ....................................................... (6,369,651) (6,450,619)
-------------- --------------
Total shareholders' equity ................................................. 2,382,794 2,310,385
-------------- --------------
Total liabilities and shareholders' equity .................................. $ 2,446,142 $ 5,633,268
============== ==============
</TABLE>
See accompanying notes
F-7
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Investment income ................................................... $ 1,437 $ --
Administrative Expenses ............................................. (8,095) --
-------------- --------------
Loss from continuing operations .................................. (6,658) --
Loss from discontinued operations associated with product
lines disposed of in 1998 ........................................ (1,232,427) $ (4,160,638)
Gain on disposal of discontinued operations ......................... 1,320,053 --
-------------- --------------
Gain (loss) from discontinued operations ............................ 87,626 (4,160,638)
-------------- --------------
Net income (loss) ................................................... $ 80,968 $ (4,160,638)
============== ==============
Net income (loss) per common share -- basic and diluted ............. $ .06 $ (3.07)
============== ==============
Weighted average number of shares outstanding ....................... 1,359,320 1,355,631
============== ==============
</TABLE>
See accompanying notes
F-8
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS 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, 1996 ............. 1,148,256 $ 45,930 $ 6,943,287 $ (2,289,981) $ 4,699,236
Issuance of Common Stock to purchase
Elan product line ..................... 213,750 8,550 1,754,887 -- 1,763,437
Stock options exercised ............... 2,000 80 8,270 -- 8,350
Net loss .............................. -- -- -- (4,160,638) (4,160,638)
----------- ---------- ------------ -------------- ------------
Balance at December 31, 1997 ............. 1,364,006 54,560 8,706,444 (6,450,619) 2,310,385
Repurchase of fractional shares in
conjunction with reverse stock split .. (5) -- (9) -- (9)
Common stock acquired in connection
with debt extinguishment .............. (213,750) (8,550) -- -- (8,550)
Net income ............................ -- -- -- 80,968 80,968
----------- ---------- ------------ -------------- ------------
Balance at December 31, 1998 ............. 1,150,251 $ 46,010 $8,706,435 $ (6,369,651) $ 2,382,794
=========== ========== ============ ============== ============
</TABLE>
See accompanying notes
F-9
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 80,968 $ (4,160,638)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization (and goodill write-off) ............................. -- 1,853,936
Depreciation ..................................................... 2,885 331,854
Reserve for bad debts ............................................ -- (49,500)
Gain from discontinued operations ................................ (87,626) --
Changes in operating assets and liabilities exclusive
of discontinued operations:
Accounts receivable .......................................... -- (734,280)
Inventories .................................................. -- (655,050)
Prepaid expenses ............................................. 24,685 (17,362)
Accounts payable ............................................. -- 557,970
Accrued interest ............................................. -- 195,184
Accrued liabilities .......................................... 4,690 466,901
-------------- --------------
Net cash provided by (used in) operating activities ................... 25,602 (2,210,985)
INVESTING ACTIVITIES
Sale of short-term investments ........................................ -- 1,671,596
Sale (purchase) of business operations ................................ 262,293 (71,749)
Purchase of equipment and office furniture ............................ -- (303,685)
-------------- --------------
Net cash provided by investing activities ............................. 262,293 1,296,162
FINANCING ACTIVITIES
(Repurchase of) proceeds from issuance of Common Stock ................ (9) 8,350
-------------- --------------
Net cash (used in) provided by financing activities ................... (9) 8,350
-------------- --------------
Increase (decrease) in cash ........................................... 287,886 (906,473)
Cash at beginning of year ............................................. 1,647,482 2,553,955
-------------- --------------
Cash at end of year ................................................... $ 1,935,368 $ 1,647,482
============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Purchase of a business:
Issuance of subordinated debt ...................................... $ -- $ 1,593,750
Issuance of stock .................................................. -- 1,763,437
ZEVEX shares exchanged in extinguishment of subordinated debt ......... 2,016,609 --
</TABLE>
See accompanying notes
F-10
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. NATURE OF OPERATIONS
NM Holdings, Inc., as a result of the disposition of its nutrition
business operations in December 1998 (see Note 4), has no meaningful
operations. The Company intends to use its existing cash resources, together
with debt or equity financing that may be available, to pursue the potential
acquisition of other business opportunities. Prior to the December 1998
disposition, the Company, operating under the name Nutrition Medical, Inc.,
focused on the development and marketing of a line of branded generic
critical care nutrition products for the hospital/nursing home market, as
well as private label nutrition products for sale through retail chains.
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.
INVENTORIES
Inventories are valued at the lower of cost or market by the first-in,
first-out (FIFO) method.
EQUIPMENT AND OFFICE FURNITURE
Equipment and office furniture are stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of
the assets ranging from three to seven years.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities.
F-11
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment of the product.
Provisions for estimated returns and allowances are accrued at the time of
sale.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform with the 1998
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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount.
F-12
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER SHARE
Basic earnings per share is based on the weighted average shares
outstanding and excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share for the Company is the
same as basic earnings per share because the effect of options and warrants
is anti-dilutive.
3. REVERSE STOCK SPLIT
The Board of Directors of the Company authorized a one-for-four reverse
stock split effective June 10, 1998. As a result of the reverse split, the
par value of the Company's stock increased to $.04 per share, and the total
number of authorized and outstanding shares were proportionately reduced.
Because cash was paid in lieu of the issuance of fractional shares that
resulted from the reverse stock split, the total number of shares of the
Company's Common Stock outstanding decreased by five shares. All share, per
share and weighted average information have been restated to reflect the
reverse stock split.
4. DISCONTINUED OPERATIONS
In January 1998, the Company announced its intention to discontinue its
private label adult nutrition supplement business. Due to continuing losses
sustained by the Company's remaining product lines, the Board of Directors
approved a strategy to pursue the sale of the remaining business operations.
In a series of transactions, approved by the shareholders in December 1998,
the Company sold substantially all of the assets and product know-how
associated with its critical care nutrition business operations, including
those assets and products acquired from Elan Pharma, Inc. ("Elan") in January
1997. As part of these transactions, Elan also agreed to cancel the
subordinated note payable and return the Common Stock issued by the Company
as consideration in
F-13
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
4. DISCONTINUED OPERATIONS (CONTINUED)
that acquisition, in exchange for a portion of the proceeds obtained in the
1998 transactions. The following is a summary of the individual transactions
involved in the divestiture of the Company's business operations:
ZEVEX, INC. TRANSACTION
On July 27, 1998, the Company entered into an agreement with ZEVEX, Inc.
(the "ZEVEX Transaction") whereby ZEVEX agreed to acquire and assume
certain of the assets and liabilities of the Company which were used in
the critical care enteral feeding pump and plastic disposables business.
The Company received a total purchase price equal to $500,000 in cash,
the Company's actual costs of the related inventory and 115,000 shares
of ZEVEX common stock (the "ZEVEX Shares").
USE OF PROCEEDS
Certain of the assets sold in the ZEVEX Transaction were acquired from
Elan in January 1997 and were pledged as security on a note payable
issued by the Company in connection with the assets purchased (see Note
7). In conjunction with the ZEVEX Transaction, the Company entered into
an agreement with Elan whereby the Company transferred to Elan the ZEVEX
Shares and $450,000 of cash. In addition, the Company issued a warrant
to purchase 50,000 shares of Common Stock of the Company at $3.50 per
share. Elan canceled the note payable and accrued interest and returned
the 213,750 shares of Common Stock issued by the Company to Elan at the
time of the original purchase.
The Company recognized a gain on the above transactions of $1,163,098.
F-14
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
4. DISCONTINUED OPERATIONS (CONTINUED)
GALAGEN INC. TRANSACTION
The Company and GalaGen Inc. ("GalaGen") entered into an agreement on
September 1, 1998 for the sale of the Company's critical care nutrition
formula business. Under the terms of the agreement, GalaGen paid the
Company $71,516 and issued 318,800 shares of GalaGen common stock in
exchange for the Company's right, title and interest to the acquired
critical care formulas, related inventories and certain fixed assets.
The Company recognized a gain on this transaction of $355,373.
AGRILINK FOODS, INC. TRANSACTION
In March 1998, the Company entered into an agreement with Agrilink
Foods, Inc. under which the Company transferred its private label adult
nutrition supplement business to Agrilink effective May 1, 1998. As part
of the agreement, the Company will be receiving cash for various
marketing, inventory and supply related items and royalty payments for
two years on the sale of these products. The Company expects the
ultimate gain or loss on the disposal of this operation, dependent upon
expected future royalty income, to be insignificant given the underlying
sales levels at the time of the sale.
As a result of the above transactions, the Company plans to liquidate
the remaining assets, consisting of office and production equipment and will
seek to sublet its warehouse/office facility. The Company established a
reserve in 1998 of $198,000 to adjust the carrying value of these assets to
their estimated net realizable value.
F-15
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
4. DISCONTINUED OPERATIONS (CONTINUED)
The following schedule provides the underlying sales and expense data
relating to the discontinued operations of the Company for the periods
presented:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Sales $ 4,926,765 $ 6,317,722
Cost of goods 3,623,618 4,930,028
------------- -------------
Gross profit 1,303,147 1,387,694
Selling, general and administrative 1,797,717 2,983,161
Research and development 80,397 642,020
Lawsuit settlement 513,816 --
Goodwill amortization (and write-off) -- 1,853,936
Interest expense, net 143,644 69,215
------------- -------------
2,535,574 5,548,332
------------- -------------
Loss from discontinued operations $ (1,232,427) $ (4,160,638)
============= =============
</TABLE>
F-16
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
4. DISCONTINUED OPERATIONS (CONTINUED)
The following schedule summarizes the impact of the above described
transactions on the Company's assets, liabilities and shareholders' equity:
<TABLE>
<S> <C>
Cash received $ 712,293
Other proceeds:
Common stock of acquiring companies, at market 1,037,188
Funds held in escrow, net 86,514
Subordinated note payable reduction 2,016,609
Reacquired stock 8,550
------------------
3,148,861
Assets sold:
Equipment, net 790,398
Inventory 446,794
Other assets 6,846
------------------
1,244,038
Other costs of the transactions:
Consideration in exchange for subordinated debt reduction:
Cash 450,000
Common stock of acquiring company, at market 539,063
Transaction and other settlement expenses 110,000
Reduction to net realizable value of equipment 158,000
Accrual for estimated loss for leased facility 40,000
------------------
1,297,063
------------------
$ 1,320,053
==================
</TABLE>
F-17
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
4. DISCONTINUED OPERATIONS (CONTINUED)
Net liabilities of discontinued operations at December 31, 1998 consist
of the following:
<TABLE>
<S> <C>
Accounts receivable, net (including amounts held in escrow in
association with product line sales) $ 282,480
Other current assets 85,406
Equipment, net 18,475
Accounts payable, accrued transaction costs, and lease reserves (445,019)
-------------------
$ (58,658)
===================
</TABLE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Raw materials $ 292,032 $ 292,032
Work in progress -- 63,313
Finished goods -- 1,259,820
----------- ----------
$ -- $1,615,165
=========== ==========
</TABLE>
F-18
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
6. EQUIPMENT AND OFFICE FURNITURE
Equipment and office furniture consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Equipment and office furniture:
Computer equipment $76,269 $ 153,855
Office furniture -- 104,443
Equipment, including pumps at customer sites -- 1,303,268
------- ----------
76,269 1,561,566
Less accumulated depreciation 70,167 382,366
------- ----------
$ 6,102 $1,179,200
</TABLE>
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<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 were due January 2004. This note was
secured by the assets of the Company.
F-19
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
8. LEASES
The Company leases its office and warehouse facility under a five year
operating lease. The lease terminates on November 30, 2001, and requires the
Company to pay its proportionate share of real estate taxes and operating
expenses. The Company intends on subleasing its facility in May 1999 for the
remaining portion of the lease. The Company has reserved $40,000 related to
the first four months of 1999.
Future minimum lease commitments under the lease as of December 31, 1998
are as follows:
<TABLE>
<S> <C>
1999 $ 69,545
2000 69,360
2001 65,664
------------------
$ 204,569
==================
</TABLE>
Total rent expense under the operating lease for the years ended
December 31, 1998 and 1997 was $126,900 and $90,383, respectively.
9. INCOME TAXES
At December 31, 1998 and 1997, the Company had net operating loss
carryforwards for tax purposes of approximately $4,346,000 and $3,601,000,
respectively. These net operating loss carryforwards are available to offset
future taxable income through 2018 subject to limitations under Section 382
of the Internal Revenue Code due to changes in the equity ownership of the
Company.
F-20
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
9. INCOME TAXES (CONTINUED)
Significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,351,000 $ 1,440,000
Goodwill write-off -- 692,000
Depreciation 80,000 32,000
Inventory reserve -- 258,000
Accounts receivable allowance 5,000 13,000
Accrued professional fees -- 80,000
Other accrued expenses 52,000 22,000
----------- -----------
Net deferred income tax assets 2,488,000 2,537,000
Valuation allowance (2,488,000) (2,537,000)
----------- -----------
Net deferred income taxes $ -- $ --
=========== ===========
</TABLE>
10. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
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,
1998, the maximum number of shares of common stock reserved under the Plans
is 225,000 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.
F-21
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
10. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes activity under the Plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES PLAN OPTIONS OUTSTANDING EXERCISE
AVAILABLE ------------------------------- PRICE PER
FOR GRANT INCENTIVE NON-QUALIFIED SHARE
--------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 61,562 65,125 98,313 $ 7.88
Exercised -- (250) (1,750) 4.16
Granted (34,750) 29,125 5,625 11.88
Canceled 30,125 (28,875) (1,250) 9.36
Balance at December 31, 1997 56,937 65,125 100,938 8.52
Granted (125,000) -- 125,000 1.18
Canceled 83,875 (64,500) (19,375) 8.98
Balance at December 31, 1998 15,812 625 206,563 $ 3.80
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
NUMBER REMAINING AVERAGE AVERAGE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
-------------------------- -------------- ------------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ .62 - $ 1.20 125,000 10 years $ 1.18 119,375 $ 1.19
4.00 - 6.00 49,938 2 years 4.70 49,313 4.71
8.00 - 17.00 32,250 3 years 13.19 32,250 13.19
-------------- --------------
207,188 7 years $ 3.80 200,938 $ 3.80
============== ==============
</TABLE>
Options outstanding under the Plans expire at various dates during the
period from March 1999 through December 2008. The number of options
exercisable as of December 31, 1998 and 1997 were 200,938 and 104,762,
respectively, and are exercisable at a weighted average price of $3.80 and
$6.56 per share, respectively. The weighted average fair value of options
granted during the years ended December 31, 1998 and 1997 was $.51 and $1.29
per share, respectively.
F-22
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
10. STOCK OPTIONS AND WARRANTS (CONTINUED)
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 1998 and 1997: risk-free interest rate of 5.0% and 6.0%,
respectively; dividend yield of 0% for both years; volatility factor of the
expected market price of the Company's common stock of .61 and .71,
respectively; and a weighted average expected life of the option of five
years for both years.
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>
1998 1997
----------------- ----------------
<S> <C> <C>
Pro forma net loss $(10,569) $(4,248,128)
Pro forma net loss per common share-- basic and diluted (.01) (.78)
</TABLE>
F-23
<PAGE>
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
NOTES TO FINANCIAL STATEMENTS
10. STOCK OPTIONS AND WARRANTS (CONTINUED)
The pro forma effect on net loss of 1998 and 1997 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.
WARRANTS
In conjunction with various debt and equity financing activities, the
Company has granted warrants to acquire up to 131,777 shares of the Company's
Common Stock at exercise prices ranging from $3.50 - $16.80 (weighted average
exercise price of $7.36). The total includes 50,000 shares issued in December
1998 in conjunction with the debt settlement arrangement with Elan Pharma,
Inc. (see Note 4).
11. LITIGATION SETTLEMENT
In August 1995, the Company was named as a defendant in a patent
infringement lawsuit brought by Novartis, formerly Sandoz Nutrition. The
complaint asserted that one of the Company's products, L-Emental-TM- Plus,
infringed on two patents held by Novartis and asked for relief in the form of
an injunction preventing the Company from selling the product, as well as
damages of an unspecified amount.
On December 15, 1998, the Company entered into a Settlement and Mutual
Release with Novartis whereby Novartis agreed to release all claims against
the Company, and the Company paid Novartis $450,000 and agreed to discontinue
production of its L-Emental-TM- Plus product. The Company recognized a charge
to discontinued operations in December 1998 of $513,816 relating to the
settlement payment and the write-off of the related product inventory.
12. SUBSEQUENT EVENT
In March 1999, the Company announced that they are actively engaged in
negotiations with MJK Holdings, Inc. to merge the two companies. The
execution of a definitive agreement is subject to the negotiation of terms
and due diligence and is also subject to approval by the respective boards of
directors and shareholders.
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MJK Holdings, Inc.
We have audited the accompanying consolidated statements of financial
condition of MJK Holdings, Inc. as of March 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial position of MJK Holdings,
Inc. as of March 31, 1999 and 1998 and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
May 21, 1999
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Miller, Johnson & Kuehn, Incorporated
We have audited the accompanying statements of income, shareholders' equity
and cash flows of Miller, Johnson & Kuehn, Incorporated for the year ended
March 31, 1997. 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 audit.
We conducted our audit 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 audit provides 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 Miller, Johnson & Kuehn,
Incorporated at March 31, 1997 and the results of its operations and its cash
flows for the period then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
May 15, 1997, except for Notes 17, 18 and 19
as to which the date is April 27, 1999
F-26
<PAGE>
MJK HOLDINGS, INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,200,661 $ 3,282,884
Cash and investments segregated under federal and other regulations
(primarily U.S. government obligations) 73,130,503 95,646,109
Receivable from customers 139,910,839 142,021,964
Receivable from brokers and dealers 69,616,726 6,183,230
Receivable from clearing organization 733,580 802,934
Trading securities owned, at market 15,265,814 3,486,824
Secured demand notes receivable, collateralized by securities 9,675,000 10,475,000
Furniture, equipment and leasehold improvements, net 2,200,912 2,461,436
Other assets 8,618,815 8,255,793
------------- -------------
Total assets $ 322,352,850 $ 272,616,174
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 33,900,000 $ 12,000,000
Payable to customers 203,313,836 194,225,936
Payable to brokers and dealers 43,388,593 4,998,591
Payable to clearing broker 9,975,000 31,608,020
Trading securities sold but not yet purchased, at market 812,212 4,193,405
Notes payable 4,538,114 5,252,521
Liabilities subordinated to claims of general creditors 9,675,000 10,475,000
Other liabilities 9,738,951 8,504,443
------------- -------------
Total liabilities 315,341,706 271,257,916
Shareholders' equity Common Stock, $.01 par value:
Authorized shares: 1999-50,000,000; 1998-50,000,000
Issued and outstanding shares: 1999-4,255,971; 1998-4,255,971 42,560 42,560
Preferred Stock
Authorized shares: 1999-5,000,000; 1998-5,000,000
Issued and outstanding shares: 1999-558,000; 1998-0 4,380,300 --
Paid-in capital 2,539,966 2,539,966
Retained earnings 48,318 (1,224,268)
------------ ------------
Total shareholders' equity 7,011,144 1,358,258
------------ ------------
Total liabilities and shareholders' equity $322,352,850 $272,616,174
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-27
<PAGE>
MJK HOLDINGS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Trading profits $ 15,063,093 $ 10,634,085 $ 9,855,461
Interest 15,410,255 13,506,682 9,149,917
Commissions 9,888,209 9,039,869 3,930,256
Investment banking 8,388,876 9,656,221 7,716,272
Clearing fees 3,105,376 1,902,345 785,213
Other income 3,734,514 2,353,385 1,170,199
------------- ------------- ------------
Total revenues 55,590,323 47,092,587 32,607,318
Expenses
Employee compensation and benefits 26,986,849 25,950,355 17,736,553
Clearing fees 2,890,129 1,474,517 749,812
Occupancy and equipment 3,285,121 3,380,638 1,964,819
Communications 5,251,422 3,937,930 2,298,041
Interest 11,805,926 11,027,386 7,427,375
Other expense 3,113,290 3,145,029 2,206,915
------------- ------------- ------------
Total expenses 53,332,737 48,915,855 32,383,515
Income (loss) before income taxes 2,257,586 (1,823,268) 223,803
Income tax expense (benefit) 985,000 (599,000) 33,700
------------- ------------- ------------
Net income (loss) $ 1,272,586 $ (1,224,268) $ 190,103
============= ============= ============
Basic and dilutive earnings per share $ .30 $ (.29) $ .05
Weighted average common shares outstanding 4,255,971 4,255,971 4,195,795
</TABLE>
SEE ACCOMPANYING NOTES.
