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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22247
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NM HOLDINGS, INC.
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(Name of small business issuer in its charter)
Minnesota 41-1756256
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9850 51st Avenue North, Suite 110, Minneapolis, MN 55442
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (612) 551-9595
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Securities registered under Section 12(b) of the Exchange Act:
None
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(Title of class)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.04 par value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
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State issuer's revenues for its most recent fiscal year: $4,926,765
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On March 22, 1999, and based on the average bid and asked prices as of that
date, the aggregate market value of the voting stock held by non-affiliates of
the issuer was $4,216,694.
The number of shares outstanding of the registrant's common stock, $.04 par
value, as of March 22, 1999 was 1,150,251 shares.
Transitional Small Business Disclosure Format: Yes No X
Page 2 of 19
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
NM Holdings, Inc. (the "Company" or "Registrant") 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 its product
lines and assets used in connection with the critical care business and adult
nutrition product business. The Company does not currently conduct any active
business operations. The Company intends to use its existing cash resources,
together with debt or equity financing that may be available, 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. 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 the Company's common stock.
During 1996 and 1997, the Company incurred significant expenses related
to the development of the generic infant formula product. In January 1998,
unable to successfully complete a marketable product, the Company announced
its decision to suspend further development efforts of its generic infant
formula product. Also in January 1998, the Company announced 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. ("Agrilink"), a New York corporation, its private
label adult nutrition business in return for (i) cash in an amount equal to
the Company's cost for the inventory and labels used in such business, (ii)
cash in the amount of $18,000 for the Company's label development costs, and
(iii) 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 lawsuit described in "Item 3. Legal
Proceedings" 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
Page 3 of 19 pages
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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 would 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 the Company's 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 Company common stock issued to Elan in January
1997.
As a result of the ZEVEX and GalaGen transactions and the settlement with
Novartis, described in "Item 3. Legal Proceedings," whereby the Company agreed
to discontinue its L-Emental-TM- Plus product, the Company currently has no
products or product-related patents or trademarks.
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 cancelation of the Elan
subordinated promissory note, and the reduction in the number of shares
outstanding through the reacquisition of Company common stock issued to Elan
will position 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. It is the Board of
Directors' intention to pursue business combinations with entities engaged in
other lines of business, using the Company's cash resources (approximately $2
million as of December 31, 1998) together with other resources. The acquisition
of a business 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 finalization of the 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. Consequently, The Nasdaq Stock Market has
notified the Company that it may no longer qualify for inclusion in The Nasdaq
Stock Market (see "Item 5. Market for Common Equity and Related Stockholder
Matters"). Pending a business acquisition by the Company, the net proceeds of
the ZEVEX and GalaGen transactions, after deduction of the expenses incurred by
the Company in connection therewith, will be invested in U.S. government
securities.
On March 17, 1999, the Company issued a press release announcing it had
commenced negotiations with Miller, Johnson & Kuehn, Incorporated, a
brokerage/clearing firm located in Minneapolis, Minnesota ("MJK") regarding
an acquisition transaction. On March 25, 1999, the Company entered into an
agreement with MJK Holdings, Inc., the parent company of MJK, pursuant to
which MJK will merge with and into a newly formed, wholly owned subsidiary of
the Company. The agreement provides that each share of capital stock of MJK
Holdings, Inc. will be exchanged for 3.76378 shares of Company common stock.
The closing of the transaction is subject to various closing conditions,
including, but not limited to, the approval of the Company's shareholders.
RESIGNATION OF WILLIAM L. RUSH AS CHIEF EXECUTIVE OFFICER, PRESIDENT AND
CHAIRMAN OF THE BOARD
Page 4 of 19 pages
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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.
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. The Company expects to retain employees, as needed, upon
the Company's acquisition of a business.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters are located at 9850 51st Avenue
North, Suite 110, Minneapolis, Minnesota, 55442, in an office/warehouse
facility consisting of approximately 9,500 square feet. The Company's lease
expires on November 30, 2001. Monthly rent, which includes the Company's pro
rata share of taxes, utilities and common area charges, is $8,800. As a
result of the Company's product line sales in 1998, the space in the facility
exceeds the Company's current needs. In March 1999, the Company entered into
an agreement with Sentinel Real Estate Corporation ("Sentinel"), the lessor of
the facility, that allows the Company to sublet substantially all of its
leased space effective April 1, 1999. Additionally, the Company established a
reserve in the year ended December 31, 1998, to cover the expected costs of
operating the facility and any losses the Company may incur by subletting the
property. In March 1999, the Company entered into a sublease agreement with
U-Ship, Inc., whereby U-Ship, Inc. will assume the Company's remaining
liability under the lease with Sentinel, including taxes and common area
maintenance costs.
ITEM 3. 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the Company was held on December 22,
1998, at which time the following matters were approved:
1. The election of three nominees to the Board of Directors for one-year
terms.
2. The Asset Purchase Agreement dated as of July 27, 1998, by and between the
Company and ZEVEX, a Delaware corporation, pursuant to which the Company
agreed to sell and transfer, and ZEVEX agreed to purchase and assume,
certain of the assets and liabilities of the Company in connection with the
Company's enteral feeding pump and plastic disposables business.
3. The Asset Purchase Agreement dated as of September 1, 1998, as amended
pursuant to an Amendment Agreement dated October 28, 1998, by and between
the Company and GalaGen, a Delaware corporation,
Page 5 of 19 pages
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pursuant to which the Company agreed to sell and transfer, and GalaGen
agreed to purchase and assume, certain of the assets and liabilities of the
Company in connection with the Company's critical care business.
4. An amendment to the Company's Second Restated Articles of Incorporation,
as amended, changing the name of the Company to NM Holdings, Inc.
5. The appointment of Ernst & Young LLP as the independent auditors of
the Company for the fiscal year ending December 31, 1998.
Proxies for the annual meeting were solicited by the Company pursuant to Section
14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and there was no solicitation in opposition to management's nominees to the
Board of Directors or to management's voting recommendations on the other
matters submitted to a shareholder vote at the annual meeting. All nominees for
directors as listed in the proxy statement were elected. The voting results were
as follows:
1. Election of Directors:
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<CAPTION>
For Withhold Authority
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<S> <C> <C>
George E. Kline 822,107 1,450
Lawrence A. Lehmkuhl 823,342 125
Hilding C. Nelson 823,342 125
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2. Proposal to approve the Asset Purchase Agreement between the Company and
ZEVEX dated as of July 27, 1998:
For: 822,892 Against: 75 Abstain: 500 Broker Non-vote: 0
3. Proposal to approve the Asset Purchase Agreement between the Company and
GalaGen dated as of September 1, 1998, as amended:
For: 823,217 Against: 0 Abstain: 250 Broker Non-vote: 0
4. Proposal to amend Article I of the Company's Second Restated Articles of
Incorporation, as amended, changing the name of the Company to NM Holdings,
Inc.:
For: 821,942 Against: 1,420 Abstain: 75 Broker Non-vote: 0
5. Proposal to appoint Ernst & Young LLP as independent auditors of the
Company for the fiscal year ending December 31, 1998:
For: 822,017 Against: 1,420 Abstain: 0 Broker Non-vote: 0
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has traded on The Nasdaq SmallCap Market system
under the symbol NMED since September 26, 1996. As of March 22, 1999, there were
approximately 45 holders of record of the Company's common stock.
On June 10, 1998, in response to a listing requirement for The Nasdaq
SmallCap Market that the common stock maintain a minimum bid price of $1.00 per
share, the Company effected a one-for-four reverse stock split (the "Reverse
Stock Split"). Unless otherwise noted, all share numbers and per-share prices
contained in this Form 10-KSB reflect the Reverse Stock Split.
