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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ___________.
Commission File Number 0-5958
MERIDIAN MEDICAL TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-0898764
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
10240 Old Columbia Road, Columbia, Maryland 21046
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 410-309-6830
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section (12g) of the act: Common Stock,
$.10 par value
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K any amendment to this
Form 10-K. [ ]
As of (October 27, 1997), the aggregate market value of voting stock held by
non-affiliates of the Registrant, based on the average of the high and low sales
prices of such stock reported by the National Association of Securities Dealers,
Inc. on such date, was approximately $18.6 million.
There were 2,912,502 shares of Registrant's common stock outstanding as of
September 30, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Meridian Medical Technologies, Inc. definitive Proxy Statement
for the Annual Meeting of Shareholders for the fiscal year ended July 31, 1997
are incorporated by reference into Part III of this Form 10-K.
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(End of cover page)
2
TABLE OF CONTENTS
PART I
Item 1. BUSINESS Page
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General ....................................................... 4
Products and Services ......................................... 5
Injectable Drug Delivery System ...................... 5
STI Military Systems ................................. 6
Cardiopulmonary Systems .............................. 7
Competition ................................................... 9
Backlog and Renegotiation ..................................... 9
Research and Development ...................................... 10
Patents, Trademarks, and Licenses ............................. 10
Product Liability Insurance ................................... 10
Cost Reduction Program ........................................ 11
Government Regulation ......................................... 11
Employees ..................................................... 12
Item 2. PROPERTIES .................................................... 13
Item 3. LEGAL PROCEEDINGS ............................................. 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 14
EXECUTIVE OFFICERS OF THE REGISTRANT
(Unnumbered Item) ............................................ 14
3
TABLE OF CONTENTS
PART II Page
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Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS ............................. 15
Item 6. SELECTED FINANCIAL DATA...................................... 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ....................................
PART III
Items 10
Through 13.
(Incorporated by reference from the definitive Proxy
Statement for the Annual Meeting of Shareholders for the
fiscal year ended July 31, 1997, which will be filed with the
Securities and Exchange Commission not later than 120 days
after the end of that fiscal year)...........................
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND
REPORTS ON FORM 8-K .........................................
Signatures ...........................................................
4
Certain statements in this Annual Report on Form 10-K are forward-looking and
are identified by the use of forward-looking words or phrases such as "will be
positioned", "expects", is or are "expected", "anticipates", and "anticipated".
These forward-looking statements are based on the Company's current
expectations. Because forward-looking statements involve risks and
uncertainties, the Company's actual results could differ materially. In addition
to the factors discussed under "Business--Competition", "Business--Product
Liability Insurance" and "Business--Government Regulation", among the factors
that could cause results to differ materially from current expectations are: (i)
the general economic and competitive conditions in markets and countries where
the Company and its subsidiaries offer products and services; (ii) changes in
capital availability or costs; (iii) fluctuations in demand for certain of the
Company's products, including changes in government procurement policy; (iv)
technological challenges associated with the development and manufacture of
current and anticipated products; (v) commercial acceptance of auto-injectors
and competitive pressure from traditional and new drug delivery methods; and
(vi) delays, costs and uncertainties associated with government approvals
required to market new drugs and medical devices.
PART I
ITEM 1. BUSINESS
GENERAL
Meridian Medical Technologies, Inc. (hereinafter referred to as the "Company" or
"MMT" or "Meridian") was formed in November 1996 through the merger of Survival
Technology, Inc. ("STI") and Brunswick Biomedical Corporation ("Brunswick"). At
the time of the merger, Brunswick held approximately 61% of STI's outstanding
common stock, which Brunswick purchased from the estate of STI's late founder on
April 15, 1996. As a result, STI had been treated for financial accounting
purposes as a consolidated, majority-owed subsidiary of Brunswick from that
date. Upon completion of the merger, STI was the surviving corporation as a
legal matter but the merger was recorded as a purchase of STI by Brunswick for
financial accounting purposes.
This merger of STI and Brunswick brought together two companies with a long
standing historical relationship that had complimentary business synergies and
marketing strategies. Both companies were focused on the rapidly growing home
healthcare and emergency healthcare markets.
STI was a publicly traded company that primarily sold auto-injectors to
commercial and military markets. Brunswick was a privately held Company with
core technologies focused on enhancing the diagnosis of cardiac ischemia and
arrhythmias. Brunswick was primarily a research and development Company focused
on the development of the PRIME ECG(TM) cardiac analysis system.
MMT, through its predecessor company, STI, pioneered the development of
auto-injectors for the self-administration of injectable drugs. An auto-injector
is a spring-loaded, prefilled, pen-like device that allows a patient to
automatically inject a precise drug dosage quickly, safely, reliably and, with
the new TRUJECT(TM) platform, without seeing the needle. The auto-injector is a
convenient, disposable, one-time use device designed to improve the medical and
economic value of many drug therapies. The product is well-suited for the
administration of certain drugs, including epinephrine for the treatment of
allergic reactions, lidocaine for the treatment of cardiac arrhythmias, morphine
for the treatment of pain and antidotes and diazepam for the treatment of nerve
gas poisoning and other chemical and biological exposures in battlefield
conditions. MMT also supplies customized drug delivery system design,
pharmaceutical research and development and GMP-approved sterile product
manufacturing to pharmaceutical and biotechnology companies.
