<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
SURVIVAL TECHNOLOGY, INC.
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(Name of Registrant as Specified in Its Charter)
- ------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
COMMON STOCK, PREFERRED STOCK AND COMMON STOCK EQUIVALENTS
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2) Aggregate number of securities to which transaction applies:
1,151,779
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule O-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
SEE NO. 4 BELOW
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4) Proposed maximum aggregate value of transaction:
$3,915,913 (AGGREGATE BOOK VALUE AS OF JUNE 30, 1996)
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5) Total fee paid:
$784.00
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/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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SURVIVAL TECHNOLOGY, INC.
2275 RESEARCH BOULEVARD, SUITE #100
ROCKVILLE, MARYLAND 20850
October 30, 1996
Dear Stockholder:
We are pleased to enclose your Notice of Annual Meeting and Proxy
Statement for the Annual Meeting of Stockholders of Survival Technology, Inc.
(the "Company" or "STI") to be held on November 20, 1996, at 10:00 a.m.,
local time, at DoubleTree Hotel, Woodmont Room, located at 1750 Rockville
Pike, Rockville, Maryland 20852.
At the Annual Meeting, you will be asked to approve the merger ("Merger")
of Brunswick Biomedical Corporation ("Brunswick" or "BBC"), the holder of
61.1% of the outstanding shares of common stock, par value $.10 per share
("Common Stock"), of the Company, with and into the Company. As part of the
Merger, the Company's Certificate of Incorporation and By-Laws will be
amended and restated to make the changes described in the accompanying Proxy
Statement. In addition, following the Merger, the Company's name will be
changed to Meridian MedTec Inc. You also will be asked to elect five
directors of the Company and to ratify the selection of Price Waterhouse LLP
as the independent auditors of the Company.
The Merger will result in a combination of Brunswick's medical device
business with the Company's existing operations. The Company's Board of
Directors believes that the transaction is in the best interests of the
Company and its stockholders, and that the combined enterprise should have
substantial growth opportunities in the rapidly expanding medical device
industry. The Board also believes that the Merger should create a broader,
more liquid trading market for the Company's Common Stock and enhance the
Company's access to capital markets. The Board recommends that you vote FOR
adoption of the Agreement and Plan of Merger ("Agreement"), and the
transactions contemplated thereby.
As a result of the Merger, each of the 66,780 outstanding shares of
Brunswick's common stock (except as otherwise provided in the Agreement) will
be converted into the right to receive 2.1 shares of the Common Stock, and
each of the 746,995 outstanding shares of Brunswick's preferred stock (except
as otherwise provided in the Agreement) will be converted into the right to
receive 2.1 shares of the Company's Common Stock and a warrant to purchase
0.4 of a share of the Company's Common Stock at $11.00 per share exercisable
for five years from the effective time of the Merger. The Company also will
assume Brunswick's obligations under outstanding stock options and warrants,
which could, over time, result in the issuance of approximately 1,053,358
additional shares of Common Stock. Each of the 1,888,126 shares of the
Common Stock now owned by Brunswick will be retired. Your shares of Common
Stock will not be changed in the Merger.
I encourage you to read this Proxy Statement in its entirety.
Very truly yours,
/s/ James H. Miller
James H. Miller
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
SURVIVAL TECHNOLOGY, INC.
2275 RESEARCH BOULEVARD, SUITE #100
ROCKVILLE, MARYLAND 20850
(301) 926-1800
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the stockholders of
SURVIVAL TECHNOLOGY, INC.:
Notice is hereby given that the annual meeting of stockholders of
Survival Technology, Inc. ("Company" or "STI") will be held on Wednesday,
November 20, 1996, at 10:00 a.m., local time, at DoubleTree Hotel, Woodmont
Room, located at 1750 Rockville Pike, Rockville, Maryland 20852, for the
following purposes:
(1) To consider and vote upon the approval of an Agreement and
Plan of Merger ("Agreement") between the Company and Brunswick
Biomedical Corporation ("Brunswick" or "BBC"), a Massachusetts
corporation, dated as of September 11, 1996, pursuant to which: (i)
Brunswick will be merged with and into the Company ("Merger"); (ii)
each outstanding share of common stock of Brunswick (except as
otherwise provided in the Agreement) will be converted into the
right to receive 2.1 shares of common stock of the Company, par
value $.10 per share ("Common Stock"), and each outstanding share of
preferred stock of Brunswick (except as otherwise provided in the
Agreement) will be converted into the right to receive 2.1 shares of
Common Stock plus a warrant to purchase 0.4 of a share of Common
Stock at an exercise price of $11.00 per share for a period of five
years following the Merger, together, in each case, with cash in
lieu of any fractional share; (iii) each outstanding Brunswick stock
option and warrant will be assumed by the Company; (iv) the
1,888,126 shares of Common Stock held by Brunswick will be retired
and become authorized but unissued shares of the Company; (v) the
Company's Certificate of Incorporation and By-Laws will be amended
and restated; and (vi) following the Merger, the name of the Company
will be changed to Meridian MedTec Inc.;
(2) To elect five directors to serve until the next annual
meeting of stockholders and, if the Merger becomes effective, for a
term of one year, two years or three years or until their successors
have been elected and qualified;
(3) To consider and vote upon the ratification of the selection
by the Board of Directors of Price Waterhouse LLP as independent
auditors of the Company for the current fiscal year; and
(4) To transact such other business as may properly come before
the meeting or any adjournment or adjournments thereof.
Only stockholders of record at the close of business on October
9, 1996, are entitled to notice of and to vote at the meeting or any
adjournment or adjournments thereof.
By Order of the Board of Directors
/s/ J. CHONTELLE WOODWARD
ASSISTANT CORPORATE SECRETARY
Rockville, Maryland
October 30, 1996
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SURVIVAL TECHNOLOGY, INC.
2275 RESEARCH BOULEVARD, SUITE #100
ROCKVILLE, MARYLAND 20850
(301) 926-1800
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PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
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INTRODUCTION
The Board of Directors of Survival Technology, Inc. ("Company" or "STI"),
the executive offices of which are located at 2275 Research Boulevard, Suite
#100, Rockville, Maryland, 20850, hereby solicits your proxy in the form
enclosed for use at the annual meeting of stockholders to be held on
Wednesday, November 20, 1996, at 10:00 a.m., or any adjournment or
adjournments thereof ("Annual Meeting"). The expenses of soliciting your
proxy will be borne by the Company. This Proxy Statement and the
accompanying form of proxy are first being released for mailing to the
stockholders on or about October 30, 1996.
At the Annual Meeting, stockholders of the Company will be asked to
approve an Agreement and Plan of Merger dated September 11, 1996
("Agreement") pursuant to which (i) Brunswick Biomedical Corporation, a
Massachusetts corporation ("Brunswick" or "BBC"), will be merged with and
into the Company ("Merger") and (ii) each outstanding share of Brunswick
common stock, par value $.01 per share ("Brunswick Common Stock") (except as
otherwise provided in the Agreement) will be converted into the right to
receive 2.1 shares of common stock, par value $.10 per share ("Common
Stock"), of the Company ("Common Per Share Merger Consideration") and each
outstanding share of Brunswick preferred stock ("Brunswick Preferred Stock")
(except as otherwise provided in the Agreement) will be converted into the
right to receive 2.1 shares of Common Stock plus a warrant ("Merger Warrant")
to purchase 0.4 of a share of Common Stock at an exercise price of $11.00 per
share for a five-year period from the effective time of the Merger
("Preferred Per Share Merger Consideration" and, together with the Common Per
Share Merger Consideration, the "Merger Consideration"), together in each
case with cash in lieu of any fractional share. See "PROPOSAL 1 -- THE
MERGER -- Terms of the Merger."
Brunswick is the holder of 1,888,126 shares of Common Stock, representing
approximately 61% of the outstanding shares of Common Stock. In accordance
with the terms of the Agreement, at the effective time of the Merger (the
"Effective Time"), Brunswick will be merged with and into the Company, the
separate corporate existence of Brunswick will cease, and the Company, as the
surviving corporation, will continue to exist. At the Effective Time, each
of the 1,888,126 shares of Common Stock now owned by Brunswick will be
retired. At the Effective Time, the Company also will assume the obligations
of Brunswick with respect to outstanding stock options and warrants, in each
case as adjusted for the Merger.
<PAGE>
At the Annual Meeting, stockholders will be asked to elect five directors
of the Company to serve until the next annual meeting of stockholders or, if
the Merger becomes effective, staggered terms as described below.
Stockholders also will be asked to ratify the selection of Price Waterhouse
LLP as independent auditors of the Company for the current fiscal year.
In connection with the Merger, the Company's Certificate of Incorporation
will be amended and restated to provide, among other things, that the Board
of Directors will be divided into three classes, with each class to serve
initial terms of one year, two years and three years and to serve for terms
of three years thereafter. If the Merger becomes effective, the directors of
the Company will be elected into classes, as described herein. The
Certificate of Incorporation and By-Laws of the Company also will be amended
and restated to include certain provisions that may have the effect of
impeding a change of control of the Company by a third party without the
consent of the Board of Directors. See "PROPOSAL 2 -- ELECTION OF DIRECTORS"
and "AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND
RESTATED BY-LAWS OF THE COMPANY."
Following the Merger, effective as of December 1, 1996, the name of the
Company will be changed to Meridian MedTec Inc. which will conduct business
as Meridian Medical Technologies. The name change is intended to reflect the
expanded focus of the combined company in the medical device industry. A
vote to approve the Agreement will constitute a vote in favor of amending the
Amended and Restated Certificate of Incorporation following the Effective
Time to change the name of the Company from "Survival Technology, Inc." to
"Meridian MedTec Inc." See "PROPOSAL 1 -- THE MERGER -- Strategy After the
Merger."
Although the Company will be the surviving corporation in the Merger as a
legal matter, the Merger will be treated as a purchase of the Company by
Brunswick for financial accounting purposes. As a result, the Company's
assets and liabilities will be revalued to their respective fair values, and
Brunswick's historical financial statements will reflect the combined
operations of the Company and Brunswick after the Effective Time. See
"PROPOSAL 1 -- THE MERGER -- Accounting Treatment of the Merger."
The Company is a technology-based health care company that designs,
develops and produces a broad range of automatic injectors
("auto-injectors"), prefilled syringes and other innovative health care
devices, with a major focus on safe and convenient participation by the
patient in injection therapy. The Company also supplies customized drug
delivery system design, pharmaceutical research and development and sterile
product manufacturing to pharmaceutical and biotechnology companies.
Brunswick is engaged in the development, manufacture and sale of
emergency care products and medical devices for non-invasive cardiac
diagnostics. Current products include first response emergency care products
and devices that measure and transmit by telephone electrocardiograms, blood
pressure readings, and pulmonary function measurements. Products in
development include an exclusive, 64-lead cardiac mapping system and
educational CD-ROM products for children. See "INFORMATION CONCERNING
BRUNSWICK."
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The principal executive offices of the Company and of Brunswick are
located at 2275 Research Boulevard, Suite #100, Rockville, Maryland 20850,
telephone (301) 926-1800.
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CERTAIN STATEMENTS IN THIS PROXY STATEMENT ARE FORWARD-LOOKING AND ARE
IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS OR PHRASES SUCH AS "INTENDED,"
"WILL BE POSITIONED," "EXPECTS," IS OR ARE "EXPECTED," "ANTICIPATES," AND
"ANTICIPATED." THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE COMPANY'S
CURRENT EXPECTATIONS. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. IN
ADDITION TO THE FACTORS DISCUSSED UNDER "PROPOSAL 1 -- THE MERGER --
BACKGROUND OF THE MERGER," "PROPOSAL 1 -- THE MERGER --APPROVAL BY THE BOARD
OF DIRECTORS," "INFORMATION CONCERNING BRUNSWICK," AND ELSEWHERE IN THIS
PROXY STATEMENT, AMONG THE FACTORS THAT COULD CAUSE RESULTS TO DIFFER
MATERIALLY FROM CURRENT EXPECTATIONS ARE: (i) THE GENERAL ECONOMIC AND
COMPETITIVE CONDITIONS IN MARKETS AND COUNTRIES WHERE THE COMPANY AND
BRUNSWICK OFFER PRODUCTS AND SERVICES; (ii) CHANGES IN CAPITAL AVAILABILITY
OR COSTS; (iii) FLUCTUATIONS IN DEMAND FOR CERTAIN OF THE COMPANY'S AND/OR
BRUNSWICK'S PRODUCTS, INCLUDING CHANGES IN GOVERNMENT PROCUREMENT POLICY;
(iv) TECHNOLOGICAL CHALLENGES ASSOCIATED WITH THE DEVELOPMENT AND MANUFACTURE
OF CURRENT AND ANTICIPATED PRODUCTS; (v) COMMERCIAL ACCEPTANCE OF THE
COMPANY'S AND/OR BRUNSWICK'S PRODUCTS AND COMPETITIVE PRESSURE FROM OTHER
TRADITIONAL AND NEW PRODUCTS; AND (vi) DELAYS, COSTS AND UNCERTAINTIES
ASSOCIATED WITH GOVERNMENT APPROVALS REQUIRED TO MARKET NEW DRUGS AND MEDICAL
DEVICES.
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MEETING INFORMATION
DATE, PLACE AND TIME
The Annual Meeting will be held on Wednesday, November 20, 1996 at 10:00
a.m., local time, at DoubleTree Hotel, Woodmont Room, 1750 Rockville Pike,
Rockville, Maryland 20852.
RECORD DATE; VOTING RIGHTS
Only stockholders of record at the close of business on October 9, 1996
will be entitled to vote at the Annual Meeting. On October 9, 1996, there
were 3,097,637 outstanding shares of Common Stock, each of which is entitled
to one vote. The presence in person or by proxy at the Annual Meeting of the
holders of a majority of the shares of Common Stock will constitute a quorum
for the transaction of business.
With respect to the Agreement and the change of the Company's name,
approval will require the affirmative vote of a majority of the issued and
outstanding shares of Common Stock. Shares of Common Stock represented at
the Annual Meeting that are not voted, and abstentions, will have the effect
of votes cast against approval of the Agreement and the name change.
In addition, under the rules of the National Association of Securities
Dealers, brokers who hold shares in street name for customers who are the
beneficial owners do not have the authority to vote on a merger without
specific instruction from their customers. Such broker non-votes (arising
from the lack of instruction from beneficial owners) will not be included in
the vote total on the proposal and thus will have the effect of votes cast
against the Agreement and the name change.
With respect to the election of directors, the nominees for election as
directors who receive the greatest number of votes cast at the Annual
Meeting, assuming that a quorum is present, will be elected as directors. A
withheld vote on any nominee will not have any effect on the outcome of the
election of directors.
Brunswick holds shares of Common Stock representing approximately 61% of
the shares of Common Stock entitled to vote on the adoption of the Agreement.
In accordance with the terms of the Agreement, Brunswick has agreed to vote
its shares of Common Stock in favor of the Agreement and has indicated that
it will vote for the nominees for election as directors and the ratification
of the selected auditors. The shares of Common Stock held by Brunswick will
constitute a quorum for the transaction of business at the Annual Meeting and
will be sufficient to approve the Agreement and the name change, to elect the
directors and to ratify the selection of auditors.
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VOTING AND REVOCATION OF PROXIES
If the enclosed form of proxy is properly executed and returned to the
Company in time to be voted at the Annual Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
Executed but unmarked proxies will be voted "FOR" approval of the Agreement,
"FOR" the nominees proposed by the Board of Directors and "FOR" the
ratification of the selection of auditors. If any other matters are properly
brought before the Annual Meeting, the persons named in the accompanying
proxy will vote the shares represented by the proxies on such matters as
determined by a majority of the Board of Directors.
Any proxy may be revoked at any time before it is exercised by giving
written notice of such revocation or delivering a later dated proxy to the
Assistant Corporate Secretary of the Company prior to the meeting, or by the
vote of the stockholder in person at the meeting.
SOLICITATION OF PROXIES
The cost of soliciting proxies in the form enclosed herewith will be
borne by the Company. In addition to the solicitation of proxies by mail,
the Company, through its directors, officers and regular employees, may also
solicit proxies personally or by telephone. The Company also will request
persons, firms and corporations holding shares in their names or in the name
of their nominees, which are beneficially owned by others, to send proxy
material to and obtain proxies from the beneficial owners and will reimburse
the holders for their reasonable expenses in so doing.
PROPOSAL 1 -- THE MERGER
BACKGROUND OF THE MERGER
Since the death of the Company's founder and controlling stockholder, Dr.
Stanley J. Sarnoff, in May 1990, the Company, while profitable, has had
difficulty implementing and realizing certain of its long-term plans due, in
part, to uncertainty over the Company's future in light of the Common Stock
holdings of Dr. Sarnoff's estate ("Sarnoff Estate"). The Company also has
been unable to invest in capital improvements as quickly or to the extent
desired because of limitations on its ability to raise capital. The
relatively small number of shares of Common Stock available for trading also
has precluded the Company from obtaining broad research coverage and limited
its ability to gain institutional investor interest.
Following discussions with the Sarnoff Estate in March 1994, the Company
retained Merrill Lynch Business Advisory Services, a division of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), to evaluate
various capital structure alternatives that could accommodate the respective
interests of the Company, its stockholders and the Sarnoff Estate. After
receipt of Merrill Lynch's initial study, the Sarnoff Estate confirmed its
interest in the Company's retention of an investment banker to explore
possible transactions in which it could liquidate its holdings of Common
Stock ("Estate Shares"), and the Company and the Sarnoff
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Estate agreed to retain Merrill Lynch for that purpose. Prior to Merrill
Lynch's formal engagement in November 1994, the Sarnoff Estate had received a
proposal by Brunswick to purchase approximately 1,600,000 shares of Common
Stock at a price of $10.00 per share. In connection with that proposal,
Brunswick indicated that it would consider proposing a merger of Brunswick
and the Company. The Sarnoff Estate did not accept the proposal pending the
solicitation of additional offers by Merrill Lynch, and the proposal expired
in accordance with its terms.
Despite public announcements regarding the first and second Merrill Lynch
engagements and an extensive search undertaken by Merrill Lynch during the
first quarter of 1995, only Brunswick, on March 14, 1995, submitted a
proposal to purchase the Estate Shares. The revised Brunswick proposal,
which covered all of the Estate's shares, increased the purchase price for
the Estate Shares to $11.00 per share, but did not include a second step
merger with the Company.
Merrill Lynch continued to entertain other indications of interest but
received no additional offers. In November 1995, Brunswick again submitted a
proposal to acquire the Estate Shares. Under this proposal, the purchase
price remained $11.00 per share, but a portion of the purchase price would be
paid with a promissory note of Brunswick. In addition, as part of this
proposal, Brunswick indicated the possibility that its financing sources
would require a merger of Brunswick and the Company after Brunswick's
acquisition of the Estate Shares. In that transaction, Brunswick would be
merged into the Company, the outstanding capital stock of Brunswick would be
converted into Common Stock, and the Company's stockholder base would be
comprised of the Company's existing stockholders and the former Brunswick
stockholders.
Although Brunswick's purchase of the Estate Shares did not require
approval by the Board of Directors of the Company, Brunswick requested that
the Board approve the transaction in order to avoid the application of
Section 203 of the Delaware General Corporation Law ("DGCL") to any
subsequent business combination transaction with the Company. Section 203
prohibits any corporation from engaging in any business combination,
including a merger, with any interested stockholder for a period of 3 years
following the time that such stockholder became an interested stockholder
unless such corporation's board of directors approved the transaction that
resulted in the stockholder becoming an interested stockholder. An
interested stockholder includes the owner of 15% or more of the outstanding
voting stock of the corporation. The effect of approval by the Board of
Directors of Brunswick's purchase was to exempt the proposed merger from the
three-year restricted period specified in Section 203.
In connection with seeking the Board's approval of its purchase of the
Estate Shares, Brunswick offered to enter into certain undertakings that
would, among other things, provide protection for the Company's minority
stockholders in connection with the proposed merger in addition to that
provided by Section 203. The Board of Directors concluded that its refusal
to approve Brunswick's proposal would significantly impair the prospects of
selling the Estate Shares and, as a result, the ability of the Company to
implement successfully its business plan.
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After negotiation, Brunswick agreed to the undertakings, and the Board
approved Brunswick's acquisition of the Estate Shares for purposes of Section
203.
As part of the undertakings, Brunswick agreed, until the earlier of a
merger or the expiration of three years (the "Undertaking Period"), to use
its best efforts to cause the Company to have at least two independent
directors. During the Undertaking Period, (i) Brunswick and its stockholders
will not enter into a transaction with the Company unless the transaction is
approved by a special committee of independent directors of the Board of
Directors ("Special Committee"); (ii) Brunswick and its affiliates will not
acquire shares of Common Stock at a price of less than $11.00 per share,
unless otherwise approved by the Special Committee; and (iii) Brunswick will
not engage in certain business combination transactions with the Company,
including a merger, unless the transaction is approved by the Special
Committee based on a fairness opinion received from an investment banker.
On April 15, 1996, Brunswick completed its purchase of the Estate Shares
from the Sarnoff Estate for $11.00 per share or an aggregate purchase price
of $20,769,386. The purchase price consisted of $16,069,386 in cash and a
subordinated promissory note of Brunswick in the principal amount of
$4,700,000 ("Estate Note"), together with warrants to purchase 50,000 shares
of Brunswick Common Stock, exercisable at $27.55 per share, subject to
adjustment. The cash portion of the purchase price was financed by (i) a
portion of the proceeds of a senior bridge loan ("Senior Bridge Loan") in the
amount of $11,000,000, (ii) the proceeds of a subordinated loan
("Subordinated Loan") in the amount of $1,000,000 from a Brunswick investor
and a customer and licensee of the Company and (iii) the balance from
proceeds of a sale of Brunswick convertible preferred stock. In connection
with the Senior Bridge Loan, Brunswick also issued two series of warrants to
the lender to purchase shares of its non-voting common stock (which shares
are convertible on a one-for-one basis into Brunswick Common Stock), one of
which is exercisable for 33,370 shares at an initial price of $.01 per share
and the other of which is exercisable for 36,298 shares at an initial price
of $27.55 per share.
Concurrent with the purchase of the Estate Shares, Robert Herzstein,
Donald M. Spero and Paul H. Way resigned from the Company's Board of
Directors at Brunswick's request. Brunswick appointed Robert G. Foster,
David L. Lougee and E. Andrews Grinstead, III to serve as directors with
James H. Miller and Bruce M. Dresner, the Company's remaining directors. In
accordance with the Brunswick undertakings, the Board of Directors
subsequently appointed the Special Committee consisting of Messrs. Dresner
and Grinstead to consider Brunswick's merger proposal and the other
transactions with Brunswick.
In May 1996, Brunswick consolidated its administrative functions with
those of the Company in order to reduce overhead costs. Pursuant to the
undertakings, the Special Committee approved the arrangement because it found
that the terms were no less favorable to the Company than those available
from a third party on an arm's-length basis. The Special Committee's
determination was based on reports of the Company's management as reviewed by
the Company's independent auditors.
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<PAGE>
In anticipation of its receipt of a merger proposal, in May 1996, the
Special Committee retained Lehman Brothers Inc. ("Lehman Brothers") to
provide financial advice and to render an opinion regarding the fairness from
a financial point of view of any Brunswick-proposed business combination.
Prior to retaining Lehman Brothers as the Special Committee's financial
advisor, the Special Committee considered several leading investment banking
firms to assist it in evaluating a Brunswick merger proposal. In making its
decision, the Special Committee considered, among other things, the
reputation and experience of each firm in the medical device and drug
delivery industries, the manner in which each firm proposed to assist the
Special Committee, and the competitiveness of the fee structure proposed by
each firm. Ultimately, the Special Committee retained Lehman Brothers based
on, among other factors, its reputation, experience, and familiarity with the
Company. Lehman Brothers also agreed to accept a portion of its fee in Common
Stock, which, the Special Committee concluded, would create a common interest
between Lehman Brothers and the Company's other minority stockholders.
In May 1996, Brunswick submitted a proposal to merge with and into the
Company at an exchange ratio equal to 2.505 shares of Common Stock for each
share of capital stock of Brunswick. The Special Committee directed its
legal counsel and financial advisor to begin conducting due diligence with
respect to Brunswick and to evaluate the Brunswick proposal. That process
continued over several weeks, concurrently with negotiations with respect to
the terms of the Agreement.
On June 25, 1996, members of senior management of Brunswick (including
Mr. Miller, who serves as Chairman, President and Chief Executive Officer of
Brunswick as well as of the Company, see "-- Prior Relationship of Brunswick
and the Company") met with the Special Committee. At that meeting,
Brunswick's management reviewed and discussed Brunswick's business, business
plans, and current and future products. Brunswick's management also
presented its views of the shared benefits of, and the benefits to, the
Company of a proposed combination. During and after the Brunswick
presentation, the Special Committee engaged in extensive discussion and asked
a number of questions. In particular, the Special Committee asked that
Brunswick provide it with additional information regarding Brunswick's
business plans and strategies.
On June 28, 1996, the Special Committee met with representatives of
Lehman Brothers. At that meeting, Lehman Brothers discussed its preliminary
valuation of the Company and Brunswick. The Special Committee requested that
Lehman Brothers obtain additional information from Brunswick.
Over the next several weeks, Lehman Brothers analyzed additional
information furnished by Brunswick and its financial advisors and
periodically reported to the Special Committee on the results of that
analysis and its ongoing discussions with Brunswick. Thereafter, at the
direction of the Special Committee, Lehman Brothers submitted a counter
proposal to Brunswick and subsequently commenced negotiations that culminated
in approval of the Agreement by the Special Committee and the Board of
Directors on September 11, 1996.
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PRIOR RELATIONSHIP OF BRUNSWICK AND THE COMPANY
For many years, the Company offered a variety of products in the
emergency medical care field. A significant portion of the Company's
emergency medical care product revenues were derived from sales of products
developed by Brunswick Manufacturing, Inc., a predecessor to Brunswick. In
1973, STI began distributing Brunswick's products. In 1986, at the
suggestion of Dr. Sarnoff (founder of STI), Brunswick formed a relationship
with Dr. John Anderson of Northern Ireland Research and Development ("NIRAD")
to develop cardiac pacing and defibrillation technology. In 1988, a research
and development partnership was formed between BBC and STI to develop low
power defibrillation and ventilation technology. In 1991, Brunswick acquired
STI's interest in NIRAD.
The Company acted as the exclusive distributor of emergency care products
manufactured by Brunswick Manufacturing until 1989. From 1989 until 1990, the
Company continued to provide limited marketing and administrative support
services during a transition of the Company's exclusive distributorship back
to Brunswick Manufacturing. In addition, Brunswick manufactured the
Company's electronic heart monitoring device known as the CardioBeeper.
In November 1993, Brunswick recruited James H. Miller, President and
Chief Executive Officer of the Company, to serve as its Chairman, President
and Chief Executive Officer. At that time, the Company's Board of Directors
evaluated whether Mr. Miller could continue to fulfill his responsibilities
to the Company while serving as chief executive officer of Brunswick.