Page 6 of 19 pages
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On November 6, 1998, the Company received notice from The Nasdaq Stock
Market that the Company's common stock was not in compliance with the minimum
bid price requirement of $1.00 per share, pursuant to NASD Marketplace Rule
4310(c)(4). On November 19, 1998, the Company received notice from The Nasdaq
Stock Market that the Company did not maintain net tangible assets of at least
$2 million as required pursuant to NASD Marketplace Rule 4310(c)(2). On December
15, 1998, the Company received notice from The Nasdaq Stock Market that it did
not maintain the required minimum $1 million market value of its public float
pursuant to NASD Marketplace Rule 4310(c)(7). The Company believes that
subsequent to the closing of the transactions with ZEVEX and GalaGen on December
23, 1998, and as a result of certain changed market conditions related to the
Company's Common Stock minimum bid price and related market capitalization, the
Company is currently in compliance with these requirements for listing on The
Nasdaq SmallCap Market. On January 13, 1999, the Company also received notice
from The Nasdaq Stock Market that subsequent to the closing of the transactions
with ZEVEX and GalaGen, the Company's status as a "shell" corporation
disqualifies it for inclusion in The Nasdaq SmallCap Market pursuant to NASD
Marketplace Rules 4300 and 4330. A hearing with representatives of
The Nasdaq Stock Market was held on March 26, 1999, regarding this delisting
action. At the hearing the Company requested a listing extension in light of
its agreement with MJK Holdings, Inc. Nasdaq officials have indicated that a
final determination will be made in approximately three to four weeks.
The quotations shown below represent inter-dealer sale prices as
reported by The Nasdaq SmallCap Market, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
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1998 High Low
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First Quarter 5 1/2 2
Second Quarter 3 3/8 1
Third Quarter 1 7/8 7/8
Fourth Quarter 1 1/4 5/8
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1997 High Low
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First Quarter 16 13 1/2
Second Quarter 15 8
Third Quarter 13 1/2 8
Fourth Quarter 10 1/2 4
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The Company has never paid or declared any cash dividends on its common
stock and does not intend to declare any dividends on its common stock in the
foreseeable future. The Company currently intends to retain any earnings for
use to pursue a business combination with another entity as discussed in
"Item 1. Description of Business" above.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY STATEMENT
Certain information contained in this Form 10-KSB that does not relate to
historical financial information may be deemed to constitute forward-looking
statements. When used in this Form 10-KSB and in future filings by the Company
with the Securities and Exchange Commission (the "Commission"), in the Company's
press releases and in oral statements made with the approval of an authorized
executive officer, the words or phrases "believes," "anticipates," "intends,"
"will likely result," "estimates," "projects" or similar expressions identify
such forward-looking statements within the meaning of Section 21E of the
Exchange Act, but are not the exclusive means of identifying such statements.
These forward-looking statements involve risks and uncertainties that may cause
the Company's actual results to differ materially from the results discussed in
the forward-looking statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances after the
date of such statements. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Commission that attempt to advise interested
parties of the risks and factors that may affect the Company's business. Such
forward-looking statements are qualified in their entirety by the cautions and
risk factors set forth under the "Cautionary Statement" filed as Exhibit 99.1 to
this Form 10-KSB.
Page 7 of 19 pages
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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 1999, 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. The patent infringement lawsuit described in "Item
3. Legal Proceedings" 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 would 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. The Company intends to use 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 Company common stock issued to Elan will position 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. It is the Board of Directors' intention to pursue
business combinations with entities engaged in other lines of business, using
the Company's cash resources (approximately $2 million as of December 31, 1998)
together with other resources. The acquisition of a business 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.
On March 25, 1999, the Company entered into an agreement with MJK Holdings,
Inc., the parent company of MJK, pursuant to which MJK will merge with and
into a newly formed, wholly owned acquisition subsidiary of the Company. The
agreement provides that each share of capital stock of MJK Holdings, Inc.
will be exchanged for 3.76378 shares of Company common stock. The closing of
the transaction is subject to various closing conditions, including, but not
limited to, the approval of the Company's shareholders.
RESULTS OF OPERATIONS
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.
Page 8 of 19 pages
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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 audited financial statements).
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.
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 audited financial statements).
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.
Page 9 of 19 pages
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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,
$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 ISSUE
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
discontinuation of its core business and the pursuit of new investment
opportunities. A fundamental aspect of due diligence with any potential
acquisition candidate will include a comprehensive review of any Year 2000
exposure.
The Company incurred less than $1000 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 the Company's 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
Page 10 of 19 pages
<PAGE>
operations totaled $262,293. Cash and cash equivalents as of December 31,
1998, totaled $1,935,368. 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 that have not yet been identified. 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.
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements are included as a separate section
following the signature page to this Form 10-KSB:
Report of Independent Auditors
Balance Sheets as of December 31, 1998 and 1997
Statements of Operations for the years ended December 31, 1998 and 1997
Statement of Changes in Shareholders' Equity for the years ended December
31, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1998 and 1997
Notes to Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No changes in accountants or disagreements between the Company and its
accountants regarding accounting principles or financial statement disclosures
have occurred within the twenty-four months prior to date of the Registrant's
most recent financial statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Certain biographical information regarding the Company's directors,
including each director's name, age, principal occupation, business experience
and period of service as a director of the Company, is set forth below.
GEORGE E. KLINE, age 62, has been a director of the Company since May
1995. Since 1966, Mr. Kline has been President of Venture Management, a
financial consulting services firm. Since 1985, Mr. Kline also has served as
an officer of Brightstone Capital, Ltd. LLC, a venture capital partnership.
Mr. Kline is also a director of CyberOptics Corporation and Rimage
Corporation. Mr. Kline became Chairman of the Board of the Company on
September 1, 1999, and was elected Chief Executive Officer and President of
the Company effective January 1, 1999.
LAWRENCE A. LEHMKUHL, age 61, has been a director of the Company since
January 1995. From 1985 to March 1993, Mr. Lehmkuhl was President and Chief
Executive Officer of St. Jude Medical, Inc., a medical device manufacturer, and
from April 1993 to February 1995, Mr. Lehmkuhl was Chairman of St. Jude's board
of directors. From 1966 to 1985, Mr. Lehmkuhl was employed by American Hospital
Supply Corporation in various management capacities. Mr. Lehmkuhl is also a
director of Kera Vision, Inc., which was founded in 1986 to develop and
commercialize proprietary medical products for the treatment of common vision
problems, including myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. Mr. Lehmkuhl previously served as a director of Fischer Imaging
Corporation, which designs, manufactures and markets specialty and general
purpose medical imaging systems for the diagnosis and treatment of disease.
HILDING C. NELSON, age 60, was appointed as a director of the Company in
November 1998 to fill the vacancy created by the resignation of William L.
Rush. From October 1979 until his resignation in May 1998, Mr. Nelson was
director of Kinnard Investments, Inc., a publicly held holding company that
provides financial products and services. Mr. Nelson was Chairman of
Kinnard's board of directors from October 1995 until his resignation from
Kinnard. From April 1995 to October 1995, Mr. Nelson was President and Chief
Executive Officer of and consultant to Pet Food
Page 11 of 19 pages
<PAGE>
Warehouse, Inc., a retailer of pet food and supplies. Mr. Nelson also serves
as a director of Image Systems Corporation, which designs, develops,
manufactures and markets large high bright high resolution monitors. Since
January 1, 1990, Mr. Nelson has been a private investor and has also
previously served as President of Lund International Holdings, Inc., a
leading designer, manufacturer and marketer of a broad line of appearance
accessories for new and used light trucks, including pickup trucks, sport
utility vehicles, minivans and other vans, and a leading manufacturer of
aftermarket and original equipment manufacturer accessories for the heavy
truck market.
Certain biographical information regarding each executive officer of the
Company, including name, age and position held with the Company, is set forth
below.
