CONFIDENTIAL
PROJECT SURF
FAIRNESS OPINION PRESENTATION TO THE
SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS
March 20, 2000
SG COWEN SG
SG Cowen board presentation received by the special committee at its meeting
on March 20, 2000, conformed to reflect comments made at or prior to the time
of such meeting.
PROJECT
SURF
-----------------------------------------------------------
INTRODUCTION
THE FOLLOWING MATERIALS WERE PREPARED SOLELY FOR DISCUSSION
AT THE MEETING OF THE SPECIAL COMMITTEE OF THE BOARD OF
DIRECTORS OF SURF ("COMPANY") SCHEDULED FOR MARCH 20, 2000.
IN PREPARING THIS PRESENTATION, WE HAVE, WITH YOUR CONSENT,
RELIED UPON INFORMATION PROVIDED BY SURF, DUNE AND OTHER
PUBLICLY AVAILABLE INFORMATION. WE HAVE NOT INDEPENDENTLY
VERIFIED ANY OF SUCH INFORMATION, AND HAVE RELIED ON IT
BEING COMPLETE AND ACCURATE IN ALL MATERIAL RESPECTS.
PLEASE NOTE THAT THIS PRESENTATION IS BASED ON THE BUSINESS
AND OPERATIONS OF SURF AND DUNE AS REPRESENTED TO US AS OF
THE DATE HEREOF, AND DOES NOT PURPORT TO TAKE INTO
CONSIDERATION ANY INFORMATION OR EVENTS ARISING SUBSEQUENT
TO SUCH DATE. SG COWEN MAKES NO REPRESENTATION OR WARRANTY
THAT THERE HAS BEEN NO MATERIAL CHANGE IN THE INFORMATION
PROVIDED OR REVIEWED BY US IN CONNECTION HEREWITH.
THE INFORMATION CONTAINED HEREIN IS CONFIDENTIAL AND HAS
BEEN PREPARED EXCLUSIVELY FOR THE BENEFIT AND USE OF THE
SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY
IN ITS CONSIDERATION OF THE PROPOSED TRANSACTION, AND MAY
NOT BE USED FOR ANY OTHER PURPOSE OR REPRODUCED,
DISSEMINATED, QUOTED OR REFERRED TO AT ANY TIME, IN ANY
MANNER OR FOR ANY PURPOSE WITHOUT OUR PRIOR WRITTEN CONSENT.
THIS PRESENTATION IS NOT FOR THE BENEFIT OF, AND DOES NOT
CONVEY ANY RIGHTS OR REMEDIES TO, ANY HOLDER OF SECURITIES
OF THE COMPANY OR ANY OTHER PERSON.
THIS PRESENTATION IS SUBJECT TO THE ASSUMPTIONS,
QUALIFICATIONS AND LIMITATIONS SET FORTH HEREIN AND IN THE
FORM OF OUR FAIRNESS OPINION LETTER, INCLUDED AS AN APPENDIX
TO THIS PRESENTATION, AND DOES NOT CONSTITUTE A
RECOMMENDATION BY SG COWEN TO THE SPECIAL COMMITTEE OF THE
BOARD OF DIRECTORS OR SHAREHOLDERS OF THE COMPANY ON HOW TO
VOTE WITH RESPECT TO THE PROPOSED TRANSACTION.
SG
PROJECT
SURF
-----------------------------------------------------------
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY
2. SURF OVERVIEW
3. DUNE OVERVIEW
4. VALUATION CONSIDERATIONS
SG 1
PROJECT
SURF
-----------------------------------------------------------
EXECUTIVE SUMMARY
SG 2
PROJECT
SURF
EXECUTIVE SUMMARY
-----------------------------------------------------------
TRANSACTION SUMMARY
STRUCTURE - Proposed acquisition of Surf
Merger
Purchase method of accounting
CONSIDERATION - Dune to pay, in the aggregate, approximately $100.8
million(a) on a fully-diluted basis consisting of:
$13.25 per Surf Callable Common Share in cash
Warrant to purchase shares of Dune common stock
valued at $2.50
WARRANT VALUE - For each share of Surf Callable Common Stock,
shareholders will receive one warrant
("Warrant") representing the right to purchase a
certain fraction of a share of Dune common stock
Exercise price of Warrant will be calculated as the
average closing price of Dune common stock for the
10 consecutive trading days ending on and including
the day prior to the public announcement of the
transaction terms (the "Measurement Price")
multiplied by 1.25
Conversion ratio based on Black-Scholes Option
Valuation Model with a 65% volatility factor, a 60
month term, and a risk free rate which is equal to
the 5 year U.S. Treasury Note
A fixed exchange ratio collar of 20% around the
Measurement Price
- If the average closing price of Dune common
stock for the 10 consecutive trading days
ending on the day prior to closing (the "Closing
Price") is at least 20% greater than or at least
20% less than the Measurement Price (the "Collar
Range"), the warrant value will be fixed while
the exchange ratio will fluctuate
- As of March 16, 2000, this collar will allow the
warrant value to fluctuate between $1.81 and
$3.22
(a) Based on Treasury Method calculation which includes 6.325
million Surf Callable Common shares outstanding per Surf
Form 10-Q for the period ended September 30, 1999 and 0.737
million options outstanding at a weighted average exercise
price of $14.13 per Surf management as of March 14, 2000
SG 3
PROJECT
SURF EXECUTIVE SUMMARY
-----------------------------------------------------------
TRANSACTION SUMMARY (CONTINUED)
ILLUSTRATIVE WARRANT WARRANT VALUATION (BLACK-SCHOLES METHODOLOGY)
VALUATION (Per share data in US$)
Parameter Value
-----------------------------------------------------------
Dune Stock Price (a) $14.53
Exercise Price (b) $18.16
Risk-free Rate (c) 6.457%
Assumed Volatility (d) 65.0%
Years to Expiration 5.0
Type of Option American Style
------------------------------------------------------------
WARRANT VALUE $8.08
------------------------------------------------------------
CONVERSION RATIO ANALYSIS
(Per share data in US$)
Item Value
------------------------------------------------------------
Warrant Value $8.08
Value Offered $2.50
Conversion Ratio (e) 0.3096
------------------------------------------------------------
MAXIMUM DUNE SHARES ISSUED (f) 1.981
------------------------------------------------------------
PRO FORMA OWNERSHIP 4.169%
ILLUSTRATIVE COLLAR
ANALYSIS
COLLAR ANALYSIS
(Per share data in US$)
Dune Stock Price at Closing
-----------------------------------------------------------------------------------------------------
$6.00 $8.00 $10.00 $11.63 $13.08 $14.53 (a) $15.98 $17.44 $19.00 $21.00 $23.00
-----------------------------------------------------------------------------------------------------
Premium / (Discount) (58.7)% (44.9)% (31.2)% (20.0)% (10.0)% 0.0% 10.0% 20.0% 30.8% 44.5% 58.3%
Warrant Value per Dune Share $2.09 $3.32 $4.68 $5.85 $6.95 $8.08 $9.23 $10.42 $11.71 $13.40 $15.12
Conversion Ratio 0.8652 0.5454 0.3872 0.3096 0.3096 0.3096 0.3096 0.3096 0.2753 0.2406 0.2132
Warrant Value per Surf Share $1.81 $1.81 $1.81 $1.81 $2.15 $2.50 $2.86 $3.22 $3.22 $3.22 $3.22
(a) Represents the average stock price for Dune Common Stock
for the last ten consecutive trading days, ending on and
including March 16, 2000
(b) Based on a 25% premium to the Dune Stock Price
(c) Source: Bloomberg as of March 16, 2000; represents yield
on 5 year U.S. Treasury Note
(d) The implied volatility for Dune as of March 16, 2000 as
per Bloomberg is 73.1% and the 5-year historical
volatility for Dune as of February 29, 2000 as per
Bloomberg is 59.8%; the 65% volatility in the warrant
valuation is as set forth in the Merger Agreement
(e) Determined by dividing $2.50 by $8.08; represents
the number of Dune Common Stock shares each warrant
is convertible into upon exercise
(f) Assumes all warrants are exercised and no effect from
the Treasury Method
SG 4
PROJECT
SURF
EXECUTIVE SUMMARY
-----------------------------------------------------------
TRANSACTION SUMMARY (CONTINUED)
- Merger shall be terminated by:
Mutual written consent of both parties
By either party if:
- Merger has not closed on or before September 30, 2000
- One party breaches the Agreement and Plan of Merger
in a manner which would prevent it from satisfying
its closing conditions
- Any governmental entity prohibits the consummation
of the Transaction
By the Company if:
- Surf Board of Directors has received an offer which
is deemed by the Special Committee to constitute a
proposal that is superior, from a financial point of
view, and the Special Committee has promptly notified
Dune of such proposal
- Surf shall not initiate or solicit alternative acquisition
or merger proposals
Should the Company receive, on an unsolicited basis, a
written proposal which is deemed by the Special
Committee to be superior, from a financial point of
view, Surf shall promptly notify Dune of such proposal
SG 5
PROJECT
SURF
EXECUTIVE SUMMARY
-------------------------------------------------------------
TRANSACTION SUMMARY (CONTINUED)
- Fees and Expenses
All costs and expenses incurred in connection with
this Agreement and the consummation of the
Transaction shall be paid by the party incurring
such expenses
- Farallon Capital Management LLC ("Farallon"), which
owns approximately 19.5%(a) of Surf's Callable Common
Shares outstanding, has agreed to vote in favor of the
transaction
- Proposed transaction conditional upon, among other
things:
Dune shall not have entered into any agreement for
an acquisition proposal, as defined in the Agreement
Warrants have been approved for listing on the Nasdaq
National Market
Expiration of HSR waiting period, if necessary
Surf shareholder approval of:
- Dune, as the sole holder of Surf Special Common
Stock; and
- At least 50% of the holders of the Company
outstanding callable common shares
(a) According to Form 13D filed January 11, 2000, Farallon
owns approximately 1.374 million Surf Callable Common
shares; for Surf, assumes 7.062 million fully-diluted
shares outstanding which is based on 6.325 million
Callable Common shares outstanding per Form 10-Q for
the period ended September 30, 1999, 0.737 million
options outstanding per Surf management as of March 14,
2000, and no effect from the Treasury Method
SG 6
PROJECT
SURF
EXECUTIVE SUMMARY
-----------------------------------------------------------
TRANSACTION OVERVIEW
PRICE PER UNIT
IMPLIED PREMIUM / (DISCOUNT) ANALYSIS
PRICE PER SHARE OF (PER SHARE DATA IN US$)
CALLABLE COMMON
STOCK
IMPLIED PREMIUM / (DISCOUNT)
---------------------------------------
SURF DUNE ORIGINAL DUNE NEGOTIATED
SHARE / UNIT PRICE OFFER OF $12.50 OFFER OF $15.75
- ---------------------------------------------------------------------------------------------------------------------------------
Initial Offering Price - Units (December 17, 1997) (a) $16.00 (21.9)% (1.6)%
Initial Offering Price Range - Callable Common Stock
(December 17, 1997) (b) $12.00 - $14.00 4.2% - (10.7)% 31.3% - 12.5%