Ultimately, the Board concluded that it would be beneficial to the Company to
encourage Mr. Miller to remain as chief executive officer pending the
resolution of the uncertainty created by the Estate Shares. In addition, the
Board of Directors believed that the history of cooperation and collaboration
between Brunswick and the Company in the past would facilitate Mr. Miller's
serving as chief executive officer of both companies.
In July 1994, the Company sold substantially all of the assets (exclusive
of trade receivables) and the business of its medical device division to a
subsidiary of Brunswick. The assets sold consisted primarily of business
equipment, inventories of CardioBeepers and related components, patents and
customer account lists. Brunswick paid the Company $2 million in cash on the
closing date and is obligated to pay the Company royalty payments not to
exceed $1 million based on net sales over the following five years. As of
July 31, 1996, royalty income to the Company aggregated $231,900, of which
$172,300 has been paid.
The Company markets its EpiPen-Registered Trademark- and EpiE-ZPen-TM-
auto-injectors exclusively through Center Laboratories, Inc., a subsidiary of
EM Industries, Inc., which is the holder of approximately 8.9% of Brunswick's
outstanding capital stock. In addition, Mylan Laboratories, Inc., the holder
of approximately 13.4% of Brunswick's outstanding capital stock, is a party
to a licensing and long-term supply arrangement with the Company. See
"PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT."
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APPROVAL BY THE BOARD OF DIRECTORS
At a special meeting of the Board of Directors held on September 11, 1996
the Board, upon the recommendation of the Special Committee, unanimously
determined that the Merger is fair to and in the best interests of the
Company and its stockholders and recommended that the holders of the
outstanding shares of Common Stock approve and adopt the Agreement. In
reaching its determination, the Board consulted with the Special Committee,
the Company's management, as well as its financial and legal advisors, and
considered a number of material factors, including those discussed below.
The Board of Directors first reviewed the problems that the Company had
faced following the death of its founder. As discussed above, Brunswick's
purchase of the Estate Shares represented the culmination of a process that
began over two years earlier when the Sarnoff Estate had expressed an
interest in liquidating its holdings. The size of the Sarnoff Estate's
holdings and uncertainty regarding the Company's ultimate ownership made, and
likely would continue to make, it difficult for the Company to access the
capital markets and successfully implement its business plans on a
stand-alone basis.
The Board of Directors also considered that the Merger represented, in
effect, a leveraged repurchase of the Estate Shares by the Company together
with a business combination with Brunswick. The Board of Directors noted
that the Merger would cause the controlling block of its Common Stock to be
dispersed among a larger number of stockholders, thereby improving liquidity
in the market for the Company's Common Stock. In addition, the Board of
Directors recognized that Brunswick's acquisition of the Estate Shares and
proposal to merge with the Company had followed an extensive search conducted
with the assistance of Merrill Lynch to find a buyer for the Company or the
Estate Shares and that no other definitive proposals had been received.
In evaluating the Merger, the Board of Directors considered Brunswick's
current and future products, particularly Brunswick's PRIME ECG, a unique
64-lead ECG mapping system designed to provide more rapid and accurate
detection of heart attacks than current ECG equipment. Although the Board of
Directors was aware that there can be no assurance of the PRIME ECG's
successful commercialization or market acceptance, the Board of Directors
determined that PRIME ECG was a potentially significant product. In
addition, the Board of Directors found that a combination with Brunswick
would permit the Company to offer a broader range of products to existing and
potential customers, making the combined company a more effective competitor
in the rapidly expanding medical device industry. The Board of Directors
also concluded that the combined entity likely would have better access to
the capital markets. See "INFORMATION CONCERNING BRUNSWICK -- Research and
Development; PRIME ECG."
In reaching the conclusions described above, the Board evaluated the
Company's business, assets, liabilities, management, strategic objectives,
competitive positions and prospects, as well as its financial condition,
results of operations and cash flows, both on a
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historical and prospective basis. In addition, the Board of Directors
considered the dilutive impact of the Merger on the Company's earnings per
share in the short term, but noted that a combination with Brunswick could be
accretive in future periods. The Board of Directors also reviewed comparable
information for Brunswick, on a stand-alone basis, as well as for the Company
and Brunswick on a combined basis, and considered the risks to the Company if
Brunswick did not realize its business objectives. See "-- Opinion of
Financial Advisor."
The Board of Directors viewed as favorable the history of cooperation and
collaboration between Brunswick and the Company. The Board noted that
Brunswick had successfully increased sales of product lines previously
purchased from the Company and was developing additional proprietary medical
devices that are expected to be introduced to the market in the near future.
In addition, Mr. Miller's role as chief executive officer of both companies
was considered advantageous because of his familiarity with the businesses
and strategies of both companies. In light of these past relationships, the
Board concluded that the integration of the two businesses would not be
time-consuming or costly and would result in certain economies of scale. The
Board also noted that certain stockholders of Brunswick are licensees and
customers of the Company and would become stockholders of the Company.
The Board of Directors also discussed the possible benefits to
stockholders of dispersing a controlling block of Common Stock and thereby
increasing the breadth and liquidity of the trading market for the Common
Stock. To date, that market has been illiquid because of the large number of
shares of Common Stock held by a single stockholder. The Company also has
been actively seeking research coverage from analysts and concluded that the
Merger, resulting in a more liquid market, would enhance the Company's
ability to attract such coverage, as well as institutional investor interest.
The Board of Directors also considered the role of the Special Committee,
comprised entirely of independent directors, in approving and recommending
the Merger. In that regard, the Special Committee, consistent with
Brunswick's undertakings, retained Lehman Brothers to render a fairness
opinion with respect to the transaction. On September 11, 1996, Lehman
Brothers made a presentation to the Special Committee and reviewed that
presentation with the Board of Directors, including Lehman Brothers' oral
opinion, to the effect that, as of the date of such opinion, the Merger
Consideration to be paid by the Company in the Merger is fair to the Company
and, accordingly, to its stockholders. See "-- Opinion of Financial Advisor."
The Board of Directors also considered, to a lesser extent, the results
of legal and business due diligence, the quality and compatibility of
Brunswick's and the Company's management, and the Company's ability to use
Brunswick's net operating losses to reduce its federal income taxes in the
future, as well as provisions of the Agreement.
In addition, the Board of Directors viewed as favorable the terms of the
Agreement providing for a portion of the Merger Consideration to be paid in
the form of Merger Warrants. In order for the Merger Warrants to have value
to former Brunswick stockholders, the benefits of a combination must be
substantially realized and the market price of the Common Stock
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following the Merger must increase. Moreover, upon exercise of the Merger
Warrants, the Company will receive additional capital.
As part of its analysis, the Board of Directors considered that, as a
result of the Merger, the Company would assume the indebtedness that
Brunswick incurred in connection with its purchase of the Estate Shares. The
Board of Directors evaluated the Company's ability to service the
indebtedness and comply with the financial covenants contained therein.
Although the Board of Directors considered the risks associated with such
indebtedness, the Board concluded that the Company should be able to service
the debt and comply with such covenants. The Board also noted that, in
connection with the Merger, Brunswick's Senior Bridge Loan would convert to a
term loan and, in connection with that loan, the lender would make available
a $5,000,000 revolving credit loan that would be used to refinance the
Company's expiring credit facility. See "-- Assumption of Certain
Indebtedness."
Finally, the Board of Directors evaluated the impact on the Company of
not approving the Merger. In the absence of the Merger, the Board of
Directors believed that it was unlikely that Brunswick would continue to hold
the Estate Shares. However, based on the prior search conducted by the
Company and Merrill Lynch, the Board concluded that it would be unlikely
Brunswick or its successor as holder of the Estate Shares could find another
buyer for the Estate Shares on suitable terms; accordingly, the difficulties
and uncertainties facing the Company for the last several years would
continue.
BASED ON THE FOREGOING, THE BOARD OF DIRECTORS CONCLUDED THAT THE MERGER
IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY,
THE BOARD OF DIRECTORS UNANIMOUSLY VOTED TO RECOMMEND THAT STOCKHOLDERS VOTE
"FOR" THE AGREEMENT.
The discussion of the information and factors considered and given weight
by the Board of Directors is not intended to be exhaustive. In view of the
wide variety of factors considered in connection with its evaluation of the
terms of the Merger, the Board did not find it practicable to, and did not,
quantify or otherwise attempt to assign relative weight to the specific
factors considered in reaching its determinations. In addition, individual
members of the Board may have given different weight to different factors.
OPINION OF FINANCIAL ADVISOR
Lehman Brothers has acted as financial advisor to the Special Committee
in connection with the Merger, as described under "--Background of the
Merger." Lehman Brothers has been requested by the Company to render its
opinion with respect to the fairness, from a financial point of view, of the
Merger Consideration to be issued by the Company in the Merger. See "--
Background of the Merger."
In connection with the evaluation of the Agreement by the Special
Committee, Lehman Brothers made a presentation to the Special Committee on
September 11, 1996, that included its oral opinion that as of that date,
subject to certain assumptions, factors and limitations
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described below, from a financial point of view, the Merger Consideration to
be paid by the Company in the Merger is fair to the Company and, accordingly,
to its stockholders. Following such meeting, Lehman Brothers rendered
written opinions dated September 11, 1996 and as of October 29, 1996, that,
as of the date of each opinion, and subject to certain assumptions, factors
and limitations set forth in each opinion as described below, the Merger
Consideration to be issued by the Company in the Merger is fair to the
Company and, accordingly, to its stockholders.
THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS DATED OCTOBER 29,
1996 WHICH SETS FORTH ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN BY LEHMAN BROTHERS, IS ATTACHED TO THIS PROXY
STATEMENT. THE SUMMARY OF THE OPINION OF LEHMAN BROTHERS SET FORTH IN THIS
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
SUCH OPINION.
No limitations were imposed by STI on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in
rendering its opinion, except that, in light of the extensive efforts
undertaken by Merrill Lynch as described under "-- Background of the Merger,"
STI did not authorize Lehman Brothers to solicit, and Lehman Brothers did not
solicit, any indications of interest from any third party with respect to a
business combination with STI. Lehman Brothers was not requested to and did
not make any recommendations to the Special Committee as to the form or
amount of consideration to be issued by STI in the Merger, which was
determined through arm's length negotiations between the Special Committee
and BBC and their respective advisors. In arriving at its opinion, Lehman
Brothers did not ascribe a specific range of values to STI or BBC, but rather
made its determination as to the fairness, from a financial point of view, to
the Company of the consideration to be issued in the Merger on the basis of
the financial and comparative analyses described below. Lehman Brothers'
opinion is for the use and benefit of the Special Committee to the Board of
Directors of STI and was rendered to the Special Committee in connection with
its consideration of the Merger. Lehman Brothers' opinion is not intended to
be and does not constitute a recommendation to any stockholder of STI as to
how such a stockholder should vote with respect to the Merger. Lehman
Brothers' opinion does not in any manner address the underlying business
decision of the Company to proceed with or effect the Merger. In providing
its conclusion, Lehman Brothers also expressed no opinion or view whatsoever
as to the prices at which shares of STI common stock (or warrants to purchase
such shares) may trade at any time following the announcement or consummation
of the Merger and its opinion should not be viewed as providing any assurance
that the market price of shares of STI common stock will be positively
impacted by the announcement or consummation of the Merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed the
following: (1) the Agreement and the specific terms of the Merger, (2)
publicly available information concerning STI that Lehman Brothers believed
to be relevant to its analysis, (3) internal financial and operating
information with respect to the business, operations and prospects of BBC
furnished to Lehman Brothers by BBC, (4) internal financial and operating
information with respect to the business, operating and prospects of STI
furnished to Lehman Brothers by STI, (5) a trading
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history of the common stock of STI for the 36-month period prior to August
30, 1996 and a comparison of that trading history with those of other
companies that Lehman Brothers deemed relevant, (6) information with respect
to the capital structure of BBC, including information furnished by BBC with
respect to its outstanding options and warrants, (7) a comparison of the
historical financial results and present financial condition of STI with
those of other companies that Lehman Brothers deemed relevant, (8) a
comparison of the historical financial results and present financial
condition of BBC with those of other companies that Lehman Brothers deemed
relevant, (9) a comparison of the financial terms of the Merger with the
financial terms of certain other transactions that Lehman Brothers deemed
relevant, (10) the pro forma financial and operating impact on STI of the
Merger, (11) the pro forma ownership of STI and the potential for enhancement
of liquidity in the common stock of STI following the consummation of the
Merger, and (12) a theoretical valuation of the warrants to be included in
the Merger Consideration using the Black-Scholes model. In addition, Lehman
Brothers had discussions with the management of STI and the management of BBC
concerning their respective businesses, operations, assets, financial
conditions and prospects and undertook such other studies, analyses and
investigations as Lehman Brothers deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of management of STI and
BBC that they are not aware of any facts that would make such information
inaccurate or misleading. With respect to the financial forecasts of STI and
BBC, including the range of potential synergies that are expected to result
from a combination of the businesses of STI and BBC, with the consent of STI,
Lehman Brothers assumed that such forecasts had been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of STI or BBC, as the case may be, as to the future financial
performance of STI and BBC, and Lehman Brothers relied upon such forecasts in
arriving at its opinion. In arriving at its opinion, Lehman Brothers did not
conduct a physical inspection of the properties and facilities of BBC and did
not make or obtain any evaluations or appraisals of the assets or liabilities
of BBC. In addition, Lehman Brothers was not authorized by the Company to
solicit, and did not solicit, any indications of interest from any third
party with respect to a business combination with STI. Lehman Brothers'
opinion necessarily is based upon market, economic and other conditions as
they existed on, and could be evaluated as of, the date thereof.
In connection with preparing its presentation and verbal opinion to the
Special Committee to the Board of Directors of STI on September 11, 1996, and
its written opinion dated September 11, 1996, Lehman Brothers performed a
variety of financial and comparative analyses as described below. The
preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial and comparative analysis
and application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at its opinion, Lehman Brothers did not attribute
any particular weight to any analysis or factor considered by it, but rather
made qualitative judgments as to the significance and relevance of each
analysis and
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<PAGE>
factor. Accordingly, Lehman Brothers believes that its analyses must be
considered as a whole and that considering any portions of such analyses and
factors, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, Lehman Brothers made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of STI and BBC. Any estimates contained in
these analyses are not necessarily indicative of actual values or predictive
of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the
value of businesses do not purport to be appraisals or to reflect the prices
at which businesses actually may be sold.
In connection with its written opinion as of October 29, 1996, Lehman
Brothers confirmed the analyses used to render its September 11, 1996 opinion
by performing procedures to update certain of such analyses and by reviewing
the assumptions on which such analyses were based and the factors considered
in connection therewith.
VALUATION ANALYSIS OF STI
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES COMPARABLE TO STI. Using
publicly available information, Lehman Brothers compared selected financial
data of STI with similar data of selected companies engaged in businesses
considered by Lehman Brothers to be comparable to those of STI.
Specifically, Lehman Brothers included in its review Alza Corp., I-Flow
Corp., Medex, Inc., Polymedica Industries, Inc. and Ethical Holdings, PLC
(the "Comparable Drug Delivery Companies"). Lehman Brothers calculated the
multiple of, among other things, the current stock price as of August 30,
1996 to: (i) the estimated 1996 earnings per share (the "1996 P/E Multiple")
and (ii) the estimated 1997 earnings per share (the "1997 P/E Multiple") for
STI and the Comparable Drug Delivery Companies based on estimates provided by
First Call Corp. (a service company used widely by the investment community
to gather earnings estimates from various research analysts) ("First Call").
Lehman Brothers noted that, as of August 30, 1996, STI's 1996 P/E Multiple
was 12.7x compared to 18.7x for the mean of the Comparable Drug Delivery
Companies, and STI's 1997 P/E Multiple of 7.0x compared to 15.0x for the mean
of the Comparable Drug Delivery Companies. Lehman Brothers also calculated
the multiple of, among other things, equity market value plus net debt (total
debt less cash) to: (i) latest twelve months ("LTM") Revenues and (ii) LTM
Earnings Before Interest and Taxes ("EBIT"). Lehman Brothers noted that as
of August 30, 1996, STI Common Stock traded at 1.14x LTM Revenues and 14.7x
LTM EBIT, compared to 3.15x and 17.8x for the Comparable Drug Delivery
Companies.
However, because of the inherent differences between the businesses,
operations and prospects of STI and the businesses, operations and prospects
of the companies included in the Comparable Drug Delivery Companies, Lehman
Brothers believed it was inappropriate to, and therefore did not, rely solely
on the quantitative results of the analysis, and accordingly also made
qualitative judgments concerning differences between the financial and
operating
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characteristics of STI and the companies in the group of Comparable Drug
Delivery Companies that would affect the public trading values of STI and
such companies.
ANALYSIS OF SELECTED COMPARABLE TRANSACTIONS TO STI. Using publicly
available information, Lehman Brothers compared purchase price premiums and
selected financial data for STI with similar data for five selected
transactions in the drug delivery industry (the "Comparable Drug Delivery
Merger Transactions"), which Lehman Brothers deemed to be comparable
transactions. The Comparable Drug Delivery Merger Transactions included the
following transactions: Abbott Laboratories/Pancretec, Inc.; Medeva
PLC/Armstrong Pharmaceuticals; IVAX Corporation/McGaw, Inc.; Curaflex Health
Services Inc./Clinical Homecare Ltd.; and UroHealth Systems, Inc./Advanced
Surgical, Inc. Lehman Brothers observed that the purchase price
premiums/(discounts) of (5.3%), 15.8%, and 36.8% (based on the hypothetical
market values per STI share of $9.00, $11.00 and $13.00, respectively) were
below (with the exception of $13.00) the mean premium of 26.5% paid for the
Comparable Drug Delivery Merger Transactions.
However, because the reasons for and the circumstances surrounding each
of the transactions analyzed were specific to each transaction, and because
of the inherent differences between the businesses, operations and prospects
of STI and BBC and the selected companies analyzed, Lehman Brothers believed
that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the comparable transactions analysis, and
accordingly, also made qualitative judgments concerning differences between
the structures, terms and characteristics of these transactions and the
Merger that would affect the acquisition values of STI and such acquired
companies.
STI DISCOUNTED CASH FLOW ANALYSIS. Lehman Brothers calculated the
present value of the future streams of after-tax cash flows that STI could be
expected to produce over a five year period. The analysis utilized financial
and operating information relating to the business, operations and prospects
of STI provided by STI's management and relied on certain assumptions with
respect to STI's future business and operations. Lehman Brothers also
utilized publicly available third party research reports on the drug delivery
industry for future operating and earnings trend information. After-tax cash
flows were calculated as the unlevered after-tax earnings plus depreciation
and amortization less net changes in non-cash working capital and capital
expenditures. Lehman Brothers calculated terminal values for STI in the year
2001 by applying to projected EBIT a range of multiples. Lehman Brothers'
determination of the appropriate range of multiples was based on an
assessment of current trading multiples of the Drug Delivery Companies and on
Lehman Brothers' general experience in valuations of companies. The cash
flow streams and terminal values were then discounted to present values using
a range of discount rates, which were chosen based on several assumptions
regarding factors such as the inflation rate, the interest rates, the
inherent business risk in STI's business, and the cost of capital of STI.
The analysis yielded a range of values for STI of $11.77 to $24.10 per share.
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VALUATION ANALYSIS OF BBC
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES COMPARABLE TO BBC. Using
publicly available information, Lehman Brothers compared selected financial
data of BBC with similar data of selected companies engaged in businesses
considered by Lehman Brothers to be comparable to those of BBC.
Specifically, Lehman Brothers included in its review Marquette Medical
Systems, Inc., CONMED Corporation, Respironics, Inc., and Physio-Control
International Corporation (the "Comparable Electrocardiography/Emergency
Response Companies" or "BBC Comparable Companies"). Lehman Brothers
calculated the multiple of, among other things, the current stock price as of
August 30, 1996 to: (i) the estimated 1996 earnings per share (the "1996 P/E
Multiple") and (ii) the estimated 1997 earnings per share (the "1997 P/E
Multiple") for the BBC Comparable Companies based on estimates provided by
First Call. Lehman Brothers noted that, as of August 30, 1996, the mean 1996
P/E Multiple of the BBC Comparable Companies was 21.1x, and the mean 1997 P/E
Multiple of the BBC Comparable Companies was 15.4x. Lehman Brothers also
calculated the multiple of, among other things, equity market value plus net
debt (total debt less cash) to: (i) latest twelve months ("LTM") Revenues
and (ii) LTM Earnings Before Interest and Taxes ("EBIT"). Lehman Brothers
noted that, as of August 30, 1996, mean LTM Revenues and LTM EBIT Multiples
for the BBC Comparable Companies were 2.31x and 13.4x, respectively. Lehman
Brothers also examined the EBIT as a percentage of revenue figures ("EBIT
Margins") for the BBC Comparable Companies. Lehman Brothers compared such
EBIT Margins to BBC's 1998 and 1999 projected EBIT Margins. Lehman Brothers
noted that BBC's projected EBIT Margins for 1998 and 1999 were 14.6% and
34.2%, respectively, compared to 17.8% for the LTM EBIT Margins for the BBC
Comparable Companies.
However, because of the inherent differences between the businesses,
operations and prospects of BBC and the businesses, operations and prospects
of the companies included in the BBC Comparable Companies, Lehman Brothers
believed it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis, and accordingly also made qualitative
judgments concerning differences between the financial and operating
characteristics of BBC and the companies in the group of BBC Comparable
Companies.
ANALYSIS OF SELECTED COMPARABLE TRANSACTIONS TO BBC. Using publicly
available information, Lehman Brothers compared selected financial data for
BBC with similar data as well as with purchase price premiums for five
selected transactions in the Electrocardiography/emergency response equipment
industry (the "Comparable Electrocardiography/Emergency Response Equipment
Merger Transactions" or the "BBC Comparable Transactions"), which Lehman
Brothers deemed to be comparable transactions. The BBC Comparable
Transactions included the following transactions: Boston Scientific
Corporation/Cardiovascular Imaging Systems, Inc.; Thermo Electron
Corporation/Bird Medical Technologies Incorporated; CONMED
Corporation/Birtcher Medical Systems, Inc.; Thermo Instrument Systems
Inc./Nicolet Instrument; and Pfizer Inc./Namie U.S.A. Corporation. Lehman
Brothers noted that mean LTM Revenues and LTM EBIT Multiples for the BBC
Comparable Transactions were 1.60x and 22.3x, respectively.
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BBC DISCOUNTED CASH FLOW ANALYSIS. Lehman Brothers calculated the
present value of the future streams of after-tax flows that BBC could be
expected to produce over a three year period. The analysis utilized
financial and operating information relating to the business, operations and
prospects of BBC provided by BBC's management ("BBC Base Case") and relied on
certain assumptions with respect to BBC's future business and operations. In
addition, Lehman Brothers applied more conservative assumptions and estimates
to the Company's "Base Case" projections based on Lehman Brothers' judgment
and experience with respect to industry performance. Lehman Brothers
reviewed the following "Sensitivity Cases": (i) Base Case adjusted for
reaching only 80% of revenue forecasts ("Case I"); and (ii) Base Case
adjusted for reaching the revenue forecasts for the PRIME ECG business
segment with one-year delay and reaching 100% of the other business segments
("Case II"). Lehman Brothers also utilized publicly available third party
research reports on the Electrocardiography/ Telemedicine/Emergency Response
industry for future operating and earnings trend information. After-tax cash
flows were calculated as the unlevered after-tax earnings plus depreciation
and amortization less net changes in non-cash working capital and capital
expenditures. Lehman Brothers calculated terminal values for BBC in the year
1999 by applying to projected EBIT a range of multiples. Lehman Brothers
determination of the appropriate range of multiples was based on an
assessment of current trading multiples of the BBC Comparable Companies and
on Lehman Brothers' general experience in valuations of companies. The cash
flow streams and terminal values were then discounted to present values using
a range of discount rates, which were chosen based on several assumptions
regarding factors such as the inflation rate, interest rates, the inherent
business risk in BBC's business, and the cost of capital of BBC. The
analysis of the various cases yielded the following range of values for BBC:
$54.75 to $85.17 per share for the Base Case; $40.11 to $61.18 per share for
Case I; and, $25.62 to $37.12 per share for Case II.
VALUATION ANALYSIS OF COMBINED COMPANY
CONTRIBUTION ANALYSIS. Lehman Brothers reviewed, among other things, the
respective contributions of STI and BBC to the estimated revenue, EBIT and
net income of the merged company for fiscal 1997, 1998 and 1999. The
analysis utilized financial and operating information relating to the
business, operations and prospects of STI provided by STI management and the
financial and operating information relating to the business, operations and
prospects of BBC from research analyst reports and discussions with BBC
management. In fiscal year 1999, BBC and STI contribution to the combined
company's revenue, EBIT, and net income are projected to be 66.9% and 33.1%,
77.4% and 22.6%, and 76.3% and 23.7%, respectively. Lehman Brothers also
noted that STI minority stockholders will hold 30.3% on a fully-diluted basis
and 41.3% on a primary basis of STI's outstanding shares (the combined
company post Merger) compare to 38.9% of STI prior to the Merger.
DISCOUNTED CASH FLOW ANALYSIS OF THE COMBINED COMPANY. Lehman Brothers
calculated the present value of the future streams of after-tax cash flows
that BBC and STI could be expected to produce as a merged company (the
"Combined Company" or "Newco") over a three year period. The analysis
utilized financial and operating information relating to the business,
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operations and prospects of BBC and STI provided by BBC's and STI's future
business and operations. In addition to reviewing the projections provided
by BBC and STI, Lehman Brothers reviewed the same sensitivity cases it used
to value BBC on a stand alone basis (see above BBC Sensitivity Cases). Lehman
Brothers also utilize publicly available third party research reports on the
Electrocardiography/Telemedicine/Emergency Response industry for future
operating and earnings trend information. After-tax flows were calculated as
the unlevered after-tax earnings plus depreciation and amortization less net
changes in non-cash working capital and capital expenditures. Lehman
Brothers calculated terminal values for Newco in the year 1999 by applying to
projected EBIT a range of multiples. Lehman Brothers determination of the
appropriate range of multiples was based on an assessment of current trading
multiples of the BBC Comparable Companies, Comparable Drug Delivery Companies
and on Lehman Brothers' general experience in valuations of companies. The
cash flow streams and terminal values were then discounted to present values
using a range of discount rates, which were chosen based on several
assumptions regarding factors such as the inflation rate, interest rates, the
inherent business risk in Newco's business, and the cost of capital of Newco.
The analysis of the various cases yielded the following range of values for
the Combined Company: $26.71 to $46.57 per share for the Base Case; $21.79
to $38.38 per share for Case I; and, $16.91 to $30.15 per share for Case II.
HAS GETS ANALYSIS. Based on an analysis of the pro forma effects of the
Merger, Lehman Brothers noted that, at the negotiated Merger Consideration,
the merger is (55.4%), 19.4% and 110.3% accretive to STI's pro forma
estimated earnings per share in fiscal 1997, 1998 and 1999, respectively.