GEORGE E. KLINE, age 62, became Chairman of the Board of Directors on
September 1, 1999, and was appointed Chief Executive Officer and President
effective January 1, 1999. His biography is set forth above.
RICHARD J. HEGSTRAND, age 45, was appointed acting Chief Operating
Officer of the Company in August 1998. Mr. Hegstrand had been Chief Financial
Officer and Secretary of the Company from November 1995 and December 1996,
respectively, until his resignation in October 1997. Mr. Hegstrand currently
also is an accounting and financial consultant to CARA Collision and Glass,
Inc., an automobile maintenance company. From December 1992 until September
1995, Mr. Hegstrand was employed by PDS Financial Corporation, an equipment
finance company, most recently as its Vice President and Chief Financial
Officer. From January 1987 to December 1992, Mr. Hegstrand served in various
management capacities with Magnetic Data, Inc., a computer disk-drive
refurbisher, most recently as its Chief Financial Officer.
HILDING C. NELSON, age 60, was appointed Secretary of the Company
effective January 1, 1999. His biography is set forth above.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities to file with the Commission initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company.
Based solely on a review of copies of such forms furnished to the
Company during the fiscal year ended December 31, 1998, the Company believes
that all Section 16(a) filing requirements applicable to its executive
officers, directors and greater-than-10% shareholders were satisfied, except
that George E. Kline, Chairman of the Board, Chief Executive Officer,
President and a director of the Company, did not timely file a Form 4
disclosing the sale of 6,250 and 21,250 shares of Company common stock on
April 17, 1998 and May 13, 1998, respectively, by Brightstone Fund IV, of
which Mr. Kline serves as general partner with James A. Bernards. By virtue
of this position, Mr. Kline may be deemed to be the benficial owner of these
shares. However, under an agreement with Mr. Bernards, Mr. Kline had no
voting or investment control over these shares. The sale of such shares was
reported on a Form 5 filed by Mr. Kline with the Commission on February 16,
1999. Hilding C. Nelson, Secretary and a director of the Company, failed to
timely file a Form 3 reflecting a stock option grant of 3,750 shares granted
upon his election to the Company's Board of Directors. Mr. Nelson's option
grant was reported on a Form 3 filed with the Commission on March 4, 1999.
ITEM 10. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
Directors of the Company receive no compensation other than authorized
expense reimbursement and stock options granted under the 1995 Long-Term
Incentive Stock Option Plan (the "1995 Stock Option Plan") or the 1996
Non-Employee Director Stock Option Plan (the "1996 Director Plan") described
below.
Page 12 of 19 pages
<PAGE>
1996 DIRECTOR PLAN
The shareholders of the Company adopted the 1996 Director Plan in August
1996. The 1996 Director Plan provides for an automatic grant of non-qualified
stock options to purchase 3,750 shares of Company 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 Company 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. As of the date
of filing of this Form 10-KSB, Messrs. Kline, Lehmkuhl and Nelson have each
received options to purchase 3,750 shares of Company common stock pursuant to
the 1996 Director Plan.
1995 STOCK OPTION PLAN
The Company adopted the 1995 Stock Option Plan in March 1995. The plan
provides for the grant of stock option awards to the Company's executive
officers, other employees, directors and consultants. The plan provides for
the grant of both incentive stock options intended to qualify for
preferential tax treatment under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and for nonqualified stock options that do not
qualify for such treatment. The exercise price of incentive stock options
(which only employees are eligible to receive) must equal or exceed the fair
market value of the Company's common stock on the date of grant; the exercise
price of nonqualified stock options must equal or exceed 85% of the fair
market value of the Company's common stock on the date of grant. The 1995
Stock Option Plan also provides for restricted stock awards and grants of
stock appreciation rights (SARs), but no restricted stock awards or SARs have
been granted to date. The Company has reserved 200,000 shares of its common
stock for issuance under the 1995 Stock Option Plan. As of December 31, 1998,
options to purchase 194,063 shares of common stock had been granted under the
plan, at a weighted average exercise price of $3.85. On December 23, 1998,
the Board of Directors approved option grants of 60,000, 15,000 and 7,500 to
Messrs. Kline, Lehmkuhl and Nelson, respectively, under the 1995 Stock Option
Plan.
EXECUTIVE COMPENSATION
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 $100,000 during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
----------------------- ----------------------
NAME AND SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- ----------------------- ------ ---------- --------- ---------------------- ----------------
<S> <C> <C> <C> <C> <C>
William L. Rush 1998 63,577(1) -- -- 122,799(2)
President and 1997 95,000 -- -- 2,118(3)
Chief 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.
Page 13 of 19 pages
<PAGE>
(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, (i) 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"); (ii) Mr. Rush retained an option to purchase 25,000
shares of Company 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; (iii) 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; (iv) 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; (v) 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 (vi) the Company paid Mr. Rush $3,471.16 for his accrued and
unpaid vacation.
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.
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 the Company's common stock. The following table sets forth
the number and aggregate dollar value of all unexercised options held by the
Named Executive Officer on December 31, 1998, at which time the closing
per-share sale price of the Company's common stock as reported on The Nasdaq
SmallCap Market was $1.1875.
Page 14 of 19 pages
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
--------------------------------------- -----------------------------------------
NAME EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
------------------ --------------- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
William L. Rush 25,000 0 (1) --
</TABLE>
________________________
(1) None of the Named Executive Officer's stock options were in the money as
of December 31, 1998. The exercise price per share of all of the Named
Executive Officer's stock options is $14.00.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of March 12, 1999, by (i) each person
known by the Company to be the beneficial owner of more than 5% of the Company's
outstanding common stock, (ii) each director and nominee for director, (iii) the
Named Executive Officer, and (iv) all executive officers and directors as a
group. In addition, shares of Company 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 Company common stock set forth opposite their
respective names:
BENEFICIAL OWNERSHIP TABLE
<TABLE>
<CAPTION>
Shares Beneficially Percent
Owned of Class
------------------- --------------
<S> <C> <C>
William L. Rush (1). . . . . . . . . . . . . 117,500 10.0%
11730 50th Place North
Plymouth, MN 55442
Lawrence A. Lehmkuhl (2) . . . . . . . . . . 35,510 3.02%
134 Dellwood Avenue
Dellwood, MN 55110
George E. Kline (3). . . . . . . . . . . . . 182,000 14.75%
Brightstone Capital
4750 IDS Center
Minneapolis, MN 55402
Hilding C. Nelson (4). . . . . . . . . . . . 9,375 *
920 Second Avenue South
Minneapolis, MN 55402
Brightstone Funds (5). . . . . . . . . . . . 100,000 8.60%
Venture Management
4750 IDS Center
Minneapolis, MN 55402
Betty L. Johnson . . . . . . . . . . . . . . 86,050 7.48%
Miller, Johnson & Kuehn, Inc.
5500 Wayzata Boulevard, Suite 800
Minneapolis, MN 55416
All directors and officers as a
group (5 persons) (6). . . . . . . . . . . . 366,885 27.85%
</TABLE>
________________________
* Less than 1%.
Page 15 of 19 pages
<PAGE>
(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 7,500 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 general partners
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 an
agreement with Mr. Bernards, Mr. Kline has no voting or investment
control over 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 71,250 shares issuable pursuant to Currently
Exercisable Options.
(4) Includes 9,375 shares exercisable pursuant to Currently Exercisable
Options.
(5) These shares are also included in beneficial ownership of Mr. Kline.
See footnote 3 above.
(6) Includes 166,875 shares issuable pursuant to Currently Exercisable Options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS
The following exhibits are included with this Annual Report on Form 10-KSB
as required by Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
2.1(a) Asset Purchase Agreement dated January 13, 1997, by and between
the Company and Elan Pharma, Inc.