Closing Price on February 11, 2000 - 1 Day Prior (c) $11.63 7.5% 35.5%
Closing Price on February 4, 2000 - 1 Week Prior (c) $11.00 13.6% 43.2%
Closing Price on January 14, 2000 - 1 Month Prior (c) $10.25 22.0% 53.7%
10-Day Average (d) $10.43 19.9% 51.1%
Last 20 Days High (c) $12.13 3.1% 29.9%
Last 20 Days Low (c) $8.94 39.9% 76.2%
Last 40 Days High (c) $12.13 3.1% 29.9%
Last 40 Days Low (c) $5.00 150.0% 215.0%
LTM High (e) $12.13 3.1% 29.9%
LTM Low (a)(e) $4.38 185.7% 260.0%
(a) Represents combined price of Surf Callable Common Stock
and Dune Warrant
(b) Assumes a $12.00 to $14.00 offering price for the
Callable Common Stock of Surf, based on a warrant
valuation range of $2.00 to $4.00; $2.00 warrant
valuation derived from Note 6 of Dune's Annual Report
filed on Form 10-K which disclosed a fair market value
for the warrants of $12.7MM; $4.00 warrant valuation
provided by Surf management
(c) Represents closing price prior to Dune's announcement
on February 14, 2000 to acquire all the outstanding
shares of Surf Callable Common Stock for $12.50 per
share in cash
(d) Represents the average stock price for Surf Callable
Common Stock for the last ten consecutive trading days
prior to Dune's announcement on February 14, 2000 to
acquire all the outstanding Surf Callable Common Stock
for $12.50 per share in cash
(e) Last Twelve Months ended February 11, 2000, which was
the last trading day prior to Dune's announcement of
Dune's original offer to acquire all the outstanding
Surf Callable Common Stock for $12.50 per share in cash
SG 7
PROJECT
SURF
EXECUTIVE SUMMARY
-------------------------------------------------------------
TRANSACTION OVERVIEW (CONTINUED)
OVERVIEW OF DISCOUNTED CASH FLOW ANALYSIS (a)
(PER SHARE DATA IN US$)
RANGE OF DISCOUNT RATES
------------------------------------------------------------
25.0% 27.5% 30.0% 32.5% 35.0%
---------------------------------------------------------------------------------------------------------------
Implied Equity Value per Share Based on: (b)
Discounted Cash Flow - Theoretical Analysis (c) $24.14 $18.62 $14.35 $11.00 $8.35
Discounted Cash Flow - Royalty Analysis (c)
20.0% $20.21 $17.65 $15.59 $13.92 $12.54
17.5% 18.12 15.85 14.03 12.56 11.35
15.0% 16.02 14.05 12.48 11.20 10.15
(a) Projections provided by Surf management
(b) Implied equity value per share based on Treasury Method
calculation which includes 6.325 million Surf Callable
Common shares outstanding per Surf Form 10-Q for the
period ended September 30, 1999 and 0.737 million
options outstanding at a weighted average exercise
price of $14.13 per Surf management as of
March 14, 2000
(c) Cash flows discounted back to March 31, 2000; assumes
Surf receives benefit of NOL's
SG 8
PROJECT
SURF
EXECUTIVE SUMMARY
-------------------------------------------------------------
TRANSACTION OVERVIEW (CONTINUED)
IMPLIED PREMIUMS TO SURF STOCK PRICE (a)
1 DAY PRIOR (b)(c) 20-DAY AVERAGE (b)(c)
-------------------------------------------------------------
[GRAPH] [GRAPH]
Dune Offer ($15.75) 35.5% Dune Offer ($15.75) 56.0%
Global Median 7.2% Global Median 7.3%
Negotiated Median 58.2% Negotiated Median 60.9%
Global Mean 25.8% Global Mean 28.6%
Negotiated Mean 47.6% Negotiated Mean 52.8%
20-DAYS PRIOR (b)(c)
---------------------------
[GRAPH]
Dune Offer ($15.75) 53.7%
Global Median 8.3%
Negotiated Median 49.7%
Global Mean 31.4%
Negotiated Mean 56.7%
(a) Premiums analysis for 1 Day Prior, 20-Day Average, and
20-Days Prior based on Surf's closing price on
February 11, 2000, the average of Surf's closing prices
from January 14, 2000 to February 11, 2000, and Surf's
closing price on January 14, 2000, respectively
(b) For precedent transactions, premiums analysis based on
the closing target company stock price one day prior to
announcement, the average of the closing target company
stock prices 20 trading days prior to announcement,
and the target company stock price 20 trading days prior
to announcement
(c) Premiums analysis excludes Centocor / Tocor transaction
announced June 20, 1991
SG 9
PROJECT
SURF
EXECUTIVE SUMMARY
-------------------------------------------------------------
NEXT STEPS AND TIMING
NEXT STEPS AND TIMING
-------------------------------------------------------------
APPROXIMATE TIMING
EVENT WEEK(S) OF
--------------------------------------------------------------------------------------------------------------
Execute Definitive Agreement and Announcement March 20
Prepare Proxy Statement / Prospectus March 20
Results of Surf Audit to be Delivered to the
Special Committee of the Board of Directors March 27
File Proxy Statement / Prospectus April 2
Receive SEC Clearance Late April / Early May
Mail Proxy to Shareholders Mid May
Surf Special Meeting to Vote and Approve the Merger Late June
Closing Late June
SG 10
PROJECT
SURF
-----------------------------------------------------------
TRANSACTION CONSIDERATIONS
SG 11
PROJECT
SURF
TRANSACTION CONSIDERATIONS
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MANAGEMENT'S POTENTIAL RISKS FOR SURF STAND-ALONE
- Financing
According to management's proposed budget for FY2000,
the Company is projected to run out of money during
the fourth quarter of FY2000
In order to complete the development of its products,
Surf management estimates the Company will require
approximately $166 million of additional investment
capital
- Further delays in the Company's clinical timeline
Surf management believes commercialization of either
BECLOMETHASONE or BUDESONIDE could be further delayed
and increased investments could be incurred should
the FDA require Surf to perform additional
reliability studies on SURF-TM-
- Implementation of two piece cassette in SURF-TM-
There are no assurances that development of the two
piece cassette will be completed according to the
product launch schedule estimated in management's
current projections
- Dune Product Purchase Option
Under the terms of the ALBUTEROL AND PRODUCT OPTION
AGREEMENT, Dune has the option to acquire Surf's
rights to the use of SURF-TM- with either
BECLOMETHASONE or BUDESONIDE
SG 12
PROJECT
SURF
TRANSACTION CONSIDERATIONS
-----------------------------------------------------------
EVALUATION OF PRODUCT PURCHASE OPTION
EVALUATION OF PRODUCT PURCHASE OPTION(a)
(US$ IN MILLIONS, EXCEPT PER SHARE DATA)
AS OF DECEMBER 31, 1999 BECLOMETHASONE BUDESONIDE
---------------------------------------------------------------------------------------------------------
Product Specific Development Costs $21.6 $6.5
Platform Development and Clinical Supply Readiness 4.5 1.3
Project Management Fee 0.9 0.3
Market Development Research 2.9 0.9
Management Fee 6.9 2.1
--------------- --------------
36.7 11.1
Initial Investment $170.0 $170.0
Interest Income 13.8 13.8
--------------- --------------
Total Initial Investment 183.8 183.8
Buyback Ratio 20.0% 6.0%
Exercise Price at End of CY2001 (b) $36.76 $36.76
Buyback Price per Share $7.34 $2.21
Shares Outstanding (c) 6.401 6.401
--------------- --------------
TOTAL BUYBACK PRICE $47.0 $14.1
(a) Source: Surf management
(b) Source: Surf IPO prospectus as of December 17, 1997
(c) Based on Treasury Method calculation which includes
6.325 million Surf Callable Common shares outstanding
per Surf Form 10-Q for the period ended
September 30, 1999 and 0.737 million options
outstanding at a weighted average exercise price of
$14.13 per Surf management as of March 14, 2000
SG 13
PROJECT
SURF
TRANSACTION CONSIDERATIONS
-----------------------------------------------------------
SG 14
PROJECT
SURF
-----------------------------------------------------------
SURF OVERVIEW
SG 15
PROJECT SURF OVERVIEW
SURF -----------------------------------------------------------
BUSINESS OVERVIEW
- Surf went public in December 1997, and focuses on the
development of a dry powder pulmonary drug delivery
system (SURF-TM-) as well as certain specified asthma
and chronic obstructive pulmonary disease (COPD) drugs
for use with the system
- As of January 1, 2000, the Surf Units originally offered
to the public on December 17, 1997 split into two
publicly traded securities; a warrant to purchase one
quarter of one share of Dune Common Stock with an
exercise price of $54.84 and Surf Callable Common Stock
Through its ownership of Surf Special Shares, Dune
has the right to purchase the Surf Callable Common
Stock
- Range of exercise prices increases quarterly
beginning January 1, 2000 in which Dune may
purchase Surf Callable Common Stock for $25.26
per share
MARKET
- 1998 estimated US combined market for inhaled
therapeutic drugs to treat asthma and COPD was
$2.1 billion (a)
PRODUCTS
- Surf currently has two selected products in development
for use with the SURF DELIVERY SYSTEM:
BECLOMETHASONE - Steroid used to treat the
inflammatory component of asthma and certain symptoms
of COPD. Currently, management expects product launch
in Q4 2001
BUDESONIDE - Second generation steroid used to treat
the inflammatory component of asthma. Currently,
management expects product launch in Q4 2002
(a) Source: Surf Form 10-K for the period ended
December 31, 1998
SG 16
PROJECT SURF OVERVIEW
SURF -----------------------------------------------------------
MANAGEMENT AND BOARD OF DIRECTORS (a)
EXECUTIVE OFFICERS
NAME POSITION
-----------------------------------------------------------
David S. Kabakoff Chairman of the Board of Directors, President, and Chief Executive Officer
Erle T. Mast Vice President and Chief Financial Officer
BOARD OF DIRECTORS (b)
NAME AGE POSITION
------------------------------------------------------------------------------------------------------------
SOL LIZERBRAM, RPH, D.O. 51 CHAIRMAN OF THE BOARD OF DIRECTORS OF HEALTHFUSION.COM
WILLIAM H. RASTETTER, PH.D 51 CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CEO OF IDEC
PHARMACEUTICALS
ALAIN B. SCHREIBER, M.D. 43 PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR OF VICAL, INC.