Lehman Brothers also noted that STI minority stockholders will hold 30.3% on
a fully-diluted basis and 41.3% on a primary basis of STI's outstanding
shares (the combined company post Merger) compare to 38.9% of STI prior to
the Merger.
VALUATION OF WARRANTS. Lehman Brothers also conducted a theoretical
valuation analysis of the warrants to be included in the Merger Consideration
using the Black-Scholes model. Lehman Brothers noted that, using STI stock
price range from $9.00 to $11.00, and stock price volatility range from 56%
to 60%, the value per each of the 300,000 warrants to be issued in connection
with the Merger is estimated to be between $4.17 and $5.87, and if calculated
on a per share basis for each of the 746,995 outstanding BBC preferred
shares, is estimated to be between $1.68 and $2.36.
ENGAGEMENT OF LEHMAN BROTHERS. Lehman Brothers is an internationally
recognized investment banking firm and, as part of its investment banking
activities, is regularly engaged in the evaluation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and
unlisted securities, private placements, and valuations for corporate, estate
and other purposes. The Special Committee to the STI board selected Lehman
Brothers because of its expertise, reputation and familiarity with the
healthcare industry, and because its investment banking professionals have
substantial experience in transactions similar to the Merger, as well as for
the other reasons described under "-- Background of the Merger."
-19-
<PAGE>
Pursuant to an engagement letter between STI and Lehman Brothers, STI has
agreed to pay Lehman Brothers a fee for acting as financial advisor in
connection with the Merger, including rendering its opinion. The fee
includes: (i) a $100,000 retainer which was paid upon signing of the
engagement letter; and (ii) an additional fee of $200,000 in cash and 13,636
shares of Common Stock, payable upon consummation of the Merger. STI also
agreed to register for resale under the Securities Act of 1933, as amended
("Securities Act"), the shares of Common Stock to be received by Lehman
Brothers and to reimburse Lehman Brothers for up to $15,000 of reasonable
out-of-pocket expenses and to indemnify Lehman Brothers for certain
liabilities that may arise out of its engagement and rendering of its
opinion. In the ordinary course of its business, Lehman Brothers may
actively trade in the securities of STI for its own account and for the
account of its customers and, accordingly, may at any time hold a long or
short position in such securities.
TERMS OF THE MERGER
At the Effective Time, Brunswick will be merged with and into the Company
and the separate corporate existence of Brunswick will cease. The Company,
as the surviving corporation, will continue its corporate existence.
Also at the Effective Time, each share of Brunswick Common Stock
outstanding immediately prior to the Effective Time (except as otherwise
provided in the Agreement) will be converted into the right to receive 2.1
shares of Common Stock and each share of Brunswick Preferred Stock
outstanding immediately prior to the Effective Time (except as otherwise
provided in the Agreement) will be converted into the right to receive 2.1
shares of Common Stock and a Merger Warrant for 0.4 of a share of Common
Stock, together in each case with cash in lieu of any fractional share of
Common Stock. Any such cash payment will be determined by multiplying such
fraction by the closing sale price of a share of the Common Stock as reported
on the Nasdaq National Market on the day immediately preceding the closing
date ("Closing Date"). Each share of Common Stock held at the Effective Time
by Brunswick will be retired and resume the status of authorized and unissued
shares of the Company.
Brunswick has a stock option plan (the "Option Plan") pursuant to which
officers and key employees of Brunswick have been granted options to purchase
a total of 124,720 shares of Brunswick Common Stock, including options
covering 70,720 shares with an exercise price of $.01 held by James H. Miller
and 8,000 shares, 5,000 shares, and 39,000 shares with an exercise price of
$7.00 held by James G. Nichols, Robert G. Foster and other employees of
Brunswick, respectively. At the Effective Time, Brunswick's obligations with
respect to such outstanding options will be assumed by the Company, and each
stock option of Brunswick outstanding will be converted automatically into
the right to receive, upon payment of the exercise price (as adjusted to
reflect the Common Per Share Merger Consideration), the right to receive 2.1
shares of Common Stock for each share of Brunswick Common Stock covered by
the stock option.
-20-
<PAGE>
At the Effective Time, the Company also will assume Brunswick's
obligations under all outstanding warrants to acquire Brunswick Common Stock.
Each such warrant, except as noted below, will become the right to receive
upon payment of the exercise price (as adjusted to reflect the Common Per
Share Merger Consideration), 2.1 shares of Common Stock for each share of
Brunswick Common Stock subject to the warrant. In addition, all outstanding
Series A Warrants and Series B Warrants to acquire 33,370 and 36,298 shares,
respectively, of Brunswick non-voting common stock will be assumed by the
Company and represent the right to acquire 2.5046 shares of non-voting common
stock of the Company for each share of Brunswick non-voting stock at exercise
prices of approximately $.10 and $11.00 per share, respectively. The
outstanding warrant to purchase 50,000 shares of Brunswick Common Stock held
by the Sarnoff Estate will be assumed by the Company and represent the right
to acquire 2.5 shares of Common Stock for each share of Brunswick Common
Stock at an exercise price of $11.00 per share.
As a result of the transactions described above, at the Effective Time,
the Company will issue an aggregate of 1,708,928 shares of Common Stock to
Brunswick's stockholders holding an aggregate of 813,775 shares of Brunswick
Common Stock and Brunswick Preferred Stock. The Company also will reserve
for issuance upon the exercise of the assumed options, warrants, and Merger
Warrants an aggregate of 1,053,358 shares of Common Stock. Pursuant to the
terms of the Agreement, the Company has agreed, at its expense, to register
for resale under the Securities Act all of the shares of Common Stock to be
received by stockholders of Brunswick in connection with the Merger and upon
the exercise of outstanding options, warrants and Merger Warrants. See
"PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT."
ASSUMPTION OF CERTAIN INDEBTEDNESS
As a consequence of the Merger, the Company will assume Brunswick's
indebtedness under the Senior Bridge Loan in the aggregate principal amount
of $11,000,000, the Estate Note in an aggregate principal amount of
$4,700,000, and the Subordinated Loan in an aggregate principal amount of
$1,000,000. Under the terms of the Senior Bridge Loan, (i) upon consummation
of the Merger and the satisfaction of certain conditions, the Senior Bridge
Loan will be converted into a $10,000,000 term loan and $1,000,000 of the
outstanding principal amount will be repaid and (ii) the lenders will make
available to the Company a $5,000,000 revolving credit loan, a portion of
which must be used to discharge certain of the Company's existing debt. Each
of the term loan and the revolving credit loan will bear interest at a
variable rate, will be secured by substantially all of the assets of the
Company as the surviving corporation, and will mature on the fifth
anniversary of the Effective Time. Quarterly principal payments of the term
loan will be required in scheduled amounts ranging from $500,000 to $750,000,
and mandatory prepayments of 75% of the Company's excess cash flow will be
required on an annual basis. Financial covenants under the term loan and the
revolving credit loan will require the Company to maintain certain levels of
net worth and debt to EBITDA ratios while limiting the Company's capital
expenditures made in any one fiscal year to amounts varying from $2,000,000
to $3,500,000. See "-- Approval By the Board of Directors."
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<PAGE>
The Estate Note matures on the fifth anniversary of the Effective Time
and bears interest at the rate of 12% per annum through April 15, 1998 and
13% thereafter. Through April 30, 1998, accrued interest will be compounded
and be added to principal. Thereafter, accrued interest is payable quarterly
in arrears. Principal under the Estate Note is payable in one payment on the
maturity date. The Company may only prepay the Estate Note after repaying
all senior indebtedness, including the term loan and the revolving credit
loan, or with the consent of the senior lender. The Company is obligated to
prepay the Estate Note, subject to the rights of the senior debt, upon
obtaining certain additional debt and equity financings to the extent of the
net cash proceeds from such financings.
The Subordinated Loan matures on the same day and bears interest at the
same rate as the Estate Note. Principal on the Subordinated Loan is payable
in seven consecutive quarterly installments of $125,000 beginning on April
30, 1999, with one final payment payable on the maturity date. The
Subordinated Loan may be prepaid only after satisfaction of the Term Loan,
the revolving credit loan and the Estate Note, or with the consent of the
senior lender. The Company is obligated to prepay the Subordinated Loan,
subject to the rights of the senior lender, upon obtaining certain additional
debt and equity financings to the extent of the net cash proceeds from such
financings.
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE MERGER; WAIVER
The Agreement contains representations and warranties of Brunswick and
the Company regarding, among other things, their respective capitalization,
organization, ownership and capitalization of their respective subsidiaries,
qualification to do business, authority to enter into the Agreement,
financial statements, regulatory filings, undisclosed liabilities, the
accuracy of information prepared and the absence of certain legal proceedings
and other events, including material adverse changes in the parties'
respective businesses, financial condition or results of operations. The
Agreement also contains representations and warranties of Brunswick regarding
tax matters, compliance with applicable laws and regulations, certain
contracts, bank accounts and powers of attorney, properties, intellectual
property, customers, accounts receivable, inventory, employee benefit plans,
employee relations, transactions with management, insurance and hazardous
materials. The representations and warranties of the Company and Brunswick
will not survive the Merger.
The respective obligations of the Company and Brunswick to consummate the
Merger are subject to the fulfillment, at or prior to the Effective Time, of
the following conditions: (i) receipt of all required stockholder approvals
and certain other consents and waivers; (ii) the absence of any court order
prohibiting consummation of the Merger; (iii) the qualification on the Nasdaq
National Market of the shares of Common Stock to be issued in the Merger;
(iv) the accuracy of the representations and warranties of each party to the
Agreement and the absence of any material adverse change in the business,
financial condition, results of operations, or prospects of the other party;
(v) the performance of all covenants required by the Agreement to be
performed prior to the Effective Time; (vi) the receipt of satisfactory
opinions of legal counsel, including opinions to the effect that the Merger
will constitute a tax-free reorganization;
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<PAGE>
(vii) the delivery of customary certificates and other documentation; and
(viii) the receipt of a comfort letter of BBC's auditors with respect to
certain financial information of Brunswick. It also is a condition to the
Merger that Mr. Miller enter into an employment agreement with the Company as
the surviving corporation. See "PROPOSAL 2 -- ELECTION OF DIRECTORS --
Executive Compensation and Other Information." In addition, the obligation
of the Company to consummate the Merger is conditioned on the number of
shares of the capital stock for which Brunswick stockholders seek to exercise
appraisal rights not exceeding 3% of Brunswick's capital stock issued and
outstanding on the Closing Date.
At any time prior to the Effective Time, the Company and Brunswick may
(i) extend the time for performance of any obligation or act of the other
party or (ii) waive compliance with any of the agreements of the other party
or any conditions to its own obligations, in each case only to the extent
such obligations, agreements and conditions are intended for its benefit.
BUSINESS PENDING THE MERGER
Under the terms of the Agreement, except with the prior written consent
of the Company, Brunswick and its subsidiaries are required to carry on their
respective businesses in the ordinary course in substantially the same manner
as conducted prior to the execution of the Agreement. In addition, Brunswick
generally may not, without the written consent of the Company or as otherwise
provided in the Agreement, increase compensation or fringe benefits of
directors, officers, employees and agents in a manner inconsistent with past
practices; incur liabilities or indebtedness beyond certain limits; declare
or pay any dividends or other distributions on capital stock; amend its
articles of organization or by-laws; make any material acquisition of
property or modify any license or technology agreement other than in the
ordinary course of business; or take other actions, other than in the
ordinary course of business, that might impact Brunswick's financial
condition or business.
EFFECTIVE DATE OF THE MERGER; TERMINATION
Brunswick and the Company each anticipate that the Merger will be
consummated during November 1996. However, consummation of the Merger could
be delayed as a result of delays in obtaining any necessary approvals or if
any other condition to consummation of the Merger is not satisfied. There
can be no assurances as to if or when such approvals will be obtained or that
the Merger will be consummated.
The Agreement may be terminated by the Company (acting through the
Special Committee) or Brunswick at any time prior to the Effective Time,
whether before or after stockholder approval: (i) if, without fault of the
terminating party, the Effective Time has not occurred on or before November
30, 1996; (ii) in the event of a material breach of the Agreement by the
other party that has not been cured within the period allowed in the
Agreement; (iii) if any court or governmental body has prohibited the Merger;
or (iv) if the requisite stockholder action of either party is not obtained.
The Agreement also may be terminated by the mutual consent of the Special
Committee and Brunswick's Board of Directors.
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<PAGE>
In the event of termination, the Agreement shall become void, except that
certain provisions relating to expenses, publicity and confidentiality shall
survive termination. Any termination resulting from a material breach of a
covenant or agreement in the Agreement shall not relieve any breaching party
from liability for any uncured willful breach giving rise to such
termination.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of certain anticipated federal income tax
consequences of the Merger. The Merger is intended to constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and the Company and Brunswick should
each be a party to such reorganization within the meaning of Section 368(b)
of the Code. Accordingly, no gain or loss should be recognized by the
Company for federal income tax purposes as a result of the Merger. Moreover,
because the Company will be the surviving corporation in the Merger and
because the current stockholders of the Company will not exchange their
Common Stock pursuant to the Merger, no gain or loss should be recognized by
the current stockholders of the Company as a result of the Merger. It is a
condition to consummation of the Merger that Brunswick and the Company each
shall have received an opinion from Palmer & Dodge LLP, counsel to Brunswick,
and Arnold & Porter, counsel to the Company, in form and substance reasonably
satisfactory to both Brunswick and the Company, as to certain federal income
tax consequences of the Merger.
APPRAISAL RIGHTS
Under Section 262 of the DGCL, stockholders of the Company do not have
the right to dissent with respect to the Merger and to be paid an appraised
value of their stock. Under the Massachusetts Business Corporation Law,
stockholders of Brunswick are entitled to object to the Merger and exercise
such appraisal rights. Under the terms of the Agreement, the Company is not
required to consummate the Merger if the holders of more than 3% of
Brunswick's outstanding capital stock dissent with respect to the Merger.
ACCOUNTING TREATMENT OF THE MERGER
Although the Company will be the surviving corporation in the Merger as a
legal matter, the Merger will be accounted for as a "purchase" of the Company
by Brunswick for accounting and financial reporting purposes. Accordingly,
Brunswick's historical financial statements will become the Company's
financial statements. Under the purchase method of accounting, the Company's
results of operations will be combined with those of Brunswick from and after
the Effective Time, and the Company's assets and liabilities will be recorded
on Brunswick's books at their respective fair values at the Effective Time.
A determination of the fair value of the Company's assets and liabilities
will be made in order to allocate the purchase price to the assets acquired
and the liabilities assumed. The expected excess of the value of the
consideration deemed to be over the fair value of the Company's assets and
liabilities will be amortized through charges to earnings over a ten-year
period following the Effective Time. See "UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS."
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<PAGE>
MANAGEMENT FOLLOWING THE MERGER
The directors of the Company immediately prior to the Effective Time will
continue as the directors of the Company as the surviving corporation. In
addition, at the Effective Time, the Board of Directors will be divided into
three classes serving staggered three-year terms, with each class
constituting approximately one-third of the total number of directors. See
"PROPOSAL 2 -- ELECTION OF DIRECTORS."
The executive officers of the Company serving prior to the Effective Time
will continue as the executive officers of the surviving corporation,
together with persons drawn from the following officers of Brunswick:
JAMES G. NICHOLS, age 55, joined Brunswick as Senior Vice President,
General Manager of Brunswick Biomedical Technologies Inc. in July 1990.
HERBERT REINHOLD, age 62, joined Brunswick as Senior Vice President in
connection with the acquisition of the Medical Devices Division of the
Company by Brunswick in July 1994. Prior to that time, Mr. Reinhold held a
number of positions, including Marketing Manager, Director of Product
Development and Vice President of the Medical Device Division at the Company.
DR. BRUCE D. WARD, age 56, joined Brunswick as Vice President Science and
Technology, in April 1995. From 1993 until April 1995, Dr. Ward was Vice
President of Research and Development at St. Jude Medical. Prior to that
time, Dr. Ward was Vice President of Technology of the Pfizer Hospital
Products group and General Manager for Pfizer's Laser Systems Division from
1986 through 1992.
STRATEGY AFTER THE MERGER
Following the Merger, the business strategy of the surviving corporation
will emphasize continuing growth, revenues and profitability, with expanded
investments in research and development, particularly in PRIME ECG and new
auto-injector technology. Stockholder approval of the Agreement will
constitute approval of an amendment to the Amended and Restated Certificate
of Incorporation to change the name of the surviving corporation from
"Survival Technology, Inc." to "Meridian MedTec Inc.," which will conduct
business as "Meridian Medical Technologies" ("Meridian").
Meridian will be postured as a medical device firm with two distinct
divisions. One division will seek to capitalize on drug delivery devices
with an emphasis on auto-injectors and the other will focus on non-invasive
cardiac diagnostics. It also is anticipated that Meridian will seek
appropriate acquisitions, particularly with respect to cardiac diagnostics
and telemedicine.
The two divisions of Meridian will operate independently in terms of
strategic planning, marketing, sales and specific product development.
Significant cost savings are expected to be
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<PAGE>
realized through the use of a single infrastructure for finance,
administration, human resources and clinical regulatory affairs for both
divisions.
The drug delivery division will concentrate on expanding its short-term
contract filling business while completing development of new auto-injectors.
The cardiac diagnostics and telemedicine division will focus on the
introduction of PRIME ECG and the expansion of the telemedicine business into
the United States' market.
For additional information regarding the Company, see "INFORMATION
CONCERNING THE COMPANY." For additional information regarding Brunswick, see
"INFORMATION CONCERNING BRUNSWICK."
MARKET FOR COMMON STOCK
The Common Stock is traded in the over-the-counter market and is quoted
in the Nasdaq National Market under the symbol STIQ. The following table sets
forth, for the periods indicated, the range of high and low sale prices for
the Common Stock as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
FISCAL YEAR 1995 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter....................... $ 8.75 $6.50
Second Quarter...................... 9.25 6.75
Third Quarter....................... 10.00 7.25
Fourth Quarter...................... 9.50 7.25
FISCAL YEAR 1996
----------------
First Quarter....................... 9.50 6.50
Second Quarter...................... 10.25 7.25
Third Quarter....................... 10.125 7.50
Fourth Quarter...................... 11.875 8.25
FISCAL YEAR 1997
----------------
First Quarter (through October 28,
1996)............................. 11.875 8.375
</TABLE>
On March 18, 1996 and April 12, 1996, the last full days of trading prior
to the announcement of the agreement between Brunswick and the Sarnoff Estate
and the purchase of the Estate Shares by Brunswick, respectively, the last
reported sales prices were $9.50 and $9.75, respectively, per share of Common
Stock. On September 10, 1996, the last full day of trading prior to the
announcement of the Merger, the last reported sales price was $9.50 per
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<PAGE>
share of Common Stock. On October 28, 1996, the last reported sales price
was $ ** per share of Common Stock. Each of such last reported sales prices
is as reported by the Nasdaq National Market on the date indicated.
The Board of Directors of the Company has not declared any dividends on
the Common Stock since the Company's organization.
There is no trading market for the Brunswick capital stock.
COMPARATIVE PER SHARE DATA
The following table presents at the dates and for the periods indicated
(i) historical and pro forma combined per share data for Brunswick capital
stock and (ii) historical and equivalent pro forma per share data for Common
Stock. The information is based upon and should be read in conjunction with
the historical financial statements of Brunswick and the Company and the
unaudited pro forma combined financial information giving effect to the
Merger appearing elsewhere herein. The unaudited pro forma combined
financial data is not necessarily indicative of the financial position and
results of future operations of the combined entity or the actual financial
position and results of operations that would have been achieved had the
Merger been consummated at the date indicated. See "UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION" and "INDEX TO FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
BBC (ACQUIRING) STI (TO BE ACQUIRED)
EQUIVALENT
HISTORICAL PRO FORMA HISTORICAL PRO FORMA(1)
---------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Per Common Share and
Common Share Equivalent
Book Value:
June 30, 1996 $6.01
July 31, 1996 $4.06 $5.60 $1.93
Net (loss) income:(2)
June 30, 1996 ($99.32)
July 31, 1996 ($2.09) $ .41 ($1.00)
Dividends: None None
- ----------
(1) The equivalent pro forma amounts give effect to the Merger on a
purchase basis with an exchange ratio of 2.1 shares of Common Stock for
each share of Brunswick Common Stock and Brunswick Preferred Stock.
(2) Options, warrants and convertible preferred stock are considered to
be Common Stock equivalents when dilutive.
</TABLE>
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PROPOSAL 2 -- ELECTION OF DIRECTORS
GENERAL
The Board of Directors has nominated E. Andrews Grinstead, III, Bruce M.
Dresner, David L. Lougee, Robert G. Foster and James H. Miller to serve as
directors for the ensuing fiscal year.
If the Merger becomes effective, the Board of Directors will be divided
into three classes, as nearly equal in number as reasonably possible, with
terms initially expiring one year, two years, and three years, and for terms
of three years thereafter. At such time, Mr. Grinstead will be elected as a
Class I director, with a term to expire at the annual meeting following
fiscal 1997; Messrs. Dresner and Lougee will be elected as Class II
directors, with terms to expire at the annual meeting following fiscal 1998;
and Messrs. Foster and Miller will be elected as Class III directors with
terms to expire at the annual meeting following fiscal 1999. If the Merger
does not become effective, each director will hold office until the next
annual meeting of stockholders.
Each of the nominees for director currently serves as a director of the
Company. Messrs. Foster, Grinstead, and Lougee have served as directors
since April 1996. Messrs. Miller and Dresner have served as directors since
1989 and 1985, respectively. Directors hold office until their successors
are elected and qualified.
The proxies solicited hereby, unless directed to the contrary therein,
will be voted for the nominees. Each of the nominees has consented to being
named in this Proxy Statement and to serve if elected. The Board has no
reason to believe that any nominee for election as a director will not be a
candidate or will be unable to serve, but if either occurs, it is intended
that the shares represented by proxies will be voted for such substituted
nominee or nominees as the Board, in its discretion, may designate.
Set forth below is a table identifying each nominee for election as a
director, his age, current position with the Company and/or current principal
occupation, other directorships, and the year in which his term of office
will expire after the Effective Time.
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<PAGE>
<TABLE>
<CAPTION>
TERM TO
EXPIRE
FOLLOWING
NAME AGE PRINCIPAL OCCUPATION FISCAL YEAR
---- --- -------------------- -----------
<S> <C> <C> <C>
James H. Miller 58 Chairman, President and Chief 1999
Executive Officer
Bruce M. Dresner 48 Vice President for Investments, 1998
Columbia University
Robert G. Foster 58 Chairman, President and Chief 1999
Executive Officer, Commonwealth
BioVentures, Inc. (venture capital
firm); Director of Wyman-Gordon
Company
E. Andrews Grinstead, III 49 Chairman, Chief Executive Officer and 1997
President, Hybridon, Inc.
(biotechnology); Director of
EcoScience Corporation and Pharmos
Corporation
David L. Lougee 56 Partner, Mirick, O'Connell, DeMallie 1998
& Lougee (law firm)
</TABLE>
During the fiscal year ended July 31, 1996 ("fiscal 1996"), the Board of
Directors held four meetings. During their term, all of the then incumbent
directors were present in person for all of the meetings of the Board and the
committees of the Board on which they serve, except Mr. Dresner who was on
leave of absence until April 16, 1996. Concurrent with Brunswick's purchase
of the Estate Shares on April 15, 1996, three of the existing directors
resigned from the Board, and Messrs. Foster, Grinstead and Lougee were
appointed to the Board of Directors.
The Compensation and Stock Option Committee ("Committee") of the Board of
Directors presently consists of Messrs. Foster, Grinstead and Lougee. The
Committee is empowered to administer the Company's 1986 Stock Option Plan
("1986 Plan"), which includes the power under the 1986 Plan to grant stock
options and stock appreciation rights and to award restricted stock and
incentive shares. The Committee also is responsible for the determination of
the compensation for the president and chief executive officer. The
Committee did not meet during fiscal 1996.
The Audit Committee of the Board of Directors has certain duties relating
to the year end audit, the Company's internal accounting controls and the
Company's relationship with its independent auditors. Messrs. Dresner and
Grinstead are the current members of the Audit
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<PAGE>
Committee. The Audit Committee held one meeting during fiscal 1996 to
approve the financial statements of the Company for the fiscal year ended
July 31, 1995.
In addition, the Board of Directors has an Executive Committee, whose
present membership consists of Messrs. Foster and Miller. The Executive
Committee did not meet during fiscal 1996.
The Company does not have a nominating committee or other committee
performing similar functions.
Each of the Company's directors other than Mr. Miller received, during
fiscal 1996, $1,500 for each meeting of the Board personally attended by him
(other than meetings held by telephone conference as to which no fee is
paid). Directors of the Company who are not also officers or employees of
the Company or a subsidiary, who have served for at least one year and who
will continue to serve as directors immediately following the annual meeting
receive automatic grants of non-statutory stock options covering 1,300 shares
of Common Stock under the 1986 Plan on the date of each annual meeting. Each
person who becomes a non-employee director receives a stock option covering
6,000 shares of Common Stock effective as of the date of such director's
election. Options so granted have an exercise price equal to the fair market
value of the Common Stock on the date of grant, become exercisable in 25
percent cumulative annual installments and generally expire 10 years from the
date of grant. If a director is removed from office, all options granted to
such director pursuant to the automatic grants will expire immediately upon
such removal. Pursuant to these provisions, Mr. Dresner was granted an
option covering 1,300 shares of Common Stock at an exercise price of $8.31
per share, and Messrs. Foster, Grinstead and Lougee were granted options
covering 6,000 shares of Common Stock at an exercise price of $9.38 per share
upon their appointment to the Board of Directors.
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<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth information as to compensation paid for
services rendered to the Company by the President and Chief Executive Officer
and the three other executive officers of the Company as of July 31, 1996 for
the three fiscal years ended July 31, 1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND FISCAL SALARY(1) BONUS OPTIONS/SARS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (#) ($) (2)
------------------ ------ --------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
James H. Miller 1996 225,000 100,000 - 9,784
Chairman, President 1995 225,000 20,000 - 8,770
and CEO 1994 225,000 45,000 15,000 12,608
Jeffrey W. Church 1996 146,053 45,000 - 8,025
Sr. Vice President 1995 131,933 - - 6,854
Finance and CFO 1994 117,154 - 7,500 6,073
O. Napoleon Monroe 1996 114,234 - - 128,713
Vice President (3) 1995 123,517 - - 6,313
1994 119,905 - 5,900 6,075
Glenn F. Wickes, Jr., 1996 144,066 - - 9,004
Sr. Vice President, 1995 137,850 10,000 - 5,637
Pharmaceutical 1994 123,077 - 13,000 27,521
Operations (4)
- ----------
(1) Includes amounts deferred at the election of the executive officer
under the Company's 401(k) Plan.
(2) Includes Company matching contributions under the Company's 401(k)
Plan in the following amounts for fiscal 1996: Mr. Miller, $5,233; Mr.
