LAWSON TWO
REPORT TO HYDROMER
1999
Confidential Valuation Report
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VALUATION OF CERTAIN SHARES
OF
BIOSEARCH MEDICAL PRODUCTS, INC.
Valuation Date: May 17, 1999
Issuance Date: June 4, 1999
Howard, Lawson & Co.
Two Penn Center Plaza Philadelphia, PA 19102
Tel: (215) 988-0010 Fax: (215) 568-0029
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Opinion Letter
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Table of Contents
Opinion Letter - The Opinion of Howard, Lawson & C the common stock of Biosearch
Medical Products, Inc. ( possible acquisition of Biosearch. The effective date
of our letter (the "Valuation Date").
Definition of Fair Market Value
The Situation
Factors Considered
Materials Reviewed
Relevant Factors Considered
Activities Conducted
Limiting Conditions and Assumptions
Discussion
Acknowledgment
Opinion
Exhibits
Summary Balance Sheet of Biosearch Medical Products
Summary Income Statement of Biosearch Medical Prod
Comparable Companies' Financial Data
Comparable Companies' Valuation Indications
Rankings of Comparable Companies
Calculation of Cost of Capital
Discounted Cash Flow Analysis - Probability of Achiev
Discounted Cash Flow Analysis - Probability of Achievi
Methodology and Background
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Howard, Lawson & Co.
Howard, Lawson & Co.
Two Penn Center Plaza Investment Banking
Philadelphia, PA 19102 Corporate Finance
215 988-0010
215 568-0029 FAX
May 17, 1999
Mr. Kenneth P. Brice
Vice President of Finance
Hydromer, Inc.
35 Industrial Parkway
Somerville, NJ 08876-3518
Dear Mr. Brice:
You have asked us to provide a valuation of the common stock (the "Shares")
of Biosearch Medical Products, Inc. ("Biosearch") to assist Hydromer, Inc.
("Hydromer") in evaluating a possible acquisition of Biosearch. The effective
date of the valuation is as of the date of our letter (the "Valuation Date").
Definition of Fair Market Value
Fair market value is the price at which an asset would change hands between
a willing buyer and a willing seller when the former is not under any compulsion
to buy and the latter is not under any compulsion to sell, and both parties are
able, as well as willing, to trade and are well informed about the asset and the
market for that asset.
The Situation
Biosearch develops, manufactures, and markets products designed for medical
and surgical applications. Biosearch's manufacturing is largely focused on
applying hydrophilic coatings to intermittent urinary catheters. Biosearch holds
an exclusive, worldwide, license to apply Hydromer(R), a patented coating
technology to certain medical devices.
Revenues for Biosearch have declined from $3.6 million in 1994 to $1.3
million in 1998. In addition, Biosearch has experienced net losses in the
aggregate of $3.1 million for the fiscal years 1995 through 1998. Revenues for
the three months ended March 31, 1999 were $218,401 compared to $604,117 for the
same period a year ago. In addition, operating losses for the three months ended
March 31, 1999 amounted to $191,035 compared to operating losses of $28,004 for
the three months ended March 31, 1998.
Biosearch Medical Products, Inc. Opinion Letter
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The Situation (continued)
Hydromer is a polymer research and development company that develops
polymeric complexes for commercial markets in the medical and industrial fields
Hydromer owns several process and application patents for Hydromer(R) which is a
polymeric substance that becomes extremely lubricious when wet, and a technique
of grafting or applying this substance onto surfaces which consist of a broad
variety of materials, including other polymers such as polyurethane, polyvinyl
chloride, and silicone elastomers, ceramics and metals.
Hydromer is considering acquiring Biosearch, which would allow Hydromer to
funnel its chemical production through Biosearch. Accordingly, you have asked us
to provide a valuation of the common stock of Biosearch to assist you in
evaluating a possible acquisition of Biosearch.
Factors Considered
In arriving at our opinion of the fair market value of common stock of
Biosearch as of the Valuation Date, we have considered all factors we deemed
relevant, including the following:
(1) The nature and history of Biosearch's business;
(2) The general economic outlook and the outlook for the medical equipment
industry;
(3) The book value of Biosearch and the financial condition of the
company;
(4) The results of operations of Biosearch;
(5) The dividend-paying capacity of Biosearch;
(6) Whether or not Biosearch has goodwill or other intangible value;
(7) Past transactions in Biosearch's common stock; and,
(8) The market price of the stocks of corporations (listed on exchanges,
NASDAQ or trading over-the-counter) engaged in the same or similar
lines of business as Biosearch, where such stock is traded in a free
and open market.
A determination of fair market value depends upon the circumstances in each
case. In forming our opinion, we considered these factors and concluded that
certain factors are more significant indicators of value than others, but have
not assigned mathematical weights to any of them in determining fair market
value.
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Howard, Lawson & Co. 2
Biosearch Medical Products, Inc. Opinion Letter
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Materials Reviewed
In arriving at our opinion, we have considered, among other things, the
following information:
(1) Audited financial statements of Biosearch for the years ended December
30, 1994 through December 31, 1998;
(2) Audited financial statements of Biosearch for three months ended March
31, 1998 and the three months ended March 31, 1999;
(3) Forecasted financial statements of Biosearch for the years ending
December 31, 1999 through December 31, 2003 provided by Biosearch;
(4) Publicly available financial and market information regarding certain
companies we deemed comparable to Biosearch; and,
(5) Information regarding the business and its prospects obtained in
discussions with the managements of Hydromer and Biosearch.