F-28
<PAGE>
MJK HOLDINGS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996 $ -- $ 42,560 $ 1,226,981 $ 1,122,883 $ 2,392,424
Issuance of common stock -- 2,092 130,948 -- 133,040
Redemption of common stock -- (2,092) (60,663) (70,286) (133,041)
Net income -- -- -- 190,103 190,103
-------------- -------------- ------------- -------------- --------------
Balance at March 31, 1997 -- 42,560 1,297,266 1,242,700 2,582,526
Exchange of Miller, Johnson &
Kuehn, Inc. common stock
for MJK Holdings, Inc. -- 1,242,700 (1,242,700) --
common stock
Net loss -- -- -- (1,224,268) (1,224,268)
-------------- -------------- ------------- -------------- --------------
Balance at March 31, 1998 -- 42,560 2,539,966 (1,224,268) 1,358,258
Issuance of preferred stock 4,380,300 -- -- -- 4,380,300
Net income -- -- -- 1,272,586 1,272,586
-------------- -------------- ------------- -------------- --------------
Balance at March 31, 1999 $ 4,380,300 $ 42,560 $ 2,539,966 $ 48,318 $ 7,011,144
============== ============== ============= ============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-29
<PAGE>
MJK HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,272,586 $ (1,224,268) $ 190,103
Adjustments to reconcile net income (loss) to net cash
(used in)/provided by operating activities:
Depreciation and amortization 1,013,913 919,191 418,315
Changes in operating assets and liabilities:
Cash and securities segregated under
federal and other regulations 22,515,606 (60,772,242) (5,473,867)
Customer receivables and payables 11,199,025 35,621,774 7,019,666
Broker and dealer receivables and payables (25,043,494) (190, 464) (19,134,560)
Clearing organization receivables and payables (21,563,666) 236,274 28,653,274
Trading securities and securities sold but
not yet purchased (15,160,183) 9,724,080 4,909,592
Other assets and liabilities 763,238 5,103,662 (1,083,739)
--------------- --------------- ---------------
Net cash (used in)/provided by operating activities (25,002,975) (10,581,993) 15,498,784
INVESTING ACTIVITIES
Acquisition of certain assets and assumption of certain -- 15,400,448
liabilities of Private Brokers Clearing Corporation --
Acquisition of certain assets and assumption --
of certain liabilities of Juran & Moody, Inc. -- (9,629,020)
Increase in goodwill due to completion of --
acquisition of certain assets and assumption of
certain liabilities of Juran & Moody, Inc. (481,903) --
Net purchases of furniture, equipment and
leasehold improvements (645,141) (1,356,883) (906,585)
--------------- --------------- ---------------
Net cash (used in)/provided by investing activities (645,141) 13,561,662 (10,535,605)
FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings 21,900,000 (5,000,000) (4,900,000)
Issuance of notes payable -- 5,100,000 1,214,382
Payments on notes payable (714,407) (969,037) (200,824)
Issuance of preferred stock 4,380,800 -- --
Issuance of common stock -- -- 133,040
Redemption of common stock -- -- (133,041)
--------------- --------------- ---------------
Net cash provided by/(used in) financing activities 25,565,893 (869,037) (3,886,443)
--------------- --------------- ---------------
Net (decrease) increase in cash and cash equivalents (82,223) 2,100,632 1,076,736
Cash and cash equivalents at beginning of year 3,282,884 1,172,252 95,516
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 3,200,661 $ 3,282,884 $ 1,172,252
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest $ 11,297,207 $ 11,188,091 $ 7,458,652
=============== =============== ===============
Income taxes (refunds) $ (373,407) $ 38,800 $ 374,532
=============== =============== ===============
</TABLE>
SEE ACCOMPANYING NOTES.
F-30
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
MJK Holdings, Inc. (MJKH) is the holding company of Miller, Johnson, &
Kuehn, Incorporated (MJKI), MJKH's primary subsidiary, and two other
wholly-owned subsidiaries whose activities are not significant to MJKH's
financial information on a consolidated basis. MJKI is a securities
broker-dealer headquartered in Minneapolis, Minnesota with branch offices in
Saint Paul, Minnesota; Scottsdale, Arizona; LaJolla, California; Clearwater,
Florida; Chicago, Illinois; and Dallas and Houston, Texas. MJKI is a member
of the National Association of Securities Dealers, Inc. (NASD), the
Securities Investor Protection Corporation (SIPC) and the Chicago Stock
Exchange. MJKI's primary business involves a combination of retail, principal
and agency transactions along with corporate and public financing
originations. In addition, MJKI provides a broad range of securities
transaction processing services to other broker-dealers. MJKH and MJKI are
hereinafter collectively referred to as the "Company."
BASIS OF PRESENTATION
The consolidated financial statements as of and for the years ended
March 31, 1999 and 1998 include the accounts of the MJKH and its
subsidiaries. All subsidiaries are wholly owned, and all intercompany
balances and transactions have been eliminated in consolidation. The
consolidated financial statements as of and for the year-ended March 31, 1998
are presented as if the June 9, 1997 exchange of MJKH shares for all of the
outstanding shares of MJKI occurred on April 1, 1997. MJKH had no operations
from April 1, 1997 to June 9, 1997. MJKI accounts represent substantially all
of the consolidated financial statements as of and for the years ended March
31, 1999 and 1998.
The financial statements for the year ended March 31, 1997 represent
only the accounts of MJKI and are provided for comparative purposes. Certain
amounts in the 1997 and 1998 financial statements have been reclassified to
conform to the 1999 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.
REVENUE RECOGNITION AND SECURITIES TRANSACTIONS
Purchases and sales of securities are recorded on a settlement date
basis, which is generally the third business day following the transaction
date. The impact of unsettled transactions on trading securities owned,
trading securities sold but not yet purchased, and income, net of related
expenses, is not material.
VALUATION OF FINANCIAL INSTRUMENTS
Trading securities owned and trading securities sold but not yet
purchased are carried at fair value. The fair values of the financial
instruments are generally based on listed market prices. If listed market
prices are not available, fair value is based on other relevant factors,
including dealer price quotations.
F-31
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Furniture and equipment are
depreciated using an accelerated method over estimated useful lives of five
to seven years. Leasehold improvements are amortized over the shorter of the
economic useful life of the improvements or the life of the lease.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, including reverse
repurchase agreements, with a maturity of three months or less when purchased
to be cash equivalents.
Cash and cash equivalents of $73,130,503 and $95,646,109 were segregated
in special reserve bank accounts for the benefit of customers under Rule
15c3-3 of the Securities and Exchange Commission at March 31, 1999 and 1998,
respectively. The cash and cash equivalents segregated in special reserve
bank accounts included $8,730,200 and $4,000,000 of reverse repurchase
agreements at March 31, 1999 and 1998, respectively.
INCOME TAXES
Deferred income taxes are recorded to reflect the tax consequences of
differences between the tax and financial reporting bases of assets and
liabilities. Recorded amounts relate primarily to net operating loss and tax
credit carryforwards.
EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the reporting period. Dilutive earnings per
share take into account the dilutive effect, if any, of potential dilutive
securities outstanding during the period.
2. ACCOUNTING CHANGES
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, is effective for financial statements for periods beginning
after December 15, 1997. This Statement requires financial and descriptive
information about an entity's operating segments to be included in the annual
financial statements.
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, is effective for financial statements for periods beginning after
June 15, 1999. This Statement establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivative instruments as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The adoption of SFAS No. 133 is not expected to have a material impact on the
Company.
3. BUSINESS COMBINATIONS AND INVESTING ACTIVITIES
On March 25, 1999, the Company entered into an Agreement and Plan of
Reorganization with NM Holdings, Inc. The merger transaction will be
accounted for as a business combination utilizing the reverse acquisition
method with the Company being the accounting acquirer. As such, the merger
will be treated as an acquisition using the
F-32
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
purchase method of accounting with no change in the recorded amount of the
Company's assets and liabilities. The assets and liabilities of NM Holdings,
Inc. that are acquired as a result of the merger will be recorded at their
fair market values.
In December 1997, the Company entered into clearing agreements with 16
former correspondents of Private Brokers Clearing Corporation (PBCC). At the
same time, pursuant to an asset purchase agreement, the Company purchased
certain assets of PBCC and PBCC transferred approximately $15,400,000 of net
correspondents' deposits and correspondents' customer balances. In connection
with these transactions, the Company assumed no other liabilities of PBCC.
In January 1997, the Company acquired certain assets and assumed certain
liabilities of Juran and Moody, Inc. (a regional broker-dealer and NASD
member firm registered under state and federal securities laws) in exchange
for approximately $9,629,000 in cash. The excess cost over fair value of the
net assets acquired (goodwill) arising from this transaction is being
amortized on a straight line basis over a 15-year period.
4. BROKER, DEALER, AND CLEARING ORGANIZATION RECEIVABLES AND PAYABLES
Broker, dealer, and clearing organization receivables and payables at
March 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Receivable from brokers and dealers $18,333,276 $ 1,831,030
Receivable from clearing organization 733,580 802,934
Securities borrowed 51,283,450 4,352,200
----------- -----------
Total receivables $70,350,306 $ 6,986,164
=========== ===========
Payable to brokers and dealers $ 5,440,078 $ 2,871,258
Payable to clearing broker 9,975,000 31,608,020
Payable to introducing brokers 2,398,315 1,941,933
Securities loaned 35,550,200 185,400
----------- -----------
Total payables $53,363,593 $36,606,611
=========== ===========
</TABLE>
Broker, dealer, and clearing organization receivables and payables arise
from securities transactions executed for customers or the Company. The
receivables are generally collected within 30 days and are collateralized by
securities in physical possession, on deposit or receivable from customers or
other brokers and dealers.
Broker and dealer payables represent amounts due upon the receipt of
securities. Should the broker, dealer, or clearing organization fail to
deliver the securities to the Company, the Company may be required to
purchase identical securities on the open market. The market value of such
securities at March 31, 1999 and 1998 approximates the amounts owed.
Securities borrowed and securities loaned are stated in the statement of
financial condition at the amounts of collateral advanced and received in
connection with the transactions. The Company measures the fair value of the
securities borrowed and loaned against the cash collateral on a daily basis.
Additional collateral is obtained as necessary to ensure such transactions
are adequately collateralized.
F-33
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CUSTOMER RECEIVABLES, PAYABLES AND SECURITIES
Receivables from and payables to customers arise from cash and margin
transactions executed by the Company on behalf of its customers. Receivables
are generally collateralized by securities with market values in excess of
the amounts due. It is the policy of the Company to monitor the market value
of the collateral and request additional collateral when required. Such
collateral is not reflected in the accompanying financial statements.
The Company is required to maintain possession or control, as defined,
of all fully paid securities and excess margin securities of customers. To
the extent such control cannot be obtained from various counter parties, the
Company may have to purchase or sell securities at prevailing market rates to
obtain such possession or control.
The Company pays interest on customers' free credit balances based on
prevailing market rates.
6. REVERSE REPURCHASE AGREEMENTS
Securities purchased under agreements to resell (reverse repurchase
agreements) are recorded at the contract amount at which the securities will
be subsequently resold plus accrued interest. These financial instruments are
collateralized by U.S. government securities. It is the Company's policy to
take possession of securities purchased under agreements to resell.
The Company's agreements with third parties specify its rights to
request additional collateral if the fair value of the underlying security,
including accrued interest, decreases in comparison to the related receivable.
7. TRADING SECURITIES
Trading securities owned and trading securities sold but not yet
purchased at March 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Owned:
Corporate equities $ 6,318,760 $ 1,843,086
State and municipal obligations 2,952,975 1,301,263
U.S. Government obligations 5,989,367 342,475
Corporate obligations 4,712 --
------------ -----------
$ 15,265,814 $ 3,486,824
============ ===========
Sold but not yet purchased:
Corporate equities $ 40,236 $ 121,409
State and municipal obligations 147,996 454,344
U.S. Government obligations 246,495 3,617,652
Corporate obligations 377,485 --
------------ -----------
$ 812,212 $ 4,193,405
============ ===========
</TABLE>
The Company's trading securities sold but not yet purchased represent
obligations of the Company to deliver a specified security at the contracted
price and thereby create a liability to purchase the security in the market
at
F-34
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
prevailing prices. Accordingly, these transactions result in
off-balance-sheet market risk as the Company's ultimate obligation to satisfy
the sale of securities sold but not yet purchased may exceed the amount
recorded in the statements of financial condition at March 31, 1999 and 1998.
8. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements at March 31 consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Furniture and equipment $4,216,512 $3,669,044
Leasehold improvements 631,677 534,004
---------- ----------
4,848,189 4,203,048
Less accumulated depreciation and amortization 2,647,277 1,741,612
---------- ----------
$2,200,912 $2,461,436
========== ==========
</TABLE>
9. FINANCING ARRANGEMENTS
The Company had discretionary lines of credit totaling $60,000,000 at
March 31, 1999 and 1998 which are secured by firm-owned securities, customer
securities collateralizing liabilities subordinated to claims of general
creditors and unpaid customer securities. These lines are payable on demand.
Borrowings on the lines bear interest at various rates over the bank's cost
of funds; such rates generally vary daily. The weighted average interest
rates on the lines were 6.48% and 7.55% as of March 31, 1999 and 1998,
respectively. As of March 31, 1999 and 1998, there were $26,100,000 and
$48,000,000 available under these lines of credit, respectively. The March
31, 1999 outstanding balances totaling $33,900,000 were collateralized by
approximately $10,800,000 of firm-owned securities, $9,000,000 of customer
securities collateralizing liabilities subordinated to claims of general
creditors and $14,100,000 of unpaid customer securities. The March 31, 1998
outstanding balances totaling $12,000,000 were collateralized by
approximately $3,500,000 of firm-owned securities and $10,475,000 of customer
securities collateralizing liabilities subordinated to claims of general
creditors. The lines of credit require the Company to comply with certain
financial debt covenants. A compensating balance arrangement totaling
$575,000 exists with respect to one of the Company's discretionary lines of
credit.
At March 31, 1999, the Company had a note payable of $3,600,000 which
was secured by the Company's ownership interest in MJKI. The note bears an
interest rate of the bank's reference rate unless the Company's investment
account balance at the bank is less than the principal balance of the note.
If the Company's investment account at the bank is less than the principal
balance of the note, the note bears an interest rate of the bank's reference
rate plus one-half of one percent. The interest rate on the note at March 31,
1999 was 7.75%. The note matures in installments through July 31, 1999.
The Company also has various notes payable at March 31, 1999 and 1998 of
$938,114 and $1,252,521, respectively, which were secured by all furniture
and equipment. Borrowings bear interest at either a fixed rate or various
rates over the bank's cost of funds; such rates generally vary daily. The
interest rates ranged from 7.00% to 8.75% as of March 31, 1999 and 7.00% to
9.50% as of March 31, 1998. The notes mature at various dates through October
10, 2002.
F-35
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's notes payable at March 31, 1999 mature as follows:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
2000 $ 919,773
2001 3,226,959
2002 243,366
2003 148,016
------------
$ 4,538,114
============
</TABLE>
10. LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to claims of general creditors at March 31,
1999 represent 36 secured demand notes receivable which are collateralized by
securities with market values in excess of their respective face amounts. The
notes bear interest at rates from 5.00% to 6.25% and mature as follows:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
2000 $2,850,000
2001 6,075,000
2002 750,000
----------
$9,675,000
==========
</TABLE>
11. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has authorization to issue up to 50,000,000 shares of common
stock. On June 9, 1997, MJKH exchanged 4,255,971 shares of common stock for
all of the issued and outstanding shares of common stock of MJKI. As a
result, the Company became the sole shareholder of MJKI.
During fiscal 1997, MJKI redeemed 209,182 shares of common stock from a
shareholder and later reissued these shares to the remaining common stock
shareholders on a pro rata basis.
PREFERRED STOCK
The Company has authorization to issue up to 5,000,000 shares of
preferred stock. In March 1999, the Company issued 558,000 shares of Series I
Non-Voting Convertible Preferred Stock at $7.85 per share. The Series I
Non-Voting Convertible Preferred Stock has no dividend rights and is
convertible to common stock if the Company consolidates or merges with
another company. The Company's Board of Directors may issue one or more
series of preferred stock and fix the voting rights, liquidation preferences,
dividend rights, repurchase rights, conversion rights, and redemption rights
and terms of the preferred stock.
12. NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company is subject to the Securities and Exchange Commission's
Uniform Net Capital Rule (Rule 15c3-1) which requires the maintenance of
minimum net capital. The Company has elected to use the alternative method
F-36
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
permitted by Rule 15c3-1 which requires that the Company maintain minimum net
capital equal to the greater of $250,000 or 2% of aggregate debit balances
arising from customer transactions, as defined. At March 31, 1999, the
Company's net capital of $11,201,974 was 7% of aggregate debit balances and
$7,996,849 in excess of required net capital. The net capital rule also
provides that equity capital may not be withdrawn or cash dividends paid if
resulting net capital would be less than 5% of aggregate debits.
Under the provisions of financing arrangements entered into during
fiscal 1998, the Company may not declare or pay dividends on any of its
outstanding capital stock.
13. EMPLOYEE BENEFIT PLANS
The Company has a qualified profit-sharing plan and a 401(k) plan, which
cover all employees with six months of continuous employment who are at least
21 years old. Employees may contribute up to 10% of their compensation to the
401(k) plan. Employer contributions are made to the profit-sharing plan at
the discretion of the Company's Board of Directors. The Company contributed
$100,000 to the profit-sharing plan in fiscal 1999. There were no
contributions to the profit-sharing plan in fiscal years 1998 or 1997.
14. COMMITMENTS AND CONTINGENCIES
The Company is obligated for the rental of office space, automobiles and
equipment under noncancellable operating leases which expire at various dates
from 1999 to 2005. The office lease includes escalation clauses for increases
in taxes and operating expenses of the leased premises. Minimum annual rental
payments under noncancellable leases in effect at March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
2000 $1,815,000
2001 1,752,000
2002 1,690,000
2003 1,503,000
2004 378,000
Thereafter 307,000
----------
Total minimum future rental payments $7,445,000
==========
</TABLE>
Rent expense charged to operations under operating leases, including
taxes and operating expenses of the leased premises, was approximately
$1,648,000, $1,583,000 and $983,000 for the years ended March 31, 1999, 1998
and 1997, respectively.
The Company is involved in various litigation and arbitration matters
arising in the normal course of business. In the opinion of management, the
ultimate resolution of such matters will not have a material adverse effect
on the financial position of the Company. During 1998, the Company expended
approximately $150,000 to satisfy arbitration decisions and other amounts in
defense of certain matters of litigation. No amounts were expended in 1999 or
1997. The Company aggressively defends these matters to reduce the expected
amount of related legal fees in future periods.
F-37
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS
Liabilities subordinated to claims of general creditors included two
secured demand notes as of March 31, 1999 and 1998 entered into by
shareholders of the Company. The notes totaled $600,000 and mature at various
dates through 2001 and 1999 for 1999 and 1998, respectively. The notes are
considered equity for the purpose of the net capital computation debt to
debt/equity total computed in accordance with Rule 15c3-1(d).
The Company also had $1,484,119 and $1,438,544 of notes receivable from
employees which are included in other assets as of March 31, 1999 and 1998,
respectively. The amounts consist of 33 and 24 notes which bear various
interest rates and mature at various dates through 2003 at March 31, 1999 and
1998, respectively.
16. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets as of March 31
are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Amortization of leasehold improvements $ 70,133 $ 41,756
Amortization of notes receivable 41,244 30,600
Deferred rent 17,114 17,114
Accrued bonuses 11,400 --
Other -- 3,808
----------- -----------
139,891 93,278
Alternative minimum tax credit carry forwards -- 12,499
Net operating loss carry forwards 172,812 481,293
----------- -----------
172,812 493,792
----------- -----------
Total deferred tax assets 312,703 587,070
Valuation allowance (29,838) (125,154)
----------- -----------
Net deferred tax assets $ 282,865 $ 461,916
=========== ===========
</TABLE>
The income tax expense (benefit) for the years ended March 31 included
the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Federal $ 705,995 $ (344,710) $ 5,613
State 99,954 5,000 25,513
Deferred 179,051 (259,290) 2,574
--------- ----------- --------
$ 985,000 $ (599,000) $ 33,700
========= =========== ========
</TABLE>
F-38
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Reconciliations of the provisions for income taxes and the amounts that
would be computed using statutory federal income tax rates for the years
ended March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Tax at statutory rate $ 769,733 $ (620,359) $ 76,093
Tax-exempt interest, net of related expenses 22,794 (30,828) (64,211)
State taxes, net of federal tax benefit 128,683 (63,988) 16,839
Non-deductible life insurance 52,872 40,623 28,539
Non-deductible meals and entertainment 29,685 31,312 21,781
Change in valuation allowance (95,316) -- (47,658)
Other 76,549 44,240 2,317
---------- ---------- ---------
$ 985,000 $ (599,000) $ 33,700
========== ========== =========
</TABLE>
At March 31, 1999, the Company has a net operating loss (NOL)
carryforward of approximately $432,000 for income tax purposes that expires
in 2004. The utilization of a portion of the NOL carryforward is restricted
under the provisions of Section 382 of the Internal Revenue Code.