5
The Company has three primary areas of business: Injectable Drug Delivery
Systems, STI Military Systems and Cardiopulmonary Systems. The Injectable Drug
Delivery and STI Military business both utilize the Company's auto-injector
technology, while the Cardiopulmonary business utilizes the Company's
electrocardiology and telemedicine technologies. The Company expects to realize
significant revenue growth from commercial applications of its auto-injector
products as a result of product development, expansion into new therapeutic
areas such as migrane, growth hormones and fertility, and the recently announced
alliances with Mylan Laboratories and Genpharm. Management also anticipates
growth in its telemedicine products and believes that the PRIME ECG(TM) cardiac
analysis system has the potential to become a significant source of revenue and
profitability for the Company. Military auto-injector revenues are expected to
increase at a more moderate pace through international market expansion, new
product development and expanding civil defense applications for the Company's
products.
PRODUCTS AND SERVICES
Injectable Drug Delivery Systems
Currently, the substantial majority of the Company's commercial (i.e.,
non-military) sales come from its epinephrine auto-injectors, the EpiPen(R) and
EpiE-Zpen(TM). The EpiPen(R) and EpiE-Zpen(TM) are prescribed to patients at
risk of anaphylaxis resulting from severe allergic reactions to bee stings,
insect bites, foods, drugs and exercise-induced anaphylaxis. These
auto-injectors permit the immediate self-injection of epinephrine, the drug of
choice for emergency treatment of such conditions. Each of these auto-injectors
has a junior version for children. The EpiPen(R), was the Company's first
commercial auto-injector. In fiscal 1996, the Company launched the
EpiE-Zpen(TM), which has a more streamlined design to better serve the consumer
market and additional safety features and product quality enhancements,
including push button activation. Demand for the EpiPen(R) and EpiE-Zpen(TM) has
grown at double-digit rates over the last several years.
The Company markets the EpiPen(R) and EpiE-Zpen(TM) through Dey Laboratories,
Inc. (formerly Center Laboratories), a subsidiary of E. Merck, a major
pharmaceutical Company based in Germany. Dey Laboratories has a co-marketing
agreement with ALK, Inc., a Danish Company, for international markets in 13
foreign countries. The Company also produces the LidoPen(R) auto-injector which
is the same delivery system as the EpiPen(R), except that it is prefilled with
lidocaine hydrochloride for self-injection by persons experiencing a serious
cardiac event. The LidoPen(R) is sold primarily in connection with the sale of
the CardioBeeper(R) ECG transmitter sold by the Cardiopulmonary Systems
business.
On October 8, 1997, the Company announced a product exchange program for all of
its EpiEZPen(R) product sold since March 1996 (approximately 500,000 units).
This exchange program was initiated after a minimal amount of units (less than
10 units) were returned for premature activation in the package. Management has
performed an analysis of potential costs of the exchange program and made their
best estimate regarding these costs. The estimated cost of the exchange program
is $1.5 million and is included in fiscal 1997 results of operations. Actual
costs could differ materially from management's estimates. The Company has not
included any anticipated cost sharing of this exchange with potentially
responsible parties as the benefit and probability of such an arrangement are
not determinable at this time. The Company believes the exchange will be
substantially complete by the end of fiscal 1998 and that the impact on future
business is anticipated to be minimal.
6
Meridian is aggressively pursuing new products to further capitalize on its
auto-injector technologies. The Company launched its new TRUJECT(TM)
auto-injector in June 1997. TRUJECT(TM) is an innovative and low cost single use
disposable auto-injector utilizing a technology platform that could replace
existing auto-injector applications. TRUJECT(TM) incorporates the latest safety
features plus a needle cover which prevents contamination and shields the needle
from view during self-injection. TRUJECT(TM) utilizes dental cartridge
technology, which is the container of choice for many commercial drug delivery
systems due to its low cost and ease of manufacturing. The Company believes that
the new TRUJECT(TM) technology coupled with the Company's drug development and
manufacturing capabilities will fuel significant growth in the its Injectable
Drug Delivery business.
In April 1997, Meridian announced a long term strategic alliance with Mylan
Laboratories ("Mylan") in which Meridian will license, develop and manufacture a
line of generic injectable drugs to be marketed by Mylan. This alliance could
result in significant sales growth for its Injectable Drug Delivery business
over the next three to five years. In fiscal 1997, the Company filed abbreviated
new drug applications ("ANDA's") for its first generic products under the Mylan
alliance. Regulatory approval of these ANDA's is expected in late fiscal 1998 or
early fiscal 1999.