Relevant Factors Considered
In forming our opinion as to the fair market value of Biosearch as of the
Valuation Date, we considered all recognized valuation methodologies, placing
emphasis on those methods used to estimate fair market value under the
assumption of the Biosearch continuing as a going concern.
Activities Conducted
In arriving at our opinion of the fair market value of Biosearch, we
conducted the following activities:
1. We performed an asset purchase analysis of Biosearch based on
estimated fair market values of Biosearch's fixed and intangible
assets. The management of Hydromer estimates that Biosearch's fixed
assets have a fair market value of $50,000 and the intangible assets
have a fair market value of $50,000.
2. We performed a discounted cash flow ("DCF") analysis based on
management's forecasts of future earnings, adjusted to reflect the
probability of a range of possible outcomes. We employed different
probabilities of Biosearch meeting its forecasts, much in the same
manner that a venture capital investor would use to analyze an
investment in a development stage company. This method is referred to
as The First Chicago Method.
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Howard, Lawson & Co. 3
Biosearch Medical Products, Inc. Opinion Letter
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Limiting Conditions or Assumptions
We have relied on management's representations concerning Biosearch and on
financial statements of Biosearch in forming our opinion of value. We have
assumed the accuracy of all financial information reviewed. See the Methodology
and Background exhibit of our report for a full description of assumptions and
limiting conditions to our valuation opinion.
Discussion
As mentioned in The Situation section of our report, revenues for Biosearch
declined from $3.6 million in 1994 to $1.3 million in 1998. In addition,
revenues for the three months ended March 31, 1999 were $218,401 compared to
$604,117 for the same period a year ago. Biosearch experienced net losses in the
aggregate of $3. l million for the fiscal years 1995 through 1998. In addition,
operating losses for the three months ended March 31, 1999 amounted to $191,035
compared to operating losses of $28,004 for the same period a year ago.
Furthermore, shareholders' equity as of March 31, 1999 was $489,561 compared to
$3.2 million as of December 31, 1994. See Exhibits 1 and 2 for a summary balance
sheet and income statement of Biosearch.
Asset Purchase
In arriving at our opinion of the fair market value of Biosearch, we
considered an asset purchase analysis of Biosearch based on estimated fair
market values of Biosearch's fixed and intangible assets as of the Valuation
Date. The management of Hydromer estimates that Biosearch's fixed assets have a
fair market value of $50,000 and the intangible assets have a fair market value
of $50,000. Assuming that Biosearch's net operating loss carryfowards are
available to a buyer, they would have an estimated value of $250,000 to
$300,000.
On the basis of an asset purchase and excluding all liabilities, we believe
the relevant range of values for Biosearch is $350,000 to $400,000 in the
aggregate, or $0.16 per share to $0.18 per share.
Discounted Cash Flow
We also performed a DCF analysis based on management's forecasts of future
earnings, adjusted to reflect the probability of a range of possible outcomes.
We employed different probabilities of Biosearch meeting its forecasts, much in
the same manner that a venture capital investor would use to analyze an
investment in a development stage company. This method is referred to as The
First Chicago Method.
In preparing the DCF analysis to determine the net present value of the
expected future cash flows of Biosearch, we first calculated a cost of capital
for Biosearch. Our DCF analysis was based on projections provided by Biosearch
to Hydromer.
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Howard, Lawson & Co. 4
Biosearch Medical Products, Inc. Opinion Letter
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Discussion (continued)
Discounted Cash Flow (continued)
In order to determine the net present value of the estimated cash flows, we
first calculated a weighted average cost of capital ("WACC") for Biosearch. The
WACC serves as an estimate of the required rate of return for an investment of
similar risk and capital structure. In calculating the cost of capital of
Biosearch, we calculated the estimated implied cost of equity based on multiples
reflected in the values of comparable publicly traded companies. See Exhibits 3
and 4 for the financial and market data of the publicly traded guideline
companies, respectively. Also, see Exhibit 5 for a comparison of Biosearch to
the public guideline companies.
The guideline companies cost of equity is readily determined by the use of
the Gordon Growth Model. According to this methodology, the rate of return (k)
is a function of a company's projected net income (I), market value (MV), and
expected five year growth rate (g).
K= I/MV + g
In our calculation of the implied cost of equity, we determined the ratio
of price, or market value, to projected net income, as shown in Exhibit 6. The
1999 projected net income-to-market value ratio is the inverse of the
price-to-projected net income ratio. The cost of equity is then determined by
adding the expected five-year growth rate to the projected net income-to-market
value ratio. Only one of the seven-selected guideline companies had analysts'
consensus five-year forecasted growth rates available. Using this methodology
results in implied costs of equity of 42%.
Biosearch did not have any interest-bearing debt as of the Valuation Debt,
and therefore we used the implied cost of equity rather than a WACC.
Exhibit 7 illustrates the calculation of the present value of forecasted
net after-tax free cash flows over the forecasted period and the calculation of
the present value of a residual value for Biosearch at the end of the forecast
period assuming that Biosearch achieves approximately 41% of its forecast. In
Exhibit 7, all cash flows of Biosearch have been discounted at 45%. We assumed
that the cash flow of Biosearch will grow at an average rate of 5% over the
long-term following the forecast period.
Using a discount rate of 45%, our calculations resulted in a present value
of the estimated cash flows for the fiscal years 1999 through 2003 of
approximately $161,000. The present value of the post-year 2003 cash flows
received in perpetuity, or residual value, is approximately $119,000. When these
two amounts are added together, the total present value of future cash flows, or
enterprise value, is $280,000. In order to determine the equity value of
Biosearch, we subtracted debt, net of any cash of $49,000. Using a WACC of 45%,
the resulting equity value is $329,000, or $0.15 per share.