Church, $4,982; Mr. Monroe, $3,548; and Mr. Wickes, $3,950. Also
includes discretionary Company contributions under the Company's profit
sharing plan in the following amounts: Mr. Miller, $1,389 and a Company
contribution to the deferred compensation account of Mr. Miller in the
amount of $691; Mr. Church, $1,192; Mr. Monroe, $1,093; and Mr. Wickes,
$1,227. The Company provides group accidental death and disability and
term life insurance to all its employees who work more than 30 hours per
week. The death and disability benefit and life insurance benefit under
the Company's plan is up to 200% of the insured person's annual
compensation (as defined in the plan), except in the case of certain
employees, including the executive officers named above, with respect to
whom benefits are up to 300% of the insured person's annual income.
Premiums paid attributable to such benefits were as follows: Mr. Miller,
$2,471; Mr. Church, $1,852; Mr. Monroe, $1,317; and Mr. Wickes, $1,827.
</TABLE>
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<PAGE>
(3) Mr. Monroe resigned from the Company in May 1996. The column "All
Other Compensation" includes a $122,815 severance payment made to Mr.
Monroe. In addition, Mr. Monroe was entitled to receive continued health
insurance coverage for 3 months after his termination of employment.
(4) Mr. Wickes' employment with the Company terminated in October 1996.
STOCK OPTIONS
No stock options were granted to the executive officers named in the
Summary Compensation Table above during fiscal 1996. The following table
summarizes certain information regarding all outstanding options for the
executive officers named in the Summary Compensation Table as of July 31,
1996.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)(1)
---------------------- ----------------------
SHARES ACQUIRED
NAME ON EXERCISE(#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- ---------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
James H. Miller 0 0 62,500/7,500 34,375/0
Jeffrey W. Church 0 0 10,750/3,750 7,969/7,969
O. Napoleon Monroe(2) 2,950 10,325 2,000/2,950 0/6,269
Glenn F. Wickes, Jr. 0 0 6,500/6,500 7,438/7,438
- ----------
(1) Value is calculated as the difference between the fair market value
of a share of Common Stock on July 31, 1996 ($8.875 per share) and the
exercise price of the options.
(2) All options held by Mr. Monroe on July 31, 1996 expired in
accordance with their terms during August 1996.
</TABLE>
EMPLOYMENT AND SEVERANCE AGREEMENTS
At July 31, 1996, the Company was a party to employment agreements
(collectively the "Employment Agreements" and individually an "Employment
Agreement") with each of James H. Miller, Jeffrey W. Church and Glenn F.
Wickes. Under the Employment Agreements, the Company will employ Mr. Miller,
Mr. Church and Mr. Wickes as President and Chief Executive Officer, Senior
Vice President, Finance and Chief Financial Officer and Senior Vice
President, Pharmaceutical Operations, respectively. The Employment Agreement
with Mr. Miller is effective through April 30, 1999, subject to annual
extensions. The Employment Agreement for Mr. Church is effective through
December 31, 1997, subject to annual extensions. As described below, Mr.
Wickes' employment with the Company terminated in October 1996. If a "Change
of Control" (as defined in the Employment Agreements) occurs
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<PAGE>
during the term of the Employment Agreements, then the Employment Agreements
will continue in effect for the lesser of (i) a period of 36 months beyond
the then-scheduled expiration of the Employment Agreements or (ii) the date
of the executive's retirement. The Employment Agreements provide for a
minimum base salary (currently $225,000 per year for Mr. Miller and $141,600
per year for Mr. Church) and customary benefits. In addition, the Employment
Agreements require the Executive to refrain from disclosing confidential
information and to abstain from competing with the Company. The purchase of
the Estate Shares by Brunswick constituted a Change in Control as defined in
the Employment Agreements.
The Company may terminate the Employment Agreements upon disability or
retirement or for "Cause" (as defined in the Employment Agreements). If the
Company terminates the Employment Agreements for any reason other than
disability, retirement or Cause, or the executive terminates the Employment
Agreement for "Good Reason," as defined in the Employment Agreements, each
executive will be entitled to receive a lump sum payment equal to 200% of his
base salary for the preceding 12 months and continued life, disability,
accident and health insurance coverage for up to 24 months. In addition, all
stock options previously awarded under the Company's stock option plans would
become immediately exercisable and any transfer restrictions on restricted
securities would lapse. The Employment Agreements further provide that any
benefits or payments pursuant to these provisions will be reduced to the
extent that such amounts received (together with any other amounts received
that must be included in such determination) would constitute an "excess
parachute payment" as defined in Section 280G of the Internal Revenue Code of
1986, as amended.
Mr. Wickes' employment with the Company terminated in October 1996. In
connection with such termination, the Company and Mr. Wickes' entered into a
consulting arrangement pursuant to which Mr. Wickes will act as a consultant
to the Company for a maximum period of 10 months. During the term of the
arrangement, Mr. Wickes will be paid at a monthly rate of approximately
$11,500 and is entitled to a monthly automobile allowance and customary
benefits. In addition, Mr. Wickes has agreed to refrain from disclosing
confidential information and to abstain from competing with the Company in
certain specified areas for a period of three years.
It is a condition to the closing of the Merger that the surviving
corporation enter into a new employment agreement with Mr. Miller. On
September 16, 1996, the Compensation Committee approved the terms of such an
agreement. Mr. Miller's new employment is expected to have terms
substantially similar to those of his existing employment agreement with the
Company described above. Mr. Miller's new employment agreement will become
effective at the Effective Time, provide for a minimum base salary of
$325,000 per year, and have an initial term of five years, subject to annual
extensions.
In connection with the Merger, the Company will assume the obligations of
Brunswick under agreements with each of Herb Reinhold, Bruce Ward, and James
G. Nichols. Under the agreements, Brunswick employs Mr. Reinhold and Dr.
Ward as Senior Vice President and Vice President of Science and Technology,
respectively. Mr. Nichols is employed by Brunswick's
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<PAGE>
principal subsidiary, Brunswick Biomedical Technologies, Inc.
("BBT"), as its Senior Vice President and General Manager. See "PROPOSAL 1
- -- THE MERGER -- Management Following the Merger."
The agreement with Mr. Reinhold is effective until August 1997 and
provides for a minimum base salary of $140,450 per year. The agreement may
be terminated upon disability or for cause (as defined in the agreement). If
the agreement is terminated other than for cause or disability, Mr. Reinhold
is entitled to a severance payment equal to his then current salary for a six
month period.
The agreements with Mr. Nichols and Dr. Ward are in the form of letter
agreements and provide for minimum base salaries of $135,000 and $160,000,
respectively. In addition, each executive may earn bonuses of up to
specified percentages of the base salary.
Each of the executives has agreed to refrain from competing with
Brunswick and from disclosing confidential information.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert G. Foster is the President, Chief Executive Officer, Chairman of
the Board of Directors and principal stockholder of Commonwealth BioVentures
Inc., a venture capital Company ("CBI"). David L. Lougee is a director and
stockholder of CBI. CBI is the general partner of BioVenture Partners
Limited Partnership, which in turn is the general partner of Commonwealth
BioVentures III, Commonwealth BioVentures IV and Commonwealth BioVentures V
("CB III," "CB IV" and "CB V," respectively). Such limited partnerships
together hold 189,579 shares of Brunswick Preferred Stock, or approximately
23% of Brunswick's outstanding capital stock. CB III, CB IV and CB V also
hold warrants to purchase 51,932 shares of Brunswick Common Stock. Mr.
Foster holds 2,000 shares of Brunswick Common Stock and 857 shares of
Brunswick Preferred Stock and has warrants to purchase 2,000 shares of
Brunswick Common Stock and options to purchase 5,000 shares of Brunswick
Common Stock. Mr. Foster and his spouse also hold 3,629 shares of Brunswick
Preferred Stock and have warrants for 5,713 shares of Brunswick Common Stock.
In addition, Mr. Foster holds 2,000 shares of Brunswick Preferred Stock in a
CBI profit sharing plan. See "PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF
MANAGEMENT."
REPORT ON COMPENSATION OF EXECUTIVE OFFICERS
The Compensation and Stock Option Plan Committee (the "Committee"), which
is comprised only of non-employee directors of the Company, is responsible
for reviewing the performance of the President and Chief Executive Officer
("CEO"), determining the form and amount of the CEO's compensation, and
administering the Company's stock option plans.
The base salary for the Company's CEO is determined at the beginning of
the fiscal year to which such salary relates. Accordingly, Mr. Miller's base
salary for fiscal 1996 was
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<PAGE>
established in October 1995 prior to the change in the composition of the
Board of Directors. In connection with setting Mr. Miller's fiscal 1996 base
salary, the Committee invited the then other members of the Board of
Directors (other than Mr. Dresner, who continued on leave of absence, and Mr.
Miller) to join in its deliberations. Mr. Miller's base salary for fiscal
1996 thus was established by the entire Board of Directors (other than Mr.
Dresner and Mr. Miller), rather than just the Committee.
The CEO's performance and bonus for the fiscal year are evaluated and
determined after the close of the fiscal year. Accordingly, Mr. Miller's
performance and bonus for fiscal 1996 were evaluated and determined in
September 1996 by the Committee as reconstituted following the purchase of
the Estate Shares by Brunswick.
The Board of Directors believes that the Company must provide a total CEO
compensation package that will motivate and retain a CEO of outstanding
ability who is capable of directing the strategic focus of the Company. The
Company's CEO compensation program has three primary components: a base
salary, a discretionary cash bonus and a long-term incentive award.
The factors and criteria considered in determining each component of Mr.
Miller's compensation for fiscal 1996 are discussed below.
BASE SALARY. The appropriate level of the base salary for Mr. Miller in
fiscal 1996 was based on the Board's subjective assessment of Mr. Miller's
performance during both the most recently completed fiscal year and his
tenure with the Company, as well as Mr. Miller's compensation history with
the Company. In making its assessment, the Board considered Mr. Miller's
contributions to the Company and other relevant factors, such as demonstrated
leadership and management skills. The Board noted that the Company had
continued to be profitable for each quarter of fiscal 1995, sales were up 2%
over fiscal 1994 and that revenues had increased slightly. The Board noted,
however, that overall profitability had declined. The Board identified a
number of factors affecting operating results that did not relate directly to
Mr. Miller's performance, but considered that the CEO's compensation
nonetheless should be related to overall corporate performance. The Board
also recognized Mr. Miller's demonstrated leadership and success in
redirecting the Company's strategic focus and attracting commercial customers
and considered Mr. Miller's continued leadership to be beneficial for the
Company. Based on its subjective assessment of Mr. Miller's short-term and
long-term performance, the Board determined to keep Mr. Miller's base salary
at $225,000 for fiscal 1996, the same level as his base salary in fiscal 1995
and fiscal 1994.
The Board also considered Mr. Miller's service as chief executive officer
of both the Company and Brunswick. The Board concluded that it would be
beneficial to the Company to encourage Mr. Miller to continue to serve as CEO
and that it wished to encourage him to do so.
ANNUAL CASH BONUS. The Board believes that an annual cash bonus,
determined and paid after the fiscal year to which the bonus relates,
provides an effective means for rewarding
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<PAGE>
outstanding individual performance by the CEO during the fiscal year. The
amount of the annual cash bonus is within the sole discretion of the
Committee and/or the Board and is not based on specific measures of corporate
or individual performance. Instead, the annual cash bonus reflects a
subjective evaluation of individual performance and accomplishments during
the preceding fiscal year.
Prior to the meeting of the Committee in September 1996 to consider the
award of an annual cash bonus to Mr. Miller, Mr. Miller advised the members
of the Committee that he had decided to forego consideration for a bonus in
light of the pending Merger and his receipt of the bonus described below.
Accordingly, the Committee did not consider or award an annual cash bonus to
Mr. Miller based on fiscal 1996 individual or corporate performance.
In November 1994, the Board of Directors authorized the payment of a
$100,000 cash bonus to Mr. Miller, conditioned on Mr. Miller's remaining
employed by the Company through the completion of a sale of all or
substantially all of the Estate Shares or the Company. Mr. Miller received
the bonus in April 1996 following the purchase of the Estate Shares by
Brunswick.
In March 1995, the Board of Directors authorized the payment of a $45,000
cash bonus to Jeffrey W. Church in recognition of Mr. Church's efforts in
connection with the sale of all or substantially all of the Estate Shares or
the Company. Payment of the bonus was contingent on the successful
completion of such a transaction and Mr. Church's remaining with the Company
or its successor for 120 days thereafter. Mr. Church received the bonus in
August 1996.
LONG-TERM INCENTIVE COMPENSATION. The Board believes that stock options
provide a useful incentive for future performance and for retaining
executives of outstanding ability. Stock option grants also serve to link
the interests of the employees and the Company's stockholders because
increases in the value of the stock options are directly tied to increases in
stockholder value.
The Committee's philosophy in administering the Company's stock option
plans is to afford a broad group of non-contract employees an opportunity to
share in the ownership of the Company and the Company's success.
Accordingly, the Committee historically has granted stock options to a broad
class of employees and not limited grants solely to executive officers.
Mr. Miller was not granted additional stock options during fiscal 1996.
However, on September 16, 1996, the Committee granted to Mr. Miller an option
covering 40,000 shares of Common Stock at an exercise price of $9.50 per
share. Under the terms of the grant, the option is exercisable as to 10,000
shares of Common Stock six months after the date of grant and will vest with
respect to the remaining 30,000 shares in one-third annual increments. In
addition, the vesting of such 30,000 shares will be accelerated, in 10,000
share increments, if the market price for the Common Stock reaches $18.00,
$27.00, and $36.00, respectively. The Committee
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<PAGE>
determined to award Mr. Miller this option based, in part, on Mr. Miller's
decision to forego consideration for an annual cash bonus.
As discussed below, the size of stock option grants to executive
officers, other than the CEO, is recommended by the CEO and approved by the
Committee. The Company did not award stock options to executive officers
during fiscal 1996.
COMPENSATION OF EXECUTIVE OFFICERS OTHER THAN CEO. The compensation of
each of the executive officers, other than the CEO, generally is determined
by the CEO within the context of the Company's Salary Administration Plan.
The Company's Salary Administration Plan was developed by the Company and an
independent compensation consultant and includes position descriptions for
all non-contract employees including the other executive officers. Each
position is assigned a grade level by measuring the position's requirements
for responsibility, creativity, analytical skills, and past job experience.
The CEO approves all direct report position descriptions and assigned grade
levels. With the assistance of independent compensation consultants, salary
ranges within each grade level are established by reference to competitive
salaries for positions with a similar range of responsibilities at companies
having comparable annual revenues to those of the Company. Salary ranges may
be increased each year by a percentage of the Consumer Price Index to ensure
that salary ranges remain competitive. The Company's job performance
appraisal is by "Management by Objectives," which concentrates on results
achieved. Once a year each of the other executive officers and the CEO agree
on objectives of the job. Examples of such objectives are financial growth,
expense reduction, operating within budget, development and commercialization
of quality products, market growth, and product and project management.
The Company's stock option grant structure for employees, including
executive officers other than the CEO, was developed by the Company and an
independent compensation consultant. This structure was based on available
survey data of other companies granting options to a broad group of
employees. For each Company job grade there is a high, medium, and low grade
level which was integrated with the Company performance appraisal ratings.
The level of grants is recommended by the CEO and approved by the Committee.
All figures are reviewed and adjustments made because of specific relevant
factors such as date of hire, promotions, and Common Stock holdings.
Robert G. Foster
E. Andrews Grinstead, III
David L. Lougee
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During fiscal 1996, to the knowledge of the Company, directors and
executive officers of the Company timely filed all required reports with the
Securities and Exchange Commission
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<PAGE>
("Commission") relating to transactions involving Common Stock of the
Company. In making this statement, the Company has relied on the written
representations of its incumbent directors and officers and copies of the
reports that they have filed with the Commission.
PERFORMANCE GRAPH
The following graph shows the cumulative stockholder return on the
Company's Common Stock during the five year period ended July 31, 1996 as
compared to (i) an overall stock market index, the NASDAQ (U.S.) Index, and
(ii) a peer group index, the S&P Medical Products and Supplies Index. The
graph assumes that $100.00 was invested on August 1, 1991, and the yearly
points marked on the horizontal axis correspond to July 31 of the indicated
year.
[GRAPH]
<TABLE>
<CAPTION>
STOCKHOLDER VALUE AT FISCAL YEAR END
- ------------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Survival Technology, Inc. $100 63 40 36 31 37
NASDAQ (U.S.) Index $100 117 143 146 206 229
S&P Medical Products & Supplies Index $100 116 93 71 111 127
</TABLE>
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<PAGE>
PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT
Set forth below is a table showing certain information with respect to
those persons known to the Company to be the beneficial owners of more than
5% of the outstanding shares of Common Stock, certain executive officers of
the Company, each director of the Company, and all executive officers and
directors of the Company as a group as of October 9, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
BENEFICIAL OWNER DIRECTLY OR INDIRECTLY(1) PERCENT OF CLASS %(3)
---------------- ---------------------- ----------------
<S> <C> <C>
Brunswick Biomedical Corporation 1,888,126 61.0%
2275 Research Boulevard, Suite #100
Rockville, Maryland 20850
Steven T. Newby 259,684(2) 8.4
c/o Newby & Company
6116 Executive Boulevard, Suite #701
Rockville, Maryland 20852
Bruce M. Dresner 19,425 *
Robert G. Foster - -
E. Andrews Grinstead, III - -
David L. Lougee - -
James H. Miller 82,285 2.6
Jeffrey W. Church 10,750 *
O. Napoleon Monroe 2,100 *
Glenn F. Wickes, Jr. 8,000 *
All directors and executive officers as a group
(8 persons) 122,560 3.8
<FN>
_________________________
* Less than 1%.
(1) Includes the following number of shares issuable upon exercise of stock
options exercisable within 60 days of the record date: Mr. Dresner,
19,425; Mr. Miller, 66,250; Mr. Church, 10,750; Mr. Monroe, 0; Mr. Wickes,
8,000; and all directors and executive officers as a group, 104,425.
(2) Steven T. Newby filed Amendment No. 3 to a Schedule 13D with the
Commission, dated July 11, 1996, indicating that he has sole voting and
dispositive power of 259,684 shares of Common Stock. The information set
forth in the table above is derived solely from the Schedule 13D filed by Mr.
Newby with the Commission.
(3) Based upon 3,097,637 shares of Common Stock outstanding as of the
record date, plus shares of Common Stock issuable within 60 days of the
record date under option to the particular director, executive officer or,
in the case of directors and executive officers as a group, in the
aggregate under option to members of such group.
</TABLE>
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<PAGE>
Set forth below is a table showing certain information with respect to
those persons expected by the Company to be the beneficial owners of more
than 5% of the outstanding shares of Common Stock after the Effective Time.
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY
BENEFICIAL OWNER OWNED DIRECTLY OR INDIRECTLY PERCENT OF CLASS %(8)
---------------- ---------------------------- ----------------
<S> <C> <C>
Commonwealth BioVentures Inc. 583,003(1) 18.8%
Four Milk Street
Portland, Maine 04101
Mylan Laboratories, Inc. 272,299(2) 9.2
P.O. Box 4310
781 Chestnut Ridge Road
Morgantown, West Virginia 26504
Steven T. Newby 259,684 8.9
c/o Newby & Company
6116 Executive Boulevard, #701
Rockville, Maryland 20852
EM Industries 181,487(3) 6.2
7 Skyline Drive
Hawthorne, New York 10532
Concord Partners II, L.P. 175,612(4) 6.0
c/o Dillon, Read & Company, Inc.
535 Madison Avenue
New York, New York 10022
Internationale Nederlanden 174,490(5) 5.6
(U.S.) Capital Corporation
135 East 57th Street
New York, New York 10022
James H. Miller 162,475(6) 5.4
BancBoston Ventures, Inc. 150,283(7) 5.1
100 Federal Street
Boston, Massachusetts 02110
<FN>
____________________
(1) Commonwealth Bioventures Inc. ("CBI") is the
general partner of BioVenture Partners Limited
Partnership, which in turn is the general partner of each
of Commonwealth BioVentures III, IV and V Limited
Partnerships. With respect to such limited partnerships,
includes 109,057 shares and 75,831 shares of Common Stock
subject to warrants and Merger Warrants, respectively.
Excludes 5,999 shares of Common Stock and 6,642 shares of
Common Stock subject to warrants, Merger Warrants and
options expected to be held by Robert G. Foster, as well
as 7,620 shares of Common Stock, and 13,448 shares of
Common Stock subject to warrants and Merger Warrants
expected to be held jointly by Mr. Foster and his spouse,
following the Effective Time. Also excludes 4,200 shares
of Common Stock expected to be held by Mr. Foster in a
profit sharing plan with CBI.
(2) Includes 43,556 shares of Common Stock issuable
upon the exercise of Merger Warrants.
(3) Includes 29,038 shares of Common Stock issuable
upon the exercise of Merger Warrants.
(4) Includes 28,098 shares of Common Stock subject
to Merger Warrants.
(5) Includes 174,490 shares of Non-Voting Common
Stock, issuable upon the exercise of warrants, that are
convertible, on a one-for-one basis, into shares of
Common Stock.
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<PAGE>
(6) Includes 95,418 shares, 6,000 shares and 726
shares of Common Stock subject to options, warrants and
Merger Warrants, respectively.
(7) Includes 23,469 shares and 3,599 shares of
Common Stock subject to warrants and Merger Warrants,
respectively.
(8) Based upon 2,918,439 shares of Common Stock
expected to be outstanding immediately after the
Effective Time, plus shares of Common Stock expected to
be issuable to a particular person upon the exercise of
warrants, Merger Warrants and options within 60 days of
the Effective Time.
</TABLE>
Immediately following the Effective Time, the minority stockholders of
the Company and the former stockholders of Brunswick will hold approximately
41.4% and 58.6%, respectively, of the outstanding shares of Common Stock of
the surviving corporation. Upon the exercise of all outstanding options and
warrants (including Merger Warrants) the former minority stockholders of STI
and the former stockholders of Brunswick will hold approximately 30.5% and
69.5%, respectively, of the outstanding Common Stock of the Company.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND
AMENDED AND RESTATED BY-LAWS OF THE COMPANY
The Certificate of Incorporation and By-Laws of the Company, as amended
in accordance with the terms of the Agreement, will be the Certificate of
Incorporation and By-Laws of the surviving corporation immediately after the
Effective Time. The following discussion summarizes certain amendments to
the Company's Certificate of Incorporation and By-Laws that will be
implemented in connection with the Merger.
AUTHORIZED CAPITAL STOCK
The Company's authorized capital stock currently consists of 10,000,000
shares of Common Stock. Following the Merger, the number of authorized
shares of Common Stock will be increased to 18,000,000 shares, including
200,000 shares of non-voting common stock ("Non-Voting Common Stock"), $.10
par value per share. In addition, the authorized capital stock of the
Company will include 2,000,000 shares of preferred stock, $.01 par value per
share ("Preferred Stock").
NON-VOTING COMMON STOCK
Non-Voting Common Stock generally will be identical in all respects to
the Common Stock and, except as otherwise required by law, will be treated as
a single class with the Common Stock, except that the Non-Voting Common Stock
will not be entitled to any voting rights, except as specifically required by
law. Each record holder of Non-Voting Common Stock will be entitled to
convert any and all shares of such holder's Non-Voting Common Stock into the
same number of shares of Common Stock at such holder's election upon the
occurrence of certain events.
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<PAGE>
PREFERRED STOCK
The Amended and Restated Certificate of Incorporation authorizes the
Board of Directors to establish one or more classes of Preferred Stock and to
determine, with respect to any class of Preferred Stock, the preferences,
rights and other terms of such class. The Company believes that the ability
of the Board of Directors to issue one or more classes of Preferred Stock
will provide the Company with increased flexibility in structuring possible
future financings and acquisitions and in meeting other corporate needs that
might arise. The authorized shares of Preferred Stock will be available for
issuance without further action by the Company's stockholders, unless the
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which the Company's securities may be listed or
traded.
Although the Board of Directors has no intention at the present time of
doing so, it could issue a class of Preferred Stock that could, depending on
the terms of such class, impede a merger, tender offer or other transaction
that some, or a majority, of the Company's stockholders might believe to be
in their best interests or in which stockholders might receive a premium for
their stock over the then current market price of such stock. The issuance
of Preferred Stock could decrease the amount of earnings and assets available
for distribution to the holders of Common Stock or could adversely affect the
rights and powers, including voting rights, of the holders of Common Stock.
In certain circumstances, such issuance could have the effect of decreasing
the market price of the Common Stock.
CERTAIN PROVISIONS OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
AND THE AMENDED AND RESTATED BY-LAWS
The Amended and Restated Certificate of Incorporation and the Amended and
Restated By-Laws of the Company contain certain provisions that could make
more difficult the acquisition of the Company by means of a tender offer, a
proxy contest or otherwise. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of the Company to negotiate
first with the Board of Directors. The Company believes that the benefits of
these provisions outweigh the potential disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals might
result in an improvement of their terms. The description set forth below is
intended as a summary only and is qualified in its entirety by reference to
the Amended and Restated Certificate of Incorporation and the Amended and
Restated By-Laws.
CLASSIFIED BOARD OF DIRECTORS
The Amended and Restated Certificate of Incorporation provides for the
Board of Directors to be divided into three classes of directors serving
staggered three-year terms, with each class to consist as nearly as possible
of one-third of the directors then elected to the Board. A classified board
may render more difficult a change in control of the Company or removal of
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<PAGE>
incumbent management. The Company believes, however, that the longer time
required to elect a majority of a classified Board of Directors will help to
ensure continuity and stability of the Company's management and policies.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Amended and Restated Certificate of Incorporation provides that the
number of directors will be determined pursuant to the By-Laws. In addition,
the Amended and Restated By-Laws provide that the number of directors shall
not be increased by 50% or more in any 12-month period without the approval
of at least 66 2/3% of the members of the Board of Directors then in office.
The Amended and Restated Certificate of Incorporation provides that any
vacancies will be filled by the vote of a majority of the remaining
directors, even if less than a quorum, and the directors so appointed shall
hold office until the next election of the class for which such directors
have been chosen and until their successors are elected and qualified.
Accordingly, the Board of Directors could temporarily prevent any stockholder
from enlarging the Board of Directors and filling the new directorships with
such stockholder's own nominees.
The Amended and Restated Certificate of Incorporation also provides that,
except as may be provided in a resolution or resolutions designating any
class or series of Preferred Stock, the directors may only be removed for
cause by the affirmative vote of 75% of the voting power of all of the shares
of capital stock of the Company then entitled to vote generally in the
election of directors, voting together as a single class.
