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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
(AMENDMENT NO. 2)
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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SUBURBAN OSTOMY SUPPLY CO., INC.
(NAME OF SUBJECT COMPANY)
COMMON STOCK, NO PAR VALUE PER SHARE
(TITLE OF CLASS OF SECURITIES)
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864471 10 7
(CUSIP NUMBER OF CLASS OF SECURITIES)
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DONALD H. BENOVITZ
PRESIDENT
75 OCTOBER HILL ROAD
HOLLISTON, MASSACHUSETTS 01746
(508) 429-1000
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON
AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON
BEHALF OF THE PERSON(S) FILING STATEMENT)
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WITH A COPY TO:
JAMES WESTRA, ESQ.
HUTCHINS, WHEELER & DITTMAR
A PROFESSIONAL CORPORATION
101 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
(617) 951-6600
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This Amendment No. 2 amends and supplements the Solicitation/Recommendation
Statement on Schedule 14D-9 filed with the Securities and Exchange Commission
(the 'Commission') by Suburban Ostomy Supply Co., Inc., a Massachusetts
corporation (the 'Company'), on December 22, 1997 (as heretofore amended, the
'Schedule 14D-9'), and relates to the tender offer made by Inva Acquisition
Corp., a Massachusetts corporation ('Purchaser') and wholly owned subsidiary of
Invacare Corporation, an Ohio corporation ('Invacare'), disclosed in a Tender
Offer Statement on Schedule 14D-1 filed with the Commission on December 22,
1997, as heretofore amended, to purchase all of the outstanding shares of the
Company's common stock, no par value per share ('Company Common Stock'), at a
purchase price of $11.75 per share of Company Common Stock, net to the seller in
cash, on the terms and subject to the conditions set forth in the Purchaser's
Offer to Purchase, dated December 22, 1997, and the related Letter of
Transmittal. The purpose of this Amendment No. 2 is to amend Item 4 of the
Schedule 14D-9 as set forth below. Terms defined in the Schedule 14D-9 are used
in this Amendment No. 2 with the same meanings as provided in the Schedule
14D-9.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(b) BACKGROUND; REASONS FOR THE RECOMMENDATION.
The second, fourth, seventh, tenth, eleventh, twelfth and thirteenth
paragraphs of Section (b) of Item 4 are amended such that Section (b) of Item 4
shall read as follows:
Background. In July, 1997, the Board of Directors of the Company
determined that, in light of (i) increasing consolidation among distributors of
home health care supplies, (ii) increasing consolidation among the Company's
customer base and (iii) the fact that certain manufacturers of disposable home
health care supplies had broadened the distribution of their products, which had
increased competition from larger, national distributors of medical products
with substantial sales forces and greater capital resources, it would be in the
best interest of the stockholders of the Company to consider the potential sale
of the Company. On July 15, 1997, the Company engaged Bear, Stearns & Co. Inc.
("Bear Stearns") to serve as its financial advisor to explore strategic
alternatives to enhance stockholder value, including a potential sale of the
Company.
In August, 1997, Bear Stearns contacted a public company competitor of the
Company which is engaged in the medical supply distribution industry to
determine whether it had an interest in acquiring the Company and the Company
entered into an agreement with the competitor pursuant to which the competitor
would have until August 19, 1997 to negotiate mutually acceptable terms with the
Company. Following two (2) meetings with the competitor, during which the
competitor conducted due diligence and discussed the terms of a potential
transaction, the competitor made a preliminary oral offer to purchase the
Company in a stock-for-stock transaction valuing the shares of the Company in
the range of $10.00-$12.00 per share, subject to further due diligence and
confirmation of the Company's anticipated results of operations. The Company
declined the offer and the Board of Directors directed Bear Stearns to solicit
interest from other potential acquirors.
In late August, 1997, Thomas R. Miklich, Parent's Chief Financial Officer,
General Counsel, Treasurer and Secretary, contacted Donald H. Benovitz, the
Company's President and Chief Operating Officer, and informed him of Parent's
interest in acquiring the Company. Shortly thereafter, Mr. Miklich was contacted
by a representative of Bear Stearns who indicated that Bear Stearns had been
retained by the Company to explore strategic alternatives to enhance stockholder
value. The Bear Stearns representative indicated that among the alternatives to
be explored was the potential sale of the Company.