17. EARNINGS PER SHARE
The components of earnings per share at March 31 were:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income $ 1,272,586 $ (1,224,268) $ 190,103
Weighted average shares outstanding 4,255,971 4,255,971 4,195,795
------------ ------------ ------------
Basic earnings per share $ .30 $ (.29) $ .05
============ ============ ============
Net income $ 1,272,586 $ (1,224,268) $ 190,103
Weighted average shares outstanding 4,255,971 4,255,971 4,195,795
Effect of dilutive securities: Convertible preferred stock 1,529 -- --
------------ ------------ ------------
4,257,500 4,255,971 4,195,795
------------ ------------ ------------
Diluted earnings per share $ .30 $ (.29) $ .05
============ ============ ============
</TABLE>
18. SEGMENTS
The Company's reportable segments are as follows: clearing services,
retail sales, investment banking, and other. The clearing services segment
consists of clearing services provided on a fully-disclosed basis to
approximately 30 other broker-dealers. The retail segment consists of various
retail branch locations which conduct security transactions for individual
and institutional investors. The investment banking segment consists of the
management, co-management, and participation by the Company in the
underwriting of corporate equity and debt securities. Other consists of
general corporate, administrative support functions, and net gains or losses
on the investment account.
Segment results are derived from the Company's branch location
profitability reporting system. Intersegment transactions are measured on the
same basis as if the transactions occurred with external customers. In
reviewing the segment operating results, the Company's operating decision
makers do not distinguish between intersegment
F-39
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
transactions and external customer transactions. Intersegment revenue is
eliminated to reconcile total segment revenue to consolidated revenue. Income
tax expense or benefit is not allocated to the Company's operating segments.
The Company does not provide balance sheet data for segment reporting as this
data is not measured for its operating segments.
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1999 1998 1997
------------------ ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Clearing Services $ 21,692 $ 17,141 $ 9,722
Retail Sales 30,672 28,009 19,787
Investment Banking 4,338 2,174 2,340
Other 1,301 941 865
------------------ ---------------- --------------
$ 58,003 $ 48,265 $ 32,714
================== ================ ==============
Pretax income (loss):
Clearing Services $ 2,051 $ 1,080 $ 340
Retail Sales (272) (3,065) (375)
Investment Banking 485 162 233
Other (6) -- 26
------------------ ---------------- --------------
$ 2,258 $ (1,823) $ 224
================== ================ ==============
</TABLE>
Reconciliation of segment revenue to consolidated revenue:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1999 1998 1997
------------------ ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Segment revenue $ 58,003 $ 48,265 $ 32,714
Intersegment eliminations (2,413) (1,172) (107)
------------------ ---------------- --------------
Consolidated revenue $ 55,590 $ 47,093 $ 32,607
================== ================ ==============
</TABLE>
F-40
<PAGE>
MJK HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited data reflecting the Company's results of operations
for each of the last eight quarters are shown in the following table. The
information for each of these quarters includes all normal and recurring
adjustments and accruals which the Company considers necessary for a fair
presentation. These operating results, however, are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
<S> <C> <C> <C> <C>
Fiscal Year 1999
Revenues $ 13,662,387 $ 13,832,950 $ 13,989,816 $ 14,105,170
Net income (loss) 392,315 442,310 499,768 (61,807)
Basic income (loss) per share $ .09 $ .10 $ .12 $ (.01)
Fiscal Year 1998
Revenues $ 10,776,229 $ 10,915,452 $ 11,664,330 $ 13,736,576
Net loss (41,512) (95,383) (525,719) (561,654)
Basic loss per share $ (.01) $ (.02) $ (.13) $ (.13)
</TABLE>
20. YEAR 2000 (UNAUDITED)
Similar to other financial and business organizations and individuals
around the world, the Company could be affected if the computer systems used
by it and its service providers do not properly process and calculate
date-related information relating to the year 2000. The Company is taking
steps that it believes are reasonably designed to address year 2000
compliance with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by each of its
major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any impact on the Company.
F-41
<PAGE>
EXHIBIT A
AMENDMENT NO. 1 TO AGREEMENT AND
PLAN OF REORGANIZATION AND CONSENT
THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF REORGANIZATION AND CONSENT
(the "Amendment") is entered into as of May 7, 1999 by MJK Holdings, Inc.
("MJK"), NM Holdings, Inc. ("NM"), and NM Merger Co. ("NM Merger").
WHEREAS, MJK, NM and NM Merger entered into an Agreement and Plan of
Reorganization dated March 25, 1999 ("Agreement"); and
WHEREAS, MJK sold more shares of Series I Preferred Stock than
originally anticipated and may issue options to purchase shares of common
stock and the undersigned desire to amend the exchange ratio contained in
Section 2.2(a) of the Agreement (the "Exchange Ratio") to account for the
additional sales of preferred stock by MJK, to provide for certain
adjustments to the Exchange Ratio in certain circumstances, and to
memorialize NM's and NM Merger's consent to the granting of certain options
by MJK;
NOW, THEREFORE, it is hereby agreed by and between the parties as follows:
1. The undersigned agree and acknowledge that Section 2.2(a) of the
Agreement shall be amended to stated that the Exchange Ratio shall be 3.72382.
2. Sections 6.14, 7.1(h) and the first sentence of Section 7.3(e) of
the agreement are hereby deleted and of no further legal effect. Any other
references to the term "Registration Rights Agreement" set forth in the
Agreement shall be deleted to be of no legal effect.
3. The undersigned acknowledge, agree and consent to MJK's grant of
options to purchase 6,723 shares of its common stock which shall upon
completion of the transactions contemplated by the Agreement convert into an
option to purchase 25,000 shares of NM common stock.
3. The undersigned acknowledge, agree and consent to the granting of
up to 21,000 additional options to purchase shares of MJK common stock;
provided, however, that granting of additional options by MJK shall require a
downward adjustment of the Exchange Ratio to account for the additional
shares that could be issued upon exercise of said additional options, and
that such additional options, upon the consummation of the merger (as defined
in the Agreement) shall not, in any manner, dilute the aggregate ownership
interest of NM's current shareholders in NM.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
MJK HOLDINGS, INC. NM HOLDINGS, INC.
By /s/ David B. Johnson By /s/ George E. Kline
---------------------------------- -------------------------------------
---------------------------------- -------------------------------------
Senior Vice President President and Chief Executive Officer
NM MERGER CO.
By /s/ George E. Kline
-------------------------------------
-------------------------------------
President and Chief Executive Officer
A-1
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF MARCH 25, 1999
BY AND BETWEEN
MJK HOLDINGS, INC.,
NM HOLDINGS, INC.
AND
NM MERGER CO.
A-2
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION dated March 25, 1999, by and
between MJK HOLDINGS, INC., a Minnesota corporation ("MJK"), NM HOLDINGS,
INC., a Minnesota corporation ("NM"), and NM MERGER CO., a Minnesota
corporation and a wholly-owned subsidiary of NM ("Merger Sub").
WITNESSETH:
WHEREAS, the Boards of Directors of MJK and NM have determined that it
is in the best interests of MJK and NM and their respective shareholders to
consummate the merger (the "Merger") of Merger Sub, a newly-formed subsidiary
of NM, with and into MJK with MJK as the surviving corporation;
WHEREAS, MJK and NM desire that the Merger be made on the terms and
subject to the conditions set forth in this Agreement and qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended; and
WHEREAS, as a condition to the Merger, MJK requires that NM amend and
restate its Second Restated Articles of Incorporation, as amended, to change
the name of NM and to authorize additional shares of Common Stock.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS AND PRELIMINARY TRANSACTIONS
1.1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and
plural forms of the terms defined):
AFFILIATE: as defined in Regulation 12b-2 promulgated under the
Exchange Act, as such Regulation is in effect on the date hereof.
ARTICLES OF MERGER: the Articles of Merger in substantially the form of
EXHIBIT A hereto.
CODE: the Internal Revenue Code of 1986, as amended, or any successor
legislation.
EFFECTIVE DATE: as defined in Section 2.1(e).
EFFECTIVE TIME: as defined in Section 2.1(e).
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended.
A-3
<PAGE>
EXCHANGE RATIO: as defined in Section 2.2(a).
GAAP: generally accepted accounting principles.
IRS: the Internal Revenue Service.
LIABILITIES: any and all debts, liabilities, accounts payable, Taxes,
claims and other obligations, absolute or contingent, mature or not mature,
liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever
arising (unless otherwise specified in this Agreement), including all costs
and expenses relating thereto, and including, without limitation, those
debts, liabilities and obligations arising under any law, rule, regulation,
or any actual or threatened action, suit, proceeding or investigation by or
before any court, any governmental or other regulatory or administrative
agency or commission or any arbitration tribunal, any order or consent
decrees of any governmental entity or any award of any arbitrator of any
kind, and those arising under any contract, commitment or undertaking.
MATERIAL ADVERSE EFFECT: with respect to an entity means any condition,
event, change or occurrence, individually or collectively, that has had or
may reasonably be expected to have a material adverse effect on the business,
operations, results of operations or financial condition of such entity on a
consolidated basis.
MBCA: Minnesota Business Corporation Act, as amended.
MERGER: as defined in the preambles of this Agreement.
MJK SUBSIDIARY: as defined in Section 3.5.
NEW ARTICLES: the third amended and restated articles of incorporation
of NM in substantially the form of EXHIBIT B hereto which will be effective
on or before the Effective Date.
NM 10-K REPORTS: as defined in Section 4.4.
NM 10-Q REPORTS: as defined in Section 4.4.
NM BOARD: the Board of Directors of NM immediately prior to the
Effective Date.
NM COMMON STOCK: the Common Stock, par value $.04 per share, of NM,
prior to the Effective Date.
PROXY STATEMENT: as defined in Section 6.4.
REGISTRATION RIGHTS AGREEMENT: means the agreement between the
Surviving Corporation and certain shareholders of MJK attached as EXHIBIT C
hereto.
REQUISITE MJK SHAREHOLDER VOTE: as defined in Section 3.2.
REQUISITE NM SHAREHOLDER VOTE: as defined in Section 4.2.
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SEC: the Securities and Exchange Commission.
SERIES I CONVERTIBLE PREFERRED STOCK: Series I preferred stock of MJK
Holdings, Inc. par value $7.85 per share.
SECURITIES ACT: the Securities Act of 1933, as amended.
SUBSIDIARY: with respect to any entity shall mean each corporation in
which such entity owns directly or indirectly fifty percent (50%) or more of
the voting securities of such corporation and shall, unless otherwise
indicated, be deemed to refer to both direct and indirect subsidiaries of
such entity.
SURVIVING CORPORATION: as defined in Article 2.
SURVIVING CORPORATION COMMON STOCK: the common stock, par value $.01
per share, of the Surviving Corporation.
TAX OR TAXES: any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, property or windfall profits taxes, environmental taxes, customs
duties, capital stock, franchise, employees' income withholding, foreign or
domestic withholding, social security, unemployment, disability, workers'
compensation, employment-related insurance, real property, personal property,
sales, use, transfer, value added, alternative or add-on minimum or other
governmental tax, fee, assessment or charge of any kind whatsoever including
any interest, penalties or additions to any Tax or additional amounts in
respect of the foregoing.
ARTICLE 2
MERGER
Subject to the satisfaction or waiver of the conditions set forth in
Article 7, at the Effective Time, (i) Merger Sub will merge with and into
MJK, (ii) MJK will become a wholly-owned subsidiary of NM, (iii) NM will file
with the Minnesota Secretary of State the New Articles; and (iv) NM will
change its name to a name acceptable to MJK. MJK, as a wholly-owned
subsidiary of NM after giving effect to the Merger, shall be defined herein
as the "Surviving Corporation." The Merger will be effected pursuant to the
Articles of Merger and pursuant to the provisions of, and with the effect
provided in Section 302A.641 of the MBCA.
2.1. EFFECT OF MERGER.
(a) From and after the Effective Time and until further amended in
accordance with law, (i) the Articles of Incorporation of MJK as in effect
immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation, and (ii) the Bylaws of MJK as in
effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation. From and after the Effective Time, the directors and
officers of the Surviving Corporation shall be the persons who were directors
of MJK immediately prior to the Effective Time and the officers of MJK
immediately prior to the Effective Time. These directors and officers of the
Surviving Corporation
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shall hold office for the term specified in, and subject to the provisions
contained in, the Articles of Incorporation and Bylaws of the Surviving
Corporation and applicable law. If, at or after the Effective Time, a
vacancy shall exist on the Board of Directors or in any of the offices of the
Surviving Corporation, such vacancy shall be filled in the manner provided in
the Articles of Incorporation and Bylaws of the Surviving Corporation.
The initial Board of Directors of NM immediately after the Effective
Time will consist of seven (7) members of which six (6) directors will be
designated by MJK's Board of Directors immediately prior to the Effective
Time and one (1) will be designated by NM's Board of Directors immediately
prior to the Effective Time. Immediately after the Effective Time, the Board
of Directors of NM will elect the officers of MJK immediately prior to the
Effective Time as the officers of NM. The initial directors and officers of
NM shall hold office for the term specified in, and subject to the provisions
contained in, the New Articles and Bylaws of NM and applicable law. If, at
or after the Effective Time, a vacancy shall exist on the Board of Directors
or in any of the offices of NM, such vacancy shall be filled in the manner
provided in the New Articles and Bylaws of NM.
(b) At the Effective Time, the Surviving Corporation shall thereupon
and thereafter be responsible and liable for all the liabilities, debts,
duties, restrictions, disabilities and obligations of each of MJK and the
Merger Sub, all without further action.
(c) At the Effective Time, the Surviving Corporation shall thereupon
and thereafter possess all the rights, privileges, immunities and franchises,
of a public as well as of a private nature, of each of MJK and Merger Sub;
all property, real, personal and mixed, and all debts due on whatever
account, and all and every other interest, of or belonging to or due to each
of MJK and Merger Sub, shall be taken and deemed to be transferred to and
vested in the Surviving Corporation without further act or deed; and the
title to any real estate or any interest therein, vested in MJK and Merger
Sub shall not revert or be in any way impaired by reason of the Merger.
(d) NM, Merger Sub and MJK, respectively, shall each use its best
efforts to take all such action as may be necessary or appropriate to
effectuate the Merger under the MBCA at the Effective Time. If, at any time
after the Effective Time, any further action is necessary or desirable to
carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all properties, rights,
privileges, immunities, powers and franchises of either MJK or Merger Sub,
the officers of the Surviving Corporation are fully authorized in the name of
MJK and Merger Sub or otherwise to take, and shall take, all such lawful and
necessary action.
(e) Subject to the provisions of Articles 7 and 8 hereof, the closing
(the "Closing") of the transactions contemplated hereby shall take place at
such location, on such date (the "Closing Date") and at such time as MJK and
NM mutually agree at the earliest practicable time after the satisfaction or
waiver of the conditions in Article 7, but in no event later than ten (10)
business days after all such conditions have been satisfied or waived, or on
such other date as may be mutually agreed by the parties hereto. On the
Closing Date, to effect the Merger, the parties hereto will cause the
Articles of Merger to be filed with the Minnesota Secretary of State in
accordance with the MBCA. Also on the Effective Date, the parties hereto
will effect the other transactions contemplated hereby, including, if not
previously filed, the filing of the New Articles with the Minnesota Secretary
of State. The Merger, shall be effective when the Articles of Merger are
filed with the Minnesota
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Secretary of State (the "Effective Time"). As used herein, the term
"Effective Date" shall mean the date on which the Articles of Merger are
filed with the Minnesota Secretary of State.
2.2. EFFECT ON MJK CAPITAL STOCK AND MERGER SUB CAPITAL STOCK.
To effectuate the Merger, and subject to the terms and conditions of
this Agreement, at the Effective Time:
(a) each issued and outstanding share of MJK Common Stock and
Convertible Preferred Stock immediately prior to the Effective Time (other
than shares to be extinguished pursuant to Section 2.2(c) below and
Dissenting Shares as defined in Section 2.5 below) shall be converted into
and exchangeable for 3.76378 share(s) (the "Exchange Ratio") of NM Common
Stock (after giving effect to the adoption of the New Articles on the
Effective Date as provided in Section 2.1 (a) above) and NM shall issue to
holders of MJK Common Stock and Series I Convertible Preferred Stock shares
of NM Common Stock based on the Exchange Ratio in exchange for such
outstanding shares of MJK Common Stock and Series I Convertible Preferred
Stock;
(b) the Stock Option Plan of NM and all outstanding options to
purchase shares of NM Common Stock issued pursuant to the NM Stock Option
Plan shall be continued by NM;
(c) each share of MJK Common Stock and Series I Convertible Preferred
Stock issued and outstanding immediately prior to the Effective Time and
owned by MJK, Merger Sub or NM shall be cancelled and extinguished without
any conversion thereof and no payment shall be made with respect thereto; and
(d) all issued and outstanding shares of common stock, $.01 par
value, of the Merger Sub held by NM immediately prior to the Effective Time
shall be converted into one validly issued, fully paid and nonassessable
share of the Surviving Corporation Common Stock.
2.3. RIGHTS OF HOLDERS OF MJK CAPITAL STOCK.
(a) On and after the Effective Date and until surrendered for
exchange, each outstanding stock certificate which immediately prior to the
Effective Date represented shares of MJK Common Stock and Series I
Convertible Preferred Stock (except Dissenting Shares and shares extinguished
pursuant to Section 2.2(a)) shall be deemed for all purposes, to evidence
ownership of and to represent the number of whole shares of NM Common Stock
into which such shares of MJK Common Stock and Series I Convertible Preferred
Stock shall have been converted pursuant to Section 2.2(a) above, and the
record holder of such outstanding certificate shall, after the Effective
Date, be entitled to vote the shares of NM Common Stock into which such
shares of MJK Common Stock and Series I Convertible Preferred Stock shall
have been converted on any matters on which the holders of record of the NM
Common Stock, as of any date subsequent to the Effective Date, shall be
entitled to vote. In any matters relating to such certificates of MJK Common
Stock and Series I Convertible Preferred Stock, NM may rely conclusively upon
the record of shareholders maintained by MJK containing the names and
addresses of the holders of record of MJK Common Stock and Series I
Convertible Preferred Stock on the Effective Date.
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(b) On and after the Effective Date, NM shall reserve a sufficient
number of authorized but unissued shares of NM Common Stock for issuance in
connection with the conversion of MJK Common Stock and Series I Convertible
Preferred Stock into NM Common Stock.
(c) The Exchange Ratio set forth in Section 2.2(a) shall be adjusted
equitably to reflect fully the effect of any stock split, reverse split,
stock dividend (including any dividend or distribution of securities
convertible into MJK Common Stock or NM Common Stock), reorganization or
other like change occurring after the date of this Agreement and prior to the
Effective Time.
2.4. PROCEDURE FOR EXCHANGE OF MJK COMMON STOCK AND SERIES I
CONVERTIBLE PREFERRED STOCK.
(a) After the Effective Date, holders of certificates theretofore
evidencing outstanding shares of MJK Common Stock and Series I Convertible
Preferred Stock (except Dissenting Shares and shares extinguished pursuant to
Section 2.2(c)), upon surrender of such certificates to the Secretary of NM,
shall be entitled to receive certificates representing the number of whole
shares of NM Common Stock into which shares of MJK Common Stock and Series I
Convertible Preferred Stock theretofore represented by the certificates so
surrendered shall have been converted as provided in Section 2.2(a) hereof.
NM shall not be obligated to deliver the consideration to which any former
holder of shares of MJK Common Stock and Series I Convertible Preferred Stock
is entitled as a result of the Merger until such holder surrenders the
certificate or certificates representing such shares. Upon surrender, each
certificate evidencing MJK Common Stock and Series I Convertible Preferred
Stock shall be canceled. If there is a transfer of MJK Common Stock
ownership which is not registered in the transfer records of MJK, a
certificate representing the proper number of shares of NM Common Stock may
be issued to a person other than the person in whose name the certificate so
surrendered is registered if: (i) upon presentation to NM, such certificate
shall be properly endorsed or otherwise be in proper form for transfer, (ii)
the person requesting such payment shall pay any transfer or other taxes
required by reason of the issuance of shares of NM Common Stock to a person
other than the registered holder of such certificate or establish to the
reasonable satisfaction of NM that such tax has been paid or is not
applicable, and (iii) the issuance of such NM Common Stock shall not, in the
sole discretion of NM, violate the requirements of the Regulation D "safe
harbor" of the Securities Act with respect to the private placement of NM
Common Stock that will result from the Merger.