In June 1997, Meridian announced an alliance with Genpharm, Inc., a subsidiary
of E. Merck, for the marketing of a major generic injectable pharmaceutical drug
in Canada and Europe. The Company is also working with other pharmaceutical
companies under development contracts to identify other drugs suitable for
administration using Meridian's auto-injector technologies and injectable drug
manufacturing capabilities. The Injectable Drug Delivery business also has
complete sterile parenteral Contract Filling and Packaging services for a broad
range of sterile injectable dosage forms which includes vials, dental cartridges
and pre-filled ready-to-use syringes.
Further, the Injectable Drug Delivery business provides fully validated
formulation and aseptic filling services and regulatory assistance for those
pharmaceutical and biotechnology companies not currently possessing such
capabilities. The Company also supplies customized drug delivery system design,
GMP-approved sterile product manufacturing and pharmaceutical research and
development to a number of different companies. Development programs include
feasibility and stability studies as well as the manufacturing of clinical trial
materials in the Company's St. Louis pilot plant. If feasibility and stability
are successful and all regulatory approvals are received, the Company
anticipates contracts in the coming years to manufacture these products in
vials, prefilled syringes and proprietary auto-injector systems. Revenue from
customer-funded research and development activities, including amounts earned by
STI prior to being acquired by the Company, was $1.5 million and $2.3 million
during fiscal years 1997 and 1996, respectively. The Company expects fiscal 1998
revenue from funded R&D activities to be comparable with average historical
levels.
STI Military System
The Company's military auto-injectors are designed to be used by military
personnel under combat conditions for the self-administration of antidotes
against the effects of chemical warfare. Meridian is the sole supplier of
auto-injectors to the U.S. Department of Defense ("DoD") and is the only Federal
Food and Drug Administration "FDA" approved supplier to U.S. and NATO forces.
The business plans to build upon its strong relationship with the DoD and is
positioned as the source of first choice for military auto-injector products by
introducing new products into this market. These products include a
multi-chamber device specifically for military use and the development of
auto-injectors for additional drugs. The Company will also attempt to develop
new civilian markets for its injectors such as to the Federal Emergency
Management Authority ("FEMA") and other state agencies and to serve
international populations in high risk areas in response to potential terrorist
attacks and/or in conjunction with DE-MIL programs (disarming and destroying
chemical weapon stockpiles). The Company will also continue its strategy of
expanding its international military sales into new markets in Europe, the
Middle East and Central/South America. In fiscal 1997, the STI Military Systems
business was awarded two contracts with total value of $6 million to supply two
allied governments in Europe with military auto-injectors containing nerve gas
antidote.
7
DoD procurements of auto-injectors are restricted to qualified producers and all
products must be approved by the FDA. The Company is currently the only
FDA-approved and the only qualified producer for all DoD military
auto-injectors. The Company's auto-injectors are considered so important by the
DoD that they are classified as critical "war stopper" items and are the subject
of an industrial base maintenance contract between the Company and the DoD. This
contract is part of a program by the DoD to ensure adequate supplies of critical
items in the event of war.
The industrial base maintenance contract between the Company and the DoD is a
three year contract, subject to annual renewal. The contract calls for the
retention by the Company of key personnel and facilities to assure expertise for
manufacturing auto-injectors containing nerve gas antidotes, the storage of
serviceable material from expired auto-injectors, the management of the U.S.
Army's Shelf Life Extension Program, and new product orders. A surge capability
provision allows for the coverage of defense mobilization requirements in the
event of rapid military deployment. The contract was expanded in fiscal 1996 to
include the pre-stocking of critical components to enhance readiness and
mobilization capability. Revenues under this contract have been approximately
$14 to $16 million over the last two years and are projected to remain
relatively stable over the next two to three years. All U.S. government
contracts provide that they may be terminated for the convenience of the
Government as well as for default but no such contract terminations are
anticipated by the Company. The Company has been a supplier to the DoD since
1970.
The U.S. Government, in conjunction with the Company, continues to investigate
new automatic injection delivery systems, as well as new drugs (including
Diazepam and morphine) and antidotes to be placed in new or existing automatic
injectors. In fiscal 1996, the Company began selling a Diazepam auto-injector to
the DoD. The Company currently markets a morphine injector to international
military customers and plans to introduce a similar product to the DoD in fiscal
1998. The Company has a program in conjunction with the DoD to develop a
multi-chamber auto-injector to accommodate the administration of two drugs
sequentially through a single injection. The Company has introduced
auto-injector systems that can store compounds in dry form and mix them in
solution prior to administration. Limited quantities of this product (BinaJect)
have been manufactured and sold to a foreign allied government. Many of the new
nerve agent antidotes require this technology because of their limited
shelf-life or instability in solution.