Cam L. Garner 50 Chairman of the Board of Directors and Chief Executive Officer of Dune
David S. Kabakoff 51 Chairman, President, Chief Executive Officer of Surf and President,
Dune Technologies
(a) Source: Proxy statement mailed to shareholders on May 19, 1999
(b) Bold/italics denotes Special Committee member
SG 17
PROJECT SURF OVERVIEW
SURF -----------------------------------------------------------
SUMMARY OWNERSHIP PROFILE
OWNERSHIP BY MAJOR CLASSIFICATION AS OF DECEMBER 31, 1999
OFFICER / DIRECTOR OWNERSHIP (a)
David S Kabakoff 81,660 1.2%
Erle T. Mast 22,000 0.3%
Cam L. Garner 13,250 0.2%
Sol Lizerbram 10,000 0.1%
William H. Rastetter 10,000 0.1%
Alan B. Schrelber 10,000 0.1%
---------- -------
146,910 2.1%
13F FILING INSITUTIONS
GREATER THAN 5% HOLDERS
Farallon Capital Management LLC(b) 1,374,400 19.5%
Elan International Services (c) 937,500 13.3%
HBK Investments LP (d) 935,400 13.2%
Lehman Brothers Holdings(e) 441,400 6.3%
---------- -------
3,688,700 52.2%
State Street Research and Management(f) 331,200 4.7%
TOTAL INSTITUTIONAL HOLDERS 4,019,900 56.9%
OTHER HOLDERS 2,894,690 41.0%
-----------------------------------------------------------------------
TOTAL SHARES OUTSTANDING (G) 7,061,500 100.0%
-----------------------------------------------------------------------
-----------------------------------------------------------------------
[GRAPH]
Other Holders 41.0%
Total Officers & Directors 2.1%
Total Institutional Ownership 56.9%
(a) Source: Proxy Statement mailed to shareholders on
May 19, 1999
(b) Source: Surf Form 13D filed January 11, 2000
(c) Source: Surf Form 13D/A filed March 12, 1998
(d) Source: Surf Form 13D filed February 16, 2000
(e) Source: Surf Form 13G/A filed February 12, 1999
(f) Source: Surf Form 13G filed February 9, 1999
(g) Based on 6.325 million Callable Common shares
outstanding per Form 10-Q for the period ended
September 30, 1999 and 0.737 million options
outstanding per Surf management as of March 14,
2000; excludes 1,000 Special Shares owned by Dune
SG 18
PROJECT SURF OVERVIEW
SURF -----------------------------------------------------------
OVER THE LAST TWELVE MONTHS, THE SURF UNITS AND THE SHARES OF CALLABLE COMMON
STOCK HAVE TRADED TO A HIGH OF $13.00 ON FEBRUARY 18, 2000 (CALLABLE COMMON
STOCK), A LOW OF $4.38 ON NOVEMBER 2, 1999 (UNIT), AND ON MARCH 16, 2000,
SURF CALLABLE COMMON STOCK CLOSED AT $12.56
HISTORICAL STOCK PRICE PERFORMANCE (a)
LATEST TWELVE MONTHS (b)
[GRAPH]
(a) On January 1, 2000, Surf Units separated into two
publicly traded securities: one publicly-traded
security which represents Surf Callable Common Stock
and one publicly-traded security which represents a
warrant to purchase one quarter of one share of
Dune Common Stock; all stock price data prior to
January 1, 2000 represents the price per Surf Unit as
reported by Factset; on or after January 1, 2000, all
stock price data represents the price per Surf Callable
Common share as reported by Factset
(b) Stock price data as of March 16, 2000
(c) A Unit includes one share of Surf Callable Common
Stock and a warrant to purchase one-fourth of one share
of Dune Common Stock; after January 1, 2000 unit price
is based on price per Surf Callable Common share as
reported by Factset plus price of Dune warrant as
reported by Factset
19
SG
PROJECT SURF OVERVIEW
SURF -----------------------------------------------------------
HISTORICAL STOCK PRICE PERFORMANCE (a)
SINCE THE COMPANY'S OFFERING OF UNITS ON DECEMBER 17, 1997, THE UNITS AND THE
SHARES OF CALLABLE COMMON STOCK HAVE TRADED TO A HIGH OF $19.00 ON JANUARY
22, 1998 (UNIT), A LOW OF $4.38 ON NOVEMBER 2, 1999 (UNIT), AND ON MARCH 16,
2000, SURF CALLABLE COMMON STOCK CLOSED AT $12.56
SINCE SURF INITIAL PUBLIC OFFERING (b)
(a) On January 1, 2000, Surf Units separated into two
publicly traded securities: one publicly-traded
security which represents Surf Callable Common Stock
and one publicly-traded security which represents a
warrant to purchase one quarter of one share of
Dune Common Stock; all stock price data prior to
January 1, 2000 represents the price per Surf Unit as
reported by Factset; on or after January 1, 2000, all
stock price data represents the price per Surf Callable
Common share as reported by Factset
(b) Stock price data as of March 16, 2000
(c) A Unit includes one share of Surf Callable Common
Stock and a warrant to purchase one-fourth of one share
of Dune Common Stock; after January 1, 2000 unit price
is based on price per Surf Callable Common share as
reported by Factset plus price of Dune warrant as
reported by Factset
SG 20
PROJECT SURF OVERVIEW
SURF ------------------------------------------------------------------------
HISTORICAL STOCK PRICE PERFORMANCE
DURING THE LAST TWELVE MONTHS, SURF HAS UNDERPERFORMED ITS PEER GROUP AND THE
NASDAQ COMPOSITE
SURF VS. SELECTED INDICES--LATEST TWELVE MONTHS(a)
[GRAPH]
(a) Stock price data as of March 16, 2000; on January 1, 2000, Surf Units
separated into two publicly traded securities: one publicly-traded
security which represents Surf Callable Common Stock and one
publicly-traded security which represents a warrant to purchase one
quarter of one share of Dune Common Stock; all stock price data prior
to January 1, 2000 represents the price per Surf Unit as reported by
Factset; on or after January 1, 2000, all stock price data represents
the price per Surf Callable Common share as reported by Factset
(b) Emerging Drug Delivery Companies Index includes: ALKS, ARDM, CIMA,
EMIS, INHL, NOVN, NSTA
SG
22
PROJECT SURF OVERVIEW
SURF ------------------------------------------------------------------------
FINANCIAL REVIEW
SG
23
PROJECT SURF OVERVIEW
SURF ------------------------------------------------------------------------
PROJECTED REVENUE GROWTH(a)
[GRAPH]
(US$ in millions)
2001P 2002P 2003P 2004P 2005P 2006P 2007P
Budesonide $12.9 $108.4 $168.4 $219.5 $271.5 $322.6
Beclomethasone $6.1 $30.3 $68.2 $88.9 $101.7 $116.4 $130.6
--------------------------------------------------------------
Total $6.1 $43.1 $176.6 $257.3 $321.2 $387.9 $453.2
(a) Source: Surf management as of February 17, 2000
SG
24
PROJECT SURF OVERVIEW
SURF ------------------------------------------------------------------------
FINANCIAL REVIEW
HISTORICAL AND PROJECTED FINANCIAL INFORMATION
(US$ IN MILLIONS, EXCEPT PER SHARE DATA)
HISTORICAL(A) EST.(B) PROJECTED (B)
---------------- --------- -----------------------------------------------------------------------
FISCAL YEAR ENDING DECEMBER 31, 1997(C) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Beclomethasone $0.0 $0.0 $0.0 $0.0 $6.1 $30.3 $68.2 $88.9 $101.7 $116.4 $130.6
Budesonide 0.0 0.0 0.0 0.0 0.0 12.9 108.4 168.4 219.5 271.5 322.6
------- ------- ------- -------- -------- ------- ------ ------- ------- ------- -------
TOTAL REVENUES $0.0 $0.0 $0.0 $0.0 $6.1 $43.1 $176.6 $257.3 $321.2 $387.9 $453.2
TOTAL REVENUE GROWTH NM NM NM NM NM 611.6% 309.6% 45.7% 24.8% 20.8% 16.8%
GROSS PROFIT $0.0 $0.0 $0.0 $0.0 $4.6 $35.0 $149.2 $220.3 $276.4 $335.6 $394.0
GROSS MARGIN NM NM NM NM 75.9% 81.2% 84.5% 85.6% 86.1% 86.5% 86.9%
OPERATING EXPENSES
Selling, General and
Administrative 0.1 1.0 2.0 6.0 22.3 81.6 107.7 104.8 107.7 114.9 119.6
Research and Development (d) 7.0 50.8 39.5 45.6 48.1 7.6 0.0 0.0 0.0 0.0 0.0
Technology Licensing Fee 0.0 0.0 2.0 2.0 2.0 2.2 8.8 12.9 16.1 19.4 22.7
Other Operating Expenses 0.0 0.0 17.0 19.5 18.6 0.8 0.0 0.0 0.0 0.0 0.0
------- ------- ------- -------- -------- ------- ------ ------- ------- ------- -------
Operating Income (7.1) (51.8) (60.4) (73.2) (86.5) (57.1) 32.6 102.6 152.7 201.3 251.8
OPERATING INCOME MARGIN NM NM NM NM NM NM 18.5% 39.9% 47.5% 51.9% 55.6%
Interest and Other Income, Net (0.2) (8.2) (5.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- -------- -------- ------- ------ ------- ------- ------- -------
PRE-TAX INCOME (6.9) (43.6) (55.1) (73.2) (86.5) (57.1) 32.6 102.6 152.7 201.3 251.8
Provision for Taxes 0.0 0.2 0.0 0.0 0.0 0.0 11.4 35.9 53.4 70.4 88.1
------- ------- ------- -------- -------- ------- ------ ------- ------- ------- -------
NET INCOME ($6.9) ($43.8) ($55.1) ($73.2) ($86.5) ($57.1) $21.2 $66.7 $99.2 $130.8 $163.7
======= ======= ======= ======== ======== ======= ====== ======= ======= ======= =======
NET MARGIN NM NM NM NM NM NM 12.0% 25.9% 30.9% 33.7% 36.1%
Number of Shares Outstanding 6.325 6.325 6.325 6.325 6.325 6.325 6.325 6.325 6.325 6.325 6.325
Fully Diluted E.P.S. ($1.09) ($6.92) ($8.71) ($11.57) ($13.67) ($9.03) $3.35 $10.54 $15.69 $20.68 $25.87