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Howard, Lawson & Co. 5
Biosearch Medical Products, Inc. Opinion Letter
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Discussion (continued)
Discounted Cash Flow (continued)
In addition, we performed a DCF analysis in which Biosearch achieved
approximately 55% of its forecast, as illustrated in Exhibit 8. Using the same
discount rate of 45%, the resulting equity value is $445,000, or $0.20 per
share.
As indicated above, Biosearch has experienced declining revenues and
continued operating losses during the last five fiscal years. However, the
forecasts provided by Biosearch assume a turnaround in both revenue growth and
profitability beginning in 1999. In addition, both DCF analyses illustrated in
Exhibits 7 and 8 assume a turnaround of Biosearch. If it becomes apparent that
Biosearch will be unable to meet its forecasts, then the appropriate steps will
need to be taken to cut expenses in order to stem further losses and achieve the
level of profitability indicated in the forecasts provided by Biosearch.
On the basis of our discussions with management and the materials reviewed,
it is our opinion that the fair market value for the Shares is $0.18 to $0.20
per share as of the Valuation Date.
Acknowledgment
This report was prepared by Frank Spewock and Michael Hanzelik, both
employees of Howard, Lawson & Co. and actively involved in the firm's extensive
valuation practice. The appraisers have no present or contemplated future
interest in Biosearch or any other interest that might tend to prevent their
making a fair and unbiased appraisal.
This report has been prepared in conformity with the Uniform Standards of
Professional Appraisal Practice of The Appraisal Foundation and the Principles
of Appraisal Practice and Code of Ethics of the American Society of Appraisers.
A signed certification is contained in the Methodology and Background exhibit of
our report.
Opinion
On the basis of our analysis and the materials reviewed as stated in this
letter, it is our opinion that Biosearch had a fair market value of $0.18 to
$0.20 per share as of the Valuation Date.
/s/ Howard, Lawson & Co.
HOWARD, LAWSON & CO.
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Howard, Lawson & Co. 6
EXHIBIT 2
BIOSEARCH MEDICL PRODUCTS
Income Statement
($ in 000's)
--------------------------------------------------------------------------------
December 30,
1994 1995 1996
--------------------------------------------------------------------------------
Total sales $3,574 100.0% $3,268 100.0% $2,649 100.0%
Cost of Goods Sold 2,909 81.4% 2,778 85.0% 2,239 84.5%
------ ------ ------
Gross Profit 664 18.6% 490 15.0% 410 15.5%
Operating Expenses
Selling, General & Administrative 1,452 40.6% 1,332 40.8% 1,223 46.2%
------ ------ ------
Income from Operations (788) (22.0%) (842) (25.8%) (813) (30.7%)
Other Expense (Income)
Interest Expense, Net 99 2.8% 30 0.9% 72 2.7%
Sale of Assets (3,329) (93.1%) -- 0.0% -- 0.0%
Other, Net (454) (12.7%) (29) (0.9%) (1) 0.0%
------ ------ ------
Total Other Expense (3,684) (103.1%) 2 0.0% 71 2.7%
Income Before Income Taxes 2,897 81.0% (844) (25.8%) (884) (33.4%)
------ ------ ------
Income Taxes 60 1.7% -- 0.0% -- 0.0%
Extraordinary Item 114 3.2% -- 0.0% -- 0.0%
------ ------ ------
Net Income $2,951 82.6% ($844) (25.8%) ($884) (33.4%)
====== ====== ======
EBIT 2,995 83.8% (813) (24.9%) (812) (30.6%)
EBITDA 3,120 87.3% (698) (21.4%) (721) (27.2%)
Depreciation 124 115 91
----------------------------------------------------
3 months 3 months
December 30, ended ended
1997 1998 3/31/99 3/31/98
---------------------------------------------------- ------------------------
Total sales $1,936 100.0% $1,295 100.0% $218 $604
Cost of Goods Sold 1,537 79.4% 1,271 98.2% 214 430
------ ------ ------------------------
Gross Profit 399 20.6% 24 1.8% 4 174
Operating Expenses
Selling, General & Administrative 893 46.1% 859 66.3% 195 202
------ ------ ------------------------
Income from Operations (493) (25.5%) (835) (64.5%) (191) (28)
Other Expense (Income)
Interest Expense, Net 84 4.4% 22 1.7% -- 21
Sale of Assets -- 0.0% -- 0.0% (192) --
Other, Net (22) (1.1%) (7) (0.5%) (400) (2)
------ ------ ------------------------
Total Other Expense 63 3.2 16 1.2% (592) 19
Income Before Income Taxes (556) (28.7%) (851) (65.7%) 401 (47)
------ ------ ------------------------
Income Taxes -- 0.0% -- 0.0% -- --
Extraordinary Item -- 0.0% -- 0.0% -- --
------ ------ ----
Net Income ($556) (28.7%) ($851) (65.7%) $401 ($47)
====== ====== ========================
EBIT (472) (24.4%) (829) (64.0%) 401 (26)
EBITDA (380) (19.7%) (768) (59.3%) 401 (26)
Depreciation 91 60
EXHIBIT 3
BIOSEARCH MEDICAL PRODUCTS, INC.
Comparable Public companies Financial Summary
($ in 000s)
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Electro- Dexterity Nitinol
Cathether Surgical, Medical
Corp. Inc. Technologies, Inc. MedAmicus, Inc.