Cardiopulmonary Systems
The Cardiopulmonary Systems business is developing the PRIME ECG(TM) cardiac
analysis system, a non-invasive cardiac diagnostic system, and manufactures and
sells non-invasive monitoring devices for home telemedicine applications. The
Company's strategy with respect to the Cardiopulmonary business is to develop
and commercialize the PRIME ECG(TM) cardiac analysis system and to leverage the
Company's ten years of experience in transtelephonic physiologic monitoring to
penetrate the rapidly growing home telemedicine market. Because of the
significant size of the market and the potential demand for the PRIME ECG(TM)
product, the Company expects to market the product in conjunction with a larger,
more established marketing partner that can provide an existing sales and
distribution system. The Company is currently seeking such a marketing partner.
8
PRIME ECG(TM) Cardiac Analysis System. The PRIME ECG(TM) system is a unique,
80-lead body surface mapping system being developed in collaboration with the
University of Ulster in Northern Ireland. The goal of this system is to
dramatically improve the diagnosis and treatment of coronary artery disease,
which affects over 13 million people in the U.S. alone, resulting in over 1.5
million heart attacks and almost 500,000 deaths each year. The PRIME ECG(TM)
system consists of an 80-lead patented, disposable electrode harness,
sophisticated ECG input amplifiers, a computer system and ECG analysis
algorithms. Initially, the system will be positioned for the rapid and accurate
detection of acute myocardial infarction ("AMI") or heart attack. The Company
believes the PRIME ECG(TM) system will provide superior diagnosis of AMI as
compared to a 12-lead electrocardiogram. Due to the low sensitivity and
specificity of the 12-lead electrocardiogram, subsequent tests for elevated
cardiac enzyme levels in the blood must be conducted. The results of these
tests, however, are often not available until after the window of opportunity
for optimum effectiveness of thrombolytic therapy or angioplasty has passed.
Rapid diagnosis and intervention in AMI is essential to reduce or minimize the
damage to a patient's heart. The Company expects the PRIME ECG(TM) system will
be used by the emergency room physician who needs a faster and more accurate
diagnostic tool to treat chest pain patients. The Company believes that the sale
of disposable vests will provide a recurring source of revenue and anticipates
that it will be the sole supplier of such vests. The Company is currently
pursuing a development/marketing partner with the objective of launching the
system in Europe in late 1998 and in the U.S. upon completion of clinical trials
and receipt of FDA regulatory clearance. The Company anticipates launching the
product in the U.S. by 1999. The Company believes that the product qualifies for
review under 510(k) notification, but there can be no assurance that the FDA
will not require a premarket application ("PMA"), which could delay the U.S.
launch.
Telemedicine Products
The Company is a leader in the development of devices that measure and transmit
medical physiological measurements by telephone. These telemedicine products
allow a patient's condition to be monitored while they remain at home, which
reduces expensive physician office visits, allows for earlier diagnosis and
minimizes emergency room and hospital visits during perceived emergencies.
Meridian's electronic heart monitoring device takes and transmits a patient's
electrocardiogram ("ECG") by telephone. Currently the CardioBeeper(R) product
line is sold by Shahal Medical Services, Ltd. ("Shahal"), which has exclusive
international marketing rights. Shahal, based in Israel, is a large home
healthcare monitoring company. In March 1997, the Company announced FDA approval
of the first patient-administered device capable of transmitting a complete
12-lead electrocardiogram over a standard telephone line. Other products
currently marketed measure and transmit blood pressure and peak respiratory
flow. Several new products are in development. The trend toward managed and home
healthcare in the U.S. will offer new marketing opportunities for
transtelephonic devices. The Company has also developed a CD-ROM product
focusing on teaching children CPR in a fun and entertaining way. This product is
due for release during fiscal 1998.
Sources and Availability of Raw Materials
The Company purchases, in the ordinary course of business, necessary raw
materials and supplies essential to the Company's operations from numerous
suppliers in the U.S. and overseas. During fiscal 1997, the Company experienced
no significant component supply availability problems and does not anticipate
availability problems or significant supply shortages in the future. The Company
procures inventory principally when supported by customer purchase orders.
9
COMPETITION
In the commercial auto-injector market, the Company competes directly with
companies that manufacture drug injection devices, whether such devices are
automatic like the Company's products or non-automatic, variable dose pen-like
injection devices, reloadable injection devices and disposable needle-free
injection systems. The Company is the leading manufacturer of automatic
injectors in the world. Other companies that sell commercial auto-injectors
include Glaxo Wellcome who has a reloadable auto-injector kit (designed and
manufactured by Owen Mumford and several other contract manufacturers) for use
only with its Imitrex migraine drug. MediJect, BioJect and VitaJect are all
developers and manufacturers of reloadable needle free injection systems. These
systems are bulky, very expensive devices and currently are used to administer
insulin by a small percentage of diabetics. Smaller, more convenient needle-free
injection systems are currently under development by several of these companies.
There are only three known competitors that sell auto-injectors in military
markets served by the Company: Shalon, an Israeli-based Company that sells
auto-injectors to the Israeli military; Sam Yang Chemical Co., a Korean company
that sells auto-injectors to the Korean military; and Duphar, a Holland-based
Company and unit of Solvay BV of Belgium that sells auto-injectors in
international military markets also served by the Company.