STOCKHOLDER ACTION BY UNANIMOUS WRITTEN CONSENT;
SPECIAL MEETINGS
The Amended and Restated Certificate of Incorporation provides, except as
may be provided in a resolution or resolutions providing for any class or
series of Preferred Stock, any action required or permitted to be taken by
the stockholders of the Company may be effected, without a meeting, only by
the unanimous consent in writing by such holders. Special meetings of
stockholders of the Company may be called only by the Board of Directors
pursuant to a resolution adopted by a majority of the members of the Board of
Directors then in office. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER
NOMINATIONS AND STOCKHOLDER PROPOSALS
The Amended and Restated By-Laws establish an advance notice procedure
for stockholders to make nominations of candidates for election as directors
or to bring other business before an annual meeting of stockholders of the
Company (the "Stockholder Notice Procedure").
-43-
<PAGE>
The Stockholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice containing specified
information to the Secretary of the Company prior to the meeting at which
directors are to be elected, will be eligible for election as directors of
the Company and (ii) at an annual meeting only such business may be conducted
as has been brought before the meeting by, or at the direction of, the Board
of Directors or by a stockholder who has given timely written notice to the
Secretary of the Company of such stockholder's intention to bring such
business before the meeting. Notice of stockholder nominations or business
to be conducted at a meeting must be received by the Company not later than
the time permitted for submission of a stockholder proposal for inclusion in
the Company's Proxy Statement for the corresponding meeting of stockholders
pursuant to Rule 14a-8(a)(3) of the Securities Exchange Act of 1934, as
amended ("Exchange Act"), or any successor thereto if such notice is to be
submitted at an annual stockholders meeting or no later than 10 days
following the day on which notice of the date of a special meeting of
stockholders was given if the notice is to be submitted at a special
stockholders meeting.
The purpose of requiring stockholders to give the Company advance notice
of nominations and other business is to afford the Board of Directors a
meaningful opportunity to consider the qualifications of the proposed
nominees and the advisability of the other proposed business and, to the
extent deemed necessary or desirable by the Board of Directors, to inform
stockholders and make recommendations about such qualifications or business,
as well as to provide a more orderly procedure for conducting meetings of
stockholders. Although the Amended and Restated By-Laws do not give the
Board of Directors any power to disapprove stockholder nominations for the
election of directors or proposals for action, they may have the effect of
precluding a contest for the election of directors or the consideration of
stockholder proposals if proper procedures are not followed and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal
without regard to whether consideration of such nominees or proposals might
be harmful or beneficial to the Company and its stockholders.
CONSIDERATION OF NONECONOMIC FACTORS
The Company's Amended and Restated Certificate of Incorporation provides
that, in connection with the exercise of its judgment in determining what is
in the best interests of the Company and its stockholders, the Board of
Directors of the Company may, but shall not be required to, in addition to
considering the long-term and short-term interests of the stockholders,
consider all of the following factors and any other factors that it or they
deem relevant: (i) the social and economic effects of the matter to be
considered on the Company and its subsidiaries, its and their employees,
customers, and creditors and the communities in which the Company and its
subsidiaries operate or are located; and (ii) when evaluating a business
combination or a proposal by another individual, partnership, firm,
corporation, association, trust, unincorporated organization or other entity
(a "Person") or Persons to make a business combination or a tender or
exchange offer or any other proposal relating to a potential change of
control of the Company, (x) the business and financial condition and earnings
prospects of
-44-
<PAGE>
the acquiring Person or Persons, (y) the competence, experience,
and integrity of the acquiring Person or Persons and its or their management,
and (z) the prospects for successful conclusion of the business combination,
offer or proposal.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BY-LAWS
The Company's Amended and Restated Certificate of Incorporation provides
that the provisions therein relating to the total number and shares of
capital stock, stockholder action, the classified Board of Directors, the
number of directors, vacancies on the Board of Directors, removal of
directors, the constituencies the Directors are authorized to consider in
making their decisions, special meetings of stockholders, and amendments to
the Certificate of Incorporation or By-Laws may be amended, altered, changed
or repealed, except as may be provided in a resolution or resolutions
providing for any class or series of Preferred Stock, only by the affirmative
vote of the holders of at least 75% of the voting power of all of the shares
of capital stock of the Company then entitled to vote generally in the
election of directors, voting together as a single class or by the holders of
a majority of the voting power of all the shares of capital stock of the
Company then entitled to vote generally in the election of directors, voting
as a single class, if such adoption, amendment, alteration, change or repeal
has been previously recommended by a vote of the Continuing Directors. For
the purposes of the Amended and Restated Certificate of Incorporation, the
term Continuing Director means either (i) an individual who was a member of
the Board of Directors prior to the time any person after the Effective Time,
1996 acquired 25% or more of the voting power of any voting securities of the
Company or (ii) an individual designated (before his or her initial election
as a director) as a Continuing Director by a majority of the then Continuing
Directors.
The Company's Amended and Restated Certificate of Incorporation also
provides that the other provisions of such Certificate may be amended,
altered, changed or repealed, subject to the resolutions providing for any
class or series of Preferred Stock, only by the affirmative vote of both a
majority of the members of the Board of Directors then in office and a
majority of the voting power of all of the shares of capital stock of the
Company entitled to vote generally in the election of directors, voting
together as a single class.
The Company's Amended and Restated Certificate of Incorporation also
provides that the Amended and Restated By-Laws may be adopted, amended,
altered, changed or repealed by the affirmative vote of the majority of the
Board of Directors then in office. Any action taken by the stockholders with
respect to adopting, amending, altering, changing or repealing any Amended
and Restated By-Laws may be taken only by the affirmative vote of either (i)
the holders of at least 75% of the voting power of all of the shares of
capital stock of the Company then entitled to vote generally in the election
of directors, voting together as a single class, or (ii) the holders of a
majority of the voting power of all of the shares of capital stock of the
Company then entitled to vote generally in the election of directors, voting
as a single class, if such adoption, amendment, alteration, change or repeal
has been previously recommended by a vote of the Continuing Directors.
-45-
<PAGE>
These provisions are intended to make it more difficult for stockholders
to circumvent certain other provisions contained in the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated By-Laws, such
as those that provide for the classification of the Board of Directors.
These provisions, however, also will make it more difficult for stockholders
to amend the Amended and Restated Certificate of Incorporation or Amended and
Restated By-Laws without the approval of the Board of Directors, even if a
majority of the stockholders deems such amendment to be in the best interests
of all stockholders.
-46-
<PAGE>
SURVIVAL TECHNOLOGY, INC.
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data for five years ended
July 31, 1996 is derived from the audited consolidated financial statements
of the Company. The data should be read in conjunction with the consolidated
financial statements, related notes and other financial information contained
in the Company's Annual Report on Form 10-K for the year ended July 31, 1996
("Annual Report") that accompanies this Proxy Statement and is incorporated
by reference herein.
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
YEAR ENDED JULY 31 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operations:
Net sales $31,385 $25,487 $24,856 $30,075 $40,931
Gross profit 8,957 8,259 8,657 9,726 8,133
Operating income (1) 2,274 890 1,928 3,111 2,153
Gain on sale of Medical Device
Division 1,562
Other income (expense),
net (300) (180) 81 (106) 158
Income before income
taxes and extraordinary item 1,974 710 3,571 3,005 2,311
Provision for income tax 698 250 1,442 1,160 634
----- ----- ----- ----- -----
Income before
extraordinary item 1,276 460 2,129 1,845 1,677
----- ----- ----- ----- -----
Extraordinary item 37
----- ----- ----- ----- -----
Net income $ 1,276 $ 460 $ 2,129 $ 1,845 $ 1,714
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Per share data:
Income before
extraordinary item $ .41 $ .15 $ .68 $ .60 $ .55
----- ----- ----- ----- -----
Extraordinary item .01
----- ----- ----- ----- -----
Net income $ .41 $ .15 $ .68 $ .60 $ .56
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Average common shares and
common share equivalents
outstanding 3,117 3,102 3,118 3,092 3,086
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Financial position:
Current assets $14,414 $11,553 $10,227 $10,022 $13,937
Working capital 4,204 3,668 5,193 5,635 5,782
Fixed assets, net 14,815 14,209 11,893 9,801 7,818
Total assets 31,085 27,715 24,201 21,911 22,487
Long-term debt 1,184 1,486 1,620 2,740 2,014
Shareholders' equity 17,469 16,150 15,690 13,558 11,149
<FN>
____________________
(1) Fiscal 1996 and 1995 operating income includes a restructuring charge of $321,900 and $450,000, respectively.
</TABLE>
-47-
<PAGE>
BRUNSWICK BIOMEDICAL CORPORATION
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data for the five years ended
June 30, 1996 is derived from the audited consolidated financial statements
of Brunswick. Brunswick's consolidated financial statements for the year
ended June 30, 1996 include the Company's revenues and expenses for the two
and one-half month period ended June 30, 1996 and the Company's assets and
liabilities as of July 31, 1996. The data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information contained herein. See "INDEX TO FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
YEAR ENDED JUNE 30 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operations:
Net sales $10,375 $2,904 $2,427 $2,534 $1,985
Gross profit 3,420 1,205 785 1,036 792
Operating loss (6,212) (1,581) (1,627) (512) (830)
Other expense, net (539) (19) (98) (324) (753)
Loss before income tax (6,751) (1,600) (1,725) (836) (1,583)
Provision for income tax 27
Minority interest in
consolidated subsidiary 17
------- ------- ------- ------- -------
Net loss $(6,795) $(1,600) $(1,725) $ (836) $(1,583)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net loss per share $ (99.32) $(23.39) $(24.69) $ (15.39) $ (34.97)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Average common shares and
common share equivalents
outstanding 68 68 70 54 45
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Financial position:
Current assets $16,351 $ 981 $ 3,930 $ 1,104 $ 520
Working capital 4,144 (681) 2,719 (2,034) (1,334)
Fixed assets, net 14,990 200 95 116 188
Total assets 41,694 3,188 4,284 1,429 1,011
Long-term debt 16,089 55 56 30 304
Shareholders' equity 4,387 1,472 3,017 (1,739) (1,146)
</TABLE>
-48-
<PAGE>
BRUNSWICK BIOMEDICAL CORPORATION -- SURVIVAL TECHNOLOGY, INC.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Although the Company will be the surviving corporation in the Merger as a
legal matter, the Merger will be treated as a purchase of the Company by
Brunswick for financial accounting purposes. Accordingly, the following
table sets forth certain unaudited pro forma combined financial data for
Brunswick after giving effect to the Merger, as it had occurred as of the
beginning of each period presented. This information should be read in
conjunction with the historical financial statements of Brunswick and the
Company, related notes and other financial information included elsewhere in
this Proxy Statement. The pro forma consolidated financial statements may
not be indicative of the financial position or results of operations that
actually would have occurred had the Merger been consummated on the dates
indicated, or which will be attained in the future. See "UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION" and "INDEX TO FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
AS OF
BALANCE SHEET: JULY 31, 1996
<S> <C>
Current assets $16,351
Property, plant and equipment, net 14,743
Other intangible assets 13,355
-------
Total Assets $44,449
-------
Current liabilities $12,724
Noncurrent liabilities 18,311
Stockholder's equity 13,414
-------
Total liabilities and stockholder's equity $44,449
-------
YEAR ENDED
STATEMENT OF OPERATIONS: JULY 31, 1996
Total Sales $35,015
Gross Profit $10,606
Operating Loss $(4,815)
Net Loss $(6,901)
Loss Per Share $(2.09)
</TABLE>
-49-
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements have been
prepared to reflect the Merger on a purchase basis. Although the Company
will be the surviving corporation in the Merger as a legal matter, the Merger
will be treated as a purchase of the Company by Brunswick for financial
accounting purposes. Under purchase accounting, the assets and liabilities
of the Company are adjusted to their estimated fair value at the date of
acquisition. This unaudited pro forma combined financial information should
be read in conjunction with the consolidated historical financial statements
of Brunswick and the Company, including notes thereto, appearing elsewhere or
incorporated by reference herein.
The July 31, 1996 unaudited pro forma combined financial statements combine
the historical financial statements of STI as of and for the year ended July
31, 1996 and the historical financial statements of Brunswick as of and for
the year ended June 30, 1996 as if the Merger occurred on August 1, 1995.
Brunswick did not experience any significant or unusual transactions during
the month ended July 31, 1996. The pro forma adjustments do not include any
charges or benefits related to the integration of the operation of the
businesses.
The unaudited pro forma combined balance sheet includes adjustments to the
historical June 30, 1996 Brunswick consolidated financial statements to
reflect the 39% step-up of STI and pro forma adjustments. As the historical
July 31, 1996 STI financial statements are consolidated into the Brunswick
consolidated financial statements, the July 31, 1996 STI balance sheet is not
combined with the Brunswick consolidated balance sheet when deriving the pro
forma balance sheet and has been presented for comparative purposes only.
The unaudited pro forma combined statement of operations combines the
historical Brunswick statement of operations for the year ended June 30, 1996
and the STI statement of operations for the year ended July 31, 1996;
eliminates 2.5 months of STI revenue and expense activity that is
consolidated in the Brunswick statement of operations for the year ended June
30, 1996; and reflects pro forma adjustments.
The purchase price, excluding transaction expenses, of $20,769,018 for a 61%
interest in Common Stock represents the purchase of 1,888,126 shares of
Common Stock at $11.00 per share on April 15, 1996. The purchase price,
excluding transaction expenses, of $11,885,000 for the remaining 39% interest
in Common Stock represents the exchange of the remaining 1,203,574 shares
outstanding at $9.875 per share, the market price of the Common Stock on the
date of the Merger Agreement (September 11, 1996).
The unaudited pro forma combined financial statements give effect to the
Merger but do not reflect anticipated expenses and nonrecurring charges that
may result from the Merger or estimated expense savings and revenue
enhancements anticipated to result from the Merger.
The unaudited pro forma combined financial data is not necessarily
indicative of the financial position and results of future operations of the
combined entity or the actual financial position and results of operations
that would have been achieved had the Merger been consummated at the dates
indicated. The unaudited pro forma combined condensed balance sheets reflect
preliminary pro forma adjustments made to combine Brunswick with the Company
utilizing the purchase accounting method. The actual adjustments to
Brunswick's accounts will be made as of the Effective Time and may differ
from those reflected in the pro forma financial statements.
-50-
<PAGE>
SURVIVAL TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JULY 31, 1996
<TABLE>
<CAPTION>
Pick-up of (1)
BBC additional 39% Unaudited
STI Consolidated STI step-up Pro Forma Adjustments Pro Forma B/S
07/31/96 06/30/96 DR/(CR) Debit Credit 07/31/96
----------- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 122,800 $ 511,835 $ 511,835
Restricted cash 0 958,221 958,221
Accounts receivable 7,332,300 7,536,694 7,536,694
Inventory 4,988,800 5,326,651 5,326,651
Prepaid expenses 752,400 800,204 800,204
Deferred income taxes 1,217,500 1,217,500 1,217,500
----------- ----------- -----------
Total Current Assets 14,413,800 16,351,105 16,351,105
----------- ----------- -----------
Property, plant & equipment 26,547,400 27,015,774 (308,991)(2) 26,706,783
Accumulated depreciation (11,732,400) (12,025,498) 62,200 (8) (11,963,298)
----------- ----------- ----------
Net Property, plant & equipment 14,815,000 14,990,276 14,743,485
----------- ----------- -----------
Other Assets
Goodwill, net of amortization 0 1,458,739 1,458,739
In-process research and development 0 0 2,702,234 (2) 2,702,234 (11) 0
Developed technology, patents and
licenses, net 1,848,400 7,238,957 3,332,870 (2) 769,100 (9) 9,802,727
Other intangible assets 7,800 1,654,732 570,387 (2) 131,700 (10) 2,093,419
----------- ----------- -----------
Total Other Assets 1,856,200 10,352,428 13,354,885
----------- ----------- -----------
Total Assets $31,085,000 $41,693,809 $44,449,475
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
-51-
<PAGE>
SURVIVAL TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JULY 31, 1996
<TABLE>
<CAPTION>
Pick-up of (1)
BBC additional 39% Unaudited
STI Consolidated STI step-up Pro Forma Adjustements Pro Forma
07/31/96 06/30/96 DR/(CR) Debit Credit 07/31/96
---------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current Liabilities
Notes payable to bank $3,875,400 $3,875,400 3,875,400 (4) -
Notes payable to Syntex 588,400 588,400 $ 588,400
Current portion of long term debt 516,800 516,800 516,800
Line of Credit 0 197,216 3,875,400 (4) 4,072,616
Accounts payable and accrued
expenses 2,240,700 4,018,911 1,114,900 (7) 5,133,811
Customer Deposits 736,000 736,000 736,000
Current maturiites of capital
lease obligations 0 22,069 22,069
Restructuring reserve 640,400 640,400 640,400
Other Liabilities and accruals 1,611,900 1,611,900 598,100 (12) 1,013,800
----------- ------------ ----------
Total Current Liabilities 10,209,600 12,207,096 12,723,896
Other Liabilities
Notes payable long-term 0 14,872,251 14,872,251
Other long-term debt 1,184,300 1,184,300 1,184,300
Deferred revenue 0 0
Other noncurrent liablities 616,500 616,500 616,500
Deferred income taxes 1,605,500 1,605,500 1,605,500
Long term capital lease obligations 0 32,823 32,823
----------- ----------- ----------
Total Liabilities 13,615,900 30,518,470 31,035,270
----------- ----------- ----------
Minority Interest in Consolidated
Subsidiary 0 6,788,500 6,788,500 (2) 0
Stockholders' Equity
Currency transaction adjustment 0 26,172 26,172
Common Stock 309,100 684 684 (3) 156,534 (3) 156,534
Additional Paid in Capital 5,114,700 15,866,110 (6,788,500)(2) 148,381 (3) 28,802,729
(6,296,500)(2)
Preferred Stock-Series A 0 647 647 (3) 0
Preferred Stock-Series B 0 291 291 (3) 0
Preferred Stock-Series C 0 3,744 3,744 (3) 0
Preferred Stock-Series D 0 0 0
Preferred Stock-Series E 0 0 0
Preferred Stock-Series F 0 2,787 2,787 (3) 0
Warrants 0 2,072,951 2,072,951
Retained (deficit) earnings-end of year 12,045,300 (13,393,349) 4,057,634 (5) (17,450,983)
Unearned stock option compensation 0 (181,745) (181,745)
Treasury stock at cost 0 (11,453) (11,453)
----------- ----------- ------------
Total Stockholder's Equity 17,469,100 4,386,839 13,414,205
----------- ----------- ------------
Total Liabilities & Stockholders' Equity $31,085,000 $41,693,809 $44,449,475
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
-52-
<PAGE>
SURVIVAL TECHNOLOGY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
JULY 31, 1996
<TABLE>
<CAPTION>
(1)
Eliminate STI Unaudited
BBC Amounts for 2.5 Pro Forma
STI Consolidated Months Included Pro Forma Adjustments Combined
07/31/96 06/30/96 in BBC Consolid. Debit Credit 07/31/96
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Sales $31,385,300 $10,375,342 (6,745,712) $35,014,930
Cost of Sales 22,428,200 6,955,198 (4,897,539) 77,200(6) 24,408,659
----------- ------------ ----------- -----------
Gross Profit 8,957,100 3,420,144 (1,848,173) 10,606,271
----------- ------------ ----------- -----------
Operating Expenses:
Research and development
expenses 606,600 1,724,903 (177,589) 2,153,914
Selling, general and
administrative expenses 3,881,600 2,414,063 (917,389) 5,378,274
Restructuring charge 321,900 225,800 (225,800) 321,900
Depreciation and amortization
expenses 1,873,300 803,369 (411,702) 62,200(8) 3,103,567
131,700(10)
769,100(9)
Write-off of in-process
research and development 0 4,464,007 4,464,007
----------- ------------ ----------- -----------
Operating Expenses 6,683,400 9,632,142 (1,732,480) 15,421,662
----------- ------------ ----------- -----------
Operating Income (Loss) 2,273,700 (6,211,998) (115,693) (4,815,391)
----------- ------------ ----------- -----------
Non-Operating Income (Expenses):
Interest expense(s) (387,200) (550,731) 65,617 1,114,900(7) (1,987,214)
Other Income (expense) 87,600 11,324 (19,733) 77,200(6) 1,991
----------- ------------ ----------- -----------
Total Non-Operating Income
(Expenses) (299,600) (539,407) 45,884 (1,985,223)
----------- ------------ ----------- -----------
Income (Loss) Before Income
Taxes 1,974,100 (6,751,405) (69,809) (6,800,614)
Provision for Income Taxes 698,100 26,946 (26,946) 598,100(12) 100,000
Minority Interest of
Consolidated Subsidiary 0 16,657 (16,657) 0
----------- ------------ ----------- -----------
Net Income (Loss) $ 1,276,000 $(6,795,008) (26,206) $(6,900,614)
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Weighted Averages Shares
Outstanding 3,298,071
Net Loss Per Share(13) ($2.09)
</TABLE>
-53-
<PAGE>
SURVIVAL TECHNOLOGY, INC
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. The July 31, 1996 unaudited pro forma combined financial statements
combine the historical financial statements of STI as of and for the
year ended July 31, 1996 and the historical financial statements of BBC
as of and for the year ended June 30, 1996 as if the Merger occurred on
August 1, 1995. BBC did not experience any significant or unusual
transactions during the month ended July 31, 1996. The pro forma
adjustments do not include any charges or benefits related to the
integration of the operation of the businesses.
2. The Merger will be accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations."
The Merger will be completed in two step: the acquisition of 61.1% of STI
common stock by BBC, then the exchange of BBC common stock for STI common
stock. The purchase price is to be allocated first to tangible assets and
identifiable intangible assets and liabilities of STI based on independent
assessment of their fair market values, with the excess of fair value over
the purchase price allocated to reduce proportionately the values assigned
to noncurrent assets. The purchase price and the preliminary purchase
price allocation are as follows:
<TABLE>
<CAPTION>
61% INTEREST 39% INTEREST TOTAL
------------ ------------ -----
<S> <C> <C> <C>
Cash consideration paid $16,069,386 $ - $16,069,386
Promissory note to the estate of
Dr. Stanley J. Sarnoff 4,700,000 - 4,700,000
Stock exchanged 11,885,000 11,885,000
Transaction Expenses 820,019 1,200,000 2,020,019
----------- ----------- -----------
Purchase Price 21,589,405 13,085,000 34,674,405
Historical book value of net assets acquired 10,680,600 6,788,500 17,469,100
----------- ----------- -----------
Excess of purchase price over historical net book
value of assets acquired as of July 31, 1996 $10,908,805 $6,296,500 $17,205,305
----------- ----------- -----------
----------- ----------- -----------
Allocation of excess purchase price, including reallocation of negative goodwill:
Property, plant and equipment (2,689) (308,991) (311,680)
In-process research and development 4,464,007 2,702,234 7,166,241
Developed technology 5,505,257 3,332,870 8,838,127
Other intangible assets 942,230 570,387 1,512,617
----------- ----------- -----------
$10,908,805 $6,296,500 $17,205,305
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
3. To reflect the conversion to 2.1 shares of STI common stock for each of
BBC's common and preferred stock. Based upon the conversion, 2,912,502
shares of STI common stock will be outstanding.
4. To reflect the repayment of note payable to Merrill Lynch Business
Financial Services, Inc., using proceeds from $5 million line of credit
available upon consummation of the Merger.
5. To reflect the impact on retained earnings of the pro forma adjustments
recorded on the statement of operations; interest expense on acquisition
debt, decrease in depreciation expense, amortization of developed
technology, amortization of other intangible assets and utilization of
federal NOL's.
-54-
<PAGE>
SURVIVAL TECHNOLOGY, INC
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
6. To eliminate intercompany transactions and balances
7. To reflect debt interest expense on acquisition debt of $15.7 million at
a weighted average rate of 8.97%, assuming debt was outstanding
throughout the year presented, of $1,408,290 less interest expense on
such debt of $293,390 which is included in the BBC historical financial
statements.
8. To reflect a decrease in depreciation for the $311,680 write-down of fixed
assets, assuming a depreciation life of 5 years, less reduced depreciation
expense of $100 reflected in the BBC historical financial statements for
2.5 months of reduced depreciation on the $2,689 write-down of fixed
assets.
9. To reflect amortization expense for the total developed technology of
$8,838,127 for one year, assuming an amortization period of 10 years, less
amortization expense of $114,700 included in the BBC historical financial
statements for 2.5 months of the $5,505,257 of developed technology
included in the BBC historical financial statements.
10. To reflect amortization expense for the total other intangible assets of
$1,512,617 for one year, assuming an amortization period of 10 years, less
amortization expense of $19,600 included in the BBC historical financial
statements for 2.5 months of the $942,230 of other intangible assets
included in the BBC historical financial statements.
11. To reflect in the unaudited combined pro forma balance sheet the
write-off of $2,702,234 of in-process research and development associated
with the second step of the Merger. Due to its non-recurring nature, the
write-off of in-process research and development is not reflected in the
unaudited pro forma statement of operations. The write-off of $4,464,007
of the in-process research and development associated with the first step
of the Merger is included in the BBC consolidated financial statements
for the year ended June 30, 1996.
12. To reflect the utilization of BBC Federal NOL's.
13. Pro forma per common share amounts give effect to the exchange of each
share of BBC common and preferred stock into 2.1 shares of STI common
stock. The pro forma combined financial statements are presented as if the
companies were combined for all periods presented.
-55-
<PAGE>
INFORMATION CONCERNING THE COMPANY
The Company is a technology-based health care company that designs,
develops and produces a broad range of auto-injectors, prefilled syringes and
other innovative health care devices, with a major focus on safe and
convenient participation by the patient in injection therapy. The Company
also supplies customized drug delivery system design, pharmaceutical research
and development and sterile product manufacturing to pharmaceutical and
biotechnology companies. The Company's products and services are designed to
improve the medical and economic value of drug therapy.
The Company pioneered the development of auto-injectors for the
self-administration of injectable drugs. An auto-injector is a
spring-loaded, prefilled, pen-like device that allows a patient to
automatically inject a precise drug dosage quickly, safely, reliably and
without seeing the needle. One early application of auto-injectors has been
the immediate self-injection of nerve gas antidotes by military personnel
under battlefield conditions. The Company is and intends to remain a key
supplier of nerve gas antidotes to the U.S. and allied military forces.
Auto-injectors also can be used effectively for emergency administration of
drugs or to facilitate the easy administration of injectable drugs in any
setting. The Company believes that auto-injectors help to reduce the fear of
injection, simplify the injection procedure, ensure complete dose delivery,
increase patient compliance and allow for cost-effective home health care
treatment.
The Company currently has three commercial applications for its
auto-injectors. One is an auto-injector for the self-injection of
epinephrine to treat severe allergic reactions caused by bee stings, insect
bites, foods and other allergies. The second is an auto-injector for the
self-injection of lidocaine to treat cardiac arrhythmias. The third
application is a morphine-filled auto-injector for use in home health care
pain management. The Company currently is developing several new
auto-injectors including some that will accommodate additional categories of
drugs, while others will make auto-injectors more convenient and less
expensive. The Company, together with pharmaceutical and biotechnology
companies, currently is exploring additional applications for auto-injectors.