2.2(b) Asset Purchase Agreement effective May 1, 1998, by and between
the Company and Agrilink Foods, Inc.*
2.3(c) Asset Purchase Agreement dated July 27, 1998, between the Company
and ZEVEX, Inc.
2.4(d) First and Second Amendments to Asset Purchase Agreement between
the Company and ZEVEX, Inc.
2.5(e) Asset Purchase Agreement dated September 1, 1998, as amended
through October 28, 1998, between the Company and GalaGen Inc.
2.6(f) Second Amendment to Asset Purchase Agreement between the Company
and GalaGen Inc.
3.1(f) Second Restated Articles of Incorporation of the Company, as
amended
4.1(g) Promissory Note dated January 13, 1997, by the Company in favor of
Elan Pharma, Inc.
10.1(h) 1995 Long-Term Incentive and Stock Option Plan, as amended
10.2(i) 1996 Non-Employee Director Stock Option Plan
10.3(j) Executive Employment Agreement dated October 1, 1996, between the
Company and William L. Rush
10.4 Separation Agreement and General Release dated August 31, 1998,
between the Company and William L. Rush
10.5(i) Office Lease dated October 15, 1993, between the Company and the
308 Corporation
23 Consent of independent auditors
24 Powers of Attorney (set forth on the Signature Page hereof)
27 Financial Data Schedule (EDGAR only)
99.1 Cautionary Statement
</TABLE>
Page 16 of 19 pages
<PAGE>
<TABLE>
<C> <S>
99.2 Press Release dated March 17, 1999, announcing negotiations with
Miller, Johnson & Kuehn, Incorporated
</TABLE>
________________________
(a) Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K filed
on January 23, 1997.
(b) Incorporated by reference to Exhibit 2.2 to the Registrant's Form 10-KSB
filed on March 31, 1998.
(c) Incorporated by reference to Exhibit 2.1 to the Registrant's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1998.
(d) Incorporated by reference to Exhibits 2.2 and 2.3 to the Registrant's Form
8-K filed on January 7, 1999.
(e) Incorporated by reference to Exhibit B to the Registrant's Definitive Proxy
Statement on Schedule 14A filed on December 9, 1998.
(f) Incorporated by reference to the exhibit of the same number to the
Registrant's Form 8-K filed on January 7, 1999.
(g) Incorporated by reference to Schedule 2.01(b) to the Registrant's Form 8-K
filed on January 23, 1997.
(h) Incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report
on Form 10-KSB filed on March 31, 1997.
(i) Incorporated by reference to Exhibit 10.2 to the Registrant's previously
filed Form SB-2 Registration Statement effective September 26, 1996.
* Confidential information has been omitted from such Exhibit and filed
separately with the Commission pursuant to a confidential treatment request
under Rule 24b-2.
b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K for the quarter ended
December 31, 1998. The Company filed a Form 8-K on January 7, 1999, to
announce the closing of the transactions with ZEVEX and GalaGen, the
Company's corporate name change from Nutrition Medical, Inc. to NM Holdings,
Inc., and the settlement of the litigation with Novartis. The Company filed a
Form 8-K/A on March 3, 1999, setting forth pro forma financial information of
the Company.
Page 17 of 19 pages
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NM Holdings, Inc.
/S/ RICHARD J. HEGSTRAND
-------------------------
Richard J. Hegstrand
Chief Operating Officer
Date: March 30, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated. Each person whose signature to this report on Form 10-KSB
appears below hereby constitutes and appoints Richard J. Hegstrand as his true
and lawful attorney-in-fact and agent, with full power of substitution, to sign
on his behalf individually and in the capacity stated below and to perform any
acts necessary to be done in order to file all amendments to this report on Form
10-KSB, and any and all instruments or documents filed as part of or in
connection with this report on Form 10-KSB or the amendments thereto and each of
the undersigned does hereby ratify and confirm all that said attorney-in-fact
and agent, or his substitutes, shall do or cause to be done by virtue hereof.
<TABLE>
<S> <C> <C>
By: /S/ GEORGE E. KLINE Chairman of the Board, Date: March 30, 1999
------------------- Chief Executive Officer,
George E. Kline President, and Director
(Principal Executive Officer)
By: /S/ RICHARD J. HEGSTRAND Acting Chief Operating Officer Date: March 30, 1999
------------------------ (Principal Financial Officer)
Richard J. Hegstrand
By: /S/ HILDING C. NELSON Secretary and Director Date: March 30, 1999
---------------------
Hilding C. Nelson
By: /S/ Lawrence A. Lehmkuhl Director Date: March 30, 1999
------------------------
Lawrence A. Lehmkuhl
</TABLE>
Page 18 of 19 pages
<PAGE>
FINANCIAL STATEMENTS
NM HOLDINGS, INC.
(FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Financial Statements
Years ended December 31, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................1
Financial Statements
Balance Sheets.............................................................2
Statements of Operations...................................................3
Statement of Shareholders' Equity..........................................4
Statements of Cash Flows...................................................5
Notes to Financial Statements..............................................6
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
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
<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 - 1,250,000
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.
2
<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.
3
<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 (5) - (9) - (9)
stock split
Common stock acquired in
connection with debt (213,750) (8,550) - - (8,550)
extinguishment
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.
4
<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 goodwill 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.
5
<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.
6
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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.
7
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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 lives, 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
8
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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.
9
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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.
10
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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>
11
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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
----------
3,148,860
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>
12
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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
Work in progress - 63,313
Finished goods - 1,259,820
-------------------------
$ - $1,615,165
-------------------------
-------------------------
</TABLE>
13
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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.
14
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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.
15
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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.
16
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
10. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes activity under the Plans:
<TABLE>
<CAPTION>
WEIGHTED
SHARES PLAN OPTIONS OUTSTANDING AVERAGE
AVAILABLE -------------------------- EXERCISE PRICE
FOR GRANT INCENTIVE NON-QUALIFIED PER SHARE
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 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 WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE 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.
17
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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>
18
<PAGE>
NM Holdings, Inc.
(Formerly known as Nutrition Medical, Inc.)
Notes to Financial Statements (continued)
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.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1(a) Asset Purchase Agreement dated January 13, 1997, by and
between the Company and Elan Pharma, Inc.
2.2(b) Asset Purchase Agreement effective May 1, 1998, by and between
the Company and Agrilink Foods, Inc.*
2.3(c) Asset Purchase Agreement dated July 27, 1998, between the Company
and ZEVEX, Inc.
2.4(d) First and Second Amendments to Asset Purchase Agreement between
the Company and ZEVEX, Inc.
2.5(e) Asset Purchase Agreement dated September 1, 1998, as amended
through October 28, 1998, between the Company and GalaGen Inc.
2.6(f) Second Amendment to Asset Purchase Agreement between the Company
and GalaGen Inc.
3.1(f) Second Restated Articles of Incorporation of the Company, as
amended
4.1(g) Promissory Note dated January 13, 1997, by the Company in favor of
Elan Pharma Inc.
10.1(h) 1995 Long-Term Incentive and Stock Option Plan, as amended
10.2(i) 1996 Non-Employee Director Stock Option Plan
10.3(h) Executive Employment Agreement dated October 1, 1996, between the
Company and William L. Rush
10.4 Separation Agreement and General Release dated August 31, 1998,
between the Company and William L. Rush
10.5(i) Office Lease dated October 15, 1993, between the Company and the
308 Corporation
23 Consent of independent auditors
24 Powers of Attorney (set forth on the Signature Page hereof)
27 Financial Data Schedule (EDGAR only)
99.1 Cautionary Statement
99.2 Press Release dated March 17, 1999, announcing negotiations with
Miller, Johnson & Kuehn, Incorporated
</TABLE>
________________________
(a) Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K filed
on January 23, 1997.