The Company's contract filling and packaging services operate in an intensely
competitive field which is presently dominated by larger pharmaceutical
companies. There are numerous other disposable, prefilled syringe systems
presently available which can be less expensive than those offered by the
Company. A very small group of independent companies and a few pharmaceutical
companies offer contract syringe filling services similar to those that the
Company offers.
The Cardiopulmonary business operates in a highly competitive sector of the
healthcare industry. Meridian's telemedicine products compete against the
products of numerous other companies and joint ventures. The PRIME ECG(TM)
product will compete with existing diagnostic equipment and testing procedures
and potentially with products and technologies currently under development that
may be brought to market, including blood markers for detection of acute MI
(heart attack), enhanced 12-lead ECG algorithms, invasive cardiac mapping and
improved cardiac stress testing.
BACKLOG AND RENOGOTIATION
As of July 31, 1997, the backlog of orders was approximately $13.2 million, of
which $5.4 million related to production and delivery of commercial products and
services and $7.8 million related to military products. This compares with
commercial product sales backlog of $4.9 million and military auto-injector
sales backlog of $3.1 million at July 31, 1996.
The Company's supply contracts with the DoD are subject to post-award audit and
potential price redetermination. From time to time, the DoD makes claims for
pricing adjustments with respect to completed contracts. At present, no claims
are pending.
All U.S. Government contracts provide that they may be terminated for the
convenience of the Government as well as for default. Upon termination for
convenience of cost reimbursement type contracts, the Company would be entitled
to reimbursement of allowable costs plus a portion of the fixed or target fee
related to work accomplished. Upon termination for convenience of fixed-price
contracts, the Company normally would be entitled to receive the contract price
for items which have been delivered under the contract, as well as reimbursement
for allowable costs for undelivered items, plus an allowance for profit thereon
or adjustment for loss if completion of performance would have resulted in a
loss. No such contract terminations are anticipated by the Company.
10
RESEARCH AND DEVELOPMENT
The Company expensed $2.8 million, $1.7 million and $.7 million on research and
development activities in fiscal 1997, proforma 1996 and 1995, respectively. The
Company expects research and development expenditures in fiscal 1998 to be
higher than the fiscal 1997 level.
MMT is currently developing a new family of auto-injectors to accommodate the
expanding variety of injectable drugs that demand safe and convenient patient
self-administration. These new auto-injectors are designed for use in emergency
situations and for any episodic treatment where an intramuscular or subcutaneous
injection is the preferred drug delivery method. The Company is currently
exploring certain applications of these new auto-injectors which will be subject
to regulations prior to the product reaching the marketplace. See "Government
Regulation" following:
The Company has patented auto-injector systems that can store compounds in dry
form and reconstitute them in solution prior to administration. An increasing
array of biotechnology products and many traditional therapies require this
technology because of their limited shelf-life or instability in solution. MMT
also has a single-chambered auto-injector for intramuscular and subcutaneous
injection which utilize a very thin (27 gauge) needle for potential new
applications.
In addition, MMT will continue to develop its Cardiac Analysis System and
Telemedicine Products with the key focus being on the PRIME ECG(TM).
PATENTS, TRADEMARKS, AND LICENSES
The Company considers its proprietary technology to be important in the
development, marketing and manufacture of its products and seeks to protect its
technology through a combination of patents and confidentiality agreements with
its employees and others. Patents covering important features of the Company's
current principal auto-injector products have expired. This loss of patent
protection could have an adverse effect on the Company's revenues and results of
operations. MMT is currently developing a new generation of auto-injector
products (see "Research and Development") for which a number of patents have
been granted to the Company. Over the last few years, the Company was granted
U.S. patent protection for several of its new auto-injector drug delivery
systems, designed for fast and reliable patient self-administration of the
expanding range of new pharmaceutical and biotechnology products that require
injection. Some of these patents cover the new TRUJECT(TM) technology which was
launched in June 1997. In addition, the Company holds patents and licenses on
the PRIME ECG(TM) 80-lead mapping system harness.
The Company intends to file for additional protection for all its new
auto-injector and cardiopulmonary products currently under development. The
auto-injector products are expected to replace or supplement the Company's
existing line of auto-injectors over time.
PRODUCT LIABILITY INSURANCE
The Company maintains product liability coverage for its products. The Company
will continue to maintain liability insurance as it relates to divested
operations to cover any potential claims incurred but not reported prior to
their disposition. Although, the Company's management is of the opinion that,
with respect to amounts, types and risks insured, the insurance coverage is
adequate for the business conducted by the Company, there can be no assurance
that such insurance will provide sufficient coverage against any or all
potential product liability claims.
11
COST REDUCTION PROGRAM
Meridian implemented a cost reduction program in fiscal 1997, following the
completion of the merger of STI and Brunswick, to reduce both manufacturing and
overhead costs. Meridian's gross margin improved from 30% in fiscal 1996 (on a
pro forma basis) to 37% in fiscal 1997, even though the benefit of the cost
reductions was not realized for the full fiscal year.