The Company also offers ready-to-use prefilled syringes and vials,
including its proprietary Cartrix-TM- syringe system. The Company invented
and manufactures the CytoGuard-Registered Trademark- Aerosol Protection
Device, a vial attachment used to protect medical professionals from
inadvertent exposure to potentially dangerous drugs during reconstitution,
particularly chemotherapeutics.
Additional information and consolidated financial statements for the
Company and its subsidiaries, together with Management's Discussion and
Analysis of Financial Condition and Results of Operations, are contained in
the Annual Report that accompanies this Proxy Statement and is incorporated
by reference herein.
-56-
<PAGE>
INFORMATION CONCERNING BRUNSWICK
Brunswick and its subsidiaries develop, manufacture and sell
cardiac-related emergency care products and medical devices for non-invasive
cardiac diagnostics. Brunswick is not a single medical device company.
Instead, Brunswick's strategy is to focus on the development and
commercialization of non-invasive cardiac diagnostic devices while building a
major medical device company through acquisitions. Brunswick commenced
operations in 1944 as Brunswick Manufacturing Corporation and initially
focused on the development and manufacturing of cardiac and pulmonary rescue
products.
Through BBT, Brunswick offers a variety of emergency care products.
Brunswick also develops, manufactures and sells a variety of remote medical
monitoring devices through its Telemedicine Division. Cardiac research and
development activities are conducted through Brunswick Biomedical Limited, a
wholly owned subsidiary incorporated and located in Northern Ireland, in
close cooperation with the University of Ulster, a world leader in cardiac
research.
For information regarding Brunswick's long-standing relationship with the
Company, see "PROPOSAL 1 -- THE MERGER -- Prior Relationship of Brunswick and
the Company."
PRODUCTS
Brunswick's current products include first response, emergency care
products and medical devices that measure and transmit by telephone
electrocardiograms ("ECG"), blood pressure readings and pulmonary function
measurements.
EMERGENCY CARE PRODUCTS
Brunswick was one of the early pioneers in cardiopulmonary resuscitation
("CPR"). On November 25, 1969, the trademark "CPR" was issued to Brunswick,
which trademark was subsequently assigned to the American Red Cross.
Brunswick's emergency care products are especially designed for use by the
first responder to the scene of a cardiac emergency.
Brunswick's current products include a lightweight, easy-to-use, mechanical
CPR device; a portable, self-contained stretcher and heart/lung resuscitation
system; and a variety of disposable emergency airways. Emergency care
products are distributed through an established United States distribution
network and several overseas distributors.
For the fiscal years ended June 30, 1996, 1995, and 1994, revenues from the
sale of emergency care products were $1,551,980, $1,381,317 and $1,510,247,
respectively. Brunswick believes that United States' sales of emergency care
products will remain steady, and sees an opportunity to expand sales to
foreign markets.
As an extension of its emergency care product line, Brunswick currently is
developing a multimedia, interactive CD-ROM product for children. The
CD-ROM, which has been
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<PAGE>
endorsed by the American Red Cross, is designed to
teach children CPR and how to react in emergency situations. Other future
products include additional CD-ROM products for children, next generation
mechanical CPR devices, patient transport systems, battery-powered mechanical
CPR devices and life support compression devices.
TELEMEDICINE PRODUCTS
Brunswick is a leader in the development of devices that measure and
transmit medical data by telephone. Brunswick's electronic heart monitoring
device, the CardioBeeper, takes and transmits a patient's electrocardiogram
("ECG") by telephone. Currently, the CardioBeeper product line is sold
primarily to Shahal Medical Services Ltd. ("Shahal"), which has exclusive
international marketing rights to the CardioBeeper. Shahal offers a private
cardiac monitoring service in Israel and recently has begun to introduce its
services in other countries. Brunswick purchased the CardioBeeper technology
from the Company in 1994 and, prior to that time, manufactured the
CardioBeeper for the Company. Brunswick also manufactures devices that
permit monitoring and telephonic transmission of blood pressure and pulmonary
function readings. For the fiscal years ended June 30, 1996, 1995 and 1994,
revenue from the sale of CardioBeepers and other telemedicine products were
$2,077,650, $1,512,215 and $916,737, respectively.
Brunswick has recently introduced a patented, 12-lead CardioBeeper that
provides more detailed ECG readings. Shahal has begun offering the product in
Israel and other countries. Brunswick intends to develop and seek regulatory
approval for a miniaturized 12-lead CardioBeeper for introduction into the
United States market in 1997. Other future products include transtelephonic
physiologic parameters and blood analytes and cellular transmission devices.
Brunswick believes that the trend toward managed and home health care in the
United States will offer new marketing opportunities for transtelephonic
devices in the United States.
RESEARCH AND DEVELOPMENT; PRIME ECG
Consistent with its strategic focus, Brunswick's research and development
efforts have been primarily directed toward non-invasive cardiac diagnostic
devices. Brunswick conducts research and development activities principally
through Brunswick Biomedical Limited in conjunction with the University of
Ulster in Northern Ireland and two medical device development consulting
firms. Preliminary clinical trials of devices are conducted through Royal
Victoria Hospital. The loss or termination of Brunswick's relationship with
University of Ulster or its exclusive rights to the technology described
below could have a material adverse effect on Brunswick's business, financial
condition and results of operations.
Brunswick is the exclusive licensee of PRIME ECG, a unique 64-lead ECG
mapping system developed by the University of Ulster. PRIME ECG provides
more rapid and accurate detection of acute myocardial infarction ("MI") or
heart attack than current 12-lead ECG equipment. In particular, PRIME ECG is
designed to help diagnose MI in patients whose 12-lead ECG reading, while
abnormal, does not show an acute condition. Currently, such patients
-58-
<PAGE>
must undergo additional, time-consuming clinical evaluation and testing. Rapid
diagnosis and medical intervention in acute MI is essential to reduce or
minimize the damage to a patient's heart. Brunswick expects that the primary
customer for PRIME ECG will be the emergency room physician, who needs a
faster and more accurate diagnostic tool to triage chest pain patients
rapidly.
PRIME ECG uses a patented, disposable electrode vest that can be applied
quickly to a patient experiencing chest pain. Brunswick believes that the
sale of disposable vests will provide a recurring source of revenues and
anticipates that it will be the sole provider of such vests.
Brunswick introduced PRIME ECG in Europe late in August 1996. The United
States launch of PRIME ECG will not begin until the receipt of regulatory
approvals. Clinical testing of PRIME ECG in the United States is expected to
begin in calendar 1997 and, following such testing, Brunswick will seek U.S.
regulatory approvals. The process of obtaining U.S. regulatory approval can
be costly and time consuming, and there can be no assurance that such
approval will be granted on a timely basis, if at all, or that delays will
not adversely affect the commercial introduction and market penetration of
PRIME ECG.
Brunswick believes that its future success is substantially dependent on
the commercialization and market acceptance of PRIME ECG. Market acceptance
will depend, in large part, upon Brunswick's ability to demonstrate the
diagnostic advantages, cost-effectiveness and performance features of PRIME
ECG. Because of the relatively small size of its sales staff, Brunswick also
will seek a strong strategic partner to help penetrate the United States
market and aid in funding further product research and clinical trials.
CLINICAL ADVISORY BOARD
Brunswick's Clinical Advisory Board consists of leading authorities in the
disciplines of science and medicine. The current members of the Clinical
Advisory Board are John Anderson, Dr. Joseph Omato and Dr. Burton Sobel.
Brunswick believes that the members' expertise in biomedical engineering,
emergency medicine and cardiovascular disease permit the Clinical Advisory
Board to make significant contributions to the development and
commercialization of new products. Unlike a scientific advisory board,
Brunswick uses its Clinical Advisory Board to help directly with the
commercialization of technologies under development.
Brunswick also relies on new product consultants to assist in the design,
development, and marketing of its products. Brunswick believes that the use
of such consultants helps to reduce personnel and overhead costs during the
period of time it takes to design and market a product.
-59-
<PAGE>
COMPETITION
Brunswick operates in a highly competitive sector of the health care
industry. Competition with large manufacturing companies, joint ventures and
others is intense and may increase. Many of these companies have greater
capital resources, larger research and development staffs and facilities than
Brunswick, and substantially greater marketing and sales forces.
PROPERTIES
Brunswick subleases space for its corporate headquarters from the Company
at 2275 Research Boulevard, Suite 100, Rockville, Maryland 20850.
Brunswick has manufacturing facilities located in Wareham, Massachusetts
and Antrim, Northern Ireland.
The Wareham facility manufactures emergency care products. The facility is
leased on a month-to-month basis and Brunswick believes that its
manufacturing operations could be relocated without significant disruption to
the business.
The Antrim facility manufactures Brunswick's telemedicine products.
LITIGATION
Lawsuits and claims are filed from time to time against Brunswick and its
subsidiaries in the ordinary course of business. In the opinion of
Brunswick's management, the resolution of these matters is not expected to
have a material adverse effect on the financial position or results of
operations of Brunswick.
FINANCIAL INFORMATION
Consolidated financial statements for Brunswick and its subsidiaries,
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations, are a part of this Proxy Statement. See "INDEX TO
FINANCIAL STATEMENTS."
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<PAGE>
PROPOSAL 3 -- RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors, upon the recommendation of the Audit Committee, has
selected the firm of Price Waterhouse LLP as independent auditors of the
Company for the current fiscal year. This nationally known firm has served
as the Company's independent auditors since the organization of the Company
in 1969 and has no direct or indirect financial interest in the Company.
Although not legally required to do so, the Board is submitting the
selection of Price Waterhouse LLP for ratification by the stockholders at the
Annual Meeting. If a majority of the shares of Common Stock represented in
person or by proxy at the meeting is not voted for ratification (which is not
expected), the Board will reconsider its appointment of Price Waterhouse LLP
as independent auditors for the current fiscal year.
A representative of Price Waterhouse LLP will be present at the annual
meeting and will have the opportunity to make a statement if he desires to do
so. It is anticipated that such representative will be available to respond
to appropriate questions from stockholders.
OTHER BUSINESS
The Company does not presently know of any matters that will be presented
for action at the meeting other than those set forth herein. If other
matters properly come before the meeting, proxies submitted on the enclosed
form will be voted by the persons named in the enclosed form of proxy in
accordance with their best judgment.
ANNUAL MEETING OF STOCKHOLDERS
It presently is contemplated that the annual meeting of stockholders
following fiscal 1997 will be held on or about January 8, 1998. In order for
any stockholder proposal to be considered for inclusion in the proxy
materials of the Company for the fiscal 1997 annual meeting of stockholders,
it must be received by the Secretary of the Company no later than August 14,
1997. It is urged that any such proposals be sent by certified mail, return
receipt requested.
By Order of the Board of Directors
/s/ J. CHONTELLE WOODWARD
ASSISTANT CORPORATE SECRETARY
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
BRUNSWICK BIOMEDICAL CORPORATION
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995................. F-3
Consolidated Statements of Operations for the Years Ended June 30, 1996,
1995, and 1994........................................................... F-4
Consolidated Statements of Stockholders' Equity
(Deficit)................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996,
1995, and 1994........................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ F-29
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Brunswick Biomedical Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Brunswick Biomedical Corporation and its subsidiaries at June 30, 1996 and
the results of their operations and their cash flows for the year in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. The financial statements
of the Company for the years ended June 30, 1995 and 1994 were audited by
other independent accountants whose report dated August 24, 1995 expressed an
unqualified opinion on those statements.
PRICE WATERHOUSE LLP
Washington, DC
October 25, 1996
F-2
<PAGE>
BRUNSWICK BIOMEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 511,835 $ 51,714
Restricted cash 958,221 --
Accounts receivable, net of allowance for
doubtful accounts of $61,000 and $79,000 7,536,694 579,274
Inventory 5,326,651 305,502
Prepaid expenses 800,204 44,099
Deferred income taxes 1,217,500 --
---------- ---------
Total current assets 16,351,105 980,589
---------- ---------
Fixed Assets, net 14,990,276 200,050
Goodwill, net 1,458,739 1,639,195
Developed technology, patents and
licenses, net 7,238,957 --
Other intangible assets 1,654,732 368,382
---------- ---------
Total assets $41,693,809 $3,188,176
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank 3,875,400 --
Notes Payable To Syntex 588,400 --
Note payable to shareholder -- 200,000
Current portion of long term debt 516,800 --
Line of credit 197,216 225,950
Accounts payable and accrued expenses 4,018,911 1,163,689
Customer deposits 736,000 --
Current maturities of capital lease
obligations 22,069 15,312
Restructuring reserve 640,400 --
Other liabilities and accruals 1,611,900 56,342
---------- ---------
Total current liabilities 12,207,096 1,661,293
Notes payable, long-term 14,872,251 --
Other long-term debt 1,184,300 --
Other noncurrent liabilities 616,500 --
Deferred income taxes 1,605,500 --
Long term capital lease obligations 32,823 55,381
---------- ---------
Total liabilities 30,518,470 1,716,674
---------- ---------
Minority Interest in Consolidated
Subsidiary 6,788,500 --
Stockholders' Equity
Common stock 684 684
Additional Paid in Capital 15,866,110 8,311,396
Preferred Stock-Series A 647 647
Preferred Stock-Series B 291 291
Preferred Stock-Series C 3,744 3,744
Preferred Stock-Series D -- --
Preferred Stock-Series E -- --
Preferred Stock-Series F 2,787 --
Warrants 2,072,951 --
Retained deficit (13,393,349) (6,598,341)
Unearned stock option compensation (181,745) (255,137)
Currency translation adjustment 26,172 19,671
Treasury stock, at cost (11,453) (11,453)
---------- ---------
Total Stockholder's Equity 4,386,839 1,471,502
---------- ---------
Total Liabilities & Stockholders' Equity $41,693,809 $3,188,176
---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
BRUNSWICK BIOMEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Sales $10,375,342 $ 2,903,532 $ 2,426,984
Cost of Goods Sold 6,955,198 1,698,374 1,641,581
---------- ---------- ----------
Gross profit 3,420,144 1,205,158 785,403
Operating Expenses:
Engineering, research and development 1,724,903 698,034 616,834
Selling, general and administrative expenses 2,639,863 1,844,395 1,584,616
Depreciation and amortization expenses 803,369 244,219 211,301
Write-off of in-process research and development 4,464,007 -- --
---------- ---------- ----------
Operating expenses 9,632,142 2,786,648 2,412,751
Loss from operations (6,211,998) (1,581,490) (1,627,348)
Interest expense, net (550,731) (18,577) (97,496)
Other income 11,324 -- --
---------- ---------- ----------
Loss before taxes and minority interest (6,751,405) (1,600,067) (1,724,844)
Provision for income taxes 26,946 -- --
Minority interest in consolidated subsidiary 16,657 -- --
---------- ---------- ----------
Net loss $(6,795,008) $(1,600,067) $(1,724,844)
---------- ---------- ----------
Weighted average shares outstanding 68,417 68,417 69,870
Net loss per share $(99.32) $(23.39) $(24.69)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
BRUNSWICK BIOMEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CONVERTIBLE
REDEEMABLE COMMON STOCK
PREFERRED STOCK ADDITIONAL
------------------- ------------------- CUMULATIVE
NUMBER $.01 NUMBER $.01 PAID-IN ACCUMULATED
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL WARRANTS DEFICIT
--------- --------- --------- --------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 93,809 $ 938 71,447 $714 $ 1,486,682 $(3,273,430)
Issuance of Series C preferred stock
in retirement of notes payable 95,279 953 1,666,488
Sale of Series C preferred stock,
net of issuance costs of $41,634 279,183 2,791 4,841,278
Issuance of nonqualified stock
options 125,824
Amortization of deferred
compensation
Purchase of treasury stock
Retirement of treasury stock (3,030) (30) (22,105)
Cumulative translation adjustment
Net loss (1,724,844)
------- ----- ------ --- ---------- -----------
Balance, June 30, 1994 468,271 4,682 68,417 684 8,098,167 (4,998,274)
Issuance of nonqualified stock
options 209,700
Amortization of deferred
compensation
Issuance of treasury stock for
payment of services 3,529
Cumulative translation adjustment
Net loss (1,600,067)
------- ----- ------ --- ---------- -----------
Balance, June 30, 1995 468,271 4,682 68,417 684 8,311,396 (6,598,341)
Sales of Series D preferred stock,
net of issuance costs of $19,929 45,695 457 1,238,602
Sales of Series E preferred stock,
net of issuance costs of $10,607 24,319 243 659,249
Sales of Series F preferred stock,
net of issuance costs of $91,019 208,710 2,087 5,656,863
Warrants issued with notes payable $2,072,951
Amortization of deferred
compensation
Cumulative translation adjustment
Net loss (6,795,008)
------- ----- ------ --- ---------- --------- -----------
Balance, June 30, 1996 746,995 $7,469 68,417 $684 $15,866,110 $2,072,951 $(13,393,349)
------- ----- ------ --- ---------- --------- -----------
TREASURY STOCK STOCKHOLDERS'
TRANSLATION NUMBER $.01 DEFERRED EQUITY
ADJUSTMENT OF SHARES PAR VALUE COMPENSATION (DEFICIT)
---------- -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993 $46,218 $(1,738,878)
Issuance of Series C preferred stock
in retirement of notes payable 1,667,441
Sale of Series C preferred stock,
net of issuance costs of 4,844,069
Issuance of nonqualified stock
options $(125,824)
Amortization of deferred
compensation 20,970 20,970
Purchase of treasury stock 4,887 $(35,135) (35,135)
Retirement of treasury stock (3,030) 22,135
Cumulative translation adjustment (16,775) (16,775)
Net loss (1,724,844)
------ ----- ------- -------- ---------
Balance, June 30, 1994 29,443 1,857 (13,000) (104,854) 3,016,848
Issuance of nonqualified stock
options (209,700)
Amortization of deferred
compensation 59,417 59,417
Issuance of treasury stock for
payment of services (221) 1,547 5,076
Cumulative translation adjustment (9,772) (9,772)
Net loss (1,600,067)
------ ----- ------- -------- ---------
Balance, June 30, 1995 19,671 1,636 (11,453) (255,137) 1,471,502
Sales of Series D preferred stock,
net of issuance costs of $19,929 1,239,059
Sales of Series E preferred stock,
net of issuance costs of $10,607 659,492
Sales of Series F preferred stock,
net of issuance costs of $91,019 5,658,950
Warrants issued with notes payable 2,072,951
Amortization of deferred
compensation 73,392 73,392
Cumulative translation adjustment 6,501 6,501
Net loss (6,795,008)
------ ----- ------- -------- ---------
Balance, June 30, 1996 $26,172 1,636 $(11,453) $(181,745) $4,386,839
------ ----- ------- -------- ---------
</TABLE>
F-5
<PAGE>
BRUNSWICK BIOMEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(6,795,008) $(1,600,067) (1,724,844)
Adjustments to reconcile net income to net
cash provided by (used for) operating activities,
net of effects from acquisition of STI in 1996
Depreciation and amortization 803,369 244,219 211,301
Amortization of deferred compensation 73,392 59,417 20,970
Write-off of in-process research and development 4,464,007 -- --
Minority interest 16,657 -- --
Deferred lease incentives 7,550 -- --
Issuance of treasury stock for payment of services -- 5,076 --
Interest payable converted to preferred stock -- -- 60,700
Decrease (increase) in receivables 929,396 (264,150) (40,080)
(Increase) decrease in inventories (998,783) 150,272 5,695
Decrease (increase) in prepaid expenses and other assets 454 22,871 (25,457)
(Increase) decrease in accounts payable and
accrued expenses (337,925) 365,507 (26,798)
Increase in customer deposits 906,063 -- --
Increase in restructuring reserve 185,443 -- --
----------- ---------- --------
Net cash used for operating activities (745,385) (1,016,855) (1,518,513)
----------- ---------- --------
Cash flows from investing activities:
Purchases of fixed assets (463,279) (34,798) (41,781)
Purchases of patents and licenses (752) -- --
Increase in restricted cash (958,221) -- --
Increase in deposits and other assets (355,960) (109,422) (249,968)
Purchase of STI (21,589,405) -- --
Purchase of Telemedicine Division -- (2,062,993) --
----------- ---------- --------
Net cash used for investing activities (23,367,617) (2,207,213) (291,749)
----------- ---------- --------
Cash flows from financing activities:
Purchase of treasury stock -- -- (22,135)
Net (payments) proceeds on note payable to bank (200,000) 200,000 --
Payment under noncompete agreement (57,489) (180,000) (258,905)
Net proceeds (payments) from line of credit 361,332 7,901 (2,732)
Decrease from deferred financing cost -- -- 53,444
Payments under capital lease agreements (13,917) (35,859) (23,415)
Payments on other long-term debt (72,285) -- --
Proceeds from issuance of warrants 2,072,951 -- --
Proceeds from issuance of notes payable 14,872,251 -- --
Increase in other noncurrent liabilities 55,981 -- --
Proceeds from issuance of preferred stock 7,557,501 -- 4,844,068
----------- ---------- --------
Net cash provided by (used for) financing activities 24,576,325 (7,958) 4,590,325
----------- ---------- --------
Net effect of currency fluctuation on cash flows (3,202) (4,425) (9,267)
----------- ---------- --------
Net increase (decrease) in cash 460,121 (3,236,451) 2,770,796
Cash at beginning of year 51,714 3,288,165 517,369
----------- ---------- --------
Cash at end of year $ 511,835 $ 51,714 $3,288,165
----------- ---------- --------
</TABLE>
F-6
<PAGE>
BRUNSWICK BIOMEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. THE COMPANY
Brunswick Biomedical Corporation (the Company) is engaged in the development,
manufacture and sale of emergency life saving and less/noninvasive arrhythmia
management devices.
Survival Technology, Inc. ("STI"), a 61.1% owned subsidiary of the Company,
was acquired in April 1996 and is a publicly traded technology-based health
care company that designs, develops and produces a broad range of automatic
injectors, prefilled syringes and other innovative heath care devices, with a
major focus on safe and convenient participation by the patient in injection
therapy. STI also supplies customized drug delivery system design,
pharmaceutical research and development and GMP-approved sterile product
manufacturing to pharmaceutical and biotechnology companies.
LIQUIDITY AND CAPITAL RESOURCES
Brunswick's consolidated financial statements for the year ended June 30,
1996 have been prepared on a going concern basis which contemplates the
realization of assets and settlement of liabilities and commitments in the
normal course of business. Brunswick incurred a net loss of $6,795,008 for
the year ended June 30, 1996, which increased its retained deficit to
$13,393,349. Additionally, Brunswick has incurred $16.1 million in long-term
debt to finance the purchase of 61.1% of STI's outstanding common stock and
the subsequent merger (see notes 2, 3 and 5 of the consolidated financial
statements), the major portion of which matures no later than January 15,
1997 unless the merger is completed by that date.
The Company's business plan following the merger is to operate as a medical
device firm with two distinct divisions. One division will center around the
existing STI business, focusing on drug delivery devices with an emphasis in
auto-injectors. The other division will focus on non-invasive cardiac
diagnostics and Telemedicine, carrying forward the research and development
activities of Brunswick, particularly the PRIME/ECG program.
The Company's working capital plus limited revenue from sales of emergency
medical care (EMC) and Telemedicine products and revenue from the STI
division will not be sufficient to fund continuation of the PRIME/ECG program
at its planned level and to expand EMC and Telemedicine products business.
Accordingly, in order to carry out its business plan for this division, the
Company will need to obtain external financing from strategic partners
interested in these programs or through additional equity financing. The
Company plans to explore both potential business alliances and additional
equity financing following the merger. The Company believes that broadening
the market and liquidity for its common stock as a result of the merger will
enhance its ability to raise additional equity capital.
F-7
<PAGE>
However, no assurances can be given that the Company will be successful in
raising additional capital or entering into a business alliance. If the
Company is unable to obtain adequate external financing, it will be required
to sharply curtail its research programs and certain other activities.
2. ACQUISITIONS
On April 15, 1996, the Company purchased 61.1% of STI outstanding common
stock from the estate of STI's late founder, Dr. Stanley J. Sarnoff. STI is
a technology-based health care company that designs, develops and produces a
broad range of automatic injectors, prefilled syringes and other innovative
health care devices. STI also supplies customized drug delivery system
design, pharmaceutical research and development and GMP-approved sterile
product manufacturing to pharmaceutical and biotechnology companies. STI
corporate offices are located in Rockville, Maryland and their plant
facilities are in St. Louis, Missouri.
As consideration, the Company paid $16,069,386 and issued a promissory note
to the estate of Dr. Stanley J. Sarnoff for $4,700,000. The transaction was
accounted for as a purchase. The purchase price was allocated first to
tangible assets and identifiable intangible assets and liabilities of STI
based on an independent assessment of their fair values, with the excess of
fair value over the purchase price allocated to reduce proportionately the
values assigned to noncurrent assets.
The purchase price and the purchase price allocation are summarized as
follows:
<TABLE>
<S> <C>
Cash consideration paid $16,069,386
Promissory note to the estate of
Dr. Stanley J. Sarnoff 4,700,000
Transaction Expenses 820,019
-----------
Purchase Price 21,589,405
Historical book value of net assets acquired 10,680,600
-----------
Excess of purchase price over historical net book
value of assets acquired as of July 31, 1996 $10,908,805
===========
</TABLE>
Allocation of excess purchase price, reflecting proportionate allocation
of negative goodwill:
<TABLE>
<S> <C>
Decrease to property, plant and equipment $ (2,689)
In-process research and development 4,464,007
Developed technology 5,505,257
Other intangible assets 942,230
===========
$10,908,805
===========
</TABLE>
The developed technology and other intangible assets will be amortized on a
straight-line basis over 10 years. The allocation of excess purchase price
to in-process research and development represents the independent assessment
of the fair value of a number of research
F-8
<PAGE>
and development projects whose technological feasibility has not yet been
established. These research and development projects have no alternative
future use and, therefore, have been charged to expense at the date of
consummation of the transaction.
On July 31, 1994, the Company acquired substantially all of the assets of the
Telemedicine Division of STI. As consideration, the Company paid $2,026,580
in cash and the transaction was accounted for as a purchase. In addition,
the Company must pay future royalties of up to $1,000,000 based on product
sales over five years. During fiscal 1996 and 1995, royalty expense of
approximately $134,000 and $119,000, respectively, was charged to operations.
The aggregate purchase price of $2,062,993 (which included $36,413 of direct
acquisition costs) was allocated based on the fair value of the tangible and
intangible assets acquired as follows:
<TABLE>
<S> <C>
Equipment $ 71,795
Inventory 186,580
Goodwill and intangible assets 1,804,618
----------
$2,062,993
==========
</TABLE>
The goodwill and intangible assets will be amortized on a straight-line basis
over 10 years.