(a) Per Surf Form 10-K for the period ended December 31, 1998
(b) Source: Surf management
(c) Represents operating performance from September 23, 1997 (date of
inception) through December 31, 1997 per Surf Form 10-K for the
period ended December 31, 1998
(d) Projections exclude Albuterol Development Costs, New Project and
System Enhancements, and Market Development Research
SG
25
PROJECT SURF OVERVIEW
SURF ------------------------------------------------------------------------
FINANCIAL REVIEW
VARIANCE ANALYSIS - PRODUCT REVENUES (a)
(US$ IN MILLIONS)
Projected
----------------------------------------------------------
FISCAL YEARS ENDED DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 2005
- -----------------------------------------------------------------------------------------------------------------------
CURRENT
Albuterol $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Beclomethasone 0.0 0.0 0.0 6.1 30.3 68.2 88.9 101.7
Budesonide 0.0 0.0 0.0 0.0 12.9 108.4 168.4 219.5
Ipratropium 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Ipratropium / Albuterol Combination 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- -------- -------- -------- -------- --------
TOTAL REVENUES $0.0 $0.0 $0.0 $6.1 $43.1 $176.6 $257.3 $321.2
======= ======= ======= ======== ======== ======== ======== ========
AT THE OFFERING
Albuterol $8.1 $28.8 $44.1 $62.8 $76.1 $99.9 $139.8 $170.3
Beclomethasone 0.0 7.0 41.9 60.6 65.9 71.7 78.0 84.8
Budesonide 0.0 0.0 0.0 24.7 67.7 95.9 136.8 154.9
Ipratropium 0.0 0.0 0.0 13.6 28.5 38.9 47.2 49.5
Ipratropium / Albuterol Combination 0.0 0.0 0.0 0.0 16.1 33.8 44.4 52.2
------- ------- ------- -------- -------- -------- -------- --------
TOTAL REVENUES $8.1 $35.8 $85.9 $161.6 $254.4 $340.2 $446.2 $511.8
======= ======= ======= ======== ======== ======== ======== ========
VARIANCE
Albuterol ($8.1) ($28.8) ($44.1) ($62.8) ($76.1) ($99.9) ($139.8) ($170.3)
Beclomethasone 0.0 (7.0) (41.9) (54.5) (35.7) (3.5) 10.8 16.9
Budesonide 0.0 0.0 0.0 (24.7) (54.9) 12.5 31.6 64.6
Ipratropium 0.0 0.0 0.0 (13.6) (28.5) (38.9) (47.2) (49.5)
Ipratropium / Albuterol Combination 0.0 0.0 0.0 0.0 (16.1) (33.8) (44.4) (52.2)
------- ------- ------- -------- -------- -------- -------- --------
TOTAL VARIANCE ($8.1) ($35.8) ($85.9) ($155.6) ($211.3) ($163.6) ($188.9) ($190.6)
======= ======= ======= ======== ======== ======== ======== ========
- -----------
(a) Source: Surf management
SG
26
PROJECT
SURF ------------------------------------------------------------------------
DUNE OVERVIEW
SG
27
PROJECT DUNE OVERVIEW
SURF -------------------------------------------------------------------------
BUSINESS OVERVIEW
- - Dune develops and markets prescription pharmaceutical products for the
treatment of allergies, asthma, pneumonia, and related respiratory
conditions for the US respiratory market
MARKET
- - Estimated size of targeted market for antihistamines, asthma / rhinitis
therapies, cough / cold preparations and anti-infectives in 1998 was
approximately $14 billion (a)
- - Market size and fragmented nature as well as the identifiable base of
physician prescribers allows Dune to achieve significant market penetration
with a specialized sales force
- As of December 31, 1998, Dune had approximately 401 pharmaceuticals
sales representatives nationwide
PRODUCTS
- - Dune currently sells 11 prescription product lines and also owns a separate
mail service pharmacy, Health Script Pharmacy Services
- - SURF PULMONARY DRUG DELIVERY SYSTEM is currently under development which
aerosolizes pharmaceuticals in a powder formulation for pulmonary delivery
- On behalf of Surf, Dune is developing certain drug applications which
are currently used to treat respiratory conditions, including two
steroids, BECLOMETHASONE and BUDESONIDE
- In September 1998, Dune announced an agreement with Eli Lilly to
develop pulmonary delivery technology for insulin
(a) Source: Dune Form 10-K for the period ended December 31, 1998
SG
28
PROJECT DUNE OVERVIEW
SURF -------------------------------------------------------------------------
BUSINESS OVERVIEW (CONTINUED)
OVERVIEW OF DUNE PRODUCT LINES (a)
PRODUCT CATEGORY PRODUCT LINE COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Asthma and COPD - TORNALATE - APPLICATION: Bronchodilator for bronchial asthma and for reversible
bronchospasm
- DELIVERY MECHANISM: Metered dose inhaler, solution for inhalation
....................................................................................................................................
Allergy, Cough and Cold - ENTEX - APPLICATION: Symptomatic relief of sinusitis, bronchitis, pharyngitis, and
coryza when these conditions are associated with nasal congestion and viscous
mucus in the lower respiratory tract
- DELIVERY MECHANISM: Tablets and capsules
- Originated from Procter & Gamble
- NASALIDE / NASAREL - APPLICATION: Treatment of nasal symptoms of seasonal or perennial rhinitis
- DELIVERY MECHANISM: Nasal solution
- Originated from Syntex
....................................................................................................................................
Antibiotics - SEROMYCIN - APPLICATION: Treatment of active pulmonary and extrapulmonary tuberculosis
- DELIVERY MECHANISM: Capsules, USP
- FURADANTIN - APPLICATION: Treatment of urinary tract infections
- DELIVERY MECHANISM: Oral suspension
- CECLOR CD - APPLICATION: Treatment of mild / moderate bronchitis, pharyngitis and
tonsillitis infections
- DELIVERY MECHANISM: Extended release tablets
- Originated from Eli Lilly
- MAXIPIME - APPLICATION: Treatment of pneumonia, urinary tract, skin structure and
abdominal infections
- DELIVERY MECHANISM: Injection
- Originated from Bristol-Myers Squibb
- AZACTAM - APPLICATION: Treatment of urinary tract, lower respiratory, skin structure,
abdominal and gynecologic infections, and septicemia
- DELIVERY MECHANISM: Injection
- Originated from Bristol-Myers Squibb
SG
29
- CAPASTAT - APPLICATION: Treatment of pulmonary infections
- DELIVERY MECHANISM: Injection
- Originated from Eli Lilly
- MYAMBUTOL - APPLICATION: Treatment of pulmonary tuberculosis
- DELIVERY MECHANISM: NA
- Originated from American Home Products
....................................................................................................................................
(a) Source: Dune Form 10-K for the period ended December 31, 1998 and Dune
website as of March 2000
30
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
SUMMARY OWNERSHIP PROFILE
OWNERSHIP BY MAJOR CLASSIFICATION AS OF DECEMBER 31, 1999
OFFICER / DIRECTOR OWNERSHIP (a)
James C. Blair 270,900 0.6%
Cam L. Garner 133,784 0.3%
Joseph C. Cook, Jr. 72,999 0.2%
Charles G. Smith 63,000 0.1%
Gordon V. Ramseler 58,000 0.1%
Julia Brown 51,727 0.1%
Mitchel Woodbury 46,374 0.1%
Herbert J. Conrad 34,000 0.1%
David S. Kabakoff 27,809 0.1%
David F. Hale 26,000 0.1%
Charles W. Prettyman 15,896 0.0%
Other 76,142 0.2%
----------------- --------------
876,631 1.9%
13F FILING INSTITUTIONS (b)
Safeco Asset Management Co. 2,668,300 5.9%
American Intl Group Inc. 2,458,300 5.4%
----------------- --------------
5,126,600 11.3%
OTHER INSTITUTIONAL HOLDERS 25,432,715 55.8%
TOTAL INSTITUTIONAL HOLDERS 30,559,315 67.1%
OTHER HOLDERS 14,112,856 31.0%
- ------------------------------------------------------------------------------------
TOTAL SHARES OUTSTANDING (c) 45,548,802 100.0%
- ------------------------------------------------------------------------------------
[Graph]
Other Holders 31.0%
Total Officers & Directors 1.9%
Total Institutional Ownership 67.1%
(a) Source: Proxy Statement as of May 20, 1999
(b) Source: CDA/Spectrum as of December 31, 1999
(c) Assumes 45,548,802 fully diluted shares outstanding for the three months
ended December 31, 1999 as reported in the Dune Form 10-Q for the three
month period ended September 30, 1999
31
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
HISTORICAL STOCK PRICE PERFORMANCE
DURING THE LAST TWELVE LATEST TWELVE MONTHS (a)
MONTHS, DUNE'S STOCK
PRICE HAS RANGED FROM A
HIGH OF $19.13 ON JANUARY [Graphic]
13, 2000 TO A LOW OF $9.75
ON JULY 26, 1999 AND
CLOSED AT $13.75 ON MARCH
16, 2000
(a) Stock price data as of March 16, 2000
32
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
HISTORICAL STOCK PRICE PERFORMANCE
SINCE SURF'S CALLABLE SINCE SURF INITIAL PUBLIC OFFERING (a)
COMMON STOCK OFFERING
ON DECEMBER 17, 1997,
DUNE'S STOCK PRICE HAS
TRADED TO A HIGH OF $48.63 [Graphic]
ON JANUARY 5, 1998, A LOW
OF $8.00 ON OCTOBER 9,