The Company's cost reduction program is on-going, with additional initiatives
expected to be implemented in fiscal 1998 and beyond. The Company's new
generation products incorporate both enhanced features and lower manufacturing
costs. The Company expects to achieve significant future cost savings from the
consolidation of facilities in St. Louis. Currently the St. Louis manufacturing
operations utilize a total of nine buildings. The Company intends to consolidate
these operations into fewer buildings which should result in enhanced product
flow, increased product yield and reduced inventory and overhead costs.
GOVERNMENT REGULATION
The business of the Company is highly regulated by governmental entities,
including the FDA and corresponding agencies of states and foreign countries.
The summary below does not purport to be complete and is qualified in its
entirety by reference to the complete text of the statues and regulations cited
herein.
As a manufacturer of auto-injectors, cardiopulmonary products and pre-filled
syringes, the Company's products are subject to regulation by the FDA under the
Federal Food, Drug and Cosmetic Act ("Act"). All of the Company's auto-injectors
are "new drugs" and may be marketed only with the FDA's approval of a New Drug
Application "NDA" or a supplement to an existing NDA. The Company currently
holds approved NDAs for each of its existing auto-injector products. The use of
the Company's existing auto-injectors to administer FDA approved drugs generally
would require the filling of a NDA or supplement to an existing NDA. In
addition, the introduction of the Company's new generation auto-injectors will
require FDA approvals based on data demonstrating the safety and effectiveness
of the drug delivered by these auto-injectors. There is no assurance that the
NDAs will be processed in a timely manner or that FDA ultimately will approve
such NDAs.
The Company's Cartrix(TM) and other prefilled syringe systems are also regulated
as drugs; however, the requisite FDA approval is held by the supplier of the
drug that the Company fills into the syringe. To the extent the Company's
auto-injectors or Cartrix(TM) syringe system are expected to be used to
administer new drugs under development, FDA approval to market such drugs first
must be received by the pharmaceutical manufacturer. Obtaining the requisite FDA
approval is a time consuming and costly process through which the manufacturer
must demonstrate the safety and effectiveness of a new drug product.
12
The Company's Cardiopulmonary Systems Products must have Underwriters
Laboratories "UL" and/or CE Marking. CE Marking is required for international
sales.
In connection with its manufacturing operations, the Company must comply with a
variety of regulations, including the FDA's Good Manufacturing Practice ("GMP")
regulations, and its manufacturing facilities are subject to periodic
inspections. The Company's St. Louis facility underwent an inspection by the FDA
during fiscal 1996 in which there were no material issues brought to
management's attention.
Suppliers of bulk drugs for filling into the Company's syringe systems, as well
as some subcontractors who manufacture components for the Company's medical
devices, also are subject to FDA regulation and inspection. The Company has only
limited control over these other companies' compliance with FDA regulations.
Failure of these companies to comply with FDA requirements could adversely
affect the Company's ability to procure component parts, market finished
products and may cause the Company's products made with non-compliant components
to be adulterated or misbranded in violation of the Act, subjecting the products
to a variety of FDA administrative and judicial actions.
The FDA is empowered with broad enforcement powers. The FDA may initiate
proceedings to withdraw its approval for marketing of the Company's product
should it find that the drugs are not manufactured in compliance with GMP
regulations, that they are no longer proven to be safe and effective or that
they are not truthfully labeled. Noncompliance with GMP regulations also can
justify nonpayment of an existing government procurement contract and, until the
deficiencies are corrected to FDA's satisfaction, can result in a nonsuitability
determination, precluding the award of future procurement contracts.
For any of the Company's auto-injectors and syringe systems, noncompliance with
FDA regulations could result in civil seizure of the drugs, an injunction
against the continued distribution of the drugs or criminal sanctions against
the Company. The Company's medical devices also are subject to seizure by the
FDA through administrative or judicial proceedings. In addition, the FDA may
impose civil money penalties for most violations of law and may order that
defective devices be recalled, repaired or replaced or that purchasers be
refunded the cost of the device.
The Company also is subject to regulation by other federal and state agencies
under various statues, regulations and ordinances, including environmental laws,
occupational health and safety laws, labor laws and laws regulating the
manufacturer and sale of narcotics.
EMPLOYEES
As of September 30, 1997, the Company employed a total of 275 employees; 218
employees work at the Company's plant and warehouse facilities in St. Louis,
Missouri; 7 employees work at the Company's facility in the United Kingdom; 24
employees work in facilities in N. Ireland and 26 employees work at the
Company's corporate headquarters in Columbia, Maryland (see "Properties").
Effective March 1, 1994, STI, now the Company, entered into a five-year
agreement with the Teamsters Local Union No. 688 ("Teamsters") which is
affiliated with the International Brotherhood of Teamsters, Chauffeurs,
Warehousemen and Helpers of America. Teamsters are the exclusive agent for all
production and maintenance employees of the Company at its St. Louis facility.
Approximately 118 employees are covered by this collective bargaining agreement.