A Confidential Information Memorandum describing the Company was prepared
in September, 1997. Bear Stearns contacted twelve (12) potential strategic
buyers who were deemed to be viable candidates to acquire the Company. The
competitor which had been approached in the first instance was not sent a
Confidential Information Memorandum because it had already received the material
contained in the Confidential Information Memorandum and because, based on the
preliminary offer previously made by the competitor, the Company did not believe
such competitor would make an acceptable offer. Of the twelve (12)
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potential strategic buyers, seven (7) signed a Confidentiality Agreement and
received the Confidential Information Memorandum.
On September 5, 1997, Parent executed a Confidentiality Agreement with the
Company. On September 11, 1997, at the Company's executive offices in Holliston,
Massachusetts, A. Malachi Mixon, III, Parent's Chairman and Chief Executive
Officer, Mr. Miklich, Thomas J. Buckley, then Parent's Group Vice-
President -- Standard Products and Louis F. J. Slangen, Parent's Senior Vice
President -- Sales and Marketing, met with Herbert P. Gray, the Company's
Chairman and Chief Executive Officer, Mr. Benovitz, Steven N. Aschettino, the
Company's Vice President and Chief Financial Officer, Patrick Bohan, the
Company's Vice President of Sales and Marketing, and John Manos, the Company's
Vice President of MIS, and discussed the benefits of a close relationship
between the two (2) companies. The parties discussed the possibility of Parent
becoming a supplier to the Company as well as the potential benefits of a merger
between Parent and the Company.
Following this meeting, Parent was provided with additional information
concerning the Company. On October 3, 1997, Parent sent Bear Stearns a letter
outlining its preliminary interest in acquiring the Company. The letter included
a discussion of Parent's preliminary views of the consideration involved in such
a transaction and identified further steps that would be required to finalize
the terms and conditions of a formal acquisition proposal.
Of the seven (7) potential strategic buyers to whom a copy of the
Confidential Information Memorandum was sent, one (1) such party, a public
company engaged in the distribution of medical products, in addition to Parent
made a preliminary bid to acquire the Company. Parent's offer was in the range
of $11.00-$14.00 per share, and the other bidder's offer was in the range of
$11.00-$13.00 per share, in each case subject to further due diligence.
On October 20, 1997, the Company and its financial advisors met with the
other bidder and its financial advisors and discussed at length the Company's
operations and financial results, fiscal 1998 financial projections and
potential merger synergies.
On October 29, 1997, Messrs. Buckley, Miklich and Slangen met with Messrs.
Gray, Benovitz, Bohan, Aschettino and a representative of Bear Stearns in
Boston. At that meeting, the parties reviewed the Company's financial results
for fiscal 1997 and fiscal 1998 financial projections. A detailed discussion
took place regarding the strategies behind the Company's recent acquisitions,
and the parties also discussed the potential synergies associated with an
acquisition of the Company by Parent.
On November 4, 1997, Bear Stearns sent a letter to Parent and the other
bidder requesting final bids by November 10, 1997 and enclosing for comment a
preliminary draft of the Merger Agreement. On November 10, 1997, the other
bidder submitted a written offer to acquire the Company in a stock-for-stock
transaction at a price of $10.75 per share, subject to certain parameters with
respect to the trading price of the bidder's stock, and confirmation of pre-tax
synergies and operating income for the calendar year 1998. On November 10, 1997,
Parent advised Bear Stearns that it declined to extend an offer, indicating that
the price of $12.00 or more per share suggested by Bear Stearns (which had also
been suggested to other bidders) would be excessive. Bear Stearns and certain
members of the Company's Board of Directors continued discussions with the other
bidder for several days regarding the consideration offered and other financial
conditions of its offer.
On November 18, 1997, Mr. Miklich received a telephone call from a Bear
Stearns representative indicating that a proposal approximating $12.00 per share
might be acceptable to the Company. Parent's Board of Directors was meeting that
day, and Parent reviewed its financial analysis of the Company with its Board.
Management recommended, and Parent's Board of Directors approved in principle,
an offer to acquire the Company for a cash purchase price of $11.75 per share.
Parent's Board of Directors' decision was communicated to Bear Stearns and
confirmed in a letter dated November 20, 1997. Parent indicated to Bear Stearns
that its proposal was conditioned upon an acceptable due diligence review and
certain other conditions including an appropriate termination fee.