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FISCAL YEAR ENDED Aug 31 Dec 31 Dec 31 Dec 31
REVENUES % Growth % Growth % Growth % Growth
LATEST 12 MONTHS: LTM $4,979 $18,492 $22,131 $8,032
PRECEDING FISCAL YEARS: FY1 5,347 -19.6% 18,492 29.0% 10,125 44.2% 8,032 12.0%
FY2 6,648 -9.7% 14,337 na 7,024 83.2% 7,173 26.7%
FY3 7,362 1.4% na na 3,833 44.8% 5,660 6.9%
FY4 7,263 0.2% na na 2,647 na 5,295 75.9%
FY5 7,248 na 2,003 3,011
EBITDA % Rev % Rev % Rev % Rev
LATEST 12 MONTHS: LTM ($629) -12.6% ($1,959) -10.6% ($2,383) -10.6% $370 4.6%
PRECEDING FISCAL YEARS: FY1 (629) -11.8% (1,959) -10.6% (2,693) -26.6% 370 4.6%
FY2 (505) -7.6% (2,851) -19.9% (1,505) -21.4% 371 5.2%
FY3 (543) -7.4% na na 746 19.5% (635) -11.2%
FY4 (769) -10.6% na na 384 14.5% 10 0.2%
FY5 (1,141) -15.7% na na na na (850) -28.2%
EBIT % Rev % Rev % Rev % Rev
LATEST 12 MONTHS: LTM ($761) -15.3% ($2,089) -11.3% ($3,474) -15.7% ($95) -1.2%
PRECEDING FISCAL YEARS: FY1 (763) -14.3% (2,089) -11.3% (3,154) -31.2% 95 -1.2%
FY2 (659) -9.9% (3,013) -21.0% (1,732) -24.7% (114) -1.6%
FY3 (682) -9.3% na na 658 17.2% (1,038) -18.3%
FY4 (968) -13.3% na na 328 12.4% (283) -5.3%
FY5 (1,279) -17.6% na na na na (1,153) -38.3%
NET INCOME % Rev % Rev % Rev % Rev
LATEST 12 MONTHS: LTM ($1,384) -27.8% ($2,368) -12.8% ($3,469) -15.7% ($144) -1.8%
PRECEDING FISCAL YEARS: FY1 (1077) -20.1% (2,368) -12.8% (1,837) -18.1% (144) -1.8%
FY2 (599) -9.0% (2,283) -15.9% (1,163) -16.6% (146) -2.0%
FY3 (1,136) -15.4% na na 584 15.2% (1,212) -21.4%
FY4 (1,372) -18.9% na na 289 10.9% (1,294) -24.4%
FY5 (804) -11.1% na na na na (799) -26.5%
FINANCIALS AS OF: 11/30/98 12/31/98 9/30/98 12/31/98
TOTAL ASSETS 2,741 12,270 65,279 4,220
CASH 64 3,386 9,969 1,022
TOTAL FUNDED DEBT 2,501 3,007 18,087 978
SHAREHOLDERS' EQUITY (1,495) 4,190 33,658 2,574
TOTAL INVESTED CAPITAL 1,006 7,197 51,746 3,552
RATIO ANALYSIS:
CURRENT RATIO: 0.9 2.2 3.4 2.2
NET PROFIT MARGIN -27.8% -12.8% -15.7% -1.8%
RETURN ON ASSETS -50.5% -19.3% -5.3% -3.4%
RETURN ON EQUITY 92.6% -56.5% -10.3% -5.6%
RETURN ON TOTAL INVESTED CAPITAL -137.5% -32.9% -6.7% -4.0%
DEBT/TOTAL INVESTED CAPITAL 248.6% 41.8% 35.0% 27.5%
THREE YEAR GROWTH RATES:
REVENUES -9.7% 29.0% 56.4% 14.9%
EBITDA -6.5% -31.3% nmf 238.7%
EBIT -7.6% -30.7% nmf -30.5%
NET INCOME -7.7% 3.7% nmf -51.9%
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Valley Forge Rochester BIOSEARCH
Scientific Medical MEDICAL PRODUCTS,
Corp. Corp. Trimedyne Inc. INC.