The new labor union contract did not significantly change the mix of benefits
previously provided to such employees.
13
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in an 11,000 square foot
facility in Columbia, Maryland. The facility is leased through 2002. The
corporate headquarters facility houses the corporate administration, human
resources, finance, commercial business development and the product, design and
development functions. Meridian had entered into a ten year lease expiring in
2002 on a 17,000 square foot facility in Rockville, Maryland which previously
served as the Company's headquarters. The Rockville, Maryland facility has been
sub-leased to a third party through 2002.
The Company's primary pharmaceutical operations are located in St. Louis,
Missouri. These facilities are used primarily for formulation, aseptic filling,
assembly and final packaging of the Company's auto-injectors, vials and
pre-filled syringes. The St. Louis manufacturing facilities consist of nine
separate buildings occupying over 100,000 square feet.
The Company has a 4,200 square foot facility in Rochester, Kent in the United
Kingdom used primarily for aseptic assembly packaging of a morphine
auto-injector product under contracts with the United Kingdom and Canadian
defense departments. This facility is also used a as sales and marketing office
to promote the Company's commercial and military products in Europe and the
Middle East. The facility is leased pursuant to a lease which expires in 2010.
The Rochester facility may be consolidated into the Antrim, N. Ireland facility
in fiscal 1998.
The Company leases a 4,200 square foot facility in Antrim, N. Ireland for
assembly and engineering development of telemedicine products. The lease is
month to month and the facility may be vacated if the N. Ireland and
Rochester, England operations are consolidated during fiscal 1998.
ITEM 3. LEGAL PROCEEDINGS
Information required by this Item 3 is included in Note 10 "Commitments and
Contingencies -- Litigation," of the Notes to Consolidated Financial Statements
included herein pursuant to Part II of this Form 10-K.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by the Company during the fourth quarter of
fiscal 1997 to a vote of security holders, through the solicitation of proxies
or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists, as of September 30, 1997, the names and ages of all
executive officers of the Company, and their positions and offices held with the
Company, and their positions and offices held with the Company.
Name Age Present Positions with the Company
- ---- --- ----------------------------------
James H. Miller 59 Chairman, President and Chief Executive Officer
G. Troy Braswell 54 Vice President of Finance and Chief Financial Officer
Mark D. Ruby 43 Vice President of Sales and Marketing, Drug Delivery
Systems Group
Mr. Miller joined the Company as President of STI in June 1989, was elected
Chief Executive Officer in June 1990 and was elected Chairman of the Board in
April 1996. In November 1993, Mr. Miller assumed the additional post of chairman
and chief executive officer of Brunswick Biomedical Corporation while continuing
his position with STI. Prior to joining the Company, Mr. Miller served as
Executive Vice President of Beecham Laboratories from February 1987 to May 1989,
responsible for the Pharmaceutical and Animal Health Divisions. Prior to joining
Beecham, Mr. Miller spent ten years with Frank J. Corbet, Inc. (Advertising
Agency) as Executive Vice President and fourteen years in marketing management
with Abbott Laboratories.
Mr. Braswell joined Meridian in February 1997 and was appointed Chief Financial
Officer in May 1997. Prior to joining Meridian, he was Director and Treasurer of
Amoco/Enron in Frederick, Maryland, a solar energy joint venture partnership
between Amoco and Enron. From 1987 to 1995, Mr. Braswell served as Director of
Finance and Administration and the Chief Financial Officer of Solarex
Corporation, a unit of Amoco.
Mr. Ruby joined the Company as Vice President of Marketing and Sales in January
1996. Prior to joining the Company, Mr. Ruby served in the same capacity at
Jobts Institute, Inc. from March 1992 to December 1995 where he was responsible
for domestic and international marketing, sales and service. Prior to joining
Jobts, Mr. Ruby served in various capacities including Director of Business
Development and Director of Domestic Sales for Medisense, Inc. from July 1988 to
February 1991. Prior to joining Medisense, Mr. Ruby held various positions with
Baxter Healthcare, Inc. from July 1979 to June 1988.
15
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the over-the-counter market and is
quoted in the NASDAQ National Market System under the symbol MTEC. It was
formerly traded under the name of Survival Technologies with the symbol of STIQ
until the November 1996 merger.
The following tables sets the high and low sales of the prices of the Company's
(and its predecessor STI's) common stock for each fiscal quarter during the two
year period ended July 31, 1997, as reported on the NASAQ National Market
system.
1997 1996
---------------- ------------------
Quarter High Low High Low
- ------- ---- --- ---- ---
First 8 6 1/2 9 1/2 6 1/2
Second 9 3/8 8 1/4 10 1/4 7 1/4
Third 7 5 3/8 10 1/8 7 1/2
Fourth 7 1/8 4 1/8 11 7/8 8 1/4
The Board of Directors has not declared any dividends on the Company's common
stock since its organization. As of September 30, 1997, the number of
shareholders of record was approximately 410.