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Bear Stearns provided an opportunity for the other potential bidders with
whom it had negotiated previously to submit final offers to purchase the
Company. The competitor which the Company had approached in the first instance
submitted a final oral offer to purchase the Company in a stock-for-stock
transaction in a range of $11.75-$12.25 per share, subject to extensive
financial and legal due diligence, and confirmation of merger synergies. The
other bidder which had previously submitted a written offer submitted a final
offer to purchase the Company in a stock-for-stock transaction at a price of
$11.00 per share, subject to extensive due diligence and confirmation of merger
synergies. The Company determined that it was in the best interests of the
stockholders of the Company to pursue a transaction with Parent, given that its
offer, unlike the offers from the other bidders, was in cash, was not subject to
(i) a financing contingency, (ii) as extensive a due diligence review of the
Company's financial performance and growth rate as that required by the other
bidders, (iii) confirmation of merger synergies or (iv) other significant
conditions, and was likely to be able to close more quickly than a transaction
with one of the other bidders.
On November 24, 1997, Parent and the Company executed a letter agreement
providing that, until December 15, 1997, the Company would negotiate exclusively
with Parent concerning a proposed sale of the Company. From time to time during
the course of the next several weeks, representatives of Parent and
representatives of the Company continued to discuss valuation of the Company and
continued to discuss generally the terms and conditions of a possible
transaction.
On December 1, 1997, Messrs. Mixon, Buckley, Miklich, Slangen and Gerald B.
Blouch, President and Chief Operating Officer of Parent, met with Messrs.
Benovitz, Bohan, Gray, Aschettino and representatives of Bear Stearns in Boston
to conduct further due diligence. Beginning with that meeting, and continuing
through the date of the Merger Agreement, representatives of Parent, together
with Parent's legal counsel and environmental consultants, conducted a due
diligence review at the offices of the Company's legal counsel and at the
Company's regional distribution facilities. During the same period, Parent's
legal counsel and the Company's legal counsel discussed structural issues
regarding the proposed acquisition, including Parent's requirement that there be
agreements along the lines of the Stockholders Agreement and that there be
certain other provisions in the event of a termination of the Merger Agreement
(including the payment of a termination fee to Parent) by the Company in
connection with a competing transaction.
On December 8, 1997, Parent delivered a draft Merger Agreement to the
Company's legal counsel, and on December 11, 1997, Parent delivered a draft of
the Stockholders Agreement to the Company's legal counsel. Negotiations between
Parent and the Company continued through December 16, 1997, and the Merger
Agreement and the Stockholders Agreement were executed as of December 17, 1997.
Reasons for the Transaction; Factors Considered by the Board.
The Board of Directors and the Company's senior management have reviewed
the Company's strategic position in the medical supply distribution industry,
the near and longer term prospects for that industry, the consolidation trends
within that industry, and the Company's potential position in the industry and
the strategic alternatives available to the Company, all with a view to
maximizing stockholder value. In conducting its review, the Board considered the
Company's results of operations, including those for the quarter ended November
30, 1997. In light of the Board's review of the Company's competitive position
and recent operating results, anticipated trends in the industry, and the
prospects for the Company as an independent entity, the Board determined that it
would be in the best interests of the Company's stockholders to approve the
Merger Agreement. In approving the Merger Agreement and the transactions
contemplated thereby and recommending that all holders of shares of Company
Common Stock tender their shares pursuant to the Offer, the Board of Directors
considered a number of factors, including:
(i) The terms of the Merger Agreement and the Stockholders Agreement
executed by certain stockholders in connection therewith;
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(ii) Presentations by senior management of the Company at meetings of
the Board of Directors held December 2, 11 and 16, 1997;
(iii) The trading price of shares of the Company since its initial
public offering on October 10, 1996, including recent trends;
(iv) The Company's competitive position and current trends in the home
health care supply distribution industry;
(v) The results of the process undertaken by Bear Stearns to identify
and solicit indications of interest from a number of potential purchasers
with respect to a purchase of the Company;
(vi) The presentations by Bear Stearns at the December 2, 11 and 16,
1997 meetings of the Board of Directors and the oral opinion of Bear
Stearns delivered to the Board at the December 16th meeting (which was
subsequently confirmed in writing) to the effect that, as of such date and
based upon the assumptions and the other matters to be set forth in its
written opinion, the $11.75 per share cash consideration to be received by
the holders of the shares in the Offer and the Merger is fair to such
holders from a financial point of view. A copy of the opinion of Bear
Stearns, which sets forth the assumptions made, the matters considered and
the limitations of the review undertaken by Bear Stearns, is attached
hereto as Exhibit 4. STOCKHOLDERS ARE URGED TO READ THE OPINION OF BEAR
STEARNS CAREFULLY IN ITS ENTIRETY;
(vii) The fact that the holders of approximately 45% of the Shares
were prepared to endorse the Merger Agreement;
(viii) The fact that the Offer and the Merger are not conditioned on
the availability of financing; and
(ix) The availability of dissenters' rights of appraisal in the
Merger.