(b) No fractional shares of NM Common Stock shall be issued in
exchange for shares of MJK Common Stock and Series I Convertible Preferred
Stock. In lieu thereof, NM shall pay to the owner thereof cash equal to the
pro rata market price of a share of NM Common Stock based on the closing
sales price of the NM Common Stock on the Effective Date as reported on the
NASDAQ Small Cap Market as published by THE WALL STREET JOURNAL.
(c) All shares of NM Common Stock issued upon the surrender for
exchange of MJK Common Stock and Series I Convertible Preferred Stock in
accordance with the above terms and conditions shall be deemed to have been
issued and paid in full satisfaction of all rights pertaining to such shares
of MJK Common Stock and Series I Convertible Preferred Stock.
(d) In the event any certificate for MJK Common Stock or Series I
Convertible Preferred Stock shall have been lost, stolen or destroyed, NM
shall issue and pay in exchange for such lost,
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stolen or destroyed certificate, upon the making of an affidavit of that fact
by the holder thereof, such shares of the NM Common Stock and cash for
fractional shares, if any, as may be required pursuant to this Agreement;
provided, however, that NM, in its discretion and as a condition precedent to
the issuance and payment thereof, may require the owner of such lost, stolen
or destroyed certificate to deliver a bond in such sum as it may direct as
indemnity against any claim that may be made against NM or any other party
with respect to the certificate alleged to have been lost, stolen or
destroyed.
2.5. DISSENTING SHARES.
(a) Notwithstanding anything in this Agreement to the contrary, if
Section 302A.471 of the MBCA shall be applicable to the Merger, shares of MJK
Common Stock and Series I Convertible Preferred Stock that are issued and
outstanding immediately prior to the Effective Time and which are held by
shareholders who have not voted such shares in favor of the Merger, who shall
have delivered, prior to any vote on the Merger, a written demand for the
fair value of such shares in the manner provided in Section 302A.473 of the
MBCA and who, as of the Effective Time, shall not have effectively withdrawn
or lost such right to dissenters' rights ("Dissenting Shares") shall not be
converted into or represent a right to receive shares of NM Common Stock
pursuant to Section 2.2(a) above, but the holders thereof shall be entitled
only to such rights as are granted by Section 302A.473 of the MBCA. Each
holder of Dissenting Shares who becomes entitled to payment for such shares
pursuant to Sections 302A.471 and 302A.473 of the MBCA shall receive payment
therefor from the Surviving Corporation in accordance with the MBCA;
provided, however, that if any such holder of Dissenting Shares shall have
effectively withdrawn such holder's demand for appraisal of such shares or
lost such holder's right to appraisal and payment of such shares under
Section 302A.473 of the MBCA, such holder or holders (as the case may be)
shall forfeit the right to appraisal of such shares and each such share shall
thereupon be deemed to have been canceled, extinguished and converted, as of
the Effective Time, into and represent the right to receive payment from NM
of shares of NM Common Stock as provided in Section 2.2(a) above.
(b) If the holder of any shares of MJK Common Stock or Series I
Convertible Preferred Stock shall become entitled to receive payment for such
shares pursuant to Sections 302A.471 and 302A.473 of the MBCA and this
Section 2.5, such payment shall be made by the Surviving Corporation in
accordance with this Section 2.5.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF MJK
MJK hereby represents and warrants to NM as follows:
3.1. ORGANIZATION AND QUALIFICATION.
MJK is a corporation duly organized, validly existing and in good
standing under the laws of the State of Minnesota, and has the requisite
corporate power to carry on its business as now conducted. Each of the MJK
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation. The copies of the
Articles and Bylaws of MJK which have been made available to NM prior to the
date of this Agreement are correct and complete copies of such documents as
in effect as of the date of this Agreement. As used in this
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Agreement, the term "Articles" with respect to any corporation shall mean
those instruments that at that time constitute its articles of incorporation
as filed or recorded under the general corporation or other applicable law of
the jurisdiction of its incorporation or organization, including the articles
or certificate of incorporation and any and all amendments thereto. Each of
MJK and the MJK Subsidiaries is licensed or qualified to do business in every
jurisdiction in which the nature of its business or its ownership of property
requires it to be licensed or qualified, except where the failure to be so
licensed or qualified would not have a Material Adverse Effect on MJK or any
MJK Subsidiary. Miller, Johnson & Kuehn, Incorporated is duly licensed as a
broker dealer under the Exchange Act and all applicable state securities
laws, and is a member in good standing of the National Association of
Securities Dealers, Inc.
3.2. AUTHORITY RELATIVE TO THIS AGREEMENT; NON-CONTRAVENTION.
MJK has the requisite corporate power and authority to enter into this
Agreement and the Articles of Merger and to carry out its obligations
hereunder and thereunder. The execution and delivery of this Agreement and
the Articles of Merger by MJK and the consummation by MJK of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of MJK and, except for approval of this Agreement and the Merger by
the requisite vote of MJK's shareholders, no other corporate proceedings on
the part of MJK are necessary to authorize the execution and delivery of this
Agreement, the Articles of Merger and the consummation of the transactions
contemplated hereby and thereby. This Agreement has been duly executed and
delivered by MJK and, assuming it is a valid and binding obligation of NM,
constitutes a valid and binding obligation of MJK enforceable in accordance
with its terms except as enforcement may be limited by general principles of
equity whether applied in a court of law or a court of equity and by
bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally. The Articles of Merger, when executed and delivered by
MJK, will constitute the valid and binding obligation of MJK, enforceable in
accordance with its terms. Except as set forth in Schedule 3.2, neither MJK
nor any of the MJK Subsidiaries is subject to, or obligated under, any
provision of (a) its Articles or Bylaws, (b) any agreement, arrangement or
understanding, (c) any license, franchise or permit or (d) subject to
obtaining the approvals referred to in the next sentence, any law,
regulation, order, judgment or decree, which would conflict with, be breached
or violated, or in respect of which a right of termination or acceleration or
any security interest, charge or encumbrance on any of its assets would be
created, by the execution, delivery or performance of this Agreement, the
Articles of Merger, or the consummation of the transactions contemplated
hereby or thereby, other than any such conflicts, breaches, violations,
rights of termination or acceleration or security interests, charges or
encumbrances which, in the aggregate, could not reasonably be expected to
result in a Material Adverse Effect on MJK or any MJK Subsidiary. Except for
(a) the approval of the Merger, the Articles of Merger and this Agreement by
a requisite vote of the shareholders of MJK (the "Requisite MJK Shareholder
Vote"), (b) approvals under applicable Blue Sky laws, (c) the filing of the
Articles of Merger with the Minnesota Secretary of State in accordance with
the MBCA, and (d) such filings, authorizations or approvals as may be set
forth in Schedule 3.2, no authorization, consent or approval of, or filing
with, any public body, court or authority is necessary on the part of MJK or
any of the MJK Subsidiaries for the consummation by MJK of the transactions
contemplated by this Agreement, except for such authorizations, consents,
approvals and filings as to which the failure to obtain or make the same will
not, in the aggregate, have a Material Adverse Effect on MJK or any MJK
Subsidiary or adversely affect the consummation of the transactions
contemplated hereby.
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3.3. CAPITALIZATION.
The authorized, issued and outstanding shares of capital stock of MJK as
of the date hereof is correctly set forth on Schedule 3.3. The issued and
outstanding shares of capital stock of MJK are duly authorized, validly
issued, fully paid and nonassessable and have not been issued in violation of
any preemptive rights. MJK has no other equity securities or securities
containing any equity features authorized, issued or outstanding. Except as
set forth in Schedule 3.3 hereto, there are no agreements or other rights or
arrangements existing which provide for the sale or issuance of capital stock
by MJK and there are no rights, subscriptions, warrants, options, conversion
rights or agreements of any kind outstanding to purchase or otherwise acquire
from MJK any shares of capital stock or other securities of MJK of any kind.
Except as set forth on Schedule 3.3, there are no agreements or other
obligations (contingent or otherwise) which may require MJK to repurchase or
otherwise acquire any shares of its capital stock.
3.4. FINANCIAL STATEMENTS AND NASD REPORTS.
Prior to the execution of this Agreement, MJK has delivered or made
available to NM complete and accurate copies of MJK's audited financial
statements for the year ended March 31, 1998, unaudited balance sheets and
income statements at and for the quarterly periods ended June 30, September
30 and December 31, 1998 (the "Financial Statements"), and Miller, Johnson &
Kuehn, Incorporated's Focus Reports for the year ended March 31, 1998 and the
monthly periods from April 1, 1998 to the date of this Agreement as filed
with the NASD. As of their respective date, or as subsequently amended prior
to the date hereof, such documents (i) did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and (ii) as to the
Focus Reports, complied as to form in all material respects with the
applicable rules and regulations of the SEC and the NASD. The Financial
Statements are based upon the information contained in the books and records
of MJK and fairly present the financial condition of MJK as of the dates
thereof and results of operations for the periods referred to therein. The
audited Financial Statements have been prepared in accordance with GAAP. The
unaudited Financial Statements have been prepared in accordance with GAAP
applicable to unaudited interim financial statements (and thus may not
contain all notes and may not contain prior period comparative data which are
required to be prepared in accordance with GAAP) consistently with the
audited Financial Statements and reflect all adjustments necessary to a fair
statement of the results for the interim periods presented.
3.5. SUBSIDIARIES.
Schedule 3.5 correctly sets forth the name and jurisdiction of
incorporation of each Subsidiary of MJK (each a "MJK Subsidiary" and
collectively the "MJK Subsidiaries"). Except as disclosed on Schedule 3.5,
all of the issued and outstanding shares of capital stock of each MJK
Subsidiary are owned directly or indirectly by MJK free and clear of any
options, lien, pledge, security interest, encumbrance or charge of any kind.
All of the outstanding shares of capital stock of each MJK Subsidiary have
been duly and validly authorized and issued, and are fully paid and
nonassessable. Except as set forth in Schedule 3.5, MJK does not own any
stock, partnership interest, joint venture interest or any other security or
ownership interest issued by any other corporation, organization or entity.
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3.6. LITIGATION.
As of the date hereof, there are no actions, suits, proceedings, orders
or investigations pending or, to the knowledge of MJK, threatened against
MJK, at law or in equity, or before or by any federal, state or other
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign which challenges or seeks to make
illegal or to delay or otherwise directly or indirectly to restrain or
prohibit the consummation of the transactions contemplated hereby or seeks to
obtain material damages in connection with the transactions contemplated
hereby. As used in this Agreement, the phrase "to the knowledge of," or
words of similar import, with respect to an entity means to the knowledge of
management officials of such entity having responsibility for the matter in
question.
3.7. NO BROKERS OR FINDERS.
Except as disclosed on Schedule 3.7, there are no claims for brokerage
commissions, finders' fees, investment advisory fees or similar compensation
in connection with the transactions contemplated by this Agreement based on
any arrangement, understanding, commitment or agreement made by or on behalf
of MJK or any of the MJK Subsidiaries.
3.8. ABSENCE OF UNDISCLOSED LIABILITIES.
Except as reflected in the unaudited balance sheet of MJK dated December
31, 1998 (the "Latest Balance Sheet Date"), MJK has no liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise, whether due or to
become due, whether known or unknown, and regardless of when asserted)
arising out of transactions or events heretofore entered into, or any action
or inaction, or any state of facts existing, with respect to or based upon
transactions or events heretofore occurring, except (i) liabilities which
have arisen after the Latest Balance Sheet Date in the ordinary course of
business (none of which is a material uninsured liability for breach of
contract, breach of warranty, tort, infringement, claim or lawsuit), or (ii)
as otherwise set forth in Schedule 3.8 attached hereto.
3.9. NO MATERIAL ADVERSE CHANGES.
Since the Latest Balance Sheet Date, there has been no material adverse
change in the assets, financial condition, operating results, customer,
employee or supplier relations, or business condition of MJK.
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3.10. LEASED PREMISES.
(a) Neither MJK nor any MJK Subsidiary owns any real property. The
real property demised to MJK or any MJK Subsidiary by the leases (the
"Leases") described in Schedule 3.10 hereto constitutes all of the real
property used or occupied by MJK (the "Real Property").
(b) The Leases are in full force and effect, and MJK or the
applicable MJK Subsidiary holds a valid and existing leasehold interest under
each of the Leases for the term set forth in Schedule 3.10 hereto. To MJK's
knowledge, neither MJK nor any MJK Subsidiary is in default, and to MJK's
knowledge no circumstances exist which, if unremedied, would, either with or
without notice or the passage of time or both, result in such default under
any of the Leases; nor, to the knowledge of MJK, is any other party to any of
the Leases in default.
(c) Each of the tangible properties and tangible assets reflected on
the Latest Balance Sheet or acquired since the date thereof, free and clear
of all liens and encumbrances, except for (i) liens for current taxes not yet
due and payable, (ii) liens set forth in Schedule 3.10 hereto, (iii) the
properties subject to the Leases, (iv) assets disposed of since the date of
the Latest Balance Sheet in the ordinary course of business, (v) liens
imposed by law and incurred in the ordinary course of business for
obligations not yet due to carriers, warehousemen, laborers and materialmen
and (vi) liens in respect of pledges or deposits under workers' compensation
laws.
3.11. TAX MATTERS.
(a) To MJK's knowledge, MJK and each MJK Subsidiary have,
individually or on a consolidated basis: (i) timely filed (or has had timely
filed on its behalf) all returns, declarations, reports, estimates,
information returns, and statements ("Returns") required to be filed or sent
by it in respect of any Taxes or required to be filed or sent by it by any
taxing authority having jurisdiction; (ii) timely and properly paid (or has
had paid on its behalf) all Taxes shown to be due and payable on such
Returns; (iii) established on its Latest Balance Sheet, in accordance with
GAAP, reserves that are adequate for the payment of any Taxes not yet due and
payable; (iv) complied with all applicable laws, rules, and regulations
relating to the withholding of Taxes and the payment thereof (including,
without limitation, withholding of Taxes under Sections 1441 and 1442 of the
Internal Revenue Code of 1986, as amended (the "Code"), or similar provisions
under any foreign laws), and timely and properly withheld from individual
employee wages and paid over to the proper governmental authorities all
amounts required to be so withheld and paid over under all applicable laws.
(b) To MJK's knowledge, there are no liens for Taxes upon any assets
of MJK or of any MJK Subsidiary, except liens for Taxes not yet due.
(c) No deficiency for any Taxes has been proposed, asserted or
assessed against MJK or any MJK Subsidiary that has not been resolved and
paid in full or is hereby contested in good faith. Except as disclosed in
Schedule 3.11, no waiver, extension or comparable consent given by MJK or any
MJK Subsidiary regarding the application of the statute of limitations with
respect to any Taxes or Returns is outstanding, nor is any request for any
such waiver or consent pending. Except as disclosed in Schedule 3.11, there
has been no Tax audit or other administrative proceeding or court proceeding
with regard to any Taxes or Returns, nor is any such Tax audit or other
proceeding
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pending, nor has there been any notice to MJK or any MJK Subsidiary by any
Taxing authority regarding any such Tax, audit or other proceeding, or, to
the knowledge of MJK, is any such Tax audit or other proceeding threatened
with regard to any Taxes or Returns. MJK does not expect the assessment of
any additional Taxes of MJK or any MJK Subsidiary for any period prior to the
date hereof and is not aware of any unresolved questions, claims or disputes
concerning the liability for Taxes of MJK or any MJK Subsidiary which would
exceed the estimated reserves established on their respective books and
records.
(d) Except as set forth on Schedule 3.11, neither MJK nor any MJK
Subsidiary is a party to any agreement, contract or arrangement that would
result, separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code and the
consummation of the transactions contemplated by this Agreement will not be a
factor causing payments to be made by MJK or any MJK Subsidiary that are not
deductible (in whole or in part) under Section 280G of the Code.
(e) Except as set forth on Schedule 3.11, neither MJK nor any MJK
Subsidiary has requested any extension of time within which to file any
Return, which Return has not since been filed.
3.12. CONTRACTS AND COMMITMENTS.
(a) Schedule 3.12 hereto lists the following agreements, whether oral
or written, to which MJK or, where expressly referred to herein, an MJK
Subsidiary is a party, which are currently in effect, and which relate to the
operation of MJK's business or, where applicable, the business of the
applicable MJK Subsidiary: (i) collective bargaining agreement or contract
with any labor union; (ii) bonus, pension, profit sharing, retirement or
other form of deferred compensation plan; (iii) hospitalization insurance or
other welfare benefit plan or practice, whether formal or informal; (iv)
stock purchase or stock option plan; (v) contract for the employment of any
officer, individual employee or other person on a full-time or consulting
basis or relating to severance pay for any such person; (vi) confidentiality
agreement; (vii) contract, agreement or understanding relating to the voting
of MJK Common Stock or the election of directors of MJK; (viii) agreement or
indenture relating to the borrowing of money or to mortgaging, pledging or
otherwise placing a lien on any of the assets of MJK or any MJK Subsidiary;
(ix) guaranty of any obligation for borrowed money or otherwise; (x) lease or
agreement under which MJK or any MJK Subsidiary is lessee of, or holds or
operates any property, real or personal, owned by any other party, for which
the annual rental exceeds $150,000; (xi) lease or agreement under which MJK
or any MJK Subsidiary is lessor of, or permits any third party to hold or
operate, any property, real or personal, for which the annual rental exceeds
$100,000; (xii) contract which prohibits MJK or any MJK Subsidiary from
freely engaging in business anywhere in the world; (xiii) license agreement
or agreement providing for the payment or receipt of royalties or other
compensation by MJK or any MJK Subsidiary in connection with the intellectual
property rights listed in Schedule 3.13 hereto; (xiv) contract or commitment
for capital expenditures in excess of $100,000; (xv) agreement for the sale
of any capital asset; (xvi) contract with any MJK Subsidiary or affiliate
thereof which in any way relates to MJK (other than for employment on
customary terms); or (xxii) other agreement which is either material to MJK's
business or was not entered into in the ordinary course of business.
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(b) To MJK's knowledge, MJK and each MJK Subsidiary, where
applicable, have performed all obligations required to be performed by them
in connection with the contracts or commitments required to be disclosed in
Schedule 3.12 hereto and are not in receipt of any claim of default under any
contract or commitment required to be disclosed under such caption; MJK and
each MJK Subsidiary, where applicable, have no present expectation or
intention of not fully performing any material obligation pursuant to any
contract or commitment required to be disclosed under such caption; and MJK
has no knowledge of any breach or anticipated breach by any other party to
any contract or commitment required to be disclosed under such caption.
3.13. INTELLECTUAL PROPERTY RIGHTS.
Schedule 3.13 hereto describes all rights in patents, patent
applications, trademarks, service marks, trade names, corporate names,
copyrights, mask works, trade secrets, know-how or other intellectual
property rights owned by, licensed to or otherwise controlled by MJK or used
in, developed for use in or necessary to the conduct of MJK's business as now
conducted or planned to be conducted. MJK owns and possesses all right,
title and interest, or holds a valid license, in and to the rights set forth
in such schedule. Schedule 3.13 describes all intellectual property rights
which have been licensed to third parties and those intellectual property
rights which are licensed from third parties. MJK has taken all necessary
action to protect the intellectual property rights set forth in such
schedule. MJK has not received any notice of, nor are there any facts known
to MJK which indicate a likelihood of, any infringement or misappropriation
by, or conflict from, any third party with respect to the intellectual
property rights which are listed; no claim by any third party contesting the
validity of any intellectual property rights listed in Schedule 3.13 hereto
has been made, is currently outstanding or, to the best knowledge of MJK, is
threatened; MJK has not received any notice of any infringement,
misappropriation or violation by MJK of any intellectual property rights of
any third parties and MJK has not infringed, misappropriated or otherwise
violated any such intellectual property rights.