---------------------------------------------------------------------------------------------
FISCAL YEAR ENDED Sep 30 Sep 30 Sep 30 Dec 31
REVENUES % Growth % Growth % Growth % Growth
LATEST 12 MONTHS: LTM $3,996 $10,009 $6,385 $1,295
PRECEDING FISCAL YEARS: FY1 3,880 -2.5% 9,518 25.0% 6,985 -24.6% 1,295 -33.1%
FY2 3,978 16.2% 7,615 37.5% 9,262 -1.3% 1,936 -26.9%
FY3 3,425 27.4% 5,540 76.9% 9,383 -2.7% 2,649 -18.9%
FY4 2,688 -25.1% 3,131 43.0% 9,639 -28.0% 3,268 -8.6%
FY5 3,587 2,189 13,393 3,574
EBITDA % Rev % Rev % Rev % Rev
LATEST 12 MONTHS: LTM $206 5.2% ($2,484) -24.8% ($2,034) -31.9% ($768) -59.3%
PRECEDING FISCAL YEARS: FY1 125 3.2% (2,329) -24.5% (5,733) -82.1% (768) -59.3%
FY2 160 4.0% (1,875) -24.6% (4,975) -53.7% (380) -19.7%
FY3 46 1.3% (1,415) -25.5% (4,854) -51.7% (721) -27.2%
FY4 (223) -8.3% (954) -30.5% (5,343) -55.4% (699) -21.4%
FY5 776 21.6% (668) -30.5% (2,226) -16.6% (308) -8.6%
EBIT % Rev % Rev % Rev % Rev
LATEST 12 MONTHS: LTM $74 1.8% ($3,338) -33.4% ($2,323) -36.4% ($829) -64.0%
PRECEDING FISCAL YEARS: FY1 (10) -0.2% (3,106) -32.6% (6,038) -86.4% (829) -64.0%
FY2 20 0.5% (2,414) -31.7% (5,379) -58.1% (472) -24.4%
FY3 (96) -2.8% (1,893) -34.2% (5,351) -57.0% (812) -30.7%
FY4 (366) -13.6% (1,299) -41.5% (5,931) -61.5% (814) -24.9%
FY5 695 19.4% (1,003) -45.8% (2,774) -20.7% (333) -9.3%
NET INCOME % Rev % Rev % Rev % Rev
LATEST 12 MONTHS: LTM $20 0.5% ($2,487) -24.8% ($2,481) -38.9% ($851) -65.7%
PRECEDING FISCAL YEARS: FY1 (34) -0.9% (2,258) -23.7% (6,218) -89.0% (851) -65.7%
FY2 7 0.2% (2,099) -27.6% (5,535) -59.8% (556) -28.7%
FY3 (75) -2.2% (1,360) -24.5% (4,956) -52.8% (884) -33.4%
FY4 (216) -8.0% (1,311) -41.9% (5,622) -58.3% (844) -25.8%
FY5 548 15.3% (964) -44.0% (2,265) -16.9% (440) -12.3%
FINANCIALS AS OF: 12/31/98 12/31/98 12/31/98 12/31/98
TOTAL ASSETS 4,209 32,029 14,602 897
CASH 1,085 15,671 2,497 106
TOTAL FUNDED DEBT 0 0 0 0
SHAREHOLDERS' EQUITY 4,018 30,724 13,487 89
TOTAL INVESTED CAPITAL 4,018 30,724 13,487 89
RATIO ANALYSIS:
CURRENT RATIO: 18.9 15.6 12.6 0.9
NET PROFIT MARGIN 0.5% -24.8% -38.9% -65.7%
RETURN ON ASSETS 0.5% -7.8% -17.0% -94.9%
RETURN ON EQUITY 0.5% -8.1% -18.4% -954.3%
RETURN ON TOTAL INVESTED CAPITAL 0.5% -8.1% -18.4% -954.3%
DEBT/TOTAL INVESTED CAPITAL 0.0% 0.0% 0.0% 0.0%
THREE YEAR GROWTH RATES:
REVENUES 13.0% 44.9% -10.2% -26.6%
EBITDA nmf 34.7% 2.4% nmf
EBIT -70.2% 33.7% nmf nmf
NET INCOME -45.8% 19.9% nmf nmf
EXHIBIT 4
BIOSEARCH MEDICAL PRODUCTS, INC.
Comparable Public Companies Market Data
($ in 000s, except per share)
--------------------------------------------------------------------------------------
Electro- Dexterity Miltnol Valley Forge
Cathether Surgical, Medical Scientific
Corp. Inc. Technologies, Inc. MedAmicus, Inc. Corp.
--------------------------------------------------------------------------------------
Exchange Listing Nasdaq BB Nasdaq Nasdaq Nasdaq Nasdaq
Ticket Symbol ECTH DEXT NMTI MEDM VLFG
Common Shares Oustanding (000's) 6,290.00 6,654.00 10,629.00 4,112.00 8,229.00
Price Per Share (April 9, 1999) 0.15 1.42 3.56 1.13 3.75
Market Value 944.00 9,461.00 37,871.00 4,626.00 30,860.00
Cash 64.00 3,386.00 9,969.00 1,022.00 1,085.00
Total Funded Debt 2,501.00 3,007.00 18,087.00 978.00 0.00
Total Capitalization (1) 3,380.00 9,082.00 45,989.00 4,583.00 29,775.00
Latest Twelve Month Earnings Per Share 0.22 0.36 0.33 0.03 0.00
Three Year Average Earnings Per Share 0.15 0.35 0.08 0.12 0.00
1999 Forecasted Earnings Per Share na na na na na
1999 Forecasted Earnings Per Share na na na na na
RELATIVE VALUE MULTIPLES
- ------------------------------------------------------------------------------------------------------------------------------------
Price to Earnings neg x neg x neg x neg x 1,527.96 x
Price to 3 Year Average Earnings neg x neg x neg x neg x neg x
Price to 1999 Forecasted Earnings na x na x 14.3 x na x na x
Price to 2000 Forecasted Earnings na x na x 8.9 x na x na x
Price to Shareholders' Equity neg x x 1.1 x 1.8 x 7.7 x
Total Capitalization to Revenues 0.7 x 0.5 x 2.1 x 0.6 x 7.5 x
Total Capitalization to EBITDA neg x neg x neg x 12.4 x 144.6 x
Total Capitalization to 3 yr. Avg. EBITDA neg x neg x neg x neg x neg x
Total Capitalization to EBIT neg x neg x neg x neg x 404.2 x
Total Capitalization to 3 yr. Avg. EBIT neg x neg x neg x neg x neg x
- ------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------
Rochester BIOSEARCH
Medical Trimedyne, MEDICAL
Corp. Inc. PRODUCTS, INC.