The Board of Directors did not assign relative weight to the above factors
or determine that any factor was of particular importance. Rather, the Board of
Directors viewed its position and recommendations are being based on the
totality of the information presented to and considered by it.
Opinion of Financial Advisor. The Board of Directors of the Company
retained Bear Stearns to act as its financial advisor and to render an opinion
to the Board of Directors of the Company as to the fairness from a financial
point of view of the Merger Consideration to be received in the Offer and the
Merger by the stockholders of the Company. Bear Stearns acted as investment
adviser to the Company's founders in connection with the recapitalization of the
Company effected in July, 1995, served as a managing underwriter of the
Company's initial public offering in October, 1996, and as of the date hereof,
holds 112,667 shares of Company Common Stock. On December 16, 1997, Bear Stearns
delivered its oral opinion to the Board of Directors of the Company, and on
December 22, 1997, Bear Stearns delivered its written opinion to the Board of
Directors of the Company to the effect that, as of such date, and based upon the
assumptions and other matters set forth therein, the consideration to be
received by the Company stockholders in the Offer and the Merger was fair, from
a financial point of view, to the stockholders of the Company (the "Bear Stearns
Opinion"). No restrictions were imposed by the Company's Board of Directors upon
Bear Stearns with respect to investigations made or procedures followed by Bear
Stearns in rendering its opinion.
THE FULL TEXT OF THE BEAR STEARNS OPINION IS ATTACHED HERETO AS EXHIBIT 4.
THE COMPANY STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE BEAR STEARNS OPINION
CAREFULLY IN ITS ENTIRETY FOR ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF
THE REVIEW BY BEAR STEARNS.
The Bear Stearns Opinion addresses only the fairness from a financial point
of view of the Merger Consideration to be received in the Merger by the
stockholders of the Company and does not constitute a recommendation to any
stockholder of the Company as to whether such stockholder should tender his, her
or its Shares pursuant to the Offer or to vote such Shares in favor of the
Merger. The Bear Stearns Opinion also does not address the Company's underlying
business decision to pursue the Merger. The summary of the Bear Stearns Opinion
set forth below is qualified in its entirety by reference to the full text of
such opinion.
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Although Bear Stearns evaluated the financial terms of the Merger and
participated in discussions concerning the consideration to be paid, Bear
Stearns did not recommend the specific consideration to be paid in the Offer and
the Merger. The consideration to be received by the Company's stockholders as a
result of the Offer and the Merger was determined by negotiations between the
Company and Parent after consultation by each of such parties with their
respective financial advisors. In connection with rendering its opinion, Bear
Stearns, among other things: (i) reviewed the Merger Agreement; (ii) reviewed
the Offer to Purchase, and the Schedule 14D-9 in substantially the forms to be
distributed to the Company's stockholders; (iii) reviewed the Company's Annual
Reports to Stockholders and Annual Reports on Form 10-K for the fiscal years
ended August 31, 1996 and August 30, 1997; (iv) reviewed certain operating and
financial information, including projections, provided to Bear Stearns by
management relating to the Company's business and prospects; (v) met with
certain members of the Company's management to discuss its operations,
historical financial statements and future prospects; (vi) reviewed the
historical prices and trading volume of the common shares of the Company; (vii)
reviewed publicly available financial data and stock market performance data of
companies which it deemed generally comparable to the Company; (viii) reviewed
the terms of recent acquisitions of companies which it deemed generally
comparable to the Company; and (ix) conducted such other studies, analyses,
inquiries and investigations as it deemed appropriate.