1998 AND CLOSED AT $13.75
ON MARCH 16, 2000
(a) Stock price data as of March 16, 2000
33
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
HISTORICAL STOCK PRICE PERFORMANCE
DURING THE LAST TWELVE DUNE VS. SELECTED INDICES - LATEST TWELVE MONTHS (a)
MONTHS, DUNE HAS
UNDERPERFORMED ITS PEER
GROUP AND THE NASDAQ [Graphic]
COMPOSITE
(a) Stock price data as of March 16, 2000
(b) Emerging Drug Delivery Companies Index
includes: ALKS, ARDM, CIMA, EMIS, INHL,
NOVN, NSTA
(c) Specialty Pharmaceutical Companies Index
includes: ADRX, ALZA, BVF, ELN, FRX, IVX,
JMED, MYL, SHPGY, WPI
34
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
HISTORICAL STOCK PRICE PERFORMANCE
SINCE SURF'S CALLABLE DUNE VS. SELECTED INDICES - SINCE SURF INITIAL
COMMON STOCK OFFERING PUBLIC OFFERING (a)
ON DECEMBER 17, 1997,
DUNE HAS UNDERPERFORMED
ITS PEER GROUP AND THE [Graphic]
NASDAQ COMPOSITE
(a) Stock price data as of March 16, 2000
(b) Emerging Drug Delivery Companies Index
includes: ALKS, ARDM, CIMA, EMIS, INHL,
NOVN, NSTA
(c) Specialty Pharmaceutical Companies Index
includes: ADRX, ALZA, BVF, ELN, FRX, IVX,
JMED, MYL, SHPGY, WPI
35
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
RESEARCH COMMUNITY SENTIMENT
SUMMARY OF RECENT ANALYST COMMENTARY
EPS ESTIMATES (a)
DATE COMPANY RATING 2000E 2001E COMMENTS
- -----------------------------------------------------------------------------------------------------------------------------------
03/08/00 Prudential Securities Hold $0.26 $0.35 - "Product revenue is growing at a healthy clip,
but earnings power has remained uncertain until
recently . . . if Dune is insistent on closing
the deal (Surf), it could potentially have to
sweeten its bid, using more cash and pushing out
the timeline. With the elimination of Surf, the
business model going forward will now reflect
Dune as a bona fide maker and marketer of drugs"
- -----------------------------------------------------------------------------------------------------------------------------------
02/29/00 Robertson Stephens Long-Term 0.91 1.25 - "Near term, we believe revenue will be driven by
Attractive base product growth and incremental revenue from
product acquisitions and co-promotion
agreements. We believe that Dune's innovative
dry powder inhaler will provide the catalyst for
accelerating revenue and earnings growth in
2001-2002"
- -----------------------------------------------------------------------------------------------------------------------------------
02/24/00 Hambrecht & Quist Buy 0.92 0.32 - "We continue to like Dune as a contrarian/value
play in the emerging pharma space. Using P/E is
meaningless in 2000 because of Surf, but our
number of $0.32 in 2001 is `real' and assumes no
Surf"
- "We feel very confident in our $0.92 EPS estimate
for 2000 with the caveat that Surf should run out
of its current $65 million in cash before the end
of the year . . . we are modeling a drop in EPS
to $0.32 in 2001, which assumes Dune does not
infuse more money into Surf"
- -----------------------------------------------------------------------------------------------------------------------------------
02/23/00 Merrill Lynch Long-Term 0.30 0.35 - "Consolidation of Surf will eliminate most of
Accumulate Dune's contract revenue, while R&D expense will
be relatively unchanged. Our 2000 pro forma
estimate is being adjusted to $0.30 per share
to reflect the impact . . . our estimate also
assumes that development of Surf albuterol will
be discontinued"
- "Dune's four key in-line products, along with the
launch of Surf products in 2002 and 2003 should
result in a rapid recovery in the Company's
profitability"
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Source: First Call; otherwise, most recent analyst report
37
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
RESEARCH COMMUNITY SENTIMENT (CONTINUED)
SUMMARY OF RECENT ANALYST COMMENTARY
EPS ESTIMATES (a)
------------------
DATE COMPANY RATING 2000E 2001E COMMENTS
- -----------------------------------------------------------------------------------------------------------------------------------
02/14/00 Sutro & Co. Buy $0.31 $0.60 - "If accepted, without Surf's revenues, we believe
this year and next earnings will be reduced by
about $0.60 and $0.55 per share, respectively. At
the same time, management also announced that it
will discontinue developing albuterol in the Surf
delivery system, which should reduce its research
expenditures somewhat. Following the buyback,
however, the Company will be absorbing directly
the development of BECLOMETHASONE and BUDESONIDE
until the products are approved and launched in
2001 and 2002"
- -----------------------------------------------------------------------------------------------------------------------------------
01/25/00 CIBC World Markets Hold 0.90 1.00 - "Dune's 4Q99 results demonstrated continued
momentum in key franchise product lines, placing
the Company on target to meet management's stated
EPS growth objectives for 2000"
- -----------------------------------------------------------------------------------------------------------------------------------
FIRST CALL MEAN (b) $0.92 $0.52
===================================================================================================================================
(a) Source: First Call; otherwise, most recent analyst report
(b) Source: First Call as of March 16, 2000
38
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
TRADING STATISTICS OF SELECTED PUBLICLY TRADED COMPANIES
Price Enterprise Value
------------------------------ as a Multiple of:
Current 52 week 52 week Market Enterprise -----------------------
Company (FYE) (3/16/00) High Low Value Value(a) Sales EBITDA EBIT
- ----------------------------------------- --------- ------- ------- -------- ---------- ------- -------- ------
SELECTED EMERGING DRUG DELIVERY COMPANIES
Alkermes, Inc. (3/31) $104.94 $197.00 $21.63 $2,758.4 $2,639.6 122.36x NM NM
Anesta Corp. (12/31) 20.13 27.63 7.38 267.7 198.4 30.45 NM NM
Aradigm Corp. (12/31) 27.38 46.75 5.63 432.3 412.5 24.53 NM NM
CIMA Labs, Inc. (21/31) 18.02 25.63 2.44 173.2 172.6 12.89 102.7x NM
Emisphere Technologies, Inc. (7/31) 61.69 84.50 6.50 1,319.1 1,124.8 155.66 NM NM
Inhale Therapeutic Systems (12/31) 80.38 141.50 22.88 2,022.3 1,884.2 45.56 NM NM
Noven Pharmaceuticals, Inc. (12/31) 12.13 27.25 4.25 271.7 263.2 8.32 43.8 67.5x
High 155.66x 102.7x 67.5x
Median 30.45 73.2 67.5
Mean 57.11 73.2 67.5
Low 8.32 43.8 67.5
Dune $13.75 $19.13 $9.75 $626.3 $651.0 2.16x 8.1x 13.3x
Price/Earnings Estimated CY2001 P/E/
----------------------------------- Long-term Estimated LT
Company (FYE) LTM 2000E(b) 2001E(b) EPS Growth(c) EPS Growth(c)
- ----------------------------------------- -------- ---------- --------- -------------- ---------------
SELECTED EMERGING DRUG DELIVERY COMPANIES
Alkermes, Inc. (3/31) NM NM NM 334.0% NA
Anesta Corp. (12/31) NM NM 36.6x NA NA
Aradigm Corp. (12/31) NM NM NM NA NA
CIMA Labs, Inc. (21/31) NM 69.3x 26.1 NA NA
Emisphere Technologies, Inc. (7/31) NM NM NA NA NA
Inhale Therapeutic Systems (12/31) NM NM NM NA NA
Noven Pharmaceuticals, Inc. (12/31) 25.4x 26.9 15.7 40.0 0.4x
High 25.4x 69.3x 36.6x 334.0% 0.4x
Median 25.4 48.1 26.1 187.0 0.4
Mean 25.4 48.1 26.1 187.0 0.4
Low 25.4 26.9 15.7 40.0 0.4
Dune 19.4x 14.9x 26.4x 32.3% 0.8x
(a) Enterprise value defined as market value plus Total Debt less
Cash
(b) Estimates are calendar year end; all estimates are SG Cowen
when available; otherwise First Call
(c) Long-term growth rates are from IBES
39
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
TRADING STATISTICS OF SELECTED PUBLICLY TRADED COMPANIES (CONTINUED)
Price Enterprise Value
------------------------------ as a Multiple of:
Current 52 week 52 week Market Enterprise -----------------------
Company (FYE) (3/16/00) High Low Value Value(a) Sales EBITDA EBIT
- ----------------------------------------- --------- ------- ------- -------- ---------- ------- -------- ------
SELECTED SPECIALTY PHARMACEUTICAL COMPANIES
Alza Laboratories (12/31) $38.19 $53.56 $26.50 $3,967.7 $4,681.7 5.88x 18.0x 24.0x
Andrx Corporation (12/31) 94.00 114.50 30.81 3,060.1 2,986.7 7.37 37.6 40.3
Blovall Corporation International (12/31) 50.56 71.50 16.19 2,953.2 2,846.7 16.13 33.2 37.7
Elan Corporatio, plc (12/31) 46.00 46.50 21.25 12,857.7 13,100.8 13.04 34.2 42.6
Forest Laboratories (3/31) 83.63 84.75 41.25 7,394.2 7,117.0 8.82 39.4 45.7
IVAX Corporation (12/31) 26.63 28.63 7.38 4,235.5 4,224.7 6.31 37.6 54.1