3.14. EMPLOYEES.
(a) To the knowledge of MJK, neither any executive employee of MJK
nor any group of MJK's employees has any plans to terminate his, her or its
employment; (b) to the knowledge of MJK, MJK has complied with all laws
relating to the employment of labor, including provisions thereof relating to
wages, hours, equal opportunity, collective bargaining and the payment of
social security and other taxes; (c) MJK has no material labor relations
problem pending and its labor relations are satisfactory; (d) there are no
workers' compensation claims pending against MJK nor is MJK aware of any
facts that would give rise to such a claim; (e) to the knowledge of MJK, no
employee of MJK is subject to any secrecy or noncompetition agreement or any
other agreement or restriction of any kind that would impede in any way the
ability of such employee to carry out fully all activities of such employee
in furtherance of the business of MJK; and (f) to the knowledge of MJK, no
employee or former employee of MJK has any claim with respect to any
intellectual property rights of MJK set forth in Schedule 3.13 hereto.
3.15. EMPLOYEE BENEFIT PLANS.
(a) Except as set forth in Schedule 3.15 hereto, with respect to all
employees and former employees of MJK and each MJK Subsidiary and all
dependents and beneficiaries of such employees
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and former employees, (i) MJK does not maintain or contribute to any
nonqualified deferred compensation or retirement plans, contracts or
arrangements; (ii) MJK does not maintain or contribute to any qualified
defined contribution plans (as defined in Section 3(34) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section
414(i) of the Code; (iii) MJK does not maintain or contribute to any
qualified defined benefit plans (as defined in Section 3(35) of ERISA or
Section 414(j) of the Code); and (iv) MJK does not maintain or contribute to
any employee welfare benefit plans (as defined in Section 3(1) of ERISA).
(b) To the extent required (either as a matter of law or to obtain
the intended tax treatment and tax benefits), all employee benefit plans (as
defined in Section 3(3) of ERISA) which MJK does maintain or to which it does
contribute (collectively, the "Plans") comply in all material respects with
the requirements of ERISA and the Code. With respect to the Plans, (i) all
required contributions which are due have been made and a proper accrual has
been made for all contributions due in the current fiscal year; (ii) there
are no actions, suits or claims pending, other than routine uncontested
claims for benefits; and (iii) there have been no prohibited transactions (as
defined in Section 406 of ERISA or Section 4975 of the Code).
(c) MJK does not contribute (and has not ever contributed) to any
multi-employer plan, as defined in Section 3(37) of ERISA. MJK has no actual
or potential liabilities under Section 4201 of ERISA for any complete or
partial withdrawal from a multi-employer plan. MJK has no actual or
potential liability for death or medical benefits after separation from
employment, other than (i) death benefits under the employee benefit plans or
programs (whether or not subject to ERISA) set forth in Schedule 3.15 hereto
and (ii) health care continuation benefits described in Section 4980B of the
Code.
(d) Neither MJK nor any of its directors, officers, employees or
other "fiduciaries", as such term is defined in Section 3(21) of ERISA, has
committed any breach of fiduciary responsibility imposed by ERISA or any
other applicable law with respect to the Plans which would subject MJK, NM,
Merger Sub, the Surviving Corporation, or any of their respective directors,
officers or employees to any liability under ERISA or any applicable law.
(e) MJK has not incurred any liability for any tax or civil penalty
or any disqualification of any employee benefit plan (as defined in Section
3(3) of ERISA) imposed by Sections 4980B and 4975 of the Code and Part 6 of
Title I and Section 502(i) of ERISA.
3.16. INSURANCE.
Schedule 3.16 hereto, lists and briefly describes each insurance policy
maintained by MJK and each MJK Subsidiary with respect to MJK's and such MJK
Subsidiary's properties, assets and operations and sets forth the date of
expiration of each such insurance policy. All of such insurance policies are
in full force and effect and are issued by insurers of recognized
responsibility. To the knowledge of MJK, MJK and each MJK Subsidiary are not
in default with respect to their respective obligations under any of such
insurance policies.
3.17. AFFILIATE TRANSACTIONS.
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Except as set forth in Schedule 3.17 hereto, and other than pursuant to
this Agreement, no officer, director or employee of MJK, any MJK Subsidiary
or any member of the immediate family of any such officer, director or
employee, or any entity in which any of such persons owns any beneficial
interest (other than any publicly-held corporation whose stock is traded on a
national securities exchange or in the over-the-counter market and less than
five percent of the stock of which is beneficially owned by any of such
persons) (collectively "insiders"), has any agreement with MJK or any MJK
Subsidiary (other than normal employment arrangements) or any interest in any
property, real, personal or mixed, tangible or intangible, used in or
pertaining to the business of MJK or any MJK Subsidiary (other than ownership
of capital stock of MJK). None of the insiders has any direct or indirect
interest in any competitor, supplier or customer of MJK or any MJK Subsidiary
or in any person, firm or entity from whom or to whom MJK or any MJK
Subsidiary leases any property, or in any other person, firm or entity with
whom MJK or any MJK Subsidiary transacts business of any nature. For
purposes of this Section 3.17, the members of the immediate family of an
officer, director or employee shall consist of the spouse, parents, children
and siblings of such officer, director or employee.
3.18. COMPLIANCE WITH LAWS; PERMITS.
(a) To the knowledge of MJK, MJK, each MJK Subsidiary and their
respective officers, directors, agents and employees have complied in all
material respects with all applicable laws, regulations and other
requirements, including, but not limited to, federal, state, local and
foreign laws, ordinances, rules, regulations and other requirements
pertaining to equal employment opportunity, employee retirement, affirmative
action and other hiring practices, occupational safety and health, workers'
compensation, unemployment and building and zoning codes, which materially
affect the business of MJK or each MJK Subsidiary and to which MJK or any MJK
Subsidiary may be subject, and no claims have been filed against MJK or any
MJK Subsidiary alleging a violation of any such laws, regulations or other
requirements. MJK is not relying on any exemption from or deferral of any
such applicable law, regulation or other requirement that would not be
available to NM after it acquires MJK's properties, assets and business.
(b) MJK has, in full force and effect, all licenses, permits and
certificates, from federal, state, local and foreign authorities (including,
without limitation, federal and state agencies regulating occupational health
and safety) necessary to conduct its business and operate its properties
(other than Environmental Permits, as such term is defined in Section 3.19
hereof) (collectively, the "Permits"). A true, correct and complete list of
all the Permits is set forth in Schedule 3.18 hereto. To the knowledge of
MJK, MJK has conducted its business in compliance with all material terms and
conditions of the Permits.
(c) In particular, but without limiting the generality of the
foregoing, MJK has not violated and has no liability, and has not received a
notice or charge asserting any violation of or liability under, the federal
Occupational Safety and Health Act of 1970 or any other federal or state acts
(including rules and regulations thereunder) regulating or otherwise
affecting employee health and safety.
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3.19. ENVIRONMENTAL MATTERS.
(a) As used in this Section 3.19, the following terms shall have the
following meanings:
(i) "Hazardous Materials" means any dangerous, toxic or
hazardous pollutant, contaminant, chemical, waste, material or substance
as defined in or governed by any federal, state or local law, statute,
code, ordinance, regulation, rule or other requirement relating to such
substance or otherwise relating to the environment or human health or
safety, including without limitation any waste, material, substance,
pollutant or contaminant that might cause any injury to human health or
safety or to the environment or might subject MJK or any MJK Subsidiary
to any imposition of costs or liability under any Environmental Law.
(ii) "Environmental Laws" means all applicable federal, state,
local and foreign laws, rules, regulations, codes, ordinances, orders,
decrees, directives, permits, licenses and judgments relating to
pollution, contamination or protection of the environment (including,
without limitation, all applicable federal, state, local and foreign
laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to Hazardous
Materials in effect as of the date of this Agreement).
(iii) "Release" shall mean the spilling, leaking, disposing,
discharging, emitting, depositing, ejecting, leaching, escaping or any
other release or threatened release, however defined, whether
intentional or unintentional, of any Hazardous Material.
(b) To the knowledge of MJK, MJK, each MJK Subsidiary and the Real
Property are in material compliance with all applicable Environmental Laws.
(c) MJK and each MJK Subsidiary have obtained, and maintained in full
force and effect, all environmental permits, licenses, certificates of
compliance, approvals and other authorizations necessary to conduct its
business (collectively, the "Environmental Permits"). MJK and each MJK
Subsidiary have conducted their respective business in compliance with all
terms and conditions of the Environmental Permits. To the knowledge of MJK,
MJK and each MJK Subsidiary have filed all reports and notifications required
to be filed under and pursuant to all applicable Environmental Laws.
(d) Except as set forth in Schedule 3.19 hereto, neither MJK nor any
MJK Subsidiary has received notice alleging in any manner that MJK or such
MJK Subsidiary is, or might be potentially responsible for any Release of
Hazardous Materials, or any costs arising under or violation of Environmental
Laws.
(e) No expenditure will be required in order for NM, Merger Sub or
the Surviving Corporation to comply with any Environmental Laws in effect at
the time of the Closing in connection with the operation or continued
operation of the business in order to operate or continue operation of the
business of MJK, any MJK Subsidiary or the Real Property in a manner
consistent with the current operation thereof by MJK and the MJK Subsidiaries.
(f) MJK and each MJK Subsidiary are not and have not been listed on
the United States Environmental Protection Agency National Priorities List of
Hazardous Waste Sites, or any other
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list, schedule, law, inventory or record of hazardous or solid waste sites
maintained by any federal, state or local agency.
(g) No lien has been attached or filed against MJK, any MJK
Subsidiary or the Real Property in favor of any governmental or private
entity for (i) any liability or imposition of costs under or violation of any
applicable Environmental Law; or (ii) any Release of Hazardous Materials.
(h) MJK, on behalf of itself and its successors and assigns, hereby
waives, releases and agrees not to bring any claim, demand, cause of action
or proceeding, including without limitation any cost recovery action, against
NM, Merger Sub or the Surviving Corporation under any Environmental Law.
3.20. YEAR 2000 COMPLIANCE.
MJK has no reason to believe that all software and hardware used by MJK
or any MJK Subsidiary is not Year 2000 Compliant, including date century
recognition, calculations which accommodate same century and multi-century
formulas and date values that reflect the century. As used herein, "Year
2000 Compliant" shall mean the ability of such software and hardware to (i)
consistently handle date information before, during and after January 1,
2000, including but not limited to accepting date input, providing date
output, and performing calculations on dates or portions of dates; (ii)
function accurately in accordance with all documentation without interruption
before, during and after January 1, 2000, without any change of operations
associated with the advent of the new century; (iii) respond to two-digit
date input in a way that resolves any ambiguity as to century in a disclosed,
defined and predetermined manner; and (iv) store and provide output of date
information in ways that are unambiguous as to century.
3.21. ABSENCE OF CERTAIN DEVELOPMENTS.
Since the Latest Balance Sheet date, MJK has not:
(a) borrowed any amount or incurred or become subject to any
liability in excess of $100,000, except (i) current liabilities incurred in
the ordinary course of business and (ii) liabilities under contracts entered
into in the ordinary course of business;
(b) mortgaged, pledged, or subjected to any lien, charge or any other
encumbrance, any of its assets with a fair market value in excess of
$150,000, except (i) liens for current property taxes not yet due and
payable, (ii) liens imposed by law and incurred in the ordinary course of
business for obligations not yet due to carriers, warehousemen, laborers,
materialmen and the like, (iii) liens in respect of pledges or deposits under
workers' compensation laws, (iv) liens set forth in Schedule 3.21 attached
hereto, or (v) liens voluntarily created in the ordinary course of business,
all of which liens aggregate less than $100,000;
(c) declared or paid any dividends or other distributions with
respect to any shares of MJK's capital stock or redeemed or purchased,
directly or indirectly, any shares of MJK's capital stock or any options;
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(d) issued, sold or transferred any of its equity securities,
securities convertible into or exchangeable for its equity securities or
warrants, options or other rights to acquire its equity securities, or any
bonds or debt securities, except as otherwise described in Schedule 3.21
hereto; or
(e) made any change in accounting principles or practices from those
utilized in the preparation of the Financial Statements.
3.22. DISCLOSURE.
The representations and warranties of MJK contained in this Agreement
are true and correct in all material respects, and such representations and
warranties do not omit any material fact necessary to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading. There is no fact known to MJK which has not been disclosed
to NM pursuant to this Agreement, the Schedules hereto, the MJK Focus
Reports, all taken together as a whole, which has had or could reasonably be
expected to have a Material Adverse Effect on MJK or any MJK Subsidiary or
materially adversely affect the ability of MJK to consummate in a timely
manner the transactions contemplated hereby.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF NM
NM hereby represents and warrants to MJK as follows:
4.1. ORGANIZATION AND QUALIFICATION.
NM is a corporation duly organized, validly existing and in good
standing under the laws of the State of Minnesota, and has the requisite
corporate power to carry on its business as now conducted. NM has no
Subsidiaries. The copies of the Articles and Bylaws of NM and Merger Sub
which have been made available to MJK on or prior to the date of this
Agreement are correct and complete copies of such documents as in effect as
of the date of this Agreement. NM is licensed or qualified to do business in
every jurisdiction which the nature of its business or its ownership of
property requires it to be licensed or qualified, except where the failure to
be so licensed or qualified would not have a Material Adverse Effect on NM.
4.2. AUTHORITY RELATIVE TO THIS AGREEMENT; NON-CONTRAVENTION.
Each of NM and Merger Sub has the requisite corporate power and
authority to enter into this Agreement, the Articles of Merger and the other
agreements described herein to which it is or will be a party and to carry
out its obligations hereunder and thereunder. The execution and delivery of
this Agreement, the Articles of Merger by NM and Merger Sub and the other
agreements described herein, and the consummation by NM and Merger Sub of the
transactions contemplated hereby and thereby have been duly authorized by the
Boards of Directors of NM and Merger Sub. Except for approval of this
Agreement, the Merger and NM's New Articles by the requisite vote of NM's
shareholders, no other corporate proceedings on the part of NM or Merger Sub
are necessary to authorize the execution and delivery of this Agreement, the
Articles of Merger and the New Articles
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and the consummation of the transactions contemplated hereby and thereby.
This Agreement has been duly executed and delivered by NM and Merger Sub and,
assuming it is a valid and binding obligation of MJK, constitutes a valid and
binding obligation of NM and Merger Sub enforceable in accordance with its
terms except as enforcement may be limited by general principles of equity
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies
generally. The Articles of Merger, when executed and delivered by Merger
Sub, will constitute the valid and binding obligation of Merger Sub
enforceable in accordance with its terms. Except as set forth in Schedule
4.2, NM is not subject to, nor obligated under, any provision of (a) its
Articles or Bylaws, (b) any agreement, arrangement or understanding, (c) any
license, franchise or permit, nor (d) subject to obtaining the approvals
referred to in the next sentence, any law, regulation, order, judgment or
decree, which would conflict with, be breached or violated, or in respect of
which a right of termination or acceleration or any security interest, charge
or encumbrance on any of its assets would be created, by the execution,
delivery or performance of this Agreement and the Articles of Merger, or the
consummation of the transactions contemplated hereby or thereby, other than
any such conflicts, breaches, violations, rights of termination or
acceleration or security interests, charges or encumbrances which, in the
aggregate, could not reasonably be expected to have a Material Adverse Effect
on NM. Except for (a) the filings, notices, consents and approvals described
in Section 3.2 hereof, (b) approval of the Merger, this Agreement and NM's
New Articles by the requisite vote of the shareholders of NM (the "Requisite
NM Shareholder Vote"), (c) the filing of the Articles of Merger and the New
Articles with the Minnesota Secretary of State, and (d) such filings,
authorizations or approvals as may be set forth in Schedule 4.2, no
authorization, consent or approval of, or filing with, any public body, court
or authority is necessary on the part of NM for the consummation by NM or
Merger Sub of the transactions contemplated by this Agreement, except for
such authorizations, consents, approvals and filings as to which the failure
to obtain or make the same will not, in the aggregate, have a Material
Adverse Effect on NM or Merger Sub.
4.3. CAPITALIZATION.
The authorized, issued and outstanding shares of capital stock of each
of NM and Merger Sub as of the date hereof is correctly set forth on Schedule
4.3. The issued and outstanding shares of capital stock of each of NM and
Merger Sub are duly authorized, validly issued, fully paid and nonassessable
and have not been issued in violation of any preemptive rights. Except as
disclosed on Schedule 4.3, there are no options, warrants, conversion
privileges or other rights, agreements, arrangements or commitments
obligating NM or Merger Sub to issue, sell, purchase or redeem any shares of
its capital stock or securities or obligations of any kind convertible into
or exchangeable for any shares of its capital stock. Schedule 4.3 contains
true and correct copies of all such agreements, arrangements (including all
stock plans, but excluding individual stock option agreements) or
commitments. The outstanding shares of NM Common Stock have been listed for
trading on the NASDAQ Small Cap market system.
4.4. EXCHANGE ACT REPORTS.
Prior to the Closing Date, NM has delivered or made available to MJK
complete and accurate copies of (a) NM's Annual Reports on Form 10-K (as
amended) for the years ended December 31, 1996 and 1997 (the "NM 10-K
Reports") as filed with the SEC, (b) all NM proxy statements and annual
reports to shareholders used in connection with meetings of NM shareholders
held since
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January 1, 1996 other than the Proxy Statement described in Section 4.10
below (the "NM Proxy Statements"); (c) NM's Quarterly Reports on Form 10-Q
(as amended) for the quarters ended
March 31, June 30, and September 30, 1998 (the "NM 10-Q Reports") as filed
with the SEC; and (d) all current reports on Form 8-K filed with the SEC
after September 30, 1998 (the "NM 8-K Reports"). As of their respective
dates or as subsequently amended prior to the date hereof, such documents (i)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading and (ii) complied as to form in all material respects with the
applicable rules and regulations of the SEC. Since January 1, 1995, NM has
filed in a timely manner all reports that it was required to file with the
SEC pursuant to Section 13(a), 14(a), 14(c) and 15(d) of the Exchange Act.
The aforementioned NM financial statements (including footnotes thereto)
contained in the NM 10-K Reports and the NM 10-Q Reports were prepared in
accordance with GAAP applied on a consistent basis during the periods
involved (except as otherwise noted therein) are based upon the information
contained in the books and records of NM and fairly present the financial
condition of NM as of the dates thereof and results of operations for the
periods referred to therein. NM's audited financial statements as set forth
in the NM 10-K Reports and NM Proxy Statements have been prepared in
accordance with GAAP. NM's unaudited financial statements as set forth in
the NM 10-Q Reports and the NM Proxy Statements have been prepared in
accordance with GAAP applicable to unaudited interim financial statements
(and thus may not contain all notes and may not contain prior period
comparative data which are required to be prepared in accordance with GAAP)
consistently with NM's audited financial statements as described above and
reflect all adjustments necessary to a fair statement of the results for the
interim periods presented.
4.5. ABSENCE OF CERTAIN DEVELOPMENTS.
Except as disclosed in NM's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, in its Proxy Statement dated December 8,
1998, in the NM 8-K Reports or on Schedules 4.5 or 4.8, unless otherwise
expressly contemplated or permitted by this Agreement or as contemplated in
the foregoing Proxy Statement described in Section 4.10 below, since
September 30, 1998 to the date hereof, NM has not:
(a) issued or sold any of its equity securities other than NM Common
Stock, securities convertible into or exchangeable for its equity securities
other than NM Common Stock, warrants, options or other rights to acquire its
equity securities other than NM Common Stock;
(b) reclassified any of its outstanding shares of capital stock
except pursuant to this Agreement;
(c) entered into a written agreement to do any of the foregoing;
(d) sold or otherwise disposed of any assets other than in the
ordinary course of business;
(e) borrowed any amount or incurred or become subject to any
liability in excess of $100,000, except (i) current liabilities incurred in
the ordinary course of business and (ii) liabilities under contracts entered
into in the ordinary course of business;
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(f) mortgaged, pledged, or subjected to any lien, charge or any other
encumbrance, any of its assets with a fair market value in excess of
$150,000, except (i) liens for current property taxes not yet due and
payable, (ii) liens imposed by law and incurred in the ordinary course of
business for obligations not yet due to carriers, warehousemen, laborers,
materialmen and the like, (iii) liens in respect of pledges or deposits under
workers' compensation laws, (iv) liens set forth in Schedule 4.5 attached
hereto, or (v) liens voluntarily created in the ordinary course of business,
all of which liens aggregate less than $100,000;
(g) declared or paid any dividends or other distributions with
respect to any shares of NM's capital stock or redeemed or purchased,
directly or indirectly, any shares of NM's capital stock or any options; or
(h) made any change in accounting principles or practices from those
utilized in the preparation of the Financial Statements.
4.6. ABSENCE OF UNDISCLOSED LIABILITIES.
Except as reflected in the audited balance sheet of NM dated December
31, 1998 (the "Latest Balance Sheet Date"), NM has no liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise, whether due or to
become due, whether known or unknown, and regardless of when asserted)
arising out of transactions or events heretofore entered into, or any action
or inaction, or any state of facts existing, with respect to or based upon
transactions or events heretofore occurring, except (i) liabilities which
have arisen after the Latest Balance Sheet Date in the ordinary course of
business (none of which is a material uninsured liability for breach of
contract, breach of warranty, tort, infringement, claim or lawsuit), or (ii)
as otherwise set forth in Schedule 4.6 attached hereto.