In the course of its review, Bear Stearns relied upon and assumed without
independent verification (i) the accuracy and completeness of all of the
financial and other information provided to it by the Company for purposes of
its opinion and (ii) the reasonableness of the assumptions made by the
management of the Company with respect to its projected financial results. Bear
Stearns further relied upon the assurances of the management of the Company that
they are unaware of any facts that would make the information provided to Bear
Stearns incomplete or misleading. In addition, Bear Stearns did not make or seek
to obtain appraisals of the Company's assets or liabilities in rendering its
opinion. The Bear Stearns Opinion is also necessarily based upon the market,
economic and other conditions as in effect, and the information made available
to it, as of the date thereof.
The following is a summary of certain of the financial analyses used by
Bear Stearns in connection with providing its opinion to the Board of Directors
of the Company.
Comparable Company Analysis. Bear Stearns reviewed and compared the
financial and market performance of the Company to the financial and market
performance of ten publicly-traded companies engaged in the medical distribution
industry that Bear Stearns believed were comparable in certain respects to the
Company (the "Comparable Companies"). The Comparable Companies included: Henry
Schein, Inc. ("Schein"); Physician Sales & Service, Inc.; Patterson Dental
Company; Gulf South Medical Supply, Inc.; Graham-Field Health Products, Inc.;
Cardinal Health, Inc.; McKesson Corporation ("McKesson"); Allegiance
Corporation; Bindley Western Industries and Owens & Minor, Inc. The Comparable
Companies were chosen by Bear Stearns as companies that, based on publicly
available data, possess general business, operating and financial
characteristics representative of companies in the industry in which the Company
operates, although Bear Stearns recognizes that each of the Comparable Companies
is distinguishable from the Company in certain respects. For each of the
Comparable Companies, Bear Stearns examined certain publicly available financial
data including, net revenue, earnings before interest, taxes, depreciation and
amortization ("EBITDA"), earnings before interest and taxes ("EBIT"), net
income, earnings per share and profit margins. Bear Stearns examined balance
sheet items, published earnings forecasts and the trading performance of the
common stock of each of the Comparable Companies. In addition, Bear Stearns
calculated the ratio of the closing price (as of December 15, 1997) of the stock
of each of the Comparable Companies' stock in relation to each company's
earnings per share and the ratio of the "Enterprise Value" (the total market
value of the common stock outstanding plus the par value of total debt less cash
and investments) of each of the Comparable Companies in relation to each
company's net revenue, EBITDA and EBIT for the latest twelve months. Bear
Stearns then compared those ratios to the ratios being paid for the Company in
the Offer and the Merger based upon the price offered by Parent for the
Company's Common Stock of $11.75 per share. Based on a price for the Company of
$11.75 per share, the implied purchase price for the equity of the Company was
approximately $130.8 million, and (ii) the implied "Transaction Value" (defined
as the total
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purchase price of the common stock plus the par value of total debt less cash
and investments) for the Company was approximately $132.2 million.
The ratios of the stock prices of the Comparable Companies to projected
calendar 1997 earnings per share ranged from 20.1x to 37.4x and had a harmonic
mean of 27.3x and a median of 30.9x. These ratios compare to a purchase price
per share to be paid in the Offer and the Merger to the Company's projected
calendar 1997 earnings per share provided by the Company management of 26.8x.
The ratios of the stock prices of the Comparable Companies to projected calendar
1998 earnings per share ranged from 17.9x to 26.9x and had a harmonic mean of
21.4x and a median of 21.7x. These ratios compare to a purchase price per share
to be paid in the Offer and the Merger to the Company's projected calendar 1998
earnings per share provided by the Company management of 19.9x.
The ratios of the Enterprise Value to latest twelve months ("LTM") net
sales of the Comparable Companies ranged from 0.1x to 2.2x and had a harmonic
mean of 0.4x and a median of 0.8x. These ratios compared to a Transaction Value
to the Company's LTM net revenue of 1.4x. The ratios of the Enterprise Value to
LTM EBITDA of the Comparable Companies ranged from 7.8x to 24.4x and had a
harmonic mean of 14.2x and a median of 17.1x. These ratios compare to a
Transaction Value to the Company's LTM EBITDA of 13.9x. The ratios of the
Enterprise Value to LTM EBIT of the Comparable Companies ranged from 11.8x to
34.0x and had a harmonic mean of 17.8x and a median of 18.3x. These ratios
compare to a Transaction Value to the Company's LTM EBIT of 15.5x.