Jones Pharma, Inc. (12/31) 41.13 53.00 13.22 2,747.0 2,585.4 21.21 36.8 40.1
Mylan Laboratories (3/31) 30.00 30.94 17.06 3,903.8 3,610.8 4.71 14.4 16.8
Shire Pharmaceutical Group (12/31) 54.50 70.00 18.63 4,585.8 4,572.5 11.39 52.1 77.3
Watson Pharmaceuticals (12/31) 40.44 47.50 26.50 3,943.3 3,981.3 5.78 13.8 15.4
High 21.21x 52.1x 77.3x
Median 8.10 35.5 40.2
Mean 10.06 31.7 39.4
Low 4.71 13.8 15.4
Global High 155.66x 102.7x 77.3x
Global Median 12.89 37.2 40.3
Global Mean 29.44 38.6 42.0
Global Low 4.71 13.8 15.4
Dune $13.75 $19.13 $9.75 $626.3 $651.3 2.16x 8.1x 13.3x
Price/Earnings Estimated CY2001 P/E/
----------------------------------- Long-term Estimated LT
Company (FYE) LTM 2000E(b) 2001E(b) EPS Growth(c) EPS Growth(c)
- ----------------------------------------- -------- ---------- --------- -------------- ---------------
Alza Laboratories (12/31) 29.8x 24.6x 19.9x 20.8% 1.0x
Andrx Corporation (12/31) 61.1 72.9 38.5 51.5 0.7
Blovall Corporation International (12/31) 40.2 31.6 24.8 31.0 0.8
Elan Corporatio, plc (12/31) 37.1 30.7 25.3 23.3 1.1
Forest Laboratories (3/31) 59.0 55.4 36.4 27.6 1.3
IVAX Corporation (12/31) 63.9 42.3 34.6 31.7 1.1
Jones Pharma, Inc. (12/31) 62.7 46.7 39.5 25.5 1.6
Mylan Laboratories (3/31) 26.9 21.0 17.9 19.2 0.9
Shire Pharmaceutical Group (12/31) 110.5 56.2 41.6 32.5 1.3
Watson Pharmaceuticals (12/31) 24.2 19.9 16.6 21.0 0.8
High 110.5x 72.9x 41.6x 51.5% 1.6x
Median 49.6 36.9 29.9 26.5 1.0
Mean 51.5 40.1 29.5 28.4 1.1
Low 24.2 19.9 16.6 19.2 0.7
Global High 110.5x 72.9x 41.6x 334.0% 1.6x
Global Median 40.2 36.9 26.1 29.3 1.0
Global Mean 49.2 41.5 28.7 54.8 1.0
Global Low 24.2 19.9 15.7 19.2 0.4
Dune 19.4x 14.9x 26.4x 32.3% 0.8x
(a) Enterprise value defined as market value plus Total Debt less Cash
(b) Estimates are calendar year end; all estimates are SG Cowen when
available; otherwise First Call
(c) Long-term growth rates are from IBES
40
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
FINANCIAL REVIEW
HISTORICAL AND PROJECTED FINANCIAL INFORMATION
(US$ IN MILLIONS, EXCEPT PER SHARE DATA)
HISTORICAL(a) PROJECTED(b)
---------------------------- ----------------------------------------------- CAGR
FISCAL YEAR ENDING DECEMBER 31, 1997 1998 1999 2000 2001 2002 2003 2004 2000P-2004P
- ------------------------------------------------------------------------------------------------------------------------------
Revenue $181.3 $199.2 $301.4 $344.1 $329.7 $395.6 $497.4 $597.1 14.8%
% GROWTH NM 9.8 51.4 14.2 (4.2) 20.0 25.7 20.0
Gross Profit 149.2 169.9 255.6 287.1 260.3 308.2 388.0 465.9 12.9
% OF REVENUE 82.3 85.3 84.8 83.4 79.0 77.9 78.0 78.0
EBITDA (c) 74.8 42.4 80.1 95.9 58.8 83.2 161.0 226.7 24.0
% OF REVENUE 41.3 21.3 26.6 27.9 17.8 21.0 32.4 38.0
EBIT 59.6 21.9 49.1 60.6 24.9 42.6 109.9 165.4 28.5
% OF REVENUE 32.9 11.0 16.3 17.6 7.6 10.8 22.1 27.7
Net Income 21.8 22.1 32.4 42.4 16.4 28.0 75.2 114.1 28.1
% OF REVENUE 12.0 11.1 10.8 12.3 5.0 7.1 15.1 19.1
Earnings Per Share $0.50 $0.46 $0.71 $0.92 $0.35 $0.60 $1.60 $2.40 27.0
% GROWTH NM (7.0) 53.6 30.1 (61.6) 69.6 165.7 50.1
-----------------------------------------------------------------------------------------------
Merrill Lynch Adjusted EPS(d) $0.30 $0.35 $0.70 $1.60 $2.40
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
First Call Mean Estimates(e) $0.92 $0.52 $0.68 NA NA
-----------------------------------------------------------------------------------------------
(a) Per Dune Form 10-K for the period ended December 31, 1998 and Press release
dated January 24, 2000; excludes nonrecurring and extraordinary items
(b) Per Merrill Lynch Research Report as of February 7, 2000; assumes Dune
purchases Surf in FY 2001; excludes impact of multi-year Allergan agreement
announced February 23, 2000
(c) Assumes Depreciation and Amortization expense for the years FY 1999 to FY
2004 as a constant percentage of revenues as FY 1998
(d) Per Merrill Lynch Research Report as of February 23, 2000; assumes Dune
purchases Surf in FY 2000; includes impact of multi-year Allergan agreement
announced February 23, 2000
(e) First Call Mean Estimates as of March 13, 2000
41
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
SUMMARY CAPITALIZATION
SELECTED BALANCE SHEET ITEMS
(US $ IN MILLIONS)
DECEMBER 31, SEPTEMBER 30,
ACCOUNT 1999 (a) % OF TOTAL 1999 (b) % OF TOTAL
- --------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents $274.4 --- $266.7 ---
Current Portion of Long-Term Debt NA NA 3.9 0.5%
Long-Term Debt (c) 287.5 39.4% 287.5 39.8%
---------- ---------- -------- -------
Total Debt (c) 287.5 39.4% 291.4 40.4%
Stockholders' Equity 441.7 60.6% 430.3 59.6%
---------- ---------- -------- -------
Total Capitalization $729.2 100.0% $721.8 100.0%
========== ========== ======== =======
(a) Source: Press release dated January 24, 2000
(b) Source: Form 10-Q for the period ended September 30, 1999
(c) Includes $287.5 million of convertible subordinated notes due July 15, 2002
42
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
VALUATION CONSIDERATIONS
43
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
HISTORICAL STOCK PRICE ANALYSIS
44
SG
PROJECT DUNE OVERVIEW
SURF ----------------------------------------------------------------
HISTORICAL STOCK PRICE ANALYSIS
RELATIVE STOCK PRICE PERFORMANCE
[Graphic] Surf vs. Dune - Latest Twelve Months (a)
(a) Stock price data as of March 16, 2000; on January 1, 2000, Surf Units
separated into two publicly traded securities: one publicly-traded security
which represents Surf Callable Common Stock and one publicly-traded
security which represents a warrant to purchase one quarter of one share of
Dune Common Stock; all stock price data prior to January 1, 2000 represents
the price per Surf Unit as reported by Factset; on or after January 1,
2000, all stock price data represents the price per Surf Callable Common
share as reported by Factset
45
SG
PROJECT HISTORICAL STOCK PRICE ANALYSIS
SURF ----------------------------------------------------------------
RELATIVE STOCK PRICE PERFORMANCE
SURF VS. DUNE - SINCE SURF INITIAL PUBLIC OFFERING (a)
SINCE SURF'S CALLABLE
COMMON STOCK OFFERING
ON DECEMBER 17, 1997,
DUNE HAS GENERALLY
UNDERPERFORMED SURF
46
SG
PROJECT
SURF ----------------------------------------------------------------
PRECEDENT TRANSACTIONS
48
SG
PROJECT PRECEDENT TRANSACTIONS
SURF ----------------------------------------------------------------
IMPLIED PREMIUMS PAID ANALYSIS
Implied Premiums to Surf Stock Price (a)
[GRAPH] [GRAPH]
1 Day Prior (b)(c) 20-Day Average (b)(c)
Dune Offer ($15.75) 35.5% Dune Offer ($15.75) 56.0%
Global Median 7.2% Global Median 7.3%
Negotiated Median 58.2% Negotiated Median 60.3%
Global Mean 25.8% Global Mean 28.6%
Negotiated Mean 47.6% Negotiated Mean 52.8%
[GRAPH]
20-Days Prior (b)(c)
Dune Offer ($15.75) 53.7%
Global Median 8.3%
Negotiated Median 49.7%
Global Mean 31.4%
Negotiated Mean 56.7%
(a) Premiums analysis for 1 Day Prior, 20-Day Average, and 20-Days Prior
based on Surf's closing price on February 11, 2000, the average of
Surf's closing prices from January 14, 2000 to February 11, 2000, and
Surf's closing price on January 14, 2000, respectively
(b) For precedent transactions, premiums analysis based on the closing
target company stock price one day prior to announcement, the average
of the closing target company stock prices 20 trading days prior to
announcement, and the target company stock price 20 trading days
prior to announcement
(c) Premiums analysis excludes Centocor / Tocor transactions; announced
June 20, 1991
49
SG
PROJECT PRECEDENT TRANSACTIONS
SURF ----------------------------------------------------------------
PROFILE OF PRECEDENT TRANSACTIONS
PROFILE OF INITIAL OFFERINGS
(US$ IN MILLIONS, EXCEPT PER SHARE DATA)
EFFECTIVE OFFERING OFFER INITIAL INVESTOR CONTRIBUTION
DATE ENTITY FORMED PARENT COMPANY PRICE(a) VALUE(a) CAPITALIZATION(a) AS A % OF INITIAL CAP.
- ------------------------------------------------------------------------------------------------------------------------------------
06/18/98 CliniChem BioChem Pharma Inc. NA(b) NA(b) $150.0 0.0%
Development, Inc.
09/18/97 Crescendo ALZA Corp. NA(c) NA(c) 300.0 0.0
Pharmaceuticals Corp.
02/05/98 Neuralab Ltd. Elan Corp. $40.00 $50.0 50.0 100.0
11/20/96 Axogen Ltd. Elan Corp. 18.00 95.2 95.2 100.0
05/05/95 Allergan Ligand Retinoid Allergan / Ligand 10.00 32.5 100.0 32.5
Therapeutics
12/21/93 PerSeptive PerSeptive Biosystems Inc. 22.00 58.2 58.2 100.0
Technologies II Corp.
07/14/93 Advanced Therapeutics Elan Corp. 20.00 78.5 113.5 69.2
Systems Ltd.