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Exchange Listing Nasdaq Nasdaq Nasdaq BB
Ticket Symbol ROCM TMED no
Common Shares Oustanding (000's) 5,349.00 10,906.00 2,211.00
Price Per Share (April 9, 1999) 8.88 1.19 0.38
Market Value 47,472.00 12,956.00 829.00
Cash 15,671.00 2,497.00 106.00
Total Funded Debt 0.00 0.00 0.00
Total Capitalization (1) 31,801.00 10,459.00 723.00
Latest Twelve Month Earnings Per Share 0.46 0.23 0.38
Three Year Average Earnings Per Share 0.36 0.51 0.35
1999 Forecasted Earnings Per Share na na na
1999 Forecasted Earnings Per Share na na na
Median Mean
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Price to Earnings neg x neg x neg x nmf x nmf x
Price to 3 Year Average Earnings neg x neg x neg x nmf x nmf x
Price to 1999 Forecasted Earnings na x na x na x 14.3 x 14.3 x
Price to 2000 Forecasted Earnings na x na x na x 8.9 x 8.9 x
Price to Shareholders' Equity 1.5.x 1.0 x 9.3 x 1.5 x 2.6 x
Total Capitalization to Revenues 3.2 x 1.6 x 0.6 x 1.6 x 2.3 x
Total Capitalization to EBITDA neg x neg x neg x 78.5 x 78.5 x
Total Capitalization to 3 yr. Avg. EBITDA neg x neg x neg x nmf x nmf x
Total Capitalization to EBIT neg x neg x neg x nmf x nmf x
Total Capitalization to 3 yr. Avg. EBIT neg x neg x neg x nmf x nmf x
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(1) Total Capitalization = Total Funded Debt + Market Value of Equity
Securities Cash
EXHIBIT 5
BIOSEARCH MEDICAL PRODUCTS
Comparision of Biosearch to the Public Comparables Group
Absolute Size and Profit Margins
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LTM Revenues
Company (In 000s)
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Nitnol Medical Technologies, Inc. $22,131.00
Dexterity Surgical, Inc. $18,492.00
Rochester Medical Corp. $10,009.00
MedAmicus, Inc. $ 8,032.00
Trimedyne, Inc. $ 6,385.00
Electro-Cathether Corp. $ 4,979.00
Valley Forge Scientific Corp. $ 3,996.00
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BIOSEARCH MEDICAL PRODUCTS $ 1,295.00
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LTM EBITT
Company (As % of Revs)
- ------- ----- --------
Valley Forge Scientific Corp. 1.80%
MedAmicus, Inc. -1.20%
Dexterity Surgical, Inc. -11.30%
Electro-Cathether Corp. -15.30%
Nitnol Medical Technologies, Inc. -15.70%
Rochester Medical Corp. -33.40%
Trimedyne, Inc. -36.40%
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BIOSEARCH MEDICAL PRODUCTS -64.40%
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mean -21.90%
median -15.50%
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Net Income
Company (As % of Revs)
- ------- ----- --------
Valley Forge Scientific Corp. 0.50%
MedAmicus, Inc. -1.80%
Dexterity Surgicial, Inc. -12.80%
Nitnol Medical Technologies, Inc. -15.70%
Rochester Medical Corp. -24.80%
Electro-Cathether Corp. -27.80%
Timedyne, Inc. -38.90%
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BIOSEARCH MEDICAL PRODUCTS -65.70%
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mean 23.40%
median -20.30%
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Total Assets
Company (in $000s)
- ------- ----------
Nitnol Medical Technologies, Inc. $65,279.00
Dexterity Surgical, Inc. $32,029.00
Rochester Medical Corp. $14,602.00
MedAmicus, Inc. $12,270.00
Trimedyne, Inc. $ 4,220.00
Electro-Cathether Corp. $ 2,209.00
Valley Forge Scientific Corp. $ 2,741.00
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BIOSEARCH MEDICAL PRODUCTS $ 897.00
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LTM EBITDA
Company (As % of Revs)
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Valley Forge Scientific Corp. 5.20%
MedAmicus, Inc. 4.60%
Dexterity Surgical, Inc. -10.60%
Nitnol Medical Technologies, Inc. -10.80%
Electro-Cathether Corp. -12.60%
Rochester Medical Corp. -24.80%
Trimedyne, Inc. -31.90%
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BIOSEARCH MEDICAL PRODUCTS -59.30%
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mean -17.50%
median -11.70%
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Notes:
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EXHIBIT 5
BIOSEARCH MEDICAL PRODUCTS
Comparision of Biosearch to the Public Comparables Group
Growth Rates
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3 Year CAGR
Company Revenues
- ------- --------
Nitnol Medical Technologies, Inc. 56.40%
Rochester Medical Corp. 44.90%
Dexterity Surgical, Inc. 29.00%
MedAmicus, Inc. 14.90%
Valley Forge Scientific Group 13.00%
Electro-Cathether Corp. -9.70%
Trimedyne, Inc. -10.20%
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BIOSEARCH MEDICAL PRODUCTS -26.60%
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Mean 14.00%
Median 14.00%
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3 Year CAGR
Company EBIT
- ------- ----
Rochester Medical Corp. 33.70%
Electro-Cathether Corp. -7.60%
MedAmicus, Inc. -30.50%
Dexterity Surgicial, Inc. -30.70%
Valley Forge Scientific Corp. -70.20%
Trimedyne, Inc. nmf
Nitnol Medical Technologies, Inc. nmf
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BIOSEARCH MEDICAL PRODUCTS, INC nmf
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mean -21.10%
median -30.50%
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3 Year
Company CAGR Revenues
- ------- -------------
MedAmicus, Inc. 238.70%
Rochester Medical Corp. 34.70%
Trimedyne, Inc. 2.40%
Electro-Cathether Corp. -6.50%
Dexterity Surgical, Inc. -31.30%
Valley Forge Scientific Corp. nmf
Nitnol Medical Technologies, Inc. nmf