Bear Stearns noted that, based upon these ratios, (i) the ratio of the
Company's Transaction Value to LTM net revenue was greater than the harmonic
mean and median and within the range of the LTM net revenue ratios for the
Comparable Companies, (ii) the ratio of the Company's Transaction Value to LTM
EBITDA was approximately the same as the harmonic mean, less than the median and
within the range of the LTM EBITDA ratios for the Comparable Companies, (iii)
the ratio of the Company's Transaction Value to LTM EBIT was less than the
harmonic mean and median and within the range of the LTM EBIT ratios for the
Comparable Companies and (iv) the ratios of the Company's purchase price per
share to projected 1997 and 1998 earnings per share were less than the harmonic
mean and median and within the range of the comparable ratios for the Comparable
Companies.
Precedent Transaction Analysis. Bear Stearns reviewed certain financial
data and the purchase prices paid in the following twenty-one (21) selected
prior merger and acquisition transactions completed in the medical distribution
industry (target company/acquiring company): Gulf South Medical Supply,
Inc./Physician Sales & Service, Inc. (pending); AmeriSource Health
Corporation/McKesson Corporation (pending); Bergen Brunswig Corporation/Cardinal
Health, Inc. (pending); Sullivan Dental Products, Inc./Henry Schein, Inc.;
Thompco Medical, Inc./Physician Sales & Service, Inc.; Micro Bio-Medics,
Inc./Henry Schein, Inc.; General Medical, Inc./McKesson Corporation; Walker Drug
Company/AmeriSource Health Corporation; Owen Healthcare, Inc./Cardinal Health,
Inc.; Gateway Healthcare Corporation/Gulf South Medical Supply, Inc.; X-Ray
Corporation/Physician Sales & Service, Inc.; Chesapeake X-Ray
Corporation/Physician Sales & Service, Inc.; FoxMeyer Drug Company/McKesson
Corporation; PCI Services, Inc./Cardinal Health, Inc.; Crocker-Fels
Company/Physician Sales & Service, Inc.; Automated Healthcare, Inc./McKesson
Corporation; Pyxis Corporation/Cardinal Health, Inc.; Taylor Medical,
Inc./Physician Sales & Service, Inc.; Randolph Medical, Inc./General Medical,
Inc.; F.D. Titus & Son, Inc./General Medical, Inc.; and Stuart Medical,
Inc./Owens & Minor, Inc. In its review of these transactions, Bear Stearns
focused specifically upon two (2) transactions, which were deemed to be most
comparable to the Merger: Sullivan Dental/Schein and General Medical/McKesson
(the "Comparable Transactions").
For each of the target companies involved in the Comparable Transactions,
Bear Stearns examined certain publicly available financial data, including net
revenue, EBITDA, EBIT, net income, earnings per share and profit margins. Bear
Stearns examined the balance sheet items and published earnings forecasts (when
available) of the common stock of each of the target companies involved in the
Comparable Transactions. In addition, Bear Stearns calculated (i) the ratios of
the purchase price of the target company in relation to the target company's
projected net income (for the next fiscal year based on research analysts'
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estimates immediately prior to the announcement of such transactions) and (ii)
the ratios of the Transaction Value of each target company to its LTM net sales,
LTM EBITDA and LTM EBIT. Bear Stearns then compared those ratios to the ratios
being paid for the Company in the Offer and the Merger based upon the price
offered by Parent for the Company's Common Stock of $11.75 per share.
The ratios of the purchase price of the equity to projected net income of
the target company in Sullivan Dental/Schein was 24.2x (the ratio of the
purchase price to projected net income of the General Medical in General
Medical/McKesson was not available). This ratio compared to a ratio of purchase
price per share to the Company's projected fiscal 1998 net income of 20.6x. The
ratios of the Transaction Value to LTM net sales of the target companies in the
Comparable Transactions were 0.5x and 1.1x and had a harmonic mean of 0.7x.