05/21/93 Therapeutic Discovery Corp. ALZA Corp. NA(d) NA(d) 250.0 0.0
04/28/92 Neozyme II Corp. Genzyme Corp. 35.00 84.5 84.5 100.0
02/13/92 Cytorad Inc. Cytogen Corp. 10.00 40.3 40.3 100.0
01/21/92 Tocor I Inc. Centocor Inc. 40.00 90.0 90.0 100.0
11/27/91 Aramed Inc. Gensia Pharmaceuticals Inc. 20.00 57.5 57.5 100.0
05/23/91 SciGenics, Inc. Genetics Institute Inc. 22.00 46.0 46.0 100.0
11/14/90 Drug Research Corp. Elan Corporation 11.00 43.2 43.2 100.0
10/26/90 Neozyme Corp. Genzyme Corp. 23.00 46.0 46.0 100.0
11/17/89 Receptech Corp. Immunex Corp. 12.00 27.5 27.5 100.0
07/11/89 Tocor, Inc. Centocor Inc. 12.00 34.5 34.5 100.0
12/12/88 Bio-Electro Systems, Inc. ALZA Corp. 11.00 35.7 35.7 100.0
50
SG
- ---------------------------------------------------------------------------------------------------------------------------------
12/17/97 SURF DEVELOPMENT CORP. II DUNE $16.00 $101.2 $176.2 57.4%
10/29/95 SURF DEVELOPMENT CORP. DUNE $30.00 $28.0 $ 41.0 68.3
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Source: Initial Public Offering documents filed with the Securities and
Exchange Commission and Securities Data Corporation as of February 24,
2000
(b) Each holder of one BioChem Common Stock has the right to receive 40
Clinichem shares
(c) Each holder of ALZA Common Stock has the right to receive one Crescendo
share for every 20 shares of ALZA common stock owned; one Crescendo
share for every 36 shares of ALZA Common Stock into which the holder's
5% Debentures are convertible; and one Crescendo share for every 37
shares of ALZA common stock into which the holder's 5 1/4% Debentures
are convertible
(d) Each holder of ALZA Common Stock has the right to receive one
Therapeutic Discovery Corp. unit for every 10 shares of ALZA Common
Stock owned
51
PROJECT PRECEDENT TRANSACTIONS
SURF -----------------------------------------------------------------
PROFILE OF PRECEDENT TRANSACTIONS - EXERCISED
- -------------------------------------------------------------------------------
PROFILE OF PURCHASE TRANSACTIONS - EXERCISED
(US$ IN MILLIONS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
EXERCISE PRICE PREMIUM ANALYSIS
ANNOUNCE EXERCISE AT TIME OF PURCHASE ---------------------------
DATE DATE TARGET ACQUIROR ANNOUNCEMENT PRICE 1-DAY 20-DAY AVG. 20-DAY
- ----------------------------------------------------------------------------------------------------------------------------------
01/10/00 Pending CliniChem Development, Inc. BioChem Pharma Inc. NA NA NA NA NA
11/29/99 Pending Neuralab Ltd. Elan Corp. NA $61.01 NA NA NA
11/29/99 01/01/00 Axogen Ltd. Elan Corp. $34.56 34.56 5.5% 7.3% 7.6%
09/24/97 11/25/97 Allergan Ligand Retinoid
Therapeutics Allergan / Ligand 21.97 21.97 13.0 12.5 18.4
09/10/96 10/30/96 Advanced Therapeutics
Systems Ltd. Elan Corp. 36.00 36.00 5.1 5.7 6.7
08/26/97 09/30/97 Therapeutic Discovery Corp. ALZA Corp. 12.30 12.30 2.5 3.1 4.7
05/04/93 07/03/93 Drug Research Corp. Elan Corp. 21.00 21.00 12.8 13.5 18.3
10/18/93 12/22/93 Neozyme Corp. Genzyme Corp. 45.50 49.00 NA NA NA
12/15/92 02/19/93 Receptech Corp. Immunex Corp. 26.00 26.00 7.2 7.2 8.3
06/20/91 07/02/91 Tocor, Inc. Centocor Inc. 24.00 24.00 (60.5) (60.0) (56.8)
11/12/91 02/08/92 Bio-Electro Systems, Inc. ALZA Corp. 23.00 23.00 4.0 6.2 4.5
-------------------------------------------------------------------------------
EXERCISED MEDIAN (b) 5.5% 7.2% 7.6%
EXERCISED MEAN (b) 7.2% 7.9% 9.8%
-------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
2/14/00(c) PENDING SURF DEVELOPMENT CORP. II DUNE $25.26 $15.75 35.5% 56.0% 53.7%
10/10/97 12/19/97 SURF DEVELOPMENT CORP. DUNE $46.88 $48.97 NA NA NA
- -----------------------------------------------------------------------------------------------------------------------------------
PRICE PERFORMANCE
SINCE TARGET IPO
ANNOUNCE EXERCISE PURCHASE PRICE/ --------------------
DATE DATE TARGET ACQUIROR IRR IPO PRICE TARGET(a) PARENT
- ---------------------------------------------------------------------------------------------------------------------------
01/10/00 Pending CliniChem Development, Inc. BioChem Pharma Inc. NA NA NA NA
11/29/99 Pending Neuralab Ltd. Elan Corp. NA NA NA NA
11/29/99 01/01/00 Axogen Ltd. Elan Corp. 23.3% 1.9x 81.9% 97.4%
09/24/97 11/25/97 Allergan Ligand Retinoid
Therapeutics Allergan / Ligand 36.0 2.2 94.4 26.3
09/10/96 10/30/96 Advanced Therapeutics
Systems Ltd. Elan Corp. 19.5 1.8 71.3 112.1
08/26/97 09/30/97 Therapeutic Discovery Corp. ALZA Corp. NA NA NA 4.4
05/04/93 07/03/93 Drug Research Corp. Elan Corp. 27.8 1.9 69.3 176.5
10/18/93 12/22/93 Neozyme Corp. Genzyme Corp. NA NA (33.7) 101.4
12/15/92 02/19/93 Receptech Corp. Immunex Corp. 26.8 2.2 102.1 141.9
06/20/91 07/02/91 Tocor, Inc. Centocor Inc. 42.0 2.0 406.3 273.0
11/12/91 02/08/92 Bio-Electro Systems, Inc. ALZA Corp. 26.3 2.1 101.1 261.5
-----------------------------------------------------------------------
EXERCISED MEDIAN (b) 26.8% 2.0X 88.2% 101.4%
EXERCISED MEAN (b) 28.8% 2.0X 111.6% 108.8%
-----------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
02/14/00(c) PENDING SURF DEVELOPMENT CORP. II DUNE (0.7)% 1.0X (17.0)% (68.5)%
10/10/97 12/19/97 SURF DEVELOPMENT CORP. DUNE 30.3% 1.6X NA 242.2%
- ---------------------------------------------------------------------------------------------------------------------------
(a) In cases where warrant(s) has not separated from common stock,
represents unit performance
(b) Premiums analysis excludes Centocor / Tocor transaction announced June
20, 1991
(c) Represents date Dune announced its offer to Surf Board of Directors to
purchase Surf Callable Common Stock for $12.50 per share in cash
52
SG
PROJECT PRECEDENT TRANSACTIONS
SURF -----------------------------------------------------------------
PROFILE OF PRECEDENT TRANSACTIONS - NEGOTIATED
- -------------------------------------------------------------------------------
PROFILE OF PURCHASE TRANSACTIONS - NEGOTIATED
(US$ IN MILLIONS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
EX. PRICE DISCOUNT OF
ANNOUNCE EXERCISE AT TIME OF PUR. PUR. PRICE TO
DATE DATE TARGET ACQUIROR ANNOUNCE. PRICE EX. PRICE
- ----------------------------------------------------------------------------------------------------------
11/01/95 03/13/96 PerSeptive Tech. II PerSeptive Biosystems
Corp. Inc. $33.83 $13.96 (58.7)%
09/06/96 10/29/96 Neozyme II Corp. Genzyme Corp. 117.00 45.00 (61.5)
07/29/94 02/27/95 Cytorad Inc. Cytogen Corp. 19.50 8.81 (54.8)
12/10/93 03/11/94 Tocor II Inc. Centocor Inc. 58.00 40.00 (31.0)
06/16/95 11/22/95 Aramed Inc. Gensia Pharmaceuticals
Inc. 55.40 12.75 (77.0)
06/22/95(b)12/07/95 SciGenics, Inc. Genetics Institute Inc. 69.83 14.00 (80.0)
-----------------------------------------------------------
NEGOTIATED MEDIAN (60.1)%
NEGOTIATED MEAN (60.5)%
-----------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
02/14/00(c)PENDING SURF DEVELOPMENT CORP. II DUNE $25.26 $15.75 (37.6)%
10/10/97 12/19/97 SURF DEVELOPMENT CORP. DUNE $46.88 $48.97 4.5%
- ----------------------------------------------------------------------------------------------------------
PRICE PERFORMANCE
PREMIUM ANALYSIS SINCE TARGET IPO
ANNOUNCE EXERCISE --------------------------- PUR. PRICE/ -----------------
DATE DATE TARGET ACQUIROR 1-DAY 20-DAY AVG. 20-DAY IRR IPO PRICE TARGET(a) PARENT
- -----------------------------------------------------------------------------------------------------------------------------------
11/01/95 03/13/96 PerSeptive Tech. PerSeptive
II Corp. Biosystems Inc. 64.2% 67.7% 64.2% (18.5)% 0.6x (61.4)% (61.4)%
09/06/96 10/29/96 Neozyme II Corp. Genzyme Corp. 2.1 1.8 2.9 5.7 1.3 25.9 20.0
07/29/94 02/27/95 Cytorad Inc. Cytogen Corp. 90.5 116.8 171.1 (4.1) 0.9 (53.8) (78.8)
12/10/93 03/11/94 Tocor II Inc. Centocor Inc. 73.9 72.8 61.6 0.0 1.0 (42.5) (76.4)
06/16/95 11/22/95 Aramed Inc. Gensia
Pharmaceuticals Inc. 52.2 54.1 37.8 (10.7) 0.6 (58.1) (82.4)
06/22/95(b)12/07/95 SciGenics, Inc. Genetics Institute 2.8 3.8 2.8 (9.5) 0.6 (38.1) (33.1)
Inc.
------------------------------------------------------------------------------------------
NEGOTIATED MEDIAN 58.2% 60.9% 49.7% (6.8)% 0.8X (48.1)% (68.9)%
NEGOTIATED MEAN 47.6% 52.8% 56.7% (6.2)% 0.8X (38.0)% (52.0)%
------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
02/14/00(c)PENDING SURF DEVELOPMENT DUNE 35.5% 56.0% 53.7% (0.7)% 1.0X (17.0)% (68.5)%
CORP. II
10/10/97 12/19/97 SURF DEVELOPMENT DUNE NA NA NA 30.3% 1.6X NA 242.2%
CORP.