3. PENDING MERGER WITH SURVIVAL TECHNOLOGY, INC. SUBSIDIARY
On September 11, 1996, the Company and STI entered an Agreement and Plan of
Merger (Merger Agreement). Pursuant to the Merger Agreement, each
outstanding share of the Company's common stock will be exchanged for 2.1
shares of STI's common stock and the STI's common stock will remain
outstanding and unchanged. Each of the Company's outstanding shares of
preferred stock will be converted into a right to receive 2.1 shares of STI's
common stock and a warrant to purchase 0.4 share of STI's common stock at an
exercise price of $11.00 per share, exercisable for a period of five years
following the merger. In addition, STI will assume the Company's obligations
under outstanding options and warrants. These provisions of the agreement
will result in 1,708,928 shares of STI common stock being issued in exchange
for the Company stock at the time of the merger and could result in the
issuance of an additional 1,053,358 shares of STI common stock if all options
and warrants were exercised and the required consideration paid. Each of the
1,888,126 shares of STI common stock currently owned by the Company will be
retired in the merger. The transaction requires approval by both STI's and
the Company's shareholders and is expected to be completed during the second
quarter of fiscal 1997.
The merged company will be subject to the financial commitments of BBC which
currently include an $11 million bridge loan that will be converted to a $10
million long-term loan upon completion of the merger. The long-term loan
contains covenants which are applicable to the financial condition of the
merged company. In order to adequately service the long-term loan and comply
with the financial covenants, the merged company must achieve significantly
higher operating results, obtain external financing from strategic partners
F-9
<PAGE>
interested in its R&D programs and/or obtain additional equity financing. At
this time, there is no assurance that the merger will occur, and, if the
merger occurs, that the merged company will comply with the financial
covenants of the long-term loan.
Pursuant to the Merger Agreement, the Company will be merged into STI, the
existence of the Company will cease, and STI, as the surviving corporation,
will continue to exist. Although the STI will be the surviving corporation
in the merger as a legal matter, the merger will be treated as a purchase of
STI by the Company for accounting purposes. As a result, STI's assets and
liabilities will be revalued to their respective fair values and the
Company's historical financial statements will reflect the combined
operation of the Company and STI after the effective date of the merger.
The following unaudited pro forma financial information reflects the
adjustment of the historical financial information to give effect to the
merger as if the merger transaction occurred on August 1, 1995.
<TABLE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1996:
<S> <C>
Total revenues $35,014,900
Cost of goods sold 24,408,600
-----------
Gross profit 10,606,300
Operating expenses* 15,421,700
-----------
Operating loss (4,815,400)
Non-operating expense 1,985,200
Provision for income taxes 100,000
-----------
Net loss $(6,900,600)
===========
Net loss per share $(2.09)
BALANCE SHEET AT JULY 31, 1996:
Current assets $16,351,100
Property, plant and equipment 14,743,500
Other assets 13,354,900
-----------
Total assets $44,449,500
===========
Current liabilities $12,723,900
Long-term debt 16,089,400
Other liabilities 2,222,000
Shareholders' equity 13,414,200
-----------
Total liabilities and shareholders equity $44,449,500
===========
</TABLE>
- --------
* Included in operating expenses is a non-recurring write-off on $4,464,000
of in-process research and development.
F-10
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, and its majority-owned subsidiaries; Brunswick Biomedical
Technologies, Inc. (BBT), a Massachusetts corporation; Brunswick Biomedical
Limited (BBL) (formerly NIRAD Limited), a Northern Ireland corporation;
Brunswick Biomedical Investment Corporation (BBI), a Massachusetts
corporation; and STI, a Delaware corporation. All of the Company's
subsidiaries have a June 30 fiscal year end except for STI, which has a July
31 fiscal year end.
The Company's fiscal year 1996 consolidated financial statements and notes to
financial statements include STI revenue and expenses for the two and
one-half month period ended June 30, 1996 and STI assets and liabilities as
of July 31, 1996. The Company's fiscal years 1995 and 1994 consolidated
financial statements and notes to financial statements do not include STI
balances.
CASH AND CASH EQUIVALENTS
The Company applies Statement of Financial Accounting Standards (SFAS) No.
115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The
Company considers all highly liquid investments purchased with a remaining
maturity three months or less to be cash equivalents.
RESTRICTED CASH
At June 30, 1996, the Company had $958,221 in restricted cash related to
interest payments to be made on the notes payable associated with the
acquisition of STI. The amount is classified in current assets in the
accompanying consolidated balance sheet as it will be used to make interest
payments during fiscal 1997.
FOREIGN CURRENCY
In accordance with SFAS No. 52, FOREIGN CURRENT TRANSLATION, BBL's assets and
liabilities are translated at the exchange rate in effect at the balance
sheet date. Revenue and expense accounts are translated using a weighted
average of exchange rates in effect during the year. Cumulative translation
gains and losses are shown in the accompanying consolidated balance sheets as
a separate component of stockholders' equity. There were no material foreign
currency transaction gains or losses during fiscal 1996, 1995 and 1994.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
F-11
<PAGE>
FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost. The Company computes depreciation and
amortization under straight-line and accelerated methods using the following
estimated useful lives:
<TABLE>
<S> <C>
Furniture and equipment 2 to 15 years
Capital leases and leasehold improvements 4 to 20 years
</TABLE>
In addition, the Company uses either the units of production method or the
straight line method over a 10-year life (whichever period is shorter) to
depreciate production molds and tooling over their estimated production life
cycle. Major additions and improvements including validation costs are
capitalized and ordinary repairs, maintenance, and renewals are expensed in
the year incurred. Gains or losses on the sale or retirement of fixed assets
result from the difference between sales proceeds and the assets' net book
value.
PATENTS AND LICENSES
Legal costs incurred in connection with patent applications and costs of
acquiring patents and licenses are capitalized and amortized on a
straight-line basis over the life of the patent (not to exceed seventeen
years) or license or over the period expected to be benefited, principally
over 5 to 20 years.
REVENUE RECOGNITION
Sales of medical products are recorded when shipments are made to customers.
Revenues from the U.S. Department of Defense industrial base maintenance
contract are recorded ratably throughout the contract term with the exception
of revenue from the component prestock program that is recorded upon receipt
of components in STI's warehouse and product sales which are recorded upon
shipment to the customer. Revenues from license fees are recorded when the
fees are due and non-refundable. Revenues from research and development
arrangements are recognized in the period in which related work has been
substantially completed.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged to operations in the period
incurred.
INCOME TAXES
The Company accounts for taxes using the asset and liability approach as
prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". The asset and liability approach requires the
recognition of deferred tax assets and liabilities for expected future tax
consequences of temporary differences between carrying amounts and tax basis
of assets and liabilities.
F-12
<PAGE>
FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, which
include cash and cash equivalents, accounts receivable and current/long-term
debt, approximates their carrying value.
NET INCOME PER COMMON SHARE
Net income per common share is computed on the weighted average number of
common and common equivalent shares outstanding which were 68,417 in 1996 and
1995, and 69,870 in 1994. Stock options, warrants and convertible redeemable
preferred stock are considered to be common equivalents shares when dilutive.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
5. BORROWINGS
SENIOR BRIDGE LOAN
In April 1996, in order to finance a portion of the acquisition of STI, the
Company entered a credit agreement with Internationale Nederlanden (U.S.)
Capital Corporation ("ING") for a $11 million bridge loan. The bridge loan,
$1 million of which is held in escrow, matures on October 15, 1996 unless
extended until January 15, 1997 and has an interest rate of Federal funds
rate plus 2% (7.25%) through October 15, 1996 and the Federal funds rate plus
4.5% thereafter. The bridge loan is secured by substantially all of the
assets of the Company, including a pledge of the STI shares acquired by the
Company.
Upon completion of the merger of the Company and STI (see Note 3), the
Company's $11 million bridge loan will convert to a $10 million long-term
loan and ING will make available to the Company a $5 million revolving line
of credit. The long-term loan will have an interest rate of the Federal
Funds Rate plus 2% and will mature on the fifth anniversary of the merger
with STI. The line of credit will have an interest rate of the Federal Funds
rate plus 1.75% and will mature on the fifth anniversary of the merger with
STI. Quarterly principal payments will be required in scheduled amounts
ranging from $500,000 to $750,000. In addition, mandatory prepayments of 75%
of excess cash flow will required on an annual basis.
The Company intends to repay the subsidiary note payable to bank with the ING
revolving line of credit.
F-13
<PAGE>
SUBORDINATED PROMISSORY NOTE PAYABLE TO SARNOFF ESTATE
In April 1996, in order to finance a portion of the STI acquisition, the
Company signed a $4.7 million promissory note to the estate of Dr. Stanley J.
Sarnoff. The promissory note matures the earlier of December 31, 2001 or the
fifth anniversary of the merger with STI. The loan is unsecured and has an
interest rate of 12% through April 1998 and 13% thereafter. Prior to April
1998, accrued interest on the note will be added to the principle balance,
and subsequent to April 1998, interest will be payable monthly.
EM INDUSTRIES, INC. SUBORDINATED LOAN
In April 1996, in order to finance a portion of the STI acquisition, the
Company entered into a $1 million loan from EM Industries, Inc. The loan
matures the earlier of December 31, 2001 or the fifth anniversary of the
merger with STI. Seven consecutive quarterly installment payments of
$125,000 commence April 1999 and the remaining loan balance is due upon
maturity. The loan is unsecured and has an interest rate of 12% through
April 1998 and 13% thereafter. Accrued interest is to be added to the
principal balance and accrues interest through April 1998 and is to be paid
monthly thereafter.
NOTE PAYABLE
During the year ended June 30, 1993, the Company raised working capital
through $1,579,970 of loans from certain stockholders and others. During the
year ended June 30, 1994, the notes and accrued interest were converted into
95,279 shares of Series C convertible redeemable preferred stock of the
Company at a rate of $17.50 per share (see Note 6).
During 1995, the Company received additional financing in the form of a
$200,000 demand note payable to a shareholder. The note bears interest at
the rate of 11% and was paid in full during fiscal 1996.
LINE OF CREDIT
BBL had borrowings of $197,216 and $225,950 outstanding at June 30, 1996 and
1995, respectively, under a foreign bank line of credit that carries a
borrowing limitation of L145,000 ($225,040 at June 30, 1996). The borrowings
under the line of credit are due on demand and bear interest at the bank's
published rate (5.75% at June 30, 1996) plus 2%. The line expires on
December 18, 1996 and is secured by an irrevocable letter of credit.
The Company, as collateral for the line of credit on BBL's behalf, pledged
$250,000, which is held in an interest-bearing account by a bank. This amount
is included in deposits and other assets in the accompanying consolidated
balance sheets at June 30, 1996 and 1995.
SUBSIDIARY NOTE PAYABLE TO BANK
STI, a subsidiary of the Company, has a revolving credit agreement
("Agreement") with Merrill Lynch Business Financial Services, Inc. ("MLBFS")
with a maximum commitment
F-14
<PAGE>
of $5 million. Outstanding borrowings under the Agreement totaled $3.9
million at July 31, 1996 with an interest rate equal to the 30-day commercial
paper rate as published in the Wall Street Journal plus 265 basis points
(8.04%). The agreement is collateralized by substantially all of STI's
assets and general intangibles. Financial covenants under the Agreement
require STI to maintain certain levels of tangible net worth and debt to net
worth ratios while limiting capital expenditures to no more than $5 million
in any one fiscal year. During the first quarter of fiscal 1997, the
Agreement was extended through December 1996 with the same terms and
conditions.
SUBSIDIARY NOTE PAYABLE TO SYNTEX
In April, 1991, STI signed a Loan Agreement (the "Loan Agreement") pursuant
to which Syntex Laboratories, Inc. ("Syntex") of Palo Alto, California agreed
to lend $5.4 million to the STI for the purposes of financing capital
expenditures and working capital requirements. STI drew down approximately
$2.9 million on the capital expenditure portion of the Loan Agreement as
equipment was purchased. Principal repayments commenced August 1, 1991
through credits against amounts invoiced to Syntex for product delivered
under a Manufacturing and Packaging Agreement between the parties.
On November 30, 1992, the STI and Syntex agreed to terminate the
Manufacturing and Packaging Agreement effective February 15, 1993. As part
of this termination agreement, the repayment terms of the Loan Agreement were
modified to include an eighteen-month moratorium on the repayment of
principal beginning with the calendar quarter ended March 31, 1993 through
the calendar quarter ended June 30, 1994. The outstanding loan balance
(approximately $2.2 million) was non-interest bearing from January 1, 1993
through June 30, 1994 and effective July 1, 1994 began bearing interest at a
rate equal to that which STI pays on its current commercial line of credit
facility. Principal payments resumed for the calendar quarter ended
September 30, 1994 at the minimum of $200,000 per quarter and aggregated
$800,000 in both fiscal 1996 and 1995. As of July 31, 1996 the outstanding
loan balance of the note payable to Syntex was $588,400. The loan is subject
to acceleration upon the occurrence of certain events.
The Loan Agreement is collateralized by approximately $6.5 million of
existing STI equipment and general intangibles. Any security interest that
Syntex may have on newly acquired equipment by STI and all proceeds thereof
is subject and subordinate to the security interest of MLBFS.
OTHER SUBSIDIARY LONG-TERM DEBT
On May 23, 1995, STI entered into a loan agreement with The CIT
Group/Equipment Financing, Inc. ("CIT") to assist in financing STI's capital
investment programs. This arrangement will consist of a series of loans for
the acquisition of production molds, high speed component preparation and
filling equipment and facility renovations not to exceed a maximum aggregate
of $3 million. Loan proceeds totaled $445,300 and $1,046,100 in fiscal 1996
and 1995, respectively, of which $1.2 million was outstanding at July 31,
1996 at a weighted average interest rate of 8.8%. Terms include repayment of
each loan in sixty (60)
F-15
<PAGE>
equal monthly installments at a fixed interest rate equal to the Treasury
Yield (as published in the Wall Street Journal two business days prior to
closing on a loan amount) plus 247 basis points. The agreement with CIT is
collateralized by the assets financed with the loan proceeds. CIT's security
interest in such assets is subject and subordinate to the security interest
of Syntex.
On January 11, 1996, the STI received a non-interest bearing loan in the
amount of $375,000 from Center Laboratories, Inc.("Center"), STI's exclusive
distributor for its EpiPen and EpiE-Zpen. The proceeds from this loan will
assist STI in purchasing high-speed fill and automated packaging equipment
which will reduce the cost of manufacturing the EpiE-Zpen. Repayment of this
loan will commence during the first quarter of fiscal 1997 with an agreed
upon credit per unit on EpiE-Zpen shipments to Center. STI anticipates loan
repayment to be completed in fiscal 1999.
Other subsidiary long-term debt as of July 31, 1996 sheet consisted of the
following:
<TABLE>
<S> <C>
CIT Group/Equipment Financing, Inc. $1,209,000
Capital lease obligations (See Note 12) 117,100
Note payable to Center Labs, non-interest bearing 375,000
----------
1,701,100
Less current portion 516,800
----------
Other subsidiary long-term debt $1,184,300
==========
</TABLE>
Minimum annual principal payments on other subsidiary long-term debt,
exclusive of capitalized lease obligations, are as follows: 1997 -$417,100;
1998 - $477,500; 1999 - $374,900; 2000 - $287,900; 2001 - $26,700.
Capitalized interest costs in fiscal 1996 totalled $132,400, of which $28,500
is included in the consolidated balance sheet.
OTHER
The Company previously entered into separate noncompete agreements with two
of the minority stockholders of BBT. These noncompete agreements prohibited
these individuals from competing with the Company through June 30, 1994.
During 1994, the Company extended the repayment of one of the noncompete
agreements beyond its original June 1994 maturity. As of June 30,1995, the
discounted present value of the remaining noncompete payments was $56,342,
which matured on October 1995. The value of the noncompete agreement was
amortized in full as of June 30, 1996.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In conjunction with raising working capital during the year ended June 30,
1996, the Company increased the number of shares of its authorized common
stock from 1,075,000 to
F-16
<PAGE>
1,975,000. The Company has reserved 955,643 shares of common stock for the
conversion of the preferred stock and the issuance upon exercise of common
stock warrants.
COMMON STOCK WARRANTS
During fiscal 1996, in connection with the issuance of Series D and E
Preferred Stock, the Company issued 45,695 and 38,285 warrants, respectively,
to purchase common stock. The warrants are exercisable at $17.50 per share
and are subject to adjustment, as defined, from March 14, 1996 to March 14,
2000. The Company has the option to cancel the warrants based on certain
events, as defined.
In association with the notes payable issued in connection with the
acquisition of STI, the Company issued warrants to purchase 119,668 shares of
common stock. The Company issued 50,000 warrants exercisable at $27.55 per
share through March 18, 2001 to the Estate of Dr. Stanley J. Sarnoff, 33,370
warrants exercisable at $.01 per share through April 15, 2006 to ING, and
another 36,298 warrants exercisable at $27.55 per share through April 15,
2006 to ING. The Company allocated $2,072,951 of the note payable proceeds
to the warrants based on the relative fair value of the warrants and the
notes at the agreement date. The Company is amortizing the note discount
over the term of the obligation using the effective interest rate method.
During 1993, in connection with the issuance of notes payable discussed in
Note 5, the Company issued warrants to purchase 5,999 shares of common stock.
These warrants vested at a rate of 20% per month beginning on July 22, 1993
until the Company met certain milestones. In November 1993, the milestones
were achieved, and 3,600 of the 5,999 warrants vested. The remaining 2,399
warrants were canceled. In addition, the Company issued 4,000 warrants to
two stockholders of the Company in March 1994. These warrants are
exercisable through April 22, 2000 at a per share price of $17.50, adjustable
for certain dilutive events, as defined.
During 1992, the Company issued warrants to purchase 400 shares of common
stock, at a per share price of $17.50, to a financial institution as
additional consideration for borrowings received by the Company.
AUTHORIZED CAPITAL STOCK
During fiscal 1996, the Company amended its Certificate of Incorporation to
increase the Company's authorized capital stock to 1,400,000 shares of
preferred stock, par value $.01 per share, of which the Series A, B and C
preferred stock remained, at 65,000, 30,000 and 380,000 shares, respectively,
and 50,000 shares have been designated Series D preferred stock, 30,000
shares have been designated Series E preferred stock, 210,000 shares have
been designated Series F preferred stock and 635,000 shares have not been
designated.
F-17
<PAGE>
CONVERTIBLE REDEEMABLE PREFERRED STOCK
In April 1996, the Company issued 208,710 shares of Series F preferred stock
for $27.55 per share, resulting in net proceeds of $5,658,950. In connection
with the Series F preferred stock financing, all shares of Series D and E
preferred stock automatically converted into an equal number of shares of
Series F preferred stock.
In March 1996, the Company issued 45,695 shares of Series D preferred stock
and 24,319 shares of Series E preferred stock for $27.55 per share, resulting
in net proceeds of $1,239,059 and $659,492, respectively.
In November 1993, the Company issued 374,462 shares of Series C preferred
stock in exchange for cash and the conversion of certain notes payable (see
Note 5).
The rights, privileges and preferences of the preferred stock are listed
below:
CONVERSION
The preferred stock is convertible into common stock at the rate of one share
of common stock for each share of preferred stock, adjusted for certain
dilutive events. Conversion is at the option of the preferred stockholders
but becomes automatic upon the closing of an initial public offering at a per
share price of at least $52.50 for Series A, B and C, and $82.65 for Series
D, E and F and resulting in aggregate proceeds to the Company of at least $10
million.
REDEMPTION
Outstanding shares of Series A and B preferred stock may be redeemed over a
five-year period upon a two-thirds vote of the stockholders, beginning no
earlier than January 1, 1999, in the amount of $7.73 and $17.50 per share,
respectively, plus any declared but unpaid dividends. Shares of Series C
preferred stock may be redeemed over a three-year period upon a two-thirds
vote of the stockholders, beginning no earlier than January 1, 1999, in the
amount of $17.50 per share plus any declared but unpaid dividends. Shares of
Series D, E and F preferred stock may be redeemed over a three year period
upon a two-thirds vote of the stockholders, beginning no earlier than March
14, 2001 for Series D and E preferred stock and April 15, 2001 for Series F
preferred stock, in the amount of $27.55 per share plus any declared but
unpaid dividends. Preferred stockholders of each class my postpone or waive
redemption by a two-thirds vote.
DIVIDENDS
The holders of Series A and B preferred stock shall be entitle to receive,
when and as declared by the Board of Directors, dividends out of funds
legally available.
The holders of the Series C and F preferred stock shall be entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available, cumulative cash dividends equal to $1.75 and $2.75 per share,
respectively.
F-18
<PAGE>
The dividends shall be payable in the event of (i) a liquidation, dissolution
or winding up of the Company, (ii) a consolidation or merger of the Company,
other than merger with STI, or a sale of all or substantially all of the
assets of the Company, or (iii) a redemption of the preferred stock.
LIQUIDATION PREFERENCE
The holders of the preferred stock have preference in the event of
liquidation, sale or dissolution of the Company to liquidation proceeds equal
to the amount paid for such shares plus any declared but unpaid dividends.
Series C preferred stock has preference in liquidation over Series A and B
preferred stock. Series F preferred stock has preference in liquidation over
Series A, B and C preferred stock.
RIGHT OF FIRST REFUSAL
The preferred stockholders, subject to the rights of certain common
stockholders, have the right of first refusal to purchase a pro rate portion
of any new securities, as defined, equal to the proportion of capital stock
owned at the time of issuance of the new securities.
VOTING RIGHTS
The preferred stockholders are entitled to vote on all matters with the
common stockholders as if they were one class of stock. The preferred
stockholders are entitled to the number of votes equal to the number of
shares of common stock into which each share of the preferred stock is then
convertible.
STOCK OPTION PLAN
In November 1993, the Company adopted the 1993 Stock Option Plan ("the 1993
Plan"). Pursuant to the 1993 Plan, the Company may grant to any employee,
director or consultant of the Company stock options to purchase up to 155,493
shares of common stock. As of June 30, 1996, 124,720 options were
outstanding and 30,773 options were available for issuance under the 1993
Plan.
SUBSIDIARY STOCK OPTION PLANS
STI has adopted two Stock Option Plans ("the Plans") which reserve 700,000
shares for the granting of options through 2001 and provide for issuance of
non-qualified stock options, incentive stock options, stock appreciation
rights, incentive shares and restricted stock.
Options granted to employees, officers and directors pursuant to STI's stock
option plans generally have been exercisable in varying amounts in cumulative
annual installments up to ten years from the date of grant. The exercise
price on all options granted during the three years ended July 31, 1996 was
equivalent to the market value of STI's stock on the date of grant. At July
31, 1996, there were no stock appreciation rights outstanding.
F-19
<PAGE>
The following table summarizes the activity in STI's stock options during
fiscal 1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES 1996
- ---------------- -------
<S> <C>
Options outstanding
at beginning of year 305,000
Granted during the year 36,900
Exercised during the year (6,200)
Expired or terminated
during the year (41,900)
----------
Options outstanding
at end of year
Number of shares 293,800
Price per share $6.75-20.75
Aggregate price $3,011,400
Options reserved for
granting at end of year 106,800
Options exercised
during the year
Number of shares 6,200
Price per share $6.75-8.75
Aggregate price $42,600
Fair value per share $8.00-11.51
Aggregate fair value $61,400
Options exercisable
at end of year 196,800
</TABLE>
The Estate of Stanley J. Sarnoff, STI's founder, holds options to purchase up
to 32,500 shares of STI's common stock through September 14, 2000 (as to
30,000 shares) and 2003 (as to 2,500 shares) at a price of $9.875 and $10.78,
respectively. STI is obligated under certain circumstances to register,
under the Securities Act of 1933, shares of STI common stock owned by the
Estate.
During the first quarter of fiscal 1997, an executive officer of STI was
granted an option to purchase 40,000 shares of common stock at an exercise
price of $9.50 per share. Under the terms of the grant, the option is
exercisable as to 10,000 shares of common stock six months after the date of
the grant and will vest with respect to the remaining shares in one-third
annual increments. In addition, the vesting of such 30,000 shares will be
accelerated, in 10,000 share increments, if the market price for the common
stock reaches $18.00, $27,00, and $36.00, respectively.
F-20
<PAGE>
7. RESTRUCTURING CHARGE
In fiscal 1995, STI's Board of Directors approved a restructuring plan which
resulted in a $450,000 charge against earnings for the relocation of
corporate headquarters. As part of this plan, STI initiated certain
organizational changes during 1996 resulting in additional charges related to
employee severance benefits provided to certain employees terminated during
fiscal 1996. The Company's fiscal 1996 consolidated financial statements
include charges of $225,800 relating to restructuring charges STI incurred
from April 15, 1996 through June 30, 1996.
The following table sets forth STI's restructuring reserve as of July 31,
1996 which is included in the Company's consolidated balance sheet:
RESTRUCTURING RESERVES
<TABLE>
<CAPTION>
RELOCATION EMPLOYEE
OF FACILITIES SEPARATIONS TOTAL
------------- ----------- ---------
<S> <C> <C> <C>
Reserves as of April 15, 1996$ 450,000 $96,100 $ 546,100
Restructuring of operations charge - 225,800 225,800
Cash payments (7,200) (124,300) (131,500)
Reserve as of June 30, 1996 $442,800 $197,600 $ 640,400
</TABLE>
In October 1996, STI successfully subleased their corporate office space in
Rockville, Maryland and entered into a new lease in Columbia, Maryland for
the relocation of the corporate headquarters. The reserve balance for the
relocation of facilities at June 30, 1996 is sufficient to cover both the
moving costs and the lease rate differential on the sublease. STI is
scheduled to move its corporate headquarters by December 1996.
8. INVENTORIES
At June 30, 1996 and 1995, inventories are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Raw materials $3,217,188 $208,556
Work-in-progress 1,436,904 36,020
Finished goods 966,059 60,926
---------- --------
5,620,151 305,502
Inventory reserve (293,500) -
---------- --------
$5,326,651 $305,502
========== ========
</TABLE>
Inventories do not include amounts related to the DoD component prestock
program which are segregated in STI's warehouse facilities for future DoD
contract requirements.
F-21
<PAGE>
9. FIXED ASSETS
At June 30, 1996 and 1995, fixed assets were comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Furniture and equipment $18,191,006 $424,225
Leasehold improvements 6,707,149 -
Construction in progress 2,117,895 -
----------- --------
27,016,050 424,225
Less accumulated depreciation 12,025,774 24,195
----------- --------
$14,990,276 $200,500
=========== ========
</TABLE>
10. INCOME TAXES
As discussed in Note 4, the Company records income taxes using the asset and
liability approach as prescribed by Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes". The asset and
liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of other assets and
liabilities.
As a result of net operating losses incurred in fiscal years 1995 and 1994,
the Company did not provide for income taxes. In fiscal 1996, the Company
recorded a provision for income taxes of $26,946 relating to taxes for STI.