These ratios compared to a Transaction Value to the Company's LTM net sales of
1.4x. The ratios of the Transaction Value to LTM EBITDA of the target companies
in the Comparable Transactions were 12.8x and 16.0x and had a harmonic mean of
14.2x. These ratios compared to a Transaction Value to the Company's LTM EBITDA
of 13.9x. The ratios of the Transaction Value to LTM EBIT of the target
companies in the Comparable Transactions were 13.7x and 18.6x and had a harmonic
mean of 15.8x. These ratios compared to a Transaction Value to the Company's LTM
EBIT of 15.5x.
Bear Stearns noted that, based upon these ratios, (i) the ratio of
Transaction Value to the Company's LTM net sales was greater than the harmonic
mean of the LTM net sales ratios for the target companies in the Comparable
Transactions, (ii) the ratio of Transaction Value to the Company's LTM EBITDA
was approximately the same as the harmonic mean of the LTM EBITDA ratios for the
target companies in the Comparable Transactions, (iii) the ratio of Transaction
Value to the Company's LTM EBIT was approximately the same as the harmonic mean
of the LTM EBIT ratios for the target companies in the Comparable Transactions
and (iv) the ratio of purchase price to the Company's projected 1998 net income
was less than the Sullivan Dental/Schein purchase price to projected fiscal net
income ratio for Sullivan Dental in the Sullivan Dental/Schein transaction.
Discounted Cash Flow Analysis. A discounted cash flow analysis is a
traditional valuation methodology used to derive a valuation of a corporate
entity based on its future expected cash flows discounted back to the present.
Bear Stearns performed a discounted cash flow analysis of the Company based upon
a set of financial projections for the years 1998 through 2002 which were
provided by management.
The discounted cash flow analysis was conducted using a range of estimates
of the Company's after-tax cost of capital of 11.5% to 13.5%, which was
calculated based upon the equity betas of Comparable Companies. Using this
estimate of after-tax cost of capital, Bear Stearns calculated the present value
of free cash flows for each of the fiscal years ended August 31, 1998 through
2002 and the present value of the terminal value (the calculated value of the
Company at the end of the projection period). Bear Stearns calculated the
terminal value in year 2002 based upon a perpetual growth rate methodology using
growth rates ranging from 3.0% to 6.0%. The range of growth rates were selected
by Bear Stearns and were chosen to reflect the anticipated growth prospects and
relative risk of both the Company and the medical distribution industry in the
terminal year. Bear Stearns calculated the equity value of the Company by
subtracting total debt minus cash of the Company from the sum of the present
value of cash flows and the present value of the terminal value. Based on this
analysis, Bear Stearns calculated equity values of the Company ranging from
$5.63 to $9.81 per share with a mean value of $7.43 per share. The values were
calculated without giving effect to any expense savings or revenue enhancement
opportunities that may result from the Merger. Bear Stearns compared the range
of equity values calculated using the discounted cash flow methodology to $11.75
per share, the value being paid for the Company in the Offer and the Merger, and
noted the purchase price was higher than the indicated range of discounted cash
flow values.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying the Bear Stearns Opinion. In arriving at its opinion, Bear Stearns
considered the results of all such analyses. The analyses were prepared solely
for purposes of providing its opinion as to the fairness from a financial point
of view of the consideration to be received by the stockholders of the Company
in the Offer and the Merger and
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do not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts of
future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by such analyses. As
described above, Bear Stearns' opinion and presentation to the Board of
Directors of the Company was one of many factors taken into consideration by the
Board of Directors of the Company in making its determination to approve the
Merger. The foregoing summary does not purport to be a complete description of
the analyses performed by Bear Stearns.
As part of its engagement, Bear Stearns assisted the Company in identifying
and contacting a number of knowledgeable and qualified buyers which were given
the opportunity to make a thorough evaluation of the Company in preparation for
the submission of a proposal to acquire the Company. As a result of these
efforts, the Company received various indications of interest regarding possible
business transactions involving the Company, which Bear Stearns assessed and
reviewed with the senior management and the Board of Directors of the Company.
In the ordinary course of its business as a full-service securities firm,
Bear Stearns and its affiliates may actively trade the debt and equity
securities of Parent and the Company for their own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities, as may The Bear Stearns Companies, Inc., the parent company of
Bear Stearns. See Item 5. below for a description of the fees to be paid to Bear
Stearns.
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: January 20, 1998
SUBURBAN OSTOMY SUPPLY CO., INC.
By: /s/ DONALD H. BENOVITZ
------------------------------------
Donald H. Benovitz
President
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