(b) Incorporated by reference to Exhibit 2.2 to the Registrant's Form 10-KSB
filed on March 31, 1998.
(c) Incorporated by reference to Exhibit 2.1 to the Registrant's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1998.
(d) Incorporated by reference to Exhibits 2.2 and 2.3 to the Registrant's Form
8-K filed on January 7, 1999.
(e) Incorporated by reference to Exhibit B to the Registrant's Definitive Proxy
Statement on Schedule 14A filed on December 9, 1998.
(f) Incorporated by reference to the exhibit of the same number to the
Registrant's Form 8-K filed on January 7, 1999.
(g) Incorporated by reference to Schedule 2.01(b) to the Registrant's Form 8-K
filed on January 23, 1997.
(h) Incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report
on Form 10-KSB filed on March 31, 1997.
(i) Incorporated by reference to Exhibit 10.2 to the Registrant's previously
filed Form SB-2 Registration Statement effective September 26, 1996.
* Confidential information has been omitted from such Exhibit and filed
separately with the Commission pursuant to a confidential treatment request
under Rule 24b-2.
Page 19 of 19 pages
<PAGE>
Exhibit 10.4
SEPARATION AGREEMENT AND GENERAL RELEASE
This Separation Agreement and General Release (this "Agreement") is
made and entered into this 9th day of October, 1998, by and between William
L. Rush ("Rush"), a resident of the State of Minnesota, and Nutrition
Medical, Inc. (the "Company"), a Minnesota corporation.
WHEREAS, Rush was employed as President and Chief Executive Officer
of the Company from July 1993 through August 31, 1998;
WHEREAS, Rush resigned his employment with the Company effective
August 31, 1998;
WHEREAS, Rush and the Company are currently parties to that certain
Executive Employment Agreement, effective as of October 1, 1996, by and
between the Company and Rush which amended and restated in its entirety that
certain Executive Employment Agreement dated September 18, 1996 by and
between Rush and the Company (as so amended and restated, the "Employment
Agreement");
WHEREAS, pursuant to Section 4.7 of the Employment Agreement, the
parties thereto may terminate the Employment Agreement at any time upon such
terms or conditions as such parties may agree;
WHEREAS, Rush has negotiated with the Company regarding the terms
and conditions of his resignation and separation from the Company;
WHEREAS, Rush and the Company desire to settle all disputes related
directly or indirectly to Rush's employment with the Company, and Rush's
resignation from employment, in accordance with the terms and conditions set
forth in this Agreement; and
WHEREAS, Rush desires to enter into a consulting agreement (the
"Consulting Agreement") with GalaGen, Inc. ("GalaGen") pursuant to which Rush
would disclose to GalaGen certain confidential information related to the
Company's critical care business, subject to the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements set forth in this Agreement and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Rush and the Company agree as follows:
<PAGE>
1. TERMINATION OF EMPLOYMENT AGREEMENT. Pursuant to Section 4.7
of the Employment Agreement, the parties hereto hereby terminate the
Employment Agreement upon the terms and conditions set forth in this
Agreement.
2. RESIGNATION OF RUSH. Rush agrees and acknowledges that he
resigned voluntarily as President and Chief Executive Officer of the Company
on August 31, 1998 and, effective as of August 31, 1998, does not serve in
any capacity as an employee of the Company.
3. COMPENSATION TO RUSH. The Company will provide Rush with the
following payments and benefits:
(a) The Company shall pay Rush $7,900 on the date hereof.
(b) The Company shall pay Rush $87,100 on October 26, 1998.
(c) On or prior to October 26, 1998, the Company shall transfer
its beneficiary rights under its key man life insurance policy on Rush
(Northwestern Mutual Life policy no. 13-775-828) to a designee of Rush's
choice.
(d) On or prior to October 26, 1998, and contingent upon Rush
assuming or obtaining a discharge of all of the Company's payment
obligations (such payment obligations being equal to $1,000 per month
from October 1998 through and including December 1998) to Rousar &
Associates under the International Sales Broker Agreement, dated as of
December 1, 1997, by and between the Company and Rousar, Rush shall
receive $4,000 of the cash surrender value of the Company's split dollar
life insurance policy on Rush (Northwestern Mutual Life policy no.
14-240-880).
(e) The Company shall pay Rush $17,642 on October 31, 1998.
(f) Rush shall have the option (the "Option") to purchase 25,000
shares of the Company's common stock, $.04 par value, at a per share
exercise price of $14.00, subject to the terms and conditions of the
Company's 1995 Long-Term Incentive and Stock Plan. The Option was
granted to Rush under the terms of the Employment Agreement and was
fully vested as to 12,500 of such shares on April 1, 1998. The Option
as to the remaining 12,500 shares will vest as of the date hereof. The
Option will be canceled on the second anniversary of the date hereof
with respect to shares that have not been purchased by Rush prior to
such date pursuant to the Option.
(g) On or prior to October 26, 1998, the Company shall pay Rush
for all accrued but unpaid vacation pay.
Notwithstanding the foregoing, the Company shall have no obligation to make the
payments required by, or transfer its beneficiary rights pursuant to, paragraphs
3(b), 3(c), 3(d), 3(e) and
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<PAGE>
3(g) if Rush exercises his right to rescind or revoke this Agreement as far
as it extends to potential claims under Minn. Stat. Ch. 363 or the Age
Discrimination in Employment Act pursuant to Paragraph 10(a) or 10(c),
respectively.
4. NO LEGAL ENTITLEMENT TO COMPENSATION AND BENEFITS. Rush agrees
and acknowledges that the Company has no legal obligation absent an agreement
between the parties hereto to provide the compensation and benefits described
in Paragraph 3 and that the Company has agreed to provide Rush such
compensation and benefits to reach an expeditious and amicable resolution
regarding the terms and conditions of Rush's resignation. Rush agrees that he
was not entitled to any of the compensation and benefits specified in
Paragraph 3 absent his execution of this Agreement.
5. INCLUSIVE OF ALL INCOME AND OTHER BENEFITS. Rush agrees that
the compensation and benefits described in Paragraph 3 shall take the place
of, and discharge, any obligations of the Company to Rush for compensation or
any other expectations of payment or benefit on the part of Rush, including,
without limitation, all obligations of the Company to Rush under the
Employment Agreement.
6. PROPRIETARY INFORMATION. Rush acknowledges that during his
employment with the Company, he has been exposed to and acquired
confidential, proprietary and trade secret information belonging to the
Company and the Company's customers ("Confidential Information"), including,
without limitation, designs, processes, formulae, plans, devices and
material, directly or indirectly, useful in any aspect of the Company's
business, past, current or anticipated products or services, customer and
supplier lists, development and research work, business strategies, plans and
proposals, financial, employee and personnel data and information and
purchasing, accounting, marketing, selling and services information. Rush
understands and agrees that such Confidential Information has been disclosed
to him in confidence and for the sole benefit of the Company. Rush agrees
that beginning on the date of this Agreement he, Medical Nutrition, Inc. and
any other entity directly or indirectly controlled by Rush will (i)
diligently protect the confidentiality of all Confidential Information; (ii)
not disclose or communicate any Confidential Information to any third party
without the consent of the Company; and (iii) not make use of Confidential
Information on his own behalf or on behalf of any third party. Rush agrees
that any unauthorized disclosure or use of such Confidential Information to
or on behalf of third parties would cause irreparable harm to the
confidential status of such information and to the Company, and, therefore,
the Company shall be entitled to an injunction prohibiting any such
disclosure, use, or threatened disclosure or use. The foregoing obligations
of confidentiality shall not apply to any knowledge or information that is
now or subsequently becomes generally publicly known, other than as a direct
or indirect result of a breach of this Agreement by Rush. Notwithstanding the
foregoing, Rush may disclose to GalaGen, pursuant to the Consulting
Agreement, Confidential Information related to the Company's critical care
business; provided, however, that if the Company does not sell its critical
care business to GalaGen prior to December 31, 1998, Rush may no longer
disclose such information.