- -----------------------------------------------------------------------------------------------------------------------------------
(a) In cases where warrant(s) has not separated from callable common stock,
represents unit performance
(b) On June 22, 1995, Genetics Institute offered to purchase SciGenics for
$12.00 per share in cash; on September 7, 1995, SciGenics announced it
had entered into a Definitive Agreement with Genetics Institute for $14.00
per share in cash
(c) Represents date Dune announced its offer to Surf Board of Directors to
purchase Surf Callable Common Stock for $12.50 per share in cash
53
PROJECT
SURF -------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
54
SG
PROJECT DISCOUNTED CASH FLOW ANALYSIS
SURF -----------------------------------------------------------------
DISCOUNTED CASH FLOW - THEORETICAL ANALYSIS (WITH NOL) (a)
PROJECTED CASH FLOWS (b)
(US$ IN MILLIONS, EXCEPT PER SHARE DATA)
Projected
---------------------------------------------------------------------------------------
Fiscal Year Ending December 31, 2000(c) 2001 2002 2003 2004 2005 2006 2007
- -------------------------------------------------------------------------------------------------------------------------------
Sales $ 0.0 $ 6.1 $ 43.1 $176.6 $257.3 $321.2 $387.9 $453.2
EBITDA (54.9) (86.3) (54.8) 35.3 105.4 156.1 204.9 255.6
Less: Depreciation and Amortization 0.0 (0.2) (2.3) (2.7) (2.8) (3.5) (3.6) (3.8)
---------- ---------- ---------- --------- --------- ---------- --------- ----------
EBIT (54.9) (86.5) (57.1) 32.6 102.6 152.7 201.3 251.8
Less: Income Taxes @ 35.0%(d) 0.0 0.0 0.0 0.0 0.0 0.0 (64.8) (88.1)
---------- ---------- ---------- --------- --------- ---------- --------- ----------
Unlevered After-Tax Income (54.9) (86.5) (57.1) 32.6 102.6 152.7 136.5 163.7
Plus: Depreciation and Amortization 0.0 0.2 2.3 2.7 2.8 3.5 3.6 3.8
Less: Capital Expenditures (3.8) (11.0) (10.5) (3.0) (2.5) (3.5) (6.5) (2.0)
Less: Working Capital Investment (0.1) 1.0 0.2 (13.7) (9.3) (7.0) (6.8) (6.7)
---------- ---------- ---------- --------- --------- ---------- --------- ----------
Free Cash Flow ($ 58.7) ($ 96.3) ($ 65.2) $ 18.6 $ 93.7 $145.7 $126.8 $158.8
========== ========== ========== ========= ========= ========== ========= ==========
DISCOUNTED CASH FLOW VALUATION ANALYSIS
(US$ IN MILLIONS, EXCEPT EQUITY VALUE PER SHARE DATA)
Range of Discount Rates
-----------------------------------------------------------
25.0% 27.5% 30.0% 32.5% 35.0%
- ------------------------------------------------------------------------------------------------
Present Value of Free Cash Flow ($ 12.9) ($ 23.4) ($ 32.2) ($ 39.5) ($ 45.6)
Present Value of Terminal Value(e) 112.7 87.9 69.3 55.2 44.3
--------- --------- --------- --------- ---------
Implied Enterprise Value 99.8 64.4 37.1 15.7 (1.3)
Plus: Net Cash(f) 54.7 54.7 54.7 54.7 54.7
--------- --------- --------- --------- ---------
Implied Equity Value $154.5 $119.2 $ 91.8 $ 70.4 $ 53.5
Implied Equity Value per Share(g) $ 24.14 $ 18.62 $ 14.35 $ 11.00 $ 8.35
========= ========= ========= ========= =========
55
SG
(a) Cash flows discounted back to March 31, 2000; theoretical analysis may be
impacted by management's potential risks as discussed on page 12
(b) Source: Surf management as of February 18, 2000
(c) Represents estimates for the nine months from March 31, 2000 to December
31, 2000
(d) Assumes Surf does not receive benefit of NOL's
(e) Based on perpetual growth methodology assuming perpetual growth rate is
zero
(f) Source: Surf management; represents estimated cash as of February 29, 2000,
net payable to Dune
(g) Implied equity value per share based on Treasury Method calculation which
includes 6.325 million Surf Callable Common shares outstanding per Surf
Form 10-Q for the period ended September 30, 1999 and 0.737 million options
outstanding at a weighted average exercise price of $14.13 per Surf
management as of March 14, 2000
PROJECT DISCOUNTED CASH FLOW ANALYSIS
SURF -------------------------------------------------
DISCOUNTED CASH FLOW - THEORETICAL ANALYSIS (WITHOUT NOL) (a)
PROJECTED CASH FLOWS (b)
(US$ IN MILLIONS, EXCEPT PER SHARE DATA)
PROJECTED
---------------------------------------------------------------------------------------------
FISCAL YEAR ENDING DECEMBER 31, 2000 (c) 2001 2002 2003 2004 2005 2006 2007
- ----------------------------------------------------------------------------------------------------------------------------------
Sales $0.0 $6.1 $43.1 $176.6 $257.3 $321.2 $387.9 $453.2
EBITDA (54.9) (86.3) (54.8) 35.3 105.4 156.1 204.9 255.6
Less: Depreciation and Amortization 0.0 (0.2) (2.3) (2.7) (2.8) (3.5) (3.6) (3.8)
------- ------- ------- -------- ------- ------- ------- -------
EBIT (54.9) (86.5) (57.1) 32.6 102.6 152.7 201.3 251.8
Less: Income Taxes @ 35.0% (d) 0.0 0.0 0.0 (11.4) (35.9) (53.4) (70.4) (88.1)
------- ------- ------- -------- ------- ------- ------- -------
Unlevered After-Tax Income (54.9) (86.5) (57.1) 21.2 66.7 99.2 130.8 163.7
Plus: Depreciation and Amortization 0.0 0.2 2.3 2.7 2.8 3.5 3.6 3.8
Less: Capital Expenditures (3.8) (11.0) (10.5) (3.0) (2.5) (3.5) (6.5) (2.0)
Less: Working Capital Investment (0.1) 1.0 0.2 (13.7) (9.3) (7.0) (6.8) (6.7)
------- -------- ------- -------- ------- ------- ------- -------
Free Cash Flow ($58.7) ($96.3) ($65.2) $7.2 $57.8 $92.2 $121.1 $158.8
======= ======== ======= ======== ======= ======= ======= =======
DISCOUNTED CASH FLOW VALUATION ANALYSIS
(US$ IN MILLIONS, EXCEPT EQUITY VALUE PER SHARE DATA)
RANGE OF DISCOUNT RATES
----------------------------------------------------------------------------------
25.0% 27.5% 30.0% 32.5% 35.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Present Value of Free Cash Flow ($46.3) ($53.7) ($59.6) ($64.4) ($68.2)
Present Value of Terminal Value (e) 112.7 87.9 69.3 55.2 44.3
------ ------ ------ ----- -----
Implied Enterprise Value 66.3 34.2 9.7 (9.2) (23.9)
Plus: Net Cash (f) 54.7 54.7 54.7 54.7 54.7
------ ------ ------ ----- -----
Implied Equity Value $121.1 $89.0 $64.4 $45.6 $30.9
Implied Equity Value per Share (g) $18.92 $13.90 $10.07 $7.12 $4.82
====== ====== ====== ===== =====
(a) Cash flows discounted back to March 31, 2000; theoretical analysis may be
impacted by management's potential risks as discussed on page 12
(b) Source: Surf management as of February 18, 2000
(c) Represents estimates for the nine months from March 31, 2000 to December
31, 2000
(d) Assumes Surf does not receive benefit of NOL's
(e) Based on perpetual growth methodology assuming perpetual growth rate is
zero
(f) Source: Surf management; represents estimated cash as of February 29, 2000,
net payable to Dune
(g) Implied equity value per share based on Treasury Method calculation which
includes 6.325 million Surf Callable Common shares outstanding per Surf
Form 10-Q for the period ended September 30, 1999 and 0.737 million options
outstanding at a weighted average exercise price of $14.13 per Surf
management as of March 14, 2000
57
SG
PROJECT DISCOUNTED CASH FLOW ANALYSIS
SURF -------------------------------------------------
DISCOUNTED CASH FLOW - ROYALTY ANALYSIS (WITH NOL) (a)
PROJECTED CASH FLOWS (17.5% ROYALTY STREAM) (b)
(US$ IN MILLIONS)
PROJECTED
-------------------------------------------------------------------------------------------
FISCAL YEAR ENDING DECEMBER 31, 2000(c) 2001 2002 2003 2004 2005 2006 2007
- --------------------------------------------------------------------------------------------------------------------------------
Sales $0.0 $1.1 $7.5 $30.9 $45.0 $56.2 $67.9 $79.3
EBITDA (50.9) 1.1 7.5 30.9 45.0 56.2 67.9 79.3
Less: Depreciation and Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
-------- -------- -------- -------- -------- -------- -------- -------
EBIT (50.9) 1.1 7.5 30.9 45.0 56.2 67.9 79.3
Less: Income Taxes @ 35.0% (d) 0.0 0.0 0.0 0.0 0.0 0.0 (11.8) (27.8)
-------- -------- -------- -------- -------- -------- -------- -------
Unlevered After-Tax Income (50.9) 1.1 7.5 30.9 45.0 56.2 56.0 51.6
Plus: Depreciation and Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Capital Expenditures (3.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Working Capital Investment (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
-------- -------- -------- -------- -------- -------- -------- -------
Free Cash Flow ($54.7) $1.1 $7.5 $30.9 $45.0 $56.2 $56.0 $51.6
======== ======== ======== ======== ======== ======== ======== =======
ROYALTY ANALYSIS
(EQUITY VALUE PER SHARE IN US$)
ASSUMED ROYALTY STREAM (e)
----------------------------------------------------------------------
RANGE OF DISCOUNT RATES 15.0% 17.5% 20.0%
- ----------------------------------------------------------------------------------------------------------------------------------
25.0% $16.02 $18.12 $20.21
27.5% 14.05 15.85 17.65
30.0% 12.48 14.03 15.59
32.5% 11.20 12.56 13.92
35.0% 10.15 11.35 12.54
(a) Cash flows discounted back to March 31, 2000
(b) Based on projections provided by Surf management; assumes that Surf
licenses out all products to a third party in exchange for royalty payments
once the estimated net cash balance as of February 29, 2000 of
approximately $54.7 million is exhausted
(c) Represents estimated results for the nine months from March 31, 2000
through December 31, 2000; assumes Free Cash Flows do not exceed estimated
net cash as of February 29, 2000 of $54.7 million
(d) Assumes Surf begins to receive benefit of NOL's in FY2001
(e) Royalty ranges provided in consultation with the Company
58
SG
PROJECT DISCOUNTED CASH FLOW ANALYSIS
SURF -------------------------------------------------
DISCOUNTED CASH FLOW - ROYALTY ANALYSIS (WITHOUT NOL) (a)
PROJECTED CASH FLOWS (17.5% ROYALTY STREAM) (b)
(US$ IN MILLIONS)
PROJECTED
-------------------------------------------------------------------------------------------
FISCAL YEAR ENDING DECEMBER 31, 2000(c) 2001 2002 2003 2004 2005 2006 2007
- --------------------------------------------------------------------------------------------------------------------------------
Sales $0.0 $1.1 $7.5 $30.9 $45.0 $56.2 $67.9 $79.3
EBITDA (50.9) 1.1 7.5 30.9 45.0 56.2 67.9 79.3
Less: Depreciation and Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------ ----- ------
EBIT (50.9) 1.1 7.5 30.9 45.0 56.2 67.9 79.3
Less: Income Taxes @ 35.0% (d) 0.0 (0.4) (2.6) (10.8) (15.8) (19.7) (23.8) (27.8)
------ ------ ------ ------ ------ ------ ----- ------
Unlevered After-Tax Income (50.9) 0.7 4.9 20.1 29.3 36.5 44.1 51.6
Plus: Depreciation and Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Capital Expenditures (3.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Working Capital Investment (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------ ----- ------
Free Cash Flow ($54.7) $0.7 $4.9 $20.1 $29.3 $36.5 $44.1 $51.6
====== ====== ====== ====== ====== ====== ===== ======
ROYALTY ANALYSIS
(EQUITY VALUE PER SHARE IN US$)
ASSUMED ROYALTY STREAM (e)
----------------------------------------------------------------------------------
RANGE OF DISCOUNT RATES 15.0% 17.5% 20.0%
- ------------------------------------------------------------------------------------------------------------------
25.0% $13.05 $15.00 $16.96
27.5% 11.37 13.02 14.68
30.0% 10.04 11.46 12.88
32.5% 8.99 10.21 11.44
35.0% 8.13 9.20 10.27
(a) Cash flows discounted back to March 31, 2000
(b) Based on projections provided by Surf management; assumes that Surf
licenses out all products to a third party in exchange for royalty payments
once the estimated net cash balance as of February 29, 2000 of
approximately $54.7 million is exhausted
(c) Represents estimated results for the nine months from March 31, 2000
through December 31, 2000; assumes Free Cash Flows do not exceed estimated
net cash as of February 29, 2000 of $54.7 million
(d) Assumes Surf does not receive benefit of NOL's
(e) Royalty ranges provided in consultation with the Company
59
SG