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BIOSEARCH MEDICAL PRODUCTS nmf
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Mean 47.60%
Median 2.40%
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3 Year CAGR
Company Net Income
- ------- ----------
Rochester Medical Corp. 19.90%
Dexterity Surgicial, Inc. 3.70%
Electro-Cathether Corp. -7.70%
Valley Forge Scientific Corp. -45.80%
MedAmicus, Inc. -51.90%
Trimedyne, Inc. nmf
Nitnol Medical Technologies, Inc. nmf
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BIOSEARCH MEDICAL PRODUCTS, INC nmf
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mean -16.40%
median -7.70%
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Notes:
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EXHIBIT 5
BIOSEARCH MEDICAL PRODUCTS
Comparision of Biosearch to the Public Comparables Group
Relative Performance
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Company Return on Assets
- ------- ----------------
Valley Forge Scientific Corp. 0.50%
MedAmicus, Inc. -3.40%
Nitnol Medical Technologies, Inc. -5.30%
Rochester Medical Corp. -7.80%
Trimedyne, Inc. -17.00%
Dexterity Surgicial, Inc. -19.30%
Electro-Cathether Corp. -50.50%
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BIOSEARCH MEDICAL PRODUCTS, INC -94.90%
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Mean -24.70%
Median -12.40%
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Return on Total
Company Invested Capital
- ------- ----------------
Valley Forge Scientific Corp. 0.50%
MedAmicus, Inc. -4.00%
Nitnol Medical Technologies, Inc. -6.70%
Rochester Medical Corp. -8.10%
Trimedyne, Inc. -18.40%
Dexterity Surgicial, Inc. -32.90%
Electro-Cathether Corp. -137.50%
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BIOSEARCH MEDICAL PRODUCTS, INC -954.30%
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mean -145.20%
median -13.20%
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Company Return on Equity
- ------- ----------------
Electro-Cathether Corp. 92.60%
Valley Forge Scientific Corp. 0.50%
MedAmicus, Inc. -5.60%
Rochester Medical Corp. -8.10%
Nitinol Medical Technologies, Inc. -10.30%
Trimedyne, Inc. -18.40%
Dexterity Surgicial, Inc. -56.50%
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BIOSEARCH MEDICAL PRODUCTS, INC -954.30%
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Mean -120.00%
Median -9.20%
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Notes:
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EXHIBIT 6
BIOSEARCH MEDICAL PRODUCTS
CALCULATION OF COST OF CAPITAL
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Comparable Company Financial Data
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Analysts' Consensus
Price/Earnings Earnings Capitialization Forecasted Growth Implied Discounted
Company Name Multiple (1) Rate (2) Rate (3) Rate (4)
- ------------ ------------ -------- -------- --------
Nitinol Medical 14.3 x 7.0% 35.0% 42.0%
Mean Discount Rate 42.00%
(1) Based on the market data as of 4/9/99
(2) The inverse of the price/earnings multiple
(3) Source: Zacks
(4) Sum of the growth rate and the capitalization rate.
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Exhibit 7
BIOSEARCH MEDICAL PRODUCTS
Discounted Cash Flow Analysis
($ in 000's)
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PROBABILITY = 41% of the FORECASTS
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Terminal
1999 2000 2001 2002 2003 Value [2]
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Total Revenues 765 1,112 1,454 1,733 2,001
Earnings before Interest and Taxes (29) 69 73.8 205 343
----- ----- ----- ----- -----
Income Taxes of Subchapter S Distributions (1) (9) 22 23.6 66 110
----- ----- ----- ----- -----
Operating Income, net of tax (20) 47 50.2 139 233 245
Plus: Depreciation and Amortization 19 19 19 19 19 19
Less: (Increase) Reduction in Net Working Capital (44) 29 28 23 22 23
Less: (Capital Expenditures) (8) (8) (8) (8) (8) (19)
----- ----- ----- ----- ----- -----
Cash Flows (52) 86 89 173 266 268
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Residual Value (3) 670
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Discount Rate 45.00%
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Number of periods 0.32 1.15 2.15 3.15 4.15 4.65
Discount Factor 0.887 0.6533 0.4506 0.3107 0.2143 0.178
Present Value of Cash Flows (47) 56 40 54 57
Sum of Present Value of Cash Flows 181
Present Value of Residual Value 119
Total Present Value (Enterprise Value) $ 280
Less: Debt net of cash and investments as of (49)
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Net Equity Value $ 329
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Per Share $0.15
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Discount Rate Sensitivity Analysis
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40% 45% 50%
Equity Value $346 $329 $ 316
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Per Share $0.16 $0.15 $ 0.14
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Calculation of Net Debt
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Total Debt 0
Less: Cash and Marketable Securities 49
-------
Net Debt (49)
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Notes:
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(1) Assumes Pro-forma income taxes of 32%
(2) Terminal Cash flow based on growth rate in operating come of 5% with
depreciation, CAPEX, and working capital investments unchanged from last
forecasted year.