The Company provides deferred taxes for temporary differences between the
book basis of assets and liabilities for financial reporting purposes and the
book basis of assets and liabilities for tax return purposes. The net
deferred tax liability is attributable to the following:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
BBC net operating loss carryforwards $ 2,378,000 1,558,000
BBC credit carryforwards 53,000 25,000
BBC temporary differences 269,000 -
STI temporary differences (388,000) 378,000
----------- -----------
2,312,000 1,961,000
Valuation allowance (2,700,000) (1,961,000)
----------- ----------
Net deferred tax liability $ (388,000) $ -
=========== ==========
</TABLE>
F-22
<PAGE>
The BBC temporary differences as of June 30, 1996 and 1995 are not comprised
of any individually significant items. The composition of the STI temporary
differences as of June 30, 1996 is as follows:
<TABLE>
<S> <C>
Inventory valuation $ 255,600
Uniform inventory capitalization 322,300
Postretirement benefits 173,700
Deferred lease income 64,200
Vacation expenses 57,900
Restructuring charge 247,200
Other 96,600
-----------
Gross deferred tax asset 1,217,500
-----------
Depreciation (1,492,700)
Patent costs (112,800)
Other -
Gross deferred tax liability (1,605,500)
-----------
Net temporary differences $ (388,000)
===========
</TABLE>
11. EMPLOYEE RETIREMENT PLANS
PENSION AND SAVINGS PLANS
STI maintains a profit sharing thrift plan covering all full-time STI
employees not covered by a collective bargaining agreement. Annual
contributions by STI under the plan may be made on the basis of STI's
available retained earnings up to 6.6% of the base annual salary of all plan
participants. Plan benefit allocations are based on the participants'
average annual compensation. STI made no contributions in fiscal 1996. As
part of this profit sharing thrift plan, eligible employees may elect to
contribute up to 12% of their base annual salary to the plan. STI matches a
portion of employee contributions which amounted to $172,000 in fiscal 1996,
of which approximately $35,800 is included in the Company's consolidated
income statement.
STI also made payments to pension plans for its full-time employees in St.
Louis, Missouri covered by a collective bargaining agreement. Contributions
to this plan aggregated $78,900 in fiscal 1996, of which approximately
$16,400 is included in the Company's consolidated income.
OTHER POSTRETIREMENT BENEFITS
STI sponsors a postretirement benefit plan ("the Plan") to provide certain
medical and life insurance benefits to retirees, their spouses and
dependents. Employees terminated from active service after March 1992 who
are at least 60 years of age but no more than age 65,
F-23
<PAGE>
with 20 years service, are eligible for medical coverage. Employees who
terminated from active service prior to April 1, 1992 who were at least 55
years of age, but no more than age 65, with 10 years service, are eligible
for medical and life insurance coverage. Upon reaching age 65, Medicare
becomes the retiree's primary medical coverage. The Plan is contributory for
medical benefits based on the retiree's years of service and noncontributory
for life insurance benefits.
On August 1, 1993, the STI adopted Statement of Financial Accounting Standard
No. 106 "Employee's Accounting of Postretirement Benefits Other Than Pension"
("SFAS 106"). STI had previously recorded the expense associated with these
benefits on a pay-as-you-go basis. Under SFAS 106, the cost of providing
retiree health care and life insurance benefits is actuarially determined and
accrued over the service period of an employee. The unrecognized transition
obligation upon adoption of the standard on August 1, 1993, was $898,000.
STI elected to amortize the transition obligation on a straight-line basis
over a twenty-year period.
The following table sets forth the Plan's funded status reconciled with the
amount included in deferred compensation in the Company's consolidated
balance sheet:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees $ 877,000
Fully eligible and other Plan participants 502,000
----------
1,379,000
Prior service cost (60,000)
Unrecognized net loss (107,000)
Unrecognized transition obligation (763,000)
----------
Accrued postretirement benefit cost $ 450,000
==========
</TABLE>
In fiscal year 1995, the Plan incurred an unrecognized net loss of $105,000,
which the Company has elected to amortize on a straight-line basis over a
fifteen-year period.
The fiscal 1996 net periodic postretirement benefit cost of $205,000, of
which approximately $42,700 is included in the Company's consolidated income
statement, included the following:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Service cost-benefits attributed to service
during periods $ 53,000
Interest cost on accumulated postretirement
benefit obligation 100,000
Amortization of net loss 7,000
Amortization of transition obligation 45,000
--------
Net periodic postretirement benefit cost $205,000
========
</TABLE>
F-24
<PAGE>
For measurement purposes, a 9.5% annual rate of increase in cost of health
care was assumed for fiscal 1996; the rate was assumed to decrease gradually
to 5% by 2005 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing assumed health care cost by 1% in each year would
increase the accumulated postretirement benefit obligation as of July 31,
1996 by $218,000 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost by $33,000 for the
year ended July 31, 1996. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 8%.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts its domestic manufacturing facilities owned by the
minority stockholders of BBT. The Company entered into an agreement with the
minority stockholders of BBT to extend the lease through June 30, 1996. The
aggregate minimum lease payments were $80,000 in year one and $55,000 in year
two. The Company has been leasing on a tenant-at-will basis since June 30,
1996, at a rate of $4,783 per month. Rent expense of approximately $55,000,
$80,000 and $125,000 was charged to BBT operations during fiscal 1996, 1995
and 1994, respectively.
STI has various commitments under capital and operating leases through 2009
relating to computer hardware and software, its pharmaceutical manufacturing
facility and warehouses in St. Louis, Missouri, its facility in the United
Kingdom and administrative offices in Rockville, Maryland and St. Louis,
Missouri.
Future minimum rentals as of July 31, 1996 under STI's noncancellable leases
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JULY 31 LEASES LEASES
- ------------------- --------- ---------
<S> <C> <C>
1997 $118,300 $ 947,150
1998 19,200 923,600
1999 -- 875,200
2000 -- 798,700
2001 -- 653,800
Thereafter -- 1,659,600
-------- ----------
137,500 $5,858,400
Less amount representing
interest (imputed at 10.5%) (20,400)
Capital lease obligations 117,100
Less current portion 99,800
--------
Long-term obligations $ 17,300
========
</TABLE>
F-25
<PAGE>
These future minimum rentals do not include CPI adjustments to which some of
the leases are subject. STI incurred rental expense of $818,800 in fiscal
1996, of which approximately $170,600 is included in the Company's
consolidated income statement. During fiscal 1996, STI amortized $30,200, of
which approximately $6,300 is included in the Company's consolidated income
statement, of lease incentives previously deferred in fiscal 1994 and prior
(aggregating $226,600) which were received in connection with a lease for
office space. These incentives are being amortized over the ten-year life of
the respective lease.
SALE/LEASEBACK OF STI CORPORATE HEADQUARTERS BUILDING
In connection with the December 1988 sale of STI's former corporate
headquarters building in Bethesda, Maryland, STI's obligations under the
Leasehold Deed of Trust ("Ground Lease") were assigned to and assumed by the
purchaser of the building. STI remains contingently liable under the Ground
Lease. The annual commitment under the Ground Lease aggregated $143,700, in
1996 (adjusted for increases in the Consumer Price Index) and extends until
the year 2042.
LITIGATION
Lawsuits and claims are filed from time to time against the Company and its
subsidiaries in the ordinary course of business. Management of the Company,
after reviewing developments to date with legal counsel, is of the opinion
that the outcome of such matters will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
GOVERNMENT CONTRACT REVENUE
STI supply contracts with the Department of Defense ("DoD") are subject to
post-award audit and potential price redetermination. In the opinion of
management, adjustments, if any, on completed contracts would not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
STI EMPLOYEE CONTRACTS
STI entered into agreements with certain key employees which provide for
certain benefits should the employee be terminated within the term of the
agreement for other than specified reasons. STI also entered into agreements
with certain other key employees which provide for certain benefits should
the employee be terminated within a two year period subsequent to a change of
control (as defined by the agreements) for other than specified reasons.
Benefits to be provided under these agreements include continued life,
disability, accident and health insurance coverage for a period of two years
and a severance payment up to 200% of the employee's annual base
compensation. Additionally, all stock options held by the employee become
immediately exercisable and any restrictions on transfer of STI stock held by
the employee shall lapse. These agreements began to expire in April 1996
through December 1996 and renew for one-year periods unless timely notice of
non-renewal is given.
F-26
<PAGE>
The maximum contingent liability under these agreements at July 31, 1996
aggregates $1.3 million.
13. INDUSTRY SEGMENT INFORMATION
The Company has no significant foreign operations and operates in one
industry segment which includes the design, development, manufacture and sale
of medical products and related services, with a major focus on safe and
convenient participation by the patient in injection therapy.
F-27
<PAGE>
Financial information relating to major customers and export sales follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1996 1995 1994
- ------------------- ----- ---- -----
<S> <C> <C> <C>
Sales to major U.S. customers:
Center Laboratories, Inc. $ 2,515,800 $ - $ -
U.S. Department of Defense 2,535,700 - -
Bristol-Myers Squibb 404,300 - -
Development Contracts 310,300 - -
Other 3,838,542 2,903,532 2,426,984
9,595,642 2,903,532 2,426,984
Export sales:
Contract Sales to the
Governments of Foreign
Countries 680,600 - -
Other 86,300 - -
766,900 - -
Total net sales $10,375,342 $2,903,532 $2,426,984
</TABLE>
Substantially all export revenue consists of sales of automatic injectors to
the Governments of Saudi Arabia, the United Kingdom and Israel. STI extends
credit to domestic customers and generally requires a letter of credit for
export sales.
F-28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
On April 15, 1996, the Company purchased 61.1% of Survival Technology,
Inc.'s (STI) outstanding common stock from the Estate of STI's late founder,
Dr. Stanley J. Sarnoff. The following discussion and analysis of financial
condition and results of operations cover the fiscal years ended June 30,
1996, 1995 and 1994 for the Company without consolidating STI. Included in
the results from operations is a separate section for the fiscal year ended
June 30, 1996 which consolidates STI as at June 30, 1996 and its results from
operations since the date of acquisition.
RESULTS OF OPERATIONS
1996, CONSOLIDATED WITH STI FROM DATE OF ACQUISITION
The Company had a net loss of $6.8 million on sales of $10.4 million for the
fiscal year ended June 30, 1996 which includes STI's results from operations
for the two and half month period ended June 30, 1996. STI had net income
after minority interest of $26,000 on revenues of $6.8 million for the two
and half month period ended June 30, 1996. The Company's net loss is the
result of a $2.2 million loss from operations of the Company (see discussion
below) and adjustments made to reflect the purchase accounting for the
investment in STI, mainly, a $4.5 million write-off of in-process research
and development which represents the allocation of excess purchase price to
in-process research and development projects whose technological feasibility
has not yet been established.
1996 AND 1995
The Company had a net loss of $2.2 million on sales of $3.6 million for the
fiscal year ended June 30, 1996. This compares with a net loss of $1.6
million on sales of $2.9 million for the fiscal year ended June 30, 1995.
The increased loss in fiscal 1996 operating results is due in part to
interest charges totaling $485,114 in connection with the financing and
purchase of 61.1% of the outstanding common stock of STI.
Operating losses for the year increased to $1.7 million in fiscal 1996 from
$1.6 million in fiscal 1995. This is primarily due to one-time increases in
research and development costs relating to pre-launch PRIME ECG programs.
PRIME ECG system is a diagnostic electrocardiogram (ECG) system consisting
of a unique 64-electrode harness and desktop computer to acquire, record,
analyze and report patient ECG to reliably diagnose acute ischemia.
The Company's major product lines are currently emergency resuscitation
equipment ("EMC") (having revenues of $1.6 million in fiscal 1996, up from
$1.4 million in fiscal 1995,) and cardio-related measurement devices designed
for telephonic transmission ("telemedicine") (having revenues of $2.1 million
in fiscal 1996, up from $1.5 million in fiscal 1995.)
F-29
<PAGE>
Revenues in fiscal 1996 increased by $726,098, or 25% over the prior year,
and gross margin increased slightly to 43% in fiscal 1996, from 41% in fiscal
1995. This is primarily due to increased sales of telemedicine products.
Engineering, research and development expenditures ("R&D") increased to $1.5
million in fiscal 1996, up from $698,034 in fiscal 1995 primarily due to
development of PRIME ECG launched in Europe August, 1996. The Company
expects engineering, R&D expenditures to run at reduced rates in fiscal 1997.
Selling, general and administrative expenses ("SG&A"), which include
depreciation and amortization, decreased by 18% to $1.8 million in fiscal
1996, from $2.1 million in fiscal 1995. This is principally due to a
decrease in selling and marketing costs associated with preliminary
development of the Company's new cardiomapping technology. The Company
expects selling and administrative costs to continue at current levels.
1995 AND 1994
The Company had a net loss of $1.6 million on sales of $2.9 million for the
fiscal year ended June 30, 1995. This represents a 7% decrease compared to
the net loss of $1.7 million on sales of $2.4 million for the fiscal year
ended June 30, 1994. Sales of EMC products decreased to $1.4 million in
fiscal 1995, from $1.5 million in fiscal 1994. Sales of telemedicine
products increased by 65% to $1.5 million from $0.9 million in fiscal 1994.
The increase was due to the Company's purchase of ownership of the
telemedicine product line from STI on July 31, 1994. Prior to that, the
Company had been manufacturing the products under license from STI.
Gross margin increased to 41% in fiscal 1995, compared to 32% in fiscal 1994,
primarily due to the acquisition of the telemedicine product line from STI.
SG&A expenses, which include depreciation and amortization, increased by 16%
to $2.1 million in fiscal 1995, from $1.8 million in fiscal 1994. Selling
and marketing expenses increased significantly in fiscal 1995 in support of
the development of PRIME ECG.
Engineering, R&D expenditures increased to $698,034 in fiscal 1995, from
$616,834 in fiscal 1994, also in support of the development of PRIME ECG.
LIQUIDITY AND CAPITAL RESOURCES
On April 15, 1996, the Company purchased 1,888,126 shares of the Common Stock
of STI from the Estate at a purchase price of $11.00 per share or an
aggregate purchase price of $20,769,386. The purchase price was paid in the
form of (i) $16,069,386 in cash from the Company's working capital and (ii)
delivery of a Subordinated Promissory Note of the Company in the principal
amount of $4,700,000 together with warrants to purchase 50,000 shares of
common stock of the Company, exercisable at a price of $27.55 per share,
subject to adjustment.
The cash portion of the purchase price was derived from (i) a portion of the
proceeds of a senior bridge loan in the amount of $11,000,000 from an
institutional lender, (ii) the proceeds
F-30
<PAGE>
of a subordinated loan in the amount of $1,000,000 an investor in the Company
and a customer and licensee of STI, and (iii) the balance from the $6,548,410
of net proceeds received upon the sale of 242,104 shares of Series D, E, and
F 10% Convertible Preferred Stock all at a price of $27.55 per share.
The $11,000,000 bridge loan provides for interest at a variable rate and
matures on October 15, 1996, unless extended until January 15, 1997. Of the
loan proceeds, $1,000,000 is held in a collateral account.
In connection with the bridge loan, the Company has issued two series of
warrants to the lender to purchase shares of its Class A Common Stock, one of
which is exercisable for 33,370 shares at an initial price of $.01 per share
and the other of which is exercisable for 36,298 shares at an initial price
of $27.55 per share, both subject to adjustment.
The $1,000,000 subordinated loan matures on the earlier of 12/31/01 or the
fifth anniversary of any merger of the Company as a result of which the
Company shareholders receive capital stock or securities convertible into
capital stock registered under the Securities Exchange Act of 1934. The loan
is unsecured, and interest accrues on the loan at the rate of 12% per annum
through the second anniversary of the closing date, and 13% thereafter.
Through April 30, 1998, accrued interest is to be added to principal and
accrues interest. Principal on the loan is payable in seven consecutive
quarterly installments of $125,000 beginning on April 30, 1999 and one final
payment of the balance on the maturity date.
The Subordinated Promissory Note Payable to The Estate in the amount of
$4,700.000 matures on the same day and bears interest at the same rate as the
note payable to EM Industries, Inc. Through April 30, 1998, accrued interest
is to be added to principal and accrues interest. Thereafter, accrued
interest is payable monthly in arrears. All principal is due in one payment
on the maturity date.
The bridge loan will convert to a $10,000,000 term loan upon completion of
the Company's merger with STI. The Company does not have the funds to repay
the bridge loan if it matures prior to the completion of the merger. The
completion of the merger is subject to the satisfaction of a number of
conditions, including the obtaining of the approval of the stockholders of
each of the companies, and no assurance can be given that it will be
completed as currently contemplated.
In conjunction with the consummation of the merger, the Company plans to
retain investment banking counsel to advise it on the possible sale of equity
securities through a secondary offering. The Company also plans to retain
independent consultants to assist it to identify other entities interested in
their research programs. Management expects that these efforts will result
in the introduction of a strategic partner with interests and resources which
may be compatible with that of the Company. However, no assurances can be
given that the Company will be successful in raising additional capital or
entering into a business alliance. If the Company is unable to obtain
adequate additional financing or enter into such business alliance,
management will be required to sharply curtail the Company's research
programs as well as certain other operations.
F-31
<PAGE>
The Company's consolidated financial statements for the year ended June 30,
1996 have been prepared on a going concern basis which contemplates the
realization of assets and settlement of liabilities and commitments in the
normal course of business. The Company incurred a net loss of $6,795,008
for the year ended June 30, 1996, which increased the retained deficit to
$13,393,349. The Company expects to incur substantial expenditures to
further its PRIME ECG program and to expand their EMC and telemedicine
products business. Additionally, the Company has incurred $16. 1 million in
long-term debt to finance the purchase of 61.1% of STI and subsequent
merger (see notes 2,3 and 5 of the consolidated financial statements). The
Company's working capital at June 30, 1996 plus limited revenue from sales of
EMC and telemedicine products and revenue from STI will not be sufficient to
meet such objectives as presently structured. Management recognizes that the
Company must generate additional resources or consider modifications to its
PRIME ECG program and other research programs or other reductions in
operating costs of the Company and STI to enable it to continue operations
with available resources. Management's plans include consideration of the
sale of additional equity securities under appropriate market conditions,
alliances or partnership agreements with entities interested in and resources
to support the Company's research programs, or other business transactions
which would generate sufficient resources to assure continuation of the
Company's operations and research programs.
BALANCE SHEET REVIEW
As a result of the consolidation of STI, the balance sheet of the Company is
significantly changed. Total assets at June 30, 1996 are $41.7 million as
compared to $3.2 million as of June 30, 1995 and working capital is $4.4
million as of June 30, 1996 as compared to a working capital deficit of
$680,704 as June 30, 1995.
Without including the effects of the consolidation of STI, working capital
deficit decreased to $86,397 in fiscal 1996, down from $680,704 in fiscal
1995. This was accomplished primarily from additional bank and private
placement equity financing, offset by the increase in payables/accruals, and
the decrease in receivables. Payables/accruals increased by $869,228, and
receivables decreased by $146,380, offset by a $32,349 increase in inventory
and a $1,295,542 increase in cash and restricted cash. Fixed assets
increased by $46,838, primarily for equipment related to product development
efforts.
F-32
<PAGE>
LEHMAN BROTHERS
October 29, 1996
Special Committee of the Board of Directors
Survival Technology, Inc.
2275 Research Blvd.
Rockville, MD 20850
Members of the Special Committee of the Board:
We understand that Survival Technology, Inc. (the "Company" or "STI") and
Brunswick Biomedical Corporation ("BBC") have entered into an Agreement and
Plan of Merger dated as of September 11, 1996 (the "Agreement") pursuant to
which (i) BBC will be merged with and into the Company, and (ii) (a) each
share of common stock of BBC will be converted into the right to receive 2.10
shares of STI common stock, $0.10 par value per share (the "Common Per Share
Merger Consideration"); (b) each outstanding share of series A preferred
stock, series B preferred stock, series C preferred stock and series F
preferred stock (including shares of the series D preferred stock and series
E preferred stock, which have been reclassified as shares of the series F
preferred stock) of BBC will be converted into the right to receive 2.50
shares of STI common stock, $0.10 par value per share, consisting of (i) 2.10
shares of STI common stock and (ii) a warrant (the "STI Merger Warrants") to
purchase 0.40 shares of STI common stock at an exercise price of $11.00 per
share exercisable for a period of five years (collectively, the "Preferred
Per Share Merger Consideration," and together with the Common Per Share
Merger Consideration, the "Per Share Merger Consideration") (the "Proposed
Transaction"). In addition, in the Proposed Transaction each outstanding
option and warrant to purchase shares of BBC common stock will be converted
into options and warrants to purchase shares of common stock of the Company
on the same economic terms. The terms and conditions of the Proposed
Transaction are set forth in more detail in the Agreement.
We have been requested by the Special Committee of the Board of Directors
of the Company to render our opinion with respect to the fairness, from a
financial point of view, of the Per Share Merger Consideration to be issued
by the Company in the Proposed Transaction. We have not been requested to
opine as to, and our opinion does not in any manner address, the Company's
underlying business decision to proceed with or effect the Proposed
Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning the Company that we believe to be relevant to our
analysis, (3) internal financial and operating
LEHMAN BROTHERS
3 WORLD FINANCIAL CENTER NEW YORK, NEW YORK 10285-1700 TELEPHONE 212 526
3262 FACSIMILE 212 528 3738
<PAGE>
Special Committee of the Board of Directors
Survival Technology, Inc.
October 29, 1996
Page 2
information with respect to the business, operations and prospects of BBC
furnished to us by BBC, (4) internal financial and operating information with
respect to the business, operating and prospects of the Company furnished to
us by the Company, (5) a trading history of the common stock of the Company
for the 36-month period prior to August 30, 1996 and a comparison of that
trading history with those of other companies that we deemed relevant, (6)
information with respect to the capital structure of BBC, including
information furnished by BBC with respect to its outstanding options and
warrants, (7) a comparison of the historical financial results and present
financial condition of the Company with those of other companies that we
deemed relevant, (8) a comparison of the historical financial results and
present financial condition of BBC with those of other companies that we
deemed relevant, (9) a comparison of the financial terms of the Proposed
Transaction with the financial terms of certain other transactions that we
deemed relevant, (10) the pro forma financial and operating impact on the
Company of the Proposed Transaction, (11) the pro forma ownership of the
Company and the potential for enhancement of liquidity in the common stock of
the Company following the consummation of the Proposed Transaction, and (12)
a theoretical valuation of the warrants to be included in the Per Share
Merger Consideration using the Black-Scholes model. In addition, we have had
discussions with the managements of the Company and BBC concerning their
respective businesses, operations, assets, financial conditions and prospects
and the cost savings, operating synergies and strategic benefits expected to
result from a combination of the businesses of the Company and BBC and
undertook such other studies, analyses and investigations as we deemed
appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information
and have further relied upon the assurances of management of the Company and
BBC that they are not aware of any facts that would make such information
inaccurate or misleading. With respect to the financial forecasts of the
Company and BBC, including the range of potential synergies that are expected
to result from a combination of the businesses of the Company and BBC, with
the consent of the Company we have assumed that such forecasts have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company or BBC, as the case
may be, as to the future financial performance of the Company and BBC, and we
have relied upon such forecasts in arriving at our opinion. In arriving at
our opinion we have not conducted a physical inspection of the properties and
facilities of BBC and have not made nor obtained any evaluations or
appraisals of the assets or liabilities of BBC. In addition, you have not
authorized us to solicit, and we have not solicited, any indications of
interest from any third party with respect to a business combination with
STI. Our opinion is necessarily based upon market, economic and other
conditions as they exist on, and can be evaluated as of, the date of this
letter.
The process by which securities trading markets establish a market price
for any security is complex, involving the interaction of many factors,
including without limitation the terms of the specific security, the terms of
comparable securities of other issuers, the business,
<PAGE>
Special Committee of the Board of Directors
Survival Technology, Inc.
October 29, 1996
Page 3
financial condition and prospects of the issuer of the security and general
market, economic and other conditions. Accordingly, in expressing the
opinion set forth below, we express no opinion or view whatsoever as to the
prices at which shares of STI common stock (or warrants to purchase such
shares) may trade at any time following the announcement or consummation of
the Proposed Transaction and this opinion should not be viewed as providing
any assurance that the market price of shares of STI common stock will be
positively impacted by the announcement or consummation of the Proposed
Transaction.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Per Share Merger
Consideration to be issued by the Company in the Proposed Transaction is fair
to the Company and, accordingly, to its stockholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services a portion of
which is contingent upon the consummation for the Proposed Transaction. In
addition, the Company has agreed to indemnify us for certain liabilities that
may arise out of the rendering of this opinion. In the ordinary course of
our own business, we actively trade in the equity securities of the Company
for our own account and for the accounts of our customers and, accordingly,
may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. The opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as
to how such stockholder should vote with respect to the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
<PAGE>
SURVIVAL TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JULY 31, 1996
ATTACHED HERE
<PAGE>
PROXY PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
SURVIVAL TECHNOLOGY, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
November 20, 1996
The undersigned hereby appoints James H. Miller and J. Chontelle Woodward,
and either of them, proxies of the undersigned, with full power of substitution,
to vote all the shares of Common Stock of Survival Technology, Inc. (the
"Company") that the undersigned is entitled to vote, at the Annual Meeting of
shareholders of the Company to be held on November 20, 1996, and at any
adjournments thereof with all powers the undersigned would possess if personally
present, as follows on the reverse side of this proxy card.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES LISTED IN ITEM 2
AND FOR APPROVAL OF PROPOSALS LISTED IN ITEMS 1 AND 3. THIS PROXY WHEN PROPERLY
EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
(Continued on Other Side, Please Sign and Date on Other Side, and Return in the
Enclosed Envelope.)
<PAGE>
IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR Please mark [X]
THE NOMINEES LISTED IN PROPOSAL 2 (INCLUDING ANY your votes as
SUBSTITUTE NOMINEE IN THE CASE OF UNAVAILABILITY) AND indicated in
FOR PROPOSALS 1 AND 3. this example.
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<CAPTION>
<S> <C> <C>
ITEM 1. Proposal to approve and adopt the Agreement FOR AGAINST ABSTAIN
and Plan of Merger dated as of September 11, [ ] [ ] [ ]
1996 by and between Survival Technology, Inc.
and Brunswick Biomedical Corporation, and
each of the transactions contemplated thereby
and to approve the name change of the Company
as described in the Proxy Statement.
ITEM 2. Election of five directors for a term of one FOR all nominees listed WITHHOLD AUTHORITY
year, and, if the merger becomes effective, below (except as to vote for all
one year, two years and three years, as marked to the contrary) nominees listed
described below.
The nominees of the Board of Directors and, if the [ ] [ ]
merger becomes effective, their classes are: E. Andrews
Grinstead, III, with a term to expire following fiscal
1997; Bruce M. Dresner and David L. Lougee, with terms
to expire following fiscal 1998; and Robert G. Foster
and James H. Miller, with terms to expire following
fiscal 1999. (Authority to vote for any nominee may be
withheld by striking a line through the nominee's name
above.)
ITEM 3. Proposal to ratify the appointment of Price
Waterhouse, LLP, as auditors for fiscal 1997.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
ITEM 4. In their discretion, on such other matters as
may properly come before the meeting or
adjournment thereof.
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Date:____________________________________________, 1996
_______________________________________________________
Signature(s)
_______________________________________________________
Signature(s)
Please sign here personally. Signature of
shareholder(s) should correspond exactly with name(s)
in which shares are registered. If the stock is
registered in more than one name, each joint owner or
fiduciary should sign personally. Only authorized
officers should sign for a corporation.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