4.7. NO MATERIAL ADVERSE CHANGES.
Since the Latest Balance Sheet Date, there has been no material adverse
change in the assets, financial condition, operating results, customer,
employee or supplier relations, business condition or prospects of NM.
4.8. LITIGATION.
Except as set forth in Schedule 4.8, as of the date hereof, there are no
actions, suits, proceedings, orders or investigations pending or, to the
knowledge of NM, threatened against NM, at law or in equity, or before or by
any federal, state or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign which challenges or
seeks to make illegal or to delay or otherwise directly or indirectly to
restrain or prohibit the consummation of the transactions contemplated hereby
or seeks to obtain material damages in connection with the transactions
contemplated hereby.
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4.9. NO BROKERS OR FINDERS.
Except as disclosed on Schedule 4.9, there are no claims for brokerage
commissions, finders' fees, investment advisory fees or similar compensation
in connection with the transactions contemplated by this Agreement based on
any arrangement, understanding, commitment or agreement made by or on behalf
of NM.
4.10. PROXY STATEMENT.
At the time the Proxy Statement is mailed to the shareholders of NM in
order to obtain approvals referred to in Section 6.9 hereof and at all times
subsequent to such mailing up to and including the times of such approvals,
the Proxy Statement (including any amendments or supplements thereto), with
respect to all information set forth therein relating to NM and its
shareholders, this Agreement, the Articles of Merger, and all other
transactions contemplated hereby, will (a) comply in all material respects
with applicable provisions of the Securities Act and the Exchange Act, and
(b) not contain any untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances under which they
are made, not misleading, except that, in each case, no such representations
shall apply to any written information, including financial statements, of or
provided by MJK or any MJK Subsidiary for such Proxy Statement.
4.11. VALIDITY OF THE SURVIVING CORPORATION COMMON STOCK.
The shares of NM Common Stock to be issued to holders of MJK Common
Stock and Series I Convertible Preferred Stock pursuant to this Agreement
will be, when issued, duly authorized, validly issued, fully paid and
nonassessable.
4.12. TITLE TO PROPERTIES.
(a) The real property demised by the leases (the "NM Leases")
described in Schedule 4.12 hereto constitutes all of the real property used
or occupied by NM (the "NM Real Property").
(b) The NM Leases are in full force and effect, and NM holds a valid
and existing leasehold interest under each of the NM Leases for the term set
forth in Schedule 4.12 hereto. NM is not in default, and no circumstances
exist which, if unremedied, would, either with or without notice or the
passage of time or both, result in such default under any of the Leases; nor,
to the best knowledge of NM, is any other party to any of the NM Leases in
default.
(c) The NM Real Property and tangible assets reflected on NM's
audited balance sheet dated as of December 31, 1998 (the "Latest Balance
Sheet") or acquired since the date thereof, free and clear of all liens and
encumbrances, except for (i) liens for current taxes not yet due and payable,
(ii) liens set forth in Schedule 4.12 hereto, (iii) the properties subject to
the NM Leases, (iv) assets disposed of since the date of the Latest Balance
Sheet in the ordinary course of business, (v) liens imposed by law and
incurred in the ordinary course of business of obligations not yet due to
carriers, warehousemen, laborers and materialmen and (vi) liens in respect of
pledges or deposits under workers' compensation laws.
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4.13. TAX MATTERS.
(a) To NM's knowledge, it has: (i) timely filed (or has had timely
filed on its behalf) all returns, declarations, reports, estimates,
information returns, and statements ("Returns") required to be filed or sent
by it in respect of any Taxes or required to be filed or sent by it by any
taxing authority having jurisdiction; (ii) timely and properly paid (or has
had paid on its behalf) all Taxes shown to be due and payable on such
Returns; (iii) established on its Latest Balance Sheet, in accordance with
GAAP, reserves that are adequate for the payment of any Taxes not yet due and
payable; (iv) complied with all applicable laws, rules, and regulations
relating to the withholding of Taxes and the payment thereof (including,
without limitation, withholding of Taxes under Sections 1441 and 1442 of the
Internal Revenue Code of 1986, as amended (the "Code"), or similar provisions
under any foreign laws), and timely and properly withheld from individual
employee wages and paid over to the proper governmental authorities all
amounts required to be so withheld and paid over under all applicable laws.
(b) To NM's knowledge, there are no liens for Taxes upon any assets
of NM, except liens for Taxes not yet due.
(c) No deficiency for any Taxes has been proposed, asserted or
assessed against NM that has not been resolved and paid in full. No waiver,
extension or comparable consent given by NM regarding the application of the
statute of limitations with respect to any Taxes or Returns is outstanding,
nor is any request for any such waiver or consent pending. There has been no
Tax audit or other administrative proceeding or court proceeding with regard
to any Taxes or Returns, nor is any such Tax audit or other proceeding
pending, nor has there been any notice to NM by any Taxing authority
regarding any such Tax, audit or other proceeding, or, to the best knowledge
of NM, is any such Tax audit or other proceeding threatened with regard to
any Taxes or Returns. NM does not expect the assessment of any additional
Taxes of NM and is not aware of any unresolved questions, claims or disputes
concerning the liability for Taxes of NM which would exceed the estimated
reserves established on its books and records.
(d) NM is not a party to any agreement, contract or arrangement that
would result, separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code and the
consummation of the transactions contemplated by this Agreement will not be a
factor causing payments to be made by NM that are not deductible (in whole or
in part) under Section 280G of the Code.
(e) Except as set forth in Schedule 4.13, NM has not requested any
extension of time within which to file any Return, which Return has not since
been filed.
4.14. CONTRACTS AND COMMITMENTS.
(a) Schedule 4.14 hereto lists the following agreements, whether oral
or written, to which NM is a party, which are currently in effect, and which
relate to the operation of NM's business: (i) collective bargaining
agreement or contract with any labor union; (ii) bonus, pension, profit
sharing, retirement or other form of deferred compensation plan; (iii)
hospitalization insurance or other welfare benefit plan or practice, whether
formal or informal; (iv) stock purchase or stock option plan; (v) contract
for the employment of any officer, individual employee or other person on a
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full-time or consulting basis or relating to severance pay for any such
person; (vi) confidentiality agreement; (vii) contract, agreement or
understanding relating to the voting of NM Common Stock or the election of
directors of NM; (viii) agreement or indenture relating to the borrowing of
money or to mortgaging, pledging or otherwise placing a lien on any of the
assets of NM; (ix) guaranty of any obligation for borrowed money or
otherwise; (x) lease or agreement under which NM is lessee of, or holds or
operates any property, real or personal, owned by any other party, for which
the annual rental exceeds $50,000; (xi) lease or agreement under which NM is
lessor of, or permits any third party to hold or operate, any property, real
or personal, for which the annual rental exceeds $50,000; (xii) contract
which prohibits NM from freely engaging in business anywhere in the world;
(xiii) license agreement or agreement providing for the payment or receipt of
royalties or other compensation by NM in connection with the intellectual
property rights listed in Schedule 4.15 hereto; (xiv) contract or commitment
for capital expenditures in excess of $50,000; (xv) agreement for the sale of
any capital asset; (xvi) contract with any affiliate which in any way
relates to NM (other than for employment on customary terms); or (xxii) other
agreement which is either material to NM's business or was not entered into
in the ordinary course of business.
(b) To NM's knowledge, NM has performed all obligations required to
be performed by them in connection with the contracts or commitments required
to be disclosed in Schedule 4.14 hereto and is not in receipt of any claim of
default under any contract or commitment required to be disclosed under such
caption; NM has no present expectation or intention of not fully performing
any material obligation pursuant to any contract or commitment required to be
disclosed under such caption; and NM has no knowledge of any breach or
anticipated breach by any other party to any contract or commitment required
to be disclosed under such caption.
4.15. INTELLECTUAL PROPERTY RIGHTS.
Schedule 4.15 hereto describes all rights in patents, patent
applications, trademarks, service marks, trade names, corporate names,
copyrights mask works, trade secrets, know-how or other intellectual property
rights owned by, licensed to or otherwise controlled by NM or used in,
developed for use in or necessary to the conduct of NM's business as now
conducted or planned to be conducted. NM owns and possesses all right, title
and interest, or holds a valid license, in and to the rights set forth in
such schedule. Schedule 4.15 describes all intellectual property rights which
have been licensed to third parties and those intellectual property rights
which are licensed from third parties. NM has taken all necessary action to
protect the intellectual property rights set forth in such schedule. NM has
not received any notice of, nor are there any facts known to NM which
indicate a likelihood of, any infringement or misappropriation by, or
conflict from, any third party with respect to the intellectual property
rights which are listed; no claim by any third party contesting the validity
of any intellectual property rights listed in Schedule 4.15 hereto has been
made, is currently outstanding or, to the best knowledge of NM, is
threatened; NM has not received any notice of any infringement,
misappropriation or violation by NM of any intellectual property rights of
any third parties and NM has not infringed, misappropriated or otherwise
violated any such intellectual property rights.
4.16. EMPLOYEES.
(a) Except as otherwise set forth in Schedule 4.16, to the best
knowledge of NM, neither any executive employee of NM nor any group of NM's
employees has any plans to terminate his,
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her or its employment; (b) NM has complied with all laws relating to the
employment of labor, including provisions thereof relating to wages, hours,
equal opportunity, collective bargaining and the payment of social security
and other taxes; (c) NM has no material labor relations problem pending and
its labor relations are satisfactory; (d) there are no workers' compensation
claims pending against NM nor is NM aware of any facts that would give rise
to such a claim; (e) to the best knowledge of NM, no employee of NM is
subject to any secrecy or noncompetition agreement or any other agreement or
restriction of any kind that would impede in any way the ability of such
employee to carry out fully all activities of such employee in furtherance of
the business of NM; and (f) no employee or former employee of NM has any
claim with respect to any intellectual property rights of NM set forth in
Schedule 4.15 hereto.
4.17. EMPLOYEE BENEFIT PLANS.
(a) Except as set forth in Schedule 4.17 hereto, with respect to all
employees and former employees of NM and all dependents and beneficiaries of
such employees and former employees, (i) NM does not maintain or contribute
to any nonqualified deferred compensation or retirement plans, contracts or
arrangements; (ii) NM does not maintain or contribute to any qualified
defined contribution plans (as defined in Section 3(34) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section
414(i) of the Code; (iii) NM does not maintain or contribute to any qualified
defined benefit plans (as defined in Section 3(35) of ERISA or Section 414(j)
of the Code); and (iv) NM does not maintain or contribute to any employee
welfare benefit plans (as defined in Section 3(1) of ERISA).
(b) To the extent required (either as a matter of law or to obtain
the intended tax treatment and tax benefits), all employee benefit plans (as
defined in Section 3(3) of ERISA) which NM does maintain or to which it does
contribute (collectively, the "Plans") comply in all material respects with
the requirements of ERISA and the Code. With respect to the Plans, (i) all
required contributions which are due have been made and a proper accrual has
been made for all contributions due in the current fiscal year; (ii) there
are no actions, suits or claims pending, other than routine uncontested
claims for benefits; and (iii) there have been no prohibited transactions (as
defined in Section 406 of ERISA or Section 4975 of the Code).
(c) NM does not contribute (and has not ever contributed) to any
multi-employer plan, as defined in Section 3(37) of ERISA. NM has no actual
or potential liabilities under Section 4201 of ERISA for any complete or
partial withdrawal from a multi-employer plan. NM has no actual or potential
liability for death or medical benefits after separation from employment,
other than (i) death benefits under the employee benefit plans or programs
(whether or not subject to ERISA) set forth in Schedule 4.17 hereto and (ii)
health care continuation benefits described in Section 4980B of the Code.
(d) Neither NM nor any of its directors, officers, employees or other
"fiduciaries", as such term is defined in Section 3(21) of ERISA, has
committed any breach of fiduciary responsibility imposed by ERISA or any
other applicable law with respect to the Plans which would subject NM, Merger
Sub, the Surviving Corporation, or any of their respective directors,
officers or employees to any liability under ERISA or any applicable law.
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(e) NM has not incurred any liability for any tax or civil penalty or
any disqualification of any employee benefit plan (as defined in Section 3(3)
of ERISA) imposed by Sections 4980B and 4975 of the Code and Part 6 of Title
I and Section 502(i) of ERISA.
4.18. INSURANCE.
Schedule 4.18 hereto, lists and briefly describes each insurance policy
maintained by NM with respect to NM's properties, assets and operations and
sets forth the date of expiration of each such insurance policy. All of such
insurance policies are in full force and effect and are issued by insurers of
recognized responsibility. NM is not in default with respect to its
obligations under any of such insurance policies.
4.19. AFFILIATE TRANSACTIONS.
Except as set forth in Schedule 4.19 hereto, and other than pursuant to
this Agreement, no officer, director or employee of NM or any member of the
immediate family of any such officer, director or employee, or any entity in
which any of such persons owns any beneficial interest (other than any
publicly-held corporation whose stock is traded on a national securities
exchange or in the over-the-counter market and less than one percent of the
stock of which is beneficially owned by any of such persons) (collectively
"insiders"), has any agreement with NM (other than normal employment
arrangements) or any interest in any property, real, personal or mixed,
tangible or intangible, used in or pertaining to the business of NM (other
than ownership of capital stock of NM). None of the insiders has any direct
or indirect interest in any competitor, supplier or customer of NM or in any
person, firm or entity from whom or to whom NM leases any property, or in any
other person, firm or entity with whom NM transacts business of any nature.
For purposes of this Section 4.19, the members of the immediate family of an
officer, director or employee shall consist of the spouse, parents and
children of such officer, director or employee.
4.20. COMPLIANCE WITH LAWS; PERMITS.
(a) To NM's knowledge, NM and its respective officers, directors,
agents and employees have complied in all material respects with all
applicable laws, regulations and other requirements, including, but not
limited to, federal, state, local and foreign laws, ordinances, rules,
regulations and other requirements pertaining to equal employment
opportunity, employee retirement, affirmative action and other hiring
practices, occupational safety and health, workers' compensation,
unemployment and building and zoning codes, which materially affect the
business of NM or the NM Real Property and to which NM may be subject, and no
claims have been filed against NM alleging a violation of any such laws,
regulations or other requirements. NM is not relying on any exemption from
or deferral of any such applicable law, regulation or other requirement that
would not be available to MJK after it acquires NM's properties, assets and
business.
(b) NM has, in full force and effect, all licenses, permits and
certificates, from federal, state, local and foreign authorities (including,
without limitation, federal and state agencies regulating occupational health
and safety) necessary to conduct its business and own and operate its
properties (other than Environmental Permits, as such term is defined in
Section 4.21 hereof) (collectively, the "Permits"). A true, correct and
complete list of all the Permits is set forth in
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Schedule 4.20 hereto. NM has conducted its business in compliance with all
material terms and conditions of the Permits.
(c) In particular, but without limiting the generality of the
foregoing, NM has not violated and has no liability, and has not received a
notice or charge asserting any violation of or liability under, the federal
Occupational Safety and Health Act of 1970 or any other federal or state acts
(including rules and regulations thereunder) regulating or otherwise
affecting employee health and safety.
4.21. ENVIRONMENTAL MATTERS.
(a) As used in this Section 4.21, the following terms shall have the
following meanings:
(i) "Hazardous Materials" means any dangerous, toxic or
hazardous pollutant, contaminant, chemical, waste, material or substance
as defined in or governed by any federal, state or local law, statute,
code, ordinance, regulation, rule or other requirement relating to such
substance or otherwise relating to the environment or human health or
safety, including without limitation any waste, material, substance,
pollutant or contaminant that might cause any injury to human health or
safety or to the environment or might subject NM to any imposition of
costs or liability under any Environmental Law.
(ii) "Environmental Laws" means all applicable federal, state,
local and foreign laws, rules, regulations, codes, ordinances, orders,
decrees, directives, permits, licenses and judgments relating to
pollution, contamination or protection of the environment (including,
without limitation, all applicable federal, state, local and foreign
laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to Hazardous
Materials in effect as of the date of this Agreement).
(iii) "Release" shall mean the spilling, leaking, disposing,
discharging, emitting, depositing, ejecting, leaching, escaping or any
other release or threatened release, however defined, whether
intentional or unintentional, of any Hazardous Material.
(b) To the knowledge of NM, NM and the Real Property are in material
compliance with all applicable Environmental Laws.
(c) NM has obtained, and maintained in full force and effect, all
environmental permits, licenses, certificates of compliance, approvals and
other authorizations necessary to conduct its business and own or operate the
NM Real Property (collectively, the "Environmental Permits"). NM has
conducted its business in compliance with all terms and conditions of the
Environmental Permits. To NM's knowledge, it has filed all reports and
notifications required to be filed under and pursuant to all applicable
Environmental Laws.
(d) Except as set forth in Schedule 4.21 hereto, NM has not received
notice alleging in any manner that NM might be potentially responsible for
any Release of Hazardous Materials, or any costs arising under or violation
of Environmental Laws.
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(e) No expenditure will be required in order for NM, Merger Sub or
the Surviving Corporation to comply with any Environmental Laws in effect at
the time of the Closing in connection with the operation or continued
operation of the business of NM or the NM Real Property in a manner
consistent with the current operation thereof by NM.
(f) NM and the NM Real Property are not and have not been listed on
the United States Environmental Protection Agency National Priorities List of
Hazardous Waste Sites, or any other list, schedule, law, inventory or record
of hazardous or solid waste sites maintained by any federal, state or local
agency.
(g) No lien has been attached or filed against NM or the NM Real
Property in favor of any governmental or private entity for (i) any liability
or imposition of costs under or violation of any applicable Environmental
Law; or (ii) any Release of Hazardous Materials.
(h) NM, on behalf of itself and its successors and assigns, hereby
waives, releases and agrees not to bring any claim, demand, cause of action
or proceeding, including without limitation any cost recovery action, against
NM, Merger Sub or the Surviving Corporation under any Environmental Law.
4.22. YEAR 2000 COMPLIANCE.
NM has no reason to believe that all software and hardware used by NM is
not Year 2000 Compliant, including date century recognition, calculations
which accommodate same century and multi-century formulas and date values
that reflect the century. As used herein, "Year 2000 Compliant" shall mean
the ability of such software and hardware to (i) consistently handle date
information before, during and after January 1, 2000, including but not
limited to accepting date input, providing date output, and performing
calculations on dates or portions of dates; (ii) function accurately in
accordance with all documentation without interruption before, during and
after January 1, 2000, without any change of operations associated with the
advent of the new century; (iii) respond to two-digit date input in a way
that resolves any ambiguity as to century in a disclosed, defined and
predetermined manner; and (iv) store and provide output of date information
in ways that are unambiguous as to century.
4.23. DISCLOSURE.
The representations and warranties of NM contained in this Agreement are
true and correct in all material respects, and such representations and
warranties do not omit any material fact necessary to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading. There is no fact known to NM which has not been disclosed to
MJK pursuant to this Agreement, the Schedules hereto and the NM 10-K Reports,
the NM 10-Q Reports, the NM 8-K Reports and the Proxy Statement dated
December 8, 1998, all taken together as a whole, which has had or could
reasonably be expected to have a Material Adverse Effect on NM or materially
adversely affect the ability of NM or Merger Sub to consummate in a timely
manner the transactions contemplated hereby.
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ARTICLE 5
CONDUCT OF BUSINESS PENDING THE MERGER
5.1. CONDUCT OF BUSINESS BY NM.
From the date of this Agreement to the Effective Date, unless MJK shall
otherwise agree in writing or as otherwise expressly contemplated or
permitted by other provisions of this Agreement, including but not limited
to, this Section 5.1, NM shall not, directly or indirectly, (a) amend or
propose to amend its Articles or Bylaws except for the New Articles, (b)
issue, sell or grant any of its equity securities convertible into or
exchangeable for its equity securities, or grants, warrants, options or other
rights to acquire its equity securities, (c) reclassify, subdivide or
otherwise change outstanding shares of capital stock of NM whether by stock
dividend, reverse stock split, distribution of securities convertible into NM
capital stock or otherwise, (d) acquire (by merger, exchange, consolidation,
acquisition of stock or assets or otherwise) any corporation, partnership,
joint venture or other business organization or division or assets thereof,
(e) default in its obligations under any material debt, contract or
commitment which default results in the acceleration of obligations due
thereunder, (f) enter into or propose to enter into, or modify or propose to
modify, any agreement, arrangement, or understanding with respect to any of
the foregoing matters; or (g) conduct its business other than in the ordinary
course on an arm's length basis and in accordance in all material respects
with all applicable laws, rules and regulations and NM's past custom and
practice.