-3-
<PAGE>
Rush expressly acknowledges that the terms of this Paragraph 6
shall survive the expiration or termination of other agreements or duties in
this Agreement.
7. COMPANY PROPERTY. Rush represents that he has not and will
not remove any Confidential Information or other property from the Company's
premises, including, without limitation, all documents, reports, manuals,
business plans, minutes, memoranda, computer software, computer databases,
computer print-outs, member or customer lists, credit cards, keys,
identification, products, access cards, and all other tangible property
relating in any way to the business of the Company, even if Rush authored,
created or assisted in authoring or creating such property. Rush agrees that
within fifteen (15) days of the date of this Agreement, he will return to the
Company all Confidential Information and other Company property currently in
his possession or under his control.
8. DISCLOSURE AND ASSIGNMENT OF INVENTIONS AND OTHER WORKS. Rush
shall promptly disclose to the Company in writing (i) all ideas, improvement
and discoveries, whether or not such are patentable or copyrightable, and
whether or not in writing or reduced to practice ("Inventions") and (ii) all
writings, drawings, diagrams, charts, tables, databases, software (in object
or source code and recorded on any medium), and any other works of
authorship, whether or not such are copyrightable ("Works of Authorship"),
which are conceived, made, discovered, written or created by Rush alone or
jointly with another person, group or entity, whether during the normal hours
of his employment at the Company or on his own time, during the term of
Rush's employment with the Company and until August 31, 1998. Rush hereby
assigns all rights to all such Inventions and Works of Authorship to the
Company. Rush will give the Company all the assistance it reasonably
requires for the Company to perfect, protect, and use its rights to such
Inventions and Works of Authorship. Rush shall sign all such documents, take
all such actions and supply all such information that the Company considers
necessary or desirable to transfer or record the transfer of Rush's entire
right, title and interest in such Inventions and Works of Authorship and to
enable the Company to obtain exclusive patent, copyright, or other legal
protection for Inventions and Works of Authorship anywhere in the world,
provided the Company shall bear all reasonable expenses of Rush in rendering
such cooperation. Notwithstanding the above, the following shall not be
deemed Inventions or Works of Authorship assigned to the Company by Rush
hereunder: any invention or work of authorship for which no equipment,
supplies, facility or Confidential Information of the Company was used and
which was developed entirely on Rush's own time, and which (a) does not
relate (i) directly to the business of the Company or (ii) to which the
Company's actual or demonstrably anticipated research or development, or (b)
which does not result from any work performed by Rush for the Company.
9. FULL COMPROMISE AND GENERAL RELEASE.
(a) Full Compromise. Rush agrees that the payment and acceptance
of the consideration described in Paragraph 3 is in full, final, and
complete compromise, settlement, and satisfaction of any and all claims
relating directly or indirectly to (i)
-4-
<PAGE>
Rush's hiring by the Company, (ii) Rush's employment with the Company,
(iii) Rush's resignation from employment with the Company, and (iv)
claims Rush could have asserted in any litigation against the Company or
any of the "Released Parties" as that term is defined in Paragraph 9(b).
(b) General Release. For the considerations expressed in this
Agreement, Rush, for and on behalf of himself and his heirs,
administrators, executors, successors and assigns, agrees to, and hereby
does, release, acquit, and forever discharge the Company and its
affiliates, subsidiaries, and related companies, and the current and
former directors, officers, members, agents, attorneys, servants,
independent contractors and employees of the Company and all of its
related entities (the "Released Parties"), from any and all claims,
whether direct or indirect, fixed or contingent, known or unknown, which
Rush ever had, has, or may claim to have, for, upon, or by reason of any
matter, act or thing prior to the date of this Agreement, including, but
not limited to, any cause of action Rush could have asserted in any
litigation against any of the Released Parties, any cause of action or
claim relating to Rush's association with or employment by the Company,
and/or any cause of action or claim relating to Rush's decision to
resign. The General Release of this Paragraph 9 specifically
encompasses, but is not limited to, claims that could be brought under
the Minnesota Human Rights Act, Minn. Stat. Section 363.01 et seq.;
Title VII of the Civil Rights Act, 42 U.S.C. Section 2000e, et seq., as
amended by the Civil Rights Act of 1991; the Age Discrimination in
Employment Act, 29 U.S.C. Section 621 et seq. (the "Age Discrimination
in Employment Act"); the Americans With Disabilities Act, 42 U.S.C.
Sections 12101-12213; the Employee Retirement Income Security Act
(ERISA), 29 U.S.C. Section 1001, et seq.; the Fair Labor Standards Act,
29 U.S.C. Section 201, et seq.; the National Labor Relations Act, 29
U.S.C. Section 151, et seq.; the Worker Adjustment Retraining and
Notification Act, 29 U.S.C. Section 2101, et seq.; and any other federal
or state statute, or local ordinance, including any attorneys' fees,
liquidated damages, punitive damages, costs or disbursements that could
be awarded in connection with these or any other statutory claims.
The General Release of this Paragraph 9 also specifically
encompasses any and all claims grounded in contract or tort theories,
including, but not limited to, breach of contract; tortious interference
with contractual relations; promissory estoppel; breach of the implied
covenant of good faith and fair dealing; breach of employee handbooks,
manuals or other policies; wrongful discharge; wrongful discharge in
violation of public policy; assault; battery; fraud; false imprisonment;
invasion of privacy; intentional or negligent misrepresentation;
defamation, including libel and slander, discharge defamation and
self-defamation; intentional or negligent infliction of emotional
distress; negligence; breach of fiduciary duty; negligent hiring,
retention or supervision; whistleblower claims; and/or any other
contract or tort theory based on either intentional or negligent conduct
of any kind, including any attorneys' fees, liquidated damages, punitive
damages, costs or disbursements that could be awarded in connection with
these or any other common law claims. The Company and Rush agree that,
by signing this
-5-
<PAGE>
Agreement, Rush does not waive any claims arising after the execution of
this Agreement.
10. RIGHT TO CONSIDER AND RESCIND THIS AGREEMENT.
(a) Right to Rescind or Revoke under Minn. Stat. Ch.
363. Rush has been informed of his right to rescind this Agreement
as far as it extends to potential claims under Minn. Stat. Ch. 363
(prohibiting discrimination in employment) by written notice to the
Company within fifteen (15) calendar days following his execution of
this Agreement. To be effective, such written notice must be
delivered either by hand or by mail, to Richard J. Hegstrand, 9850
51st Avenue North, Suite 110, Minneapolis, Minnesota 55442 (phone
number: 612-551-9595), within the 15-day period. If a notice of
rescission is delivered by mail, it must be: (i) postmarked within
the 15-day period, (ii) properly addressed to Richard J. Hegstrand
at the above address and (iii) sent by certified mail, return
receipt requested.
(b) Right to Consider under the Age Discrimination in Employment
Act. Rush understands that he has twenty-one (21) days to consider
whether he should agree to release his claims, if any, under the Age
Discrimination in Employment Act. Rush further understands, however,
that he is not required to take the entire 21-day period to decide
whether he wishes to release his claims, if any, under the Age
Discrimination in Employment Act, and that he may do so on an
accelerated basis without prejudice to his own or the Company's rights
under this Agreement.
(c) Right to Rescind or Revoke under the Age Discrimination in
Employment Act . Rush understands that he has the right to rescind the
release of his claims, if any, under the Age Discrimination in
Employment Act, for any reason, within seven (7) days after he signs
this Agreement. Rush understands that the release of his claims, if any,
under the Age Discrimination in Employment Act, will not become
effective or enforceable unless and until he executes this Agreement
and the applicable rescission period has expired. Rush understands that
if he wishes to rescind, the rescission must be in writing and must be
hand-delivered or mailed to the Company. To be effective, such written
notice must be delivered either by hand or by mail, to Richard J.