(3) Residual value equals cash flow capitalized at discount rate of 45% less
growth rate of 5%, equaling 40%
Percentage of
Forecasted Probability of Expected
Results Result Value
------- ------ -----
0% 5% 0%
25% 35% 9%
50% 50% 25%
75% 10% 8%
100% 0% 0%
--------- ----------
100% 41%
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Exhibit 8
BIOSEARCH MEDICAL PRODUCTS
Discounted Cash Flow Analysis
($ in 000's)
PROBABILITY = 55% of the FORECASTS
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Terminal
1999 2000 2001 2002 2003 Value [2]
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Total Revenues 1,020 1,483 1,939 2,311 2,668
Earnings before Interest and Taxes (38) 92 98 273 457
------ ------ ------ ------ ------
Income Taxes of Subchapter S Distributions (1) (12) 29 32 87 146
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Operating Income, net of tax (26) 62 67 186 311 327
Plus: Depreciation and Amortization 25 25 25 25 25 25
Less: (Increase) Reduction in Net Working Capital (23) 38 38 31 29 31
Less: (Capital Expenditures) (14) (14) (14) (14) (14) (25)
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Cash Flows (38) 111 115 227 351 358
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Residual Value (3) 895
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Discount Rate 45.00%
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Number of periods 0.32 1.15 2.15 3.15 4.15 4.65
Discount Factor 0.887 0.6533 0.4506 0.3107 0.2143 0.1780
Present Value of Cash Flows (34) 73 52 71 75
Sum of Present Value of Cash Flows 237
Present Value of Residual Value 159
Total Present Value (Enterprise Value) $ 396
Less: Debt net of cash and investments as of (49)
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Net Equity Value $ 445
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Per Share $ 0.20
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Discount Rate Sensitivity Analysis
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40% 45% 50%
Equity Value $527 $445 $ 384
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Calculation of Net Debt
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Total Debt 0
Less: Cash and Marketable Securities 49
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Net Debt (49)
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Notes:
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(1) Assumes Pro-forma income taxes of 32%
(2) Terminal Cash flow based on growth rate in operating come of 5% with
depreciation, CAPEX, and working capital investments unchanged from last
forecasted year.
(3) Residual value equals cash flow capitalized at discount rate of 45% less
growth rate of 5%, equaling 40%
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Percentage of
Forecasted Probability of Expected
Results Result Value
------- ------ -----
0% 5% 0%
25% 10% 3%
50% 50% 25%
75% 30% 23%
100% 5% 5%
------ -----
100% 55%
-----
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Biosearch Medical Products, Inc. Methodology & Background
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Overview
Howard, Lawson & Co. provides investment banking services to the senior
management of private and public companies. Services include financial plans for
corporations and their shareholders, valuations of securities and business
interests, fairness opinions, debt and equity financing, litigation support,
advice and negotiations dealing with changes in ownership, acquisitions and
divestitures.
In forming our opinion as to the value of Biosearch as of the Valuation
Date, we considered all the factors which we deemed relevant and have described
them in our report.
We have interviewed the senior managements of Hydromer and Biosearch, and
reviewed those documents which were necessary to form a sound opinion as to the
value of Biosearch. In forming our opinion, we have followed the suggestion of
Internal Revenue Service Revenue Ruling 59-60, which states in part:
"Because valuations cannot be made on the basis of a prescribed formula,
there is no means whereby the various applicable factors in a particular case
can be assigned mathematical weights in deriving the fair market value. For this
reason, no useful purpose is served by taking an average of several factors (for
example, book value, capitalized earnings and capitalized dividends) and basing
the valuation on the result. Such a process excludes active consideration of
other pertinent factors, and the end result cannot be supported by a realistic
application of significant facts in the case except by mere chance."
In forming our opinion, we have also reviewed relevant court cases,
treatises and articles dealing with valuation procedures.
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Howard, Lawson & Co.
Biosearch Medical Products, Inc. Methodology & Background
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Assumptions and Limiting Conditions
This appraisal is subject to the following assumptions and limiting
conditions: (1) information, estimates, and opinions contained in this report
are obtained from sources considered reliable; however, no liability for such
sources is assumed by the appraiser; (2) Hydromer and its representatives
warrant to appraiser that the information supplied to appraiser was complete and
accurate to the best of client's knowledge. Information supplied by management
has been accepted without further verification as correctly reflecting
Biosearch's past results and current condition in accordance with general
accepted accounting principles, unless otherwise noted; (3) possession of this
report, or a copy thereof, does not carry with it the right of publication of
all or part of it, nor may it i be used for any purpose by anyone but the client
without the previous written consent of the appraiser or the client and, in any
event, only with proper attribution; (4) appraiser is not required to give
testimony in court, or be in attendance during any hearings or depositions with
reference to Biosearch, unless previous arrangements have been made; and (5) the
various estimates of value presented in this report apply to this appraisal only
and may not be used out of the context presented herein. This appraisal is valid
only for the appraisal date or dates specified herein and only for the appraisal
purpose or purposes specified herein.
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Howard, Lawson & Co.
Biosearch Medical Products, Inc. Methodology & Background
Certification
This report was prepared by Frank Spewock and Michael Hanzelik, both
employees of Howard, Lawson & Co. and actively involved in the firm's extensive
valuation practice. The appraisers have no present or contemplated future
interest in Biosearch or any other interest which might tend to prevent their
making a fair and unbiased appraisal.
We hereby certify, to the best of our knowledge and beliefs, the statements
of fact contained in this report are true and correct, and this report has been
prepared in conformity with the Uniform Standards of Professional Appraisal
Practice of The Appraisal Foundation and the Principles of Appraisal Practice
and Code of Ethics of the American Society of Appraisers.
/s/ Frank Spewock
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Frank Spewock
Partner
/s/ Michael Hanzelik
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Michael Hanzelik
Associate
June 3, 1999