5.2. CONDUCT OF BUSINESS BY MJK.
From the date of this Agreement to the Effective Date, unless NM shall
otherwise agree in writing or as otherwise expressly contemplated or
permitted by other provisions of this Agreement, including but not limited
to, this Section 5.2, MJK shall not, directly or indirectly, (a) amend its
Articles or Bylaws, (b) split, combine or reclassify any outstanding shares
of capital stock of MJK, (c) declare, set aside, make or pay any dividend or
distribution in cash, stock, property or otherwise with respect to the
capital stock of MJK, (d) default in its obligations under any material debt,
contract or commitment which default results in the acceleration of
obligations due thereunder, except for such defaults arising out of this
Agreement for which consents, waivers or modifications are required to be
obtained as set forth on Schedule 3.2, (e) conduct its business other than in
the ordinary course on an arms length basis and in accordance in all material
respects with all applicable laws, rules and regulations and MJK's past
custom and practice, (f) issue or sell any additional shares of, or options,
warrants, conversions, privileges or rights of any kind to acquire any shares
of, any of its capital stock, except as otherwise set forth in Schedule 5.2
hereto, or (g) acquire (by merger, exchange, consolidation, acquisition of
stock or assets or otherwise) any corporation, partnership, joint venture or
other business organization or division or material assets thereof.
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ARTICLE 6
ADDITIONAL COVENANTS AND AGREEMENTS
6.1. GOVERNMENTAL FILINGS.
Each party will use all reasonable efforts and will cooperate with the
other party in the preparation and filing, as soon as practicable, of all
filings, applications or other documents required under applicable laws,
including, but not limited to, the Exchange Act, to consummate the
transactions contemplated by this Agreement. Prior to submitting each
filing, application, registration statement or other document with the
applicable regulatory authority, each party will, to the extent practicable,
provide the other party with an opportunity to review and comment on each
such application, registration statement or other document to the extent
permitted by applicable law. Each party will use all reasonable efforts and
will cooperate with the other party in taking any other actions necessary to
obtain such regulatory or other approvals and consents at the earliest
practicable time, including participating in any required hearings or
proceedings. Subject to the terms and conditions herein provided, each party
will use all reasonable efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement.
6.2. EXPENSES.
Except as otherwise provided in this Agreement, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such costs and expenses.
6.3. DUE DILIGENCE; ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) Between the date hereof and the date of filing the Definitive
Proxy Statement referred to in Paragraph 6.4 with the SEC, MJK and NM shall
afford to the other party and their authorized representatives the
opportunity to conduct and complete a due diligence investigation of the
other party as described herein. In light of the foregoing, each party shall
permit the other party full access on reasonable notice and at reasonable
hours to its properties and shall disclose and make available (together with
the right to copy) to the other party and its officers, employees, attorneys,
accountants and other representatives, all books, papers and records relating
to the assets, stock, properties, operations, obligations and liabilities of
such party and its subsidiaries, including, without limitation, all books of
account (including, without limitation, the general ledger), tax records,
minute books of directors' and shareholders' meetings, organizational
documents, bylaws, contracts and agreements, filings with any regulatory
authority, accountants' work papers, litigation files (including, without
limitation, legal research memoranda), attorney's audit response letters,
documents relating to assets and title thereto (including, without
limitation, abstracts, title insurance policies, surveys, environmental
reports, opinions of title and other information relating to the real and
personal property), plans affecting employees, securities transfer records
and shareholder lists, and any books, papers and records relating to other
assets or business activities in which such party may have a reasonable
interest, and otherwise provide such assistance as is reasonably requested in
order that each party may have a full opportunity to make such investigation
and evaluation as it shall reasonably desire to make of the business and
affairs of the other party; provided, however, that
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the foregoing rights granted to each party shall, whether or not and
regardless of the extent to which the same are exercised, in no way affect
the nature or scope of the representations, warranties and covenants of the
respective party set forth herein. In addition, each party and its officers
and directors shall cooperate fully (including providing introductions, where
necessary) with such other party to enable the party to contact third
parties, including customers, prospective customers, specifying agencies or
others as the party deems reasonably necessary to complete its due diligence;
provided that such party agrees not to initiate such contacts without the
prior approval of the other party, which approval will not be unreasonably
withheld.
(b) NM or MJK may, in their respective sole discretion, elect not to
proceed with the Merger based upon its due diligence investigation performed
pursuant to Section 6.3(a) above, if the results of such due diligence
investigation, in either party's reasonable judgment, (i) causes the other
party's value to be materially less than it would have been in the absence of
such information or (ii) reveals any event, condition or occurrence (not
previously disclosed in this Agreement or the schedules attached hereto) that
materially adversely affects the financial condition, assets, operating
results, business condition or prospects of the other party, by providing
such other party with written notice thereof on or before the date of the
definitive Proxy Statement referred to in Section 6.4.
(c) Prior to closing and if, for any reason, the transactions
contemplated by this Agreement are not consummated, neither NM nor MJK nor
any of their officers, employees, attorneys, accountants and other
representatives, shall disclose to third parties or otherwise use any
confidential information received from the other party in the course of
investigating, negotiating, and performing the transactions contemplated by
this Agreement; provided, however, that nothing shall be deemed to be
confidential information which:
(i) is known to the party receiving the information at the time
of disclosure;
(ii) becomes publicly known or available without the disclosure
thereof by the party receiving the information in violation of this
Agreement; or
(iii) is rightfully received by the party receiving the
information from a third party.
This provision shall not prohibit the disclosure of information required to
be made under federal or state securities laws. If any disclosure is so
required, the party making such disclosure shall consult with the other party
prior to making such disclosure, and the parties shall use all reasonable
efforts, acting in good faith, to agree upon a text for such disclosure which
is satisfactory to both parties.
(d) IF NM or MJK elects not to proceed with the Merger under this
Section, this Agreement shall terminate in accordance with the terms of
Article 8 below.
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6.4. PROXY STATEMENT.
(a) For the purpose (i) of holding a meeting of the shareholders of
NM to approve the Merger and the New Articles, the parties hereto shall
cooperate in the preparation of an appropriate Proxy Statement, which shall
satisfy all applicable requirements of the Exchange Act and the rules and
regulations thereunder (such proxy statement, together with any and all
amendments or supplements thereto, being herein referred to as the "Proxy
Statement").
(b) MJK shall furnish such information concerning MJK and the MJK
Subsidiaries as is necessary in order to cause the Proxy Statement, insofar
as it relates to MJK, the MJK Subsidiaries and MJK securities, to be prepared
in accordance with Section 6.4(a). MJK agrees promptly to advise NM if at
any time prior to the NM shareholders' meeting any information provided by
MJK in the Proxy Statement becomes incorrect or incomplete in any material
respect, and to provide NM the information needed to correct such inaccuracy
or omission.
(c) NM shall use all reasonable efforts to promptly prepare and
submit the Proxy Statement with the SEC and the NASD. NM shall use
reasonable efforts to file the definitive Proxy Statement at the earliest
practicable date. NM agrees to provide MJK and its counsel with reasonable
opportunity to review and comment on the Proxy Statement and any amendment
thereto before filing with the SEC or any other governmental entity and
agrees not to make such filing if MJK and its counsel reasonably object to
the completeness or accuracy of any information contained therein. MJK
authorizes NM to utilize in the Proxy Statement the information concerning
MJK, the MJK Subsidiaries and MJK securities provided to NM for the purpose
of inclusion in the Proxy Statement. NM shall advise MJK promptly when the
definitive Proxy Statement has been filed and shall furnish MJK with copies
of all such documents.
(d) NM shall bear all printing and mailing costs in connection with
the preparation and mailing of the Proxy Statement to NM shareholders. MJK
and NM shall each bear their own legal and accounting expenses in connection
with the Proxy Statement.
6.5. TAX TREATMENT.
Neither NM nor MJK, nor Surviving Corporation after the Effective Date,
shall knowingly take any action which would disqualify the Merger as a
"reorganization" that would be tax free to the shareholders of NM and MJK
pursuant to Section 368(a) of the Code.
6.6. PRESS RELEASES.
MJK and NM shall agree with each other as to the form and substance of
any press release or public announcement related to this Agreement or the
transactions contemplated hereby, provided, however, that nothing contained
herein shall prohibit either party, following notification to the other
party, from making any disclosure which is required by law or regulation. If
any such press release or public announcement is so required, the party
making such disclosure shall consult with the other party prior to making
such disclosure, and the parties shall use all reasonable efforts, acting in
good faith, to agree upon a text for such disclosure which is satisfactory to
both parties.
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6.7. SECURITIES REPORTS.
NM agrees to provide to MJK copies of all reports and other documents
filed under the Securities Act or Exchange Act with the SEC by it between the
date hereof and the Effective Date within two (2) days after the date such
reports or other documents are filed with the SEC.
6.8. STOCK LISTING.
NM and MJK shall use all reasonable efforts to list on the NASDAQ Small
Cap Market System the shares of NM Common Stock to be issued in connection
with the Merger, and to change its current trading symbol for NM Common Stock.
6.9. SHAREHOLDER APPROVALS.
Each of MJK and NM shall call a meeting of its shareholders for the
purpose of voting upon this Agreement and the Merger, and, in the case of NM,
the New Articles, and shall hold such meeting on such dates as mutually
agreed by NM and MJK. The Board of Directors of NM and MJK shall recommend
approval of this Agreement, the Merger and, in the case of NM, the New
Articles, and use all reasonable efforts (including, without limitation,
soliciting proxies for such approvals) to obtain approvals thereof from its
shareholders, provided, however, the Board of Directors may fail to make such
recommendation, and/or to seek to obtain the shareholder approval referred to
in this sentence, or withdraw, modify or change any such recommendation, if
such Board of Directors determines, in good faith, after consultation with
counsel, that the making of such recommendation, the seeking to obtain such
shareholder approval, or the failure to so withdraw, modify or change its
recommendation, may constitute a breach of the fiduciary or legal obligations
of such Board of Directors.
6.10. NO SOLICITATION.
(a) Unless and until this Agreement shall have been terminated
pursuant to Section 8.1, neither NM nor its officers, directors or agents
shall, directly or indirectly, encourage, solicit or initiate discussions or
negotiations with, or engage in negotiations or discussions with, or provide
non-public information to, any corporation, partnership, person or other
entity or groups concerning any merger, sale of capital stock, sale of
substantial assets or other business combination; provided that NM may engage
in such discussion in response to an unsolicited proposal from an unrelated
party if the Board of Directors of NM determines, in good faith, after
consultation with counsel, that the failure to engage in such discussions may
constitute a breach of the fiduciary or legal obligations of the Board of
Directors of NM. NM will promptly advise MJK if it receives a proposal or
inquiry with respect to the matters described above.
(b) Unless and until this Agreement shall have been terminated
pursuant to Section 8.1, neither MJK nor its officers, directors or agents
shall, directly or indirectly, encourage, solicit or initiate discussions or
negotiations with, or engage in negotiations or discussions with, or provide
non-public information to, any corporation, partnership, person or other
entity or groups concerning any merger, sale of capital stock, sale of
substantial assets or other business combination, except for any such
transaction pursuant to which (i) MJK is the surviving corporation in such
transaction, and (ii) the shareholders of MJK immediately preceding such
transaction will own at least fifty-one
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percent (51%) of the outstanding shares of MJK after giving effect to such
transaction; provided that MJK may engage in such discussion in response to
an unsolicited proposal from an unrelated party if the Board of Directors of
MJK determines, in good faith, after consultation with counsel, that the
failure to engage in such discussions may constitute a breach of the
fiduciary or legal obligations of the Board of Directors of MJK. MJK will
promptly advise NM if it receives a proposal or inquiry with respect to the
matters described above.
6.11. FAILURE TO FULFILL CONDITIONS.
In the event that either of the parties hereto determines that a
condition to its respective obligations to consummate the transactions
contemplated hereby cannot be fulfilled on or prior to the termination of
this Agreement, it will promptly notify the other party.
6.12. TAX OPINION.
MJK and NM shall reasonably cooperate with each other in obtaining a
federal tax opinion as contemplated by Section 7.1(c).
6.13. RESIGNATIONS AND ELECTION OF DIRECTORS.
At the Effective Time, NM shall deliver the voluntary resignations of
each officer of NM and each director of NM who is not designated to be a
director of NM in accordance with Section 2.1(a) and the continuing NM
directors shall appoint the other persons who shall be directors of NM in
accordance with Section 2.1(a) to be directors of NM upon the consummation of
the Merger.
6.14. REGISTRATION RIGHTS AGREEMENT.
At the Effective Date, NM shall execute and deliver the Registration
Rights Agreement.
6.15. FILING OF REPORTS NECESSARY FOR USE OF RULE 145.
After the Effective Date, NM shall use reasonable efforts to file all
reports and data with the SEC necessary to permit the shareholders of MJK and
NM who may be deemed "underwriters" (within the meaning of Rule 145 under the
Securities Act) of MJK Common Stock and Series I Convertible Preferred Stock
to sell NM Common Stock received by them in connection with the Merger
pursuant to Rules 144 and 145(d) under the Securities Act if they would
otherwise be so entitled. After the Effective Date, NM will use reasonable
efforts to file with the SEC reports, statements, and other materials
required by the federal securities laws on a timely basis.
6.16. NOTIFICATION OF CERTAIN MATTERS.
On or prior to the Effective Date, each party shall give prompt notice
to the other party of (i) the occurrence or failure to occur of any event or
the discovery of any information, which occurrence, failure or discovery
would be likely to cause any representation or warranty on its part contained
in this Agreement to be untrue, inaccurate or incomplete after the date
hereof in any material respect or, in the case of any representation or
warranty given as of a specific date, would be likely to cause any such
representation or warranty on its part contained in this Agreement to be
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untrue, inaccurate or incomplete in any material respect as of such specific
date, and (ii) any material failure of such party to comply with or satisfy
any covenant or agreement to be complied with or satisfied by it hereunder.
ARTICLE 7
CONDITIONS
7.1. CONDITIONS TO OBLIGATIONS OF EACH PARTY.
The respective obligations of each party to effect the transactions
contemplated hereby shall be subject to the fulfillment or waiver at or prior
to the Effective Date of the following conditions:
(a) NO INJUNCTION. No injunction or other order entered by a state
or federal court of competent jurisdiction shall have been issued and remain
in effect which would prohibit or make illegal the consummation of the
transactions contemplated hereby.
(b) NO PROHIBITIVE CHANGE OF LAW. There shall have been no law,
statute, rule or regulation, domestic or foreign, enacted or promulgated
which would prohibit or make illegal the consummation of the transactions
contemplated hereby.
(c) FEDERAL TAX OPINION. MJK shall have received a tax opinion
addressed to MJK by counsel or independent certified accountants acceptable
to MJK based on customary reliance and subject to customary qualifications,
to the effect that for federal income tax purposes:
(i) The formation of Merger Sub and the merger of Merger Sub
into MJK will be disregarded for federal income tax purposes, and the
transaction will be treated as an acquisition by NM of the stock of MJK
in exchange solely for the shares of the Surviving Corporation Common
Stock.
(ii) The Merger will qualify as a reorganization under Section
368(a) of the Code. NM and MJK will each be a party to the
reorganization within the meaning of Section 368(b) of the Code.
(iii) No gain or loss will be recognized by shareholders of MJK
upon the receipt of the Surviving Corporation Common Stock pursuant to
Section 356(a)(1)(B) of the Code.
(d) LISTING. The NM Common Stock to be issued in connection with the
merger shall have been approved for listing on the NASDAQ Small Cap Market
System.
(e) CONSENTS AND APPROVALS. All consents and approvals necessary to
consummate the transactions contemplated by this Agreement shall have been
obtained, including, but not limited to, those set forth on Schedules 3.2
and 4.2 as well as any and all approvals required from the NASD in order that
the transactions contemplated herein not constitute a breach or violation of,
or result in a right of termination or acceleration of, or creation of any
encumbrance on any of MJK's assets
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pursuant to the provisions of, any agreement arrangement or undertaking of or
affecting MJK or any MJK Subsidiary or any license, franchise or permit of or
affecting MJK or any MJK Subsidiary.
(f) ADVERSE PROCEEDINGS. There shall not be threatened, instituted
or pending any action or proceeding before any court or governmental
authority or agency, domestic or foreign, (i) challenging or seeking to make
illegal, or to delay or otherwise directly or indirectly to restrain or
prohibit, the consummation of the transactions contemplated hereby or seeking
to obtain material damages in connection with the transactions contemplated
hereby, (ii) seeking to prohibit direct or indirect ownership or operation by
NM or Merger Sub of all or a material portion of the business and assets of
MJK or any MJK Subsidiary, or to NM or Merger Sub or to MJK to dispose of or
to hold separately all or a material portion of the business or assets of NM,
Merger Sub, MJK or MJK Subsidiaries, as a result of the transactions
contemplated hereby, (iii) seeking to invalidate or render unenforceable any
material provision of this Agreement, the Articles of Merger or any of the
other agreements attached as exhibits hereto, or (iv) otherwise relating to
and materially adversely affecting the transactions contemplated hereby.
(g) GOVERNMENTAL ACTION. There shall not be any action taken, or any
statute, rule, regulation, judgment, order or injunction proposed, enacted,
entered, enforced, promulgated, issued or deemed applicable to the
transactions contemplated hereby by any federal, state or other court,
government or governmental authority or agency, which could reasonably be
expected to result, directly or indirectly, in any of the consequences
referred to in Section 7.1(f).
(h) REGISTRATION RIGHTS AGREEMENT. NM and the MJK shareholders that
are parties hereto shall have executed and delivered the Registration Rights
Agreement.
(i) INVESTMENT LETTER. Each of the MJK shareholders shall have
executed and delivered to NM the Investment Letter (in the form attached
hereto as EXHIBIT D).
(j) MARKET CONDITION. There shall not have occurred any general
suspension of trading on the New York Stock Exchange or NASDAQ NMS or NASDAQ
Small Cap Market System, or any suspension of trading in NM Common Stock, or
any general bank moratorium or closing or any war, national emergency or
other event affecting the economy or securities trading markets generally
that would make completion of the Merger impossible.
7.2. ADDITIONAL CONDITIONS TO OBLIGATION OF NM.
The obligation of NM to consummate the transactions contemplated hereby
in accordance with the terms of this Agreement is also subject to the
fulfillment or waiver of the following conditions:
(a) REPRESENTATIONS AND COMPLIANCE. The representations and
warranties of MJK set forth in Article 3 shall have been true and correct as
of the date hereof, and, except to the extent such representations and
warranties are made as of a specified date, shall be true and correct as of
the Effective Date as if made at and as of the Effective Date, except where
the failure to be true and correct would not have, or would not reasonably be
expected to have, a Material Adverse Effect on MJK. MJK shall in all
material respects have performed each obligation and agreement and
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complied with each covenant to be performed and complied with by it hereunder
at or prior to the Effective Date.
(b) OFFICERS' CERTIFICATE. MJK shall have furnished to NM a
certificate of the Chief Executive Officer and the Chief Financial Officer of
MJK, dated as of the Effective Date, in which such officers shall certify
that, to their best knowledge, the conditions set forth in Section 7.2(a)
have been fulfilled.
(c) SECRETARY'S CERTIFICATE. MJK shall have furnished to NM (i)
copies of the text of the resolutions by which the corporate action on the
part of MJK necessary to approve this Agreement, the Articles of Merger and
the transactions contemplated hereby and thereby were taken, (ii) a
certificate dated as of the Effective Date executed on behalf of MJK by its
corporate secretary or one of its assistant corporate secretaries certifying
to NM that such copies are true, correct and complete copies of such
resolutions and that such resolutions were duly adopted and have not been
amended or rescinded, (iii) an incumbency certificate dated as of the
Effective Date executed on behalf of MJK by its corporate secretary or one of
its assistant corporate secretaries certifying the signature and office of
each officer of MJK executing this Agreement, the Articles of Merger or any
other agreement, certificate or other instrument executed pursuant hereto by
MJK, and (iv) a copy of the Articles of MJK, certified by the Secretary of
State of Minnesota, and certificates of good standing from the Secretary of
State of Minnesota evidencing the good standing of MJK in such jurisdiction.
(d) SHAREHOLDER APPROVAL. This Agreement, the Merger, and the New
Articles shall have been approved by the Requisite NM Shareholder Vote.
(e) FAIRNESS OPINION. Within five (5) days prior to mailing the
Proxy Statement to the shareholders of NM, NM shall have received a written
opinion in a form reasonably acceptable to NM from an investment banking firm
reasonably acceptable to NM to the effect that the Merger is fair from a
financial point of view to the holders of NM Common Stock prior to the
Effective Date.