Hegstrand, 9850 51st Avenue North, Suite 110, Minneapolis, Minnesota
55442 (phone number: 612-551-9595), within the 7-day period. If a
notice of rescission is delivered by mail, it must be: (i) postmarked
within the 7-day period, (ii) properly addressed to Richard J. Hegstrand
at the above address and (iii) sent by certified mail, return receipt
requested.
Rush understands that even if he elects to rescind his agreement to
release his claims, if any, under the Age Discrimination in Employment Act or
Minn. Stat. Ch. 363 (prohibiting discrimination in employment), this
rescission shall have no effect or consequence whatsoever on the release of
any other claims Rush released pursuant to this Agreement, as set forth above.
-6-
<PAGE>
11. TERMINATION OF RIGHT TO INCUR EXPENSES, OBLIGATIONS OR
LIABILITIES. Rush understands and agrees that effective August 31, 1998, he
was and is no longer authorized to incur any expenses, obligations or
liabilities on behalf of the Company, and, if contacted by suppliers or
customers of the Company, Rush will inform such entities that he is no longer
authorized to act on behalf of the Company.
12. NO ADMISSION OF FAULT. Rush and the Company agree that their
willingness to enter into this Agreement does not constitute and should not
be construed as any admission of liability or fault on the part of Rush or
the Company or any of the Released Parties, and the Company specifically
disclaims any liability to, or wrongful acts against, Rush or any other
person, on the part of itself and the Released Parties.
13. TERMINATION OF THIS AGREEMENT. It is agreed that the
compensation and benefits specified in Paragraph 3 of this Agreement are
subject to immediate termination in the event that Rush takes any action or
engages in any conduct which is injurious to the Company. For the purposes
of this Paragraph 13, conduct by Rush that is injurious to the Company is
defined as (i) deliberate disclosure of Confidential Information; (ii)
deliberate misrepresentation of the affairs, practices, or financial
condition of the Company or its officers, directors or employees; (iii) the
deliberate failure to cooperate in such manner as the Company may reasonably
request in the location and/or transfer of records relating to the Company
which were entrusted to, or in the control of, Rush while employed by the
Company.
14. CONFIDENTIALITY. Rush agrees that it is the intent of the
parties to maintain the complete confidentiality of the terms of this
Agreement and the negotiations leading to this Agreement. Therefore, Rush
agrees that he will not publicize, and will take all prudent steps to ensure
the confidentiality of, this Agreement. The only comment Rush will make about
his resignation from the Company is that he resigned voluntarily and that all
matters relating to his employment with the Company have been resolved to the
mutual satisfaction of the parties. Notwithstanding the terms of this
Paragraph 14, Rush shall be entitled to disclose the terms of this Agreement
to his lawyers, tax advisors, accountants, and immediate family if required
by law or on the condition that those to whom such disclosure is made also
will be bound by the terms of this Paragraph 14.
15. COMPLETE AGREEMENT. This Agreement contains the entire
agreement between the parties. Rush hereby affirms that his rights to
compensation and/or benefits from the Company are specified exclusively and
completely in this Agreement. Any modification of, or addition to, this
Agreement must be in a writing signed by Rush and by an authorized
representative of the Company.
16. SEVERABILITY. Rush and the Company agree that should any
provision of this Agreement be held invalid or illegal, such illegality shall
not invalidate the whole of this Agreement, but rather, the Agreement shall
be construed as if it did not contain the illegal part, and the rights and
obligations of the parties shall be construed accordingly.
-7-
<PAGE>
17. EFFECT ON SUCCESSORS. This Agreement is personal to Rush and
may not be assigned by Rush without the written agreement of the Company.
This Agreement shall be binding on the Company, its successors and assigns.
18. GOVERNING LAW. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of Minnesota.
19. KNOWING AND VOLUNTARY AGREEMENT. Rush agrees that he has
entered into this Agreement knowingly and voluntarily. Rush further
acknowledges that he has had the opportunity to be represented by counsel in
connection with the negotiation and preparation of this Agreement and have
any terms of this Agreement explained to him. Rush also acknowledges that
the Company has recommended that he consult legal counsel to assist him in
understanding all terms of this Agreement before executing this Agreement.
Rush further affirms that he understands the meaning of the terms of this
Agreement and their effect and agrees that the provisions set forth in the
Agreement, including, but not limited, to Paragraphs 2, 3, 9 and 10 are
written in language understandable to Rush.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement by
their signatures below.
Dated: October 9, 1998 /s/ William L. Rush
----------------------------------
William L. Rush
NUTRITION MEDICAL, INC.
By /s/ Richard J. Hegstrand
-------------------------------
Its Chief Operating Officer
-----------------------------
<PAGE>
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-36619) pertaining to the 1995 Long-Term Incentive and Stock
Option Plan and 1996 Non-Employee Director Stock Option Plan of Nutrition
Medical, Inc. of our report dated March 1, 1999 with respect to the financial
statements of NM Holdings, Inc. (formerly known as Nutrition Medical, Inc.)
included in the Annual Report on Form 10-KSB for the year ended December 31,
1998.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1998 AND
1997 FINANCIAL STATEMENTS WITH 1997 FINANCIAL STATEMENTS RESTATED FOR
DISCONTINUED OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,935,368 1,647,482
<SECURITIES> 0 0
<RECEIVABLES> 0 1,171,520
<ALLOWANCES> 0 31,500
<INVENTORY> 0 1,615,165
<CURRENT-ASSETS> 1,941,915 4,454,068
<PP&E> 76,269 1,561,566
<DEPRECIATION> 70,167 382,366
<TOTAL-ASSETS> 2,446,142 5,633,268
<CURRENT-LIABILITIES> 63,348 1,533,949
<BONDS> 0 1,788,934
0 0
0 0
<COMMON> 46,010 54,560
<OTHER-SE> 2,336,784 2,255,825
<TOTAL-LIABILITY-AND-EQUITY> 2,446,142 5,633,268
<SALES> 0 0
<TOTAL-REVENUES> 1,437 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 8,095 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (6,658) 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,658) 0
<DISCONTINUED> 87,626 (4,160,638)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 80,968 (4,160,638)
<EPS-PRIMARY> .06 (3.07)
<EPS-DILUTED> .06 (3.07)
</TABLE>
<PAGE>
Exhibit 99.1
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
NM Holdings, Inc. (the "Company") wishes to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995
(the "Act") and is filing this cautionary statement in connection with such
safe harbor legislation.
The Company's Form 10-KSB and annual report to shareholders, any Form
10-QSB or Form 8-K filed by the Company or any other written or oral
statements made by or on behalf of the Company may include "forward-looking
statements" as defined in the Act. The words "believe," "expect,"
"anticipate," "intend," "estimate," "forecast," "project" and similar
expressions identify such forward-looking statements. Forward-looking
statements reflect the Company's current views with respect to future events
and financial performance, and the Company wishes to caution investors that
any forward-looking statements made by or on behalf of the Company are
subject to uncertainties and other factors that could cause actual results to
differ materially from such statements. These uncertainties and other
factors include, but are not limited to, the factors listed below (many of
which have been discussed in the Company's prior filings
with the Securities and Exchange Commission).
Although the Company has attempted to list comprehensively these
important factors, the Company wishes to caution investors that other factors
may in the future prove to be important in affecting the Company's results of
operations. New factors emerge from time to time, and it is not possible for
Company management to predict all of such factors, nor can Company management
assess the impact of each such factor on the business, or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements because such statements reflect the Company's
views only as of the date the statement was made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
CONTROL BY PRINCIPAL SHAREHOLDERS
Present and former directors and officers and principal shareholders of
the Company own beneficially approximately 27.85% of the outstanding common
stock of the Company (the "Common Stock"). As a result, such shareholders
may have the ability to control the election of the Company's entire Board of
Directors and the affairs of the Company, including all fundamental corporate
transactions such as acquisitions, mergers, consolidations and the sale of
substantially all of the Company's assets.