7.3. ADDITIONAL CONDITIONS TO OBLIGATION OF MJK.
The obligation of MJK to consummate the transactions contemplated hereby
in accordance with the terms of this Agreement is also subject to the
fulfillment or waiver of the following conditions:
(a) REPRESENTATIONS AND COMPLIANCE. The representations and
warranties of NM set forth in Article 4 shall have been true and correct as
of the date hereof, and, except to the extent such representations and
warranties are made as of a specified date, shall be true and correct as of
the Effective Date as if made at and as of the Effective Date, except where
the failure to be true and correct would not have, or would not reasonably be
expected to have, a Material Adverse Effect on NM. NM shall in all material
respects have performed each obligation and agreement and complied with each
covenant to be performed and complied with by it hereunder at or prior to the
Effective Date.
(b) OFFICERS' CERTIFICATE. NM shall have furnished to MJK a
certificate of the Chief Executive Officer and the Chief Financial Officer of
NM, dated as of the Effective Date, in which
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such officers shall certify that, to their best knowledge, the conditions set
forth in Section 7.3(a) have been fulfilled.
(c) SECRETARY'S CERTIFICATE. NM shall have furnished to MJK (i)
copies of the text of the resolutions by which the corporate action on the
part of NM necessary to approve this Agreement, the Articles of Merger, and
the New Articles, the election of the directors of the Surviving Corporation
and the transactions contemplated hereby and thereby were taken, (ii)
Articles dated as of the Effective Date executed on behalf of NM by its
corporate secretary or one of its assistant corporate secretaries certifying
to MJK that such copies are true, correct and complete copies of such
resolutions and that such resolutions were duly adopted and have not been
amended or rescinded, (iii) an incumbency certificate dated as of the
Effective Date executed on behalf of NM by its corporate secretary or one of
its assistant corporate secretaries certifying the signature and office of
each officer of NM executing this Agreement, the Articles of Merger, the New
Articles, or any other agreement, certificate or other instrument executed
pursuant hereto, and (iv) a copy of the New Articles of NM, certified by the
Secretary of State of Minnesota, and certificates of good standing from the
Secretary of State of Minnesota evidencing the good standing of NM in such
jurisdiction.
(d) SHAREHOLDER APPROVAL. This Agreement and the Merger shall have
been approved by the Requisite MJK Shareholder Vote.
(e) OTHER AGREEMENTS AND RESIGNATIONS. The Registration Rights
Agreement shall have been duly executed and delivered by the parties thereto.
Each of the officers and non-continuing directors of NM immediately prior to
the Effective Time shall deliver duly executed resignations from their
positions with NM effective immediately after the Effective Time.
ARTICLE 8
TERMINATION, AMENDMENT AND WAIVER
8.1. TERMINATION.
(a) This Agreement may be terminated prior to the Effective Date:
(b) by mutual consent of MJK and NM, if the board of directors of
each so determines by vote of a majority of the members of its entire board;
(c) by either MJK or NM, if there has been a material
misrepresentation, breach of warranty or breach of covenant on the part of
the other in the representations, warranties and covenants set forth in this
Agreement, or if any of the conditions to such party's obligation to
consummate the transactions contemplated in this Agreement shall have become
impossible to satisfy as a result of no negligent or willful action by such
party;
(d) by either MJK or NM, if (i) the Merger and this Agreement is not
duly approved by the shareholders of each of MJK or NM, including if a
shareholder meeting is not held as contemplated by the first sentence of
Section 6.9, or (ii) the New Articles are not approved by the shareholders of
NM, including if a shareholder meeting is not held as contemplated by the
first sentence of Section 6.9;
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(e) by either MJK or NM if the Effective Date is not on or before
July 15, 1999, or such later date as MJK and NM may mutually agree (unless
the failure to consummate the Merger by such date shall be due to the action
or failure to act of the party seeking to terminate this Agreement in breach
of such party's obligations under this Agreement);
(f) by either NM or MJK pursuant to Section 6.3 above; or
(g) by NM or MJK if, after the date hereof, there shall have been a
material adverse change in the financial condition or business of the other
party or if an event shall have occurred which, so far as reasonably can be
foreseen, would result in any such change, except to the extent such change
is directly caused by the party so terminating.
Any party desiring to terminate this Agreement shall give prior written
notice of such termination and the reasons therefor to the other party.
8.2. AMENDMENT.
This Agreement may not be amended except by an instrument in writing
approved by the parties to this Agreement and signed on behalf of each of the
parties hereto.
8.3. WAIVER.
At any time prior to the Effective Date, any party hereto may (a) extend
the time for the performance of any of the obligations or other acts of the
other party hereto or (b) waive compliance with any of the agreements of the
other party or with any conditions to its own obligations, in each case only
to the extent such obligations, agreements and conditions are intended for
its benefit. Any such extension or waiver shall only be effective if made in
writing and duly executed by the party giving such extension or waiver.
ARTICLE 9
GENERAL PROVISIONS
9.1. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be sufficiently given if made by hand delivery, by fax, by telecopier,
by overnight delivery service, or by registered or certified mail (postage
prepaid and return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by it
by like notice):
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If to MJK:
MJK Holdings, Inc.
5500 Wayzata Boulevard
Suite 800
Minneapolis, Minnesota 55416
Attn: Chairman and Chief Executive Officer
with copies to:
Maun & Simon, PLC
2000 Midwest Plaza Building West
801 Nicollet Mall
Minneapolis, Minnesota 55402-2534
Attn: Albert A. Woodward
If to NM or Merger Sub:
NM Holdings, Inc.
9850 51st Avenue North
Suite 110
Minneapolis, Minnesota 55442
Attention: President and Chief Executive Officer
with copies to:
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Kenneth L. Cutler
All such notices and other communications shall be deemed to have been
duly given as follows: when delivered by hand, if personally delivered, when
received; if delivered by registered or certified mail (postage prepaid and
return receipt requested), when receipt acknowledged; if faxed or telecopied,
when received, and the next day delivery after being timely delivered to a
recognized overnight delivery service.
9.2. INTERPRETATION.
The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this
Agreement. References to Sections and Articles refer to Sections and Articles
of this Agreement unless otherwise stated. Words such as "herein,"
"hereinafter," "hereof," "hereto," "hereby" and "hereunder," and words of
like import, unless the context requires otherwise, refer to this Agreement
(including the Exhibits and Schedules hereto). As used in this Agreement,
the masculine, feminine and neuter genders shall be deemed to include the
others if the context requires.
9.3. SEVERABILITY.
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If any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated, and the parties shall
negotiate in good faith to modify this Agreement and to preserve each party's
anticipated benefits under this Agreement.
9.4. MISCELLANEOUS.
This Agreement (together with all other documents and instruments
referred to herein): (a) constitutes the entire agreement, and supersedes
all other prior agreements and undertakings, both written and oral, among the
parties, with respect to the subject matter hereof; (b) shall be governed in
all respects, including validity, interpretation and effect, by the internal
laws of the State of Minnesota, without giving effect to the principles of
conflict of laws thereof; and (c) shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns,
but shall not be assignable by either party hereto without the prior written
consent of the other party hereto.
9.5. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
The representations and warranties of the parties set forth herein shall
not survive the consummation of the Merger, but covenants that specifically
relate to periods, activities or obligations subsequent to the Merger shall
survive the Merger. In addition, if this Agreement is terminated pursuant to
Section 8.1, the covenants contained in Section 6.3(c) shall survive such
termination.
9.6. SCHEDULES.
The Schedules and other disclosure items that are not exhibits hereto
referred to in this Agreement shall be delivered as soon as practicable, but
in no event later than the close of business on April 9, 1999. If on April
9, 1999 any party hereto shall have failed to deliver such Schedules, the
other party shall have the right to terminate this Agreement.
At least five (5) days prior to the Closing Date, the parties hereto
shall deliver to all other parties hereto a list of any and all amendments to
the Schedules necessary to update the Schedules from and after the date
hereof.
9.7. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
9.8. THIRD PARTY BENEFICIARIES.
Except as provided in the next following sentence, each party hereto
intends that this Agreement shall not benefit or create any right or cause of
action in or on behalf of any person other
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than the parties hereto. The provisions of Section 6.15 are intended for the
benefit of Affiliates of NM and MJK.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the date first written above by their respective officers.
MJK HOLDINGS, INC.
By /s/ Eldon C. Miller
-----------------------------------------
Eldon C. Miller
Chairman and Chief Executive Officer
NM HOLDINGS, INC.
By /s/ George E. Kline
-----------------------------------------
-----------------------------------------
President and Chief Executive Officer
NM MERGER CO.
By /s/ George E. Kline
-----------------------------------------
-----------------------------------------
President and Chief Executive Officer
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EXHIBIT B
THIRD AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
NM HOLDINGS, INC.
Under and pursuant to the Minnesota Business Corporation Act, the Board
of Directors and shareholders of NM Holdings, Inc. (f/k/a Nutrition Medical,
Inc.) have resolved to amend the Second Restated Articles of Incorporation of
the corporation, which are amended and restated as follows:
ARTICLE I.
NAME
The name of this corporation is "Stockwalk.com Group, Inc."
ARTICLE II.
REGISTERED OFFICE
The registered office of this corporation is 5500 Wayzata Boulevard,
Suite 800, Minneapolis, Minnesota 55426.
ARTICLE III.
CAPITAL STOCK
1. The aggregate number of authorized shares of the corporation is One
Hundred Million shares (100,000,000), par value of $.04 per share, of which
Fifty Million shares (50,000,000) are designated as common 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.
2. 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.
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ARTICLE IV.
DIRECTORS
1. The business of this corporation shall be managed by or under the
direction of a board of directors. Directors need not be shareholders of the
corporation. The board of directors in its discretion may elect honorary
directors who shall serve without voting power.
2. The board of directors of this corporation shall consist of six (6)
directors or such other number of directors as shall be determined by the
affirmative vote of a majority vote of the board of directors.
3. Directors shall serve for the term for which they were appointed or
elected and until their successors are elected and qualified. If any vacancy
occurs in the board of directors, the remaining directors, by the affirmative
vote of a majority thereof, shall elect a director to fill the vacancy until
the next regular meeting of the shareholders.
4. The directors shall have all of the powers conferred upon directors
by the Minnesota Business Corporation Act.
5. An action required or permitted to be taken by the board of
directors of this corporation may be taken by written action signed by the
number of directors that would be required to take the same action at a
meeting of the board at which all directors are present except as to those
matters which require shareholder approval, in which case the written action
must be signed by all members of the board of directors.
ARTICLE V.
CERTAIN SHAREHOLDER RIGHTS
Shareholders shall have no preemptive rights to purchase, subscribe for
or otherwise acquire any new or additional securities of the corporation. No
shareholder shall be entitled to cumulative voting rights.
ARTICLE VI.
BYLAWS
The power to adopt, amend and repeal Bylaws for the corporation shall be
vested in the board of directors, except to the extent otherwise limited by
the Minnesota Business Corporation Act.
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ARTICLE VII.
LIMITATION ON LIABILITY/INDEMNIFICATION
1. A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for
(i) liability based on a breach of the duty of loyalty to the corporation or
the shareholders; (ii) liability for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law; (iii)
liability based on the payment of an improper dividend or an improper
repurchase of the corporation's stock under Section 559 of the Minnesota
Business Corporation Act (Minnesota Statutes, Chap. 302A) or; (iv) liability
for any transaction from which the director derived an improper personal
benefit. If the Minnesota Business Corporation Act hereafter is amended to
authorize the further elimination or limitation of the liability of
directors, then the liability of a director of the corporation, in addition
to the limitation on personal liability provided herein, shall be limited to
the fullest extent permitted by the amended Minnesota Business Corporation
Act. Any repeal or modification of this Article by the shareholders of the
corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability of a director of the corporation
existing at the time of such repeal or modification.
2. The corporation shall indemnify any person who, in relation to or
because of such person's service to the corporation in an official capacity,
was or is a party or is threatened to be made a party to any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(including an action by or in the right of the corporation), to the full
extent permitted by the Minnesota Business Corporation Act.
ARTICLE VIII.
AMENDMENT OF ARTICLES
These Articles of Incorporation may be amended by the affirmative vote
of the holder or holders of the majority of the voting power of the common
stock present at a shareholders' meeting where said amendments are submitted
to a vote.
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EXHIBIT C
SECTIONS 302A.471 AND 302A.473 OF THE
MINNESOTA BUSINESS CORPORATION ACT
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
Subdivision 1. Actions creating rights. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in that
it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase shares
or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited through
the authorization or issuance of securities of an existing or new class or
series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise to
the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of a court, or
a disposition for cash on terms requiring that all or substantially all of
the net proceeds of disposition be distributed to the shareholders in
accordance with their respective interests within one year after the date of
disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares
will be acquired by the acquiring corporation, if the shares of the
shareholder are entitled to be voted on the plan; or
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(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by
the board directs that dissenting shareholders may obtain payment for their
shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name
of the shareholder, unless the shareholder dissents with respect to all the
shares that are beneficially owned by another person but registered in the
name of the shareholder and discloses the name and address of each beneficial
owner on whose behalf the shareholder dissents. In that event, the rights of
the dissenter shall be determined as if the shares as to which the
shareholder has dissented and the other shares were registered in the names
of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may
assert dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting shareholder under the
terms of this section and section 302A.473, if the beneficial owner submits
to the corporation at the time of or before the assertion of the rights a
written consent of the shareholder.
Subd. 3. Rights not to apply. (a) Unless the articles, the bylaws, or
a resolution approved by the board otherwise provide, the right to obtain
payment under this section does not apply to a shareholder of the surviving
corporation in a merger, if the shares of the shareholder are not entitled to
be voted on the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1,
for the determination of shareholders entitled to receive notice of and to
vote on an action described in subdivision 1, only shareholders as of the
date fixed, and beneficial owners as of the date fixed who hold through
shareholders, as provided in subdivision 2, may exercise dissenters' rights.
Subd. 4. Other rights. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a
right at law or in equity to have a corporate action described in subdivision
1 set aside or rescinded, except when the corporate action is fraudulent with
regard to the complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
Subdivision 1. Definitions. (a) For purposes of this section, the
terms defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
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(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1,
up to and including the date of payment, calculated at the rate provided in
section 549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder
meeting at which any action described in section 302A.471, subdivision 1 is
to be voted upon, the notice of the meeting shall inform each shareholder of
the right to dissent and shall include a copy of section 302A.471 and this
section and a brief description of the procedure to be followed under these
sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by
the shareholders, a shareholder who is entitled to dissent under section
302A.471 and who wishes to exercise dissenters' rights must file with the
corporation before the vote on the proposed action a written notice of intent
to demand the fair value of the shares owned by the shareholder and must not
vote the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the
proposed action has been approved by the board and, if necessary, the
shareholders, the corporation shall send to all shareholders who have
complied with subdivision 3 and to all shareholders entitled to dissent if no
shareholder vote was required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply
with any restrictions on transfer of uncertificated shares within 30 days
after the notice required by paragraph (a) was given, but the dissenter
retains all other rights of a shareholder until the proposed action takes
effect.
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Subd. 5. Payment; return of shares. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting
shareholder who has complied with subdivisions 3 and 4 the amount the
corporation estimates to be the fair value of the shares, plus interest,
accompanied by:
(1) the corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) an estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the reason
for withholding the remittance, and an offer to pay to the dissenter the
amount listed in the materials if the dissenter agrees to accept that amount
in full satisfaction. The dissenter may decline the offer and demand payment
under subdivision 6. Failure to do so entitles the dissenter only to the
amount offered. If the dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel
all transfer restrictions. However, the corporation may again give notice
under subdivision 4 and require deposit or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that
the amount remitted under subdivision 5 is less than the fair value of the
shares plus interest, the dissenter may give written notice to the
corporation of the dissenter's own estimate of the fair value of the shares,
plus interest, within 30 days after the corporation mails the remittance
under subdivision 5, and demand payment of the difference. Otherwise, a
dissenter is entitled only to the amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand,
either pay to the dissenter the amount demanded or agreed to by the dissenter
after discussion with the corporation or file in court a petition requesting
that the court determine the fair value of the shares, plus interest. The
petition shall be filed in the county in which the registered office of the
corporation is located, except that a surviving foreign corporation that
receives a demand relating to the shares of a constituent
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domestic corporation shall file the petition in the county in this state in
which the last registered office of the constituent corporation was located.
The petition shall name as parties all dissenters who have demanded payment
under subdivision 6 and who have not reached agreement with the corporation.
The corporation shall, after filing the petition, serve all parties with a
summons and copy of the petition under the rules of civil procedure.
Nonresidents of this state may be served by registered or certified mail or
by publication as provided by law. Except as otherwise provided, the rules
of civil procedure apply to this proceeding. The jurisdiction of the court
is plenary and exclusive. The court may appoint appraisers, with powers and
authorities the court deems proper, to receive evidence on and recommend the
amount of the fair value of the shares. The court shall determine whether
the shareholder or shareholders in question have fully complied with the
requirements of this section, and shall determine the fair value of the
shares, taking into account any and all factors the court finds relevant,
computed by any method or combination of methods that the court, in its
discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is
binding on all shareholders, wherever located. A dissenter is entitled to
judgment in cash for the amount by which the fair value of the shares as
determined by the court, plus interest, exceeds the amount, if any, remitted
under subdivision 5, but shall not be liable to the corporation for the
amount, if any, by which the amount, if any, remitted to the dissenter under
subdivision 5 exceeds the fair value of the shares as determined by the
court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the
costs and expenses of a proceeding under subdivision 7, including the
reasonable expenses and compensation of any appraisers appointed by the
court, and shall assess those costs and expenses against the corporation,
except that the court may assess part or all of those costs and expenses
against a dissenter whose action in demanding payment under subdivision 6 is
found to be arbitrary, vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses
of any experts or attorneys as the court deems equitable. These fees and
expenses may also be assessed against a person who has acted arbitrarily,
vexatiously, or not in good faith in bringing the proceeding, and may be
awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if
any.
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NM HOLDINGS, INC.
REVOCABLE PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned, having duly received the Notice of Special Meeting of
Shareholders and Proxy Statement dated June 15, 1999, hereby appoints George E.
Kline and Richard J. Hegstrand (each with the power to act alone and with the
power of substitution and revocation) to vote all shares of Common Stock of NM
Holdings, Inc. (the "Company") which the undersigned is entitled to vote at the
Special Meeting of Shareholders (the "Special Meeting") to be held at the
Minneapolis Club at 729 Second Avenue South, Minneapolis, Minnesota on Tuesday,
July 6, 1999, at 3:30 p.m. Minneapolis time, and at any and all adjournments
thereof, as follows:
1. Proposal to approve the Agreement and Plan of Reorganization dated as of
March 25, 1999, as amended on May 7, 1999, with MJK Holdings, Inc. ("MJK")
and NM Merger Co., a newly formed wholly-owned subsidiary of the Company
("Merger Sub"), pursuant to which Merger Sub will merge with and into MJK,
with MJK as the surviving corporation, which will then be a wholly-owned
subsidiary of the Company.
________ FOR ________ AGAINST ________ ABSTAIN
2. Proposal to amend and restate the Company's Second Restated Articles of
Incorporation, as amended, which, among other things, (a) changes the
corporate name of the Company to "Stockwalk.com Group, Inc.," (b) increases
the number of authorized shares of the Company's capital stock to
100,000,000, of which 50,000,000 will be designated as common stock and
50,000,000 will be undesignated capital stock, and (c) increases the number
of persons who will serve on the Company's Board of Directors to six, and
allows for future changes to that number by the affirmative vote of a
majority of the Board of Directors.
________ FOR ________ AGAINST ________ ABSTAIN
3. Proposal to amend the Company's 1995 Long-Term Incentive and Stock Option
Plan (the "1995 Plan") increasing to 1,500,000 the maximum number of shares
of common stock, $.04 par value, of the Company issuable upon exercise of
options or other awards granted or issued under the 1995 Plan.
________ FOR ________ AGAINST ________ ABSTAIN
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4. In their discretion, on such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" propositions 1, 2 and 3.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED.
This proxy may be revoked by filing a subsequently dated proxy or by
notifying the Secretary of NM Holdings, Inc. of your decision to revoke this
proxy, either in person, at the Special Meeting or in writing.
When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by the President
or other authorized officer. If a partnership, please sign in partnership name
by an authorized person.
Date: _______________, 1999
---------------------------------
Signature
---------------------------------
Signature if jointly held
PLEASE MARK, DATE AND RETURN THIS PROXY PROMPTLY