UNDESIGNATED STOCK
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 Minnesota Business Corporation Act. These
provisions and the power to issue additional shares and to establish separate
classes or series of common or preferred stock may, in certain circumstances,
deter or discourage take-over attempts and other changes in control of the
Company not approved by the Board of Directors.
<PAGE>
LIMITATIONS ON BROKER-DEALER SALES OF COMMON STOCK; APPLICABILITY OF "PENNY
STOCK" RULES; NO ASSURANCE OF CONTINUED QUOTATION ON THE NASDAQ SMALLCAP
MARKET.
Federal regulations promulgated under the Securities and 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,
during the time in which the Common Stock is quoted on The Nasdaq SmallCap
Market, the Common Stock is priced below $5.00 per share, trading of the Common
Stock will be subject to the provisions of Section 15(b)(6) of the Exchange Act,
which make it unlawful for any broker-dealer to participate in a distribution of
any penny stock without the consent of the Securities and Exchange Commission
(the "Commission") if, in the exercise of reasonable care, the broker-dealer is
aware of or should have been aware of the participation of a previously
sanctioned person. In such event, it may be more difficult for broker-dealers
to sell the Common Stock, and purchasers of shares of Common Stock may
experience difficulty in selling such shares in the future in secondary trading
markets.
The Common Stock is currently listed on The Nasdaq SmallCap Market. On
August 22, 1997, the Commission approved a number of proposed changes to the
Nasdaq listing requirements effective February 22, 1998. Common and preferred
stock must have a minimum bid price of $1.00. 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 having certain
shareholder voting rights. A company listed on The Nasdaq SmallCap Market also
must meet three additional requirements: (i) the company must have either net
tangible assets of more than $2 million, a market capitalization of $35 million
or net income of $500,000; (ii) the company must have a public float of 500,000
shares; and (iii) the market value of such public float must be more than
$1 million. Additionally, the company must have a minimum of 300 round lot
shareholders and there must be at least two market makers in the company's
common stock. Failure by a company to comply with these requirements or to file
a plan acceptable to Nasdaq for meeting such requirements may result in the
delisting of the company's common stock from The Nasdaq SmallCap Market.
On November 6, 1998, the Company received notice from Nasdaq that its
Common Stock was not in compliance with the minimum bid price requirement of
$1.00 per share, pursuant to NASD Marketplace Rule 4310(c)(4). On November
19, 1998, the Company received notice from Nasdaq that it did not maintain
net tangible assets of at least $2 million as required pursuant to NASD
Marketplace Rule 4310(c)(2). The Company believes that subsequent to the
closing of its transactions with ZEVEX, Inc. and GalaGen Inc. on December 23,
1998, and as a result of certain changed market conditions related to the
Common Stock minimum bid price and related market capitalization, the Company
currently is in compliance with Rules 4310(c)(4) and 4310(c)(2). On January
13, 1999, the Company also received notice from Nasdaq that subsequent to the
closing of its transactions with ZEVEX, Inc. and GalaGen Inc., the Company's
status as a "shell" corporation disqualifies it for inclusion in The Nasdaq
SmallCap Market pursuant to NASD Marketplace Rules 4300 and 4330. A hearing
with representatives of Nasdaq was held on March 26, 1999, regarding this
delisting action. At the hearing the Company requested a listing extension
in light of its agreement with MJK Holdings, Inc. Nasdaq officials have
indicated that a final determination will be made in approximately three to
four weeks.
Should the Common Stock be suspended from trading privileges as a result of
the Company's failure to comply with applicable requirements, the Company, prior
to re-inclusion, must comply with the requirements prior to continued listing.
However, should the Common Stock be terminated from trading privileges on The
Nasdaq SmallCap Market, the Company, prior to re-inclusion, must comply with the
applicable requirements for initial inclusion on The Nasdaq SmallCap Market,
which are more stringent than the requirements for continued listing. There can
be no assurance that the Common Stock will continue to be listed on The Nasdaq
SmallCap Market.
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In the event that the Common Stock is delisted from The Nasdaq SmallCap
Market and the Company fails to meet other relevant criteria, trading, if
any, in shares of the Common Stock would be subject to the full range of the
Penny Stock Rules. Under Exchange Act Rule 15g-8, broker-dealers must take
certain steps prior to selling a penny stock, which steps include: (i)
obtaining financial and investment information from the investor; (ii)
obtaining a written suitability questionnaire and purchase agreement signed
by the investor; (iii) providing the investor with a written identification
of the shares being offered and in what quantity; and (iv) 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, delisting from The Nasdaq
SmallCap Market and the application of the comprehensive Penny Stock Rules
may make it more difficult for broker-dealers to sell the Common Stock,
purchasers of shares of Common Stock may have difficulty in selling such
shares in the future in secondary trading markets and the per-share price of
the Common Stock would likely be greatly reduced.
DEPENDENCE UPON MANAGEMENT
The ability of the Company to identify an appropriate business
combination entity 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
identify such entities and consummate a 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 the
identified business opportunity. While 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.
SCARCITY OF AND COMPETITION FOR BUSINESS OPPORTUNITIES
The Company is and will continue to be an insignificant participant in the
business of seeking business combination transactions with other companies and
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 and successfully completing a business
combination transaction.
NO AGREEMENT OR STANDARDS FOR BUSINESS OPPORTUNITIES
On March 17, 1999, the Company issued a press release announcing it had
commenced negotiations with Miller, Johnson & Kuehn, Incorporated, a
brokerage/clearing firm located in Minneapolis, Minnesota ("MJK") regarding
an acquisition transaction. On March 25, 1999, the Company entered into an
agreement with MJK Holdings, Inc., the parent Company of MJK, pursuant to
which MJK will merge with and into a newly formed, wholly owned acquisition
subsidiary of the Company. The agreement provides that each share of capital
stock of MJK Holdings, Inc. will be exchanged for 3.76378 shares of Company
Common Stock. The closing of the transaction is subject to various closing
conditions, including, but not limited to, the approval of the Company's
shareholders. There can be no assurance that the Company will be successful
in closing the above transaction with MJK Holdings, Inc., or identifying and
evaluating suitable other business opportunities or consummating a business
combination transaction. 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
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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.
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
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.
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Exhibit 99.2
FOR IMMEDIATE RELEASE
NM Holdings, Inc./Miller, Johnson & Kuehn, Incorporated in Merger Discussions
March 17, 1999. Minneapolis, Minnesota. NMHoldings, Inc. (OTC-NMED) and
MJK Holdings, Inc. announced today that they are actively engaged in the
negotiation of a definitive agreement for the merger of the two companies. MJK
Holdings, Inc. is the Parent Corporation of Miller Johnson & Kuehn, Incorporated
(MJK), a Minneapolis-based regional investment-banking firm with offices in
Minnesota, Texas, Florida, Illinois and California. Privately owned MJK also
acts as a fully disclosed clearing broker for approximately 35 brokerage firms
located across the United States. In addition to both retail and institutional
equity and debt investment banking activities, the firm has previously announced
its intentions to move into the Internet areas as one of a relatively small
number of Internet brokers which are self clearing. The firm is currently
ranked 3rd in size among brokerage firms headquartered in Minnesota, and was
selected by City Business as one of the 40 fastest growing privately held firms
in Minnesota in 1997 and 1998. The execution of a definitive agreement is
subject to the negotiation of terms and to due diligence and is also subject to
approval by the respective boards of directors and shareholders.