16
ITEM 6 SELECTED FINANCIAL DATA
Meridian Medical Technologies, Inc -- Five Year Summary of Operations and
Financial Information
(In Thousands, Except Per Share Data)
Year End One Month Year End Year End Year End Year End
July 31, July 31, June 30, June 30, June 30, June 30,
1997 1996 1996 1995 1994 1993
-------------------------------------------------------------------
Operations:
Net sales $ 40,665 $ 4,511 $ 10,375 $ 2,904 $ 2,427 $ 2,534
Gross profit 15,044 1,901 3,420 1,205 785 1,036
Operating (loss) income (1,699) 908 (6,212) (1,581) (1,627) (512)
Other expense, net (2,395) (140) (539) (19) (98) (324)
(Loss) income before income tax
and minority interest (4,094) 768 (6,751) (1,600) (1,725) (836)
Provision for income tax 45 440 27 -- -- --
Minority interest in
consolidated subsidiary 265 327 17 -- -- --
========= ========= ======== ======== ======= ========
Net (loss) income $ (4,404) $ 1 $ (6,795) $(1,600) $(1,725) $ (836)
========= ========= ======== ======= ======= ========
Net loss per share $ (2.16) $ 0.02 $ (99.32) $(23.39) $(24.69) $ (15.39)
========= ========= ======== ======= ======= ========
Average common shares and
common share equivalents
outstanding 2,040 68 68 68 70 54
========= ========= ======== ======= ======= ========
Financial position:
Current assets $ 16,032 $ 16,557 $ 16,351 $ 981 $ 3,930 $ 1,104
Working capital 845 4,230 4,144 (681) 2,719 (2,034)
Fixed assets, net 15,778 14,984 14,990 200 95 116
Total assets 44,082 41,568 41,694 3,188 4,284 1,429
Long-term debt 13,922 16,385 16,057 55 56 30
Shareholders' equity 12,293 3,844 4,387 1,472 3,017 (1,739)
17
ITEM 7 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The following discussion and analysis of financial condition and results of
operations cover the fiscal years ended July 31, 1997 and June 30, 1996.
On November 20, 1996, Brunswick was merged into STI to form MMT. At the time of
the merger, Brunswick held approximately 61% of STI's outstanding common stock,
which it had purchased from the estate of STI's late founder on April 15, 1996.
As a result, STI had been treated for financial accounting purposes as a
consolidated, majority-owned subsidiary of Brunswick from that date.
Although STI was the surviving corporation of the merger as a legal matter, the
merger was treated as a purchase of STI by Brunswick for financial accounting
purposes. As a result, Brunswick's historical financial statements became the
Company's financial statements, STI's assets and liabilities have been revalued
to their respective fair values and the Company's historical financial
statements reflect the combined operations of STI and Brunswick after April 15,
1996 (subject to minority interests). The minority interests were eliminated
upon completion of the merger on November 20, 1996.
For the reasons described above, the fiscal year 1997 financial statements of
the Company contained in this Form 10-K are not comparable to the financial
statements contained in reports previously filed by STI with the Commission,
and, due to substantial differences between the revenues and results of STI and
those of Brunswick, comparisons of results between periods before and after the
purchase of Brunswick's interest in STI are of limited utility. Therefore,
management's discussion and analysis includes comparisons to prior year STI and
Brunswick's combined proforma operating results to enhance the utility of the
information herein.
MMT's business plan following the merger is to operate as a medical device
company focusing on Early Intervention Home Healthcare and Emergency Medical
Technologies. The Company has three areas of business. The Drug Delivery Systems
business capitalizes on injectable drug delivery devices with an emphasis on
commercial auto-injectors. This business also supplies customized drug delivery
system design, pharmaceutical research and development, and sterile product
manufacturing to pharmaceutical and biotechnology companies. The Cardiopulmonary
Systems business focuses on non-invasive cardiac diagnostics and telemedicine.
The Cardiopulmonary Systems business is continuing the research and development
activities for the PRIME ECG(TM) program, an 80-lead cardiac mapping system for
rapid and improved diagnostic accuracy of cardiac ischemia and is planning a US
expansion of its telemedicine business. The STI Military Systems business
focuses on the world-wide market for auto-injectors used by military personnel
for self-administration of nerve gas antidotes, morphine and diazepam.
Financial Discussion
MMT's net loss after taxes for the year ended July 31, 1997 was $4.4 million
($2.16 per share) on revenues of $40.7 million compared to a fiscal 1996 net
loss of $6.8 million ($99.32 per share) on revenues of $10.4 million. Included
in the net loss for 1997 and 1996 were write-offs of in-process R&D and merger
related costs associated with the combination of STI and Brunswick. These
write-offs were $3.9 million and $4.5 million in 1997 and 1996, respectively.
Further, in 1997 there was a non-recurring charge of $1.5 million for the
EpiEZPen(TM) Product Exchange Program. (See Note 13 of financial statements).
18
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The large disparity in revenues between 1997 and 1996 is a result of Brunswick's
prior year financial statements becoming those of the Company. Only 2.5 months
of STI results are included in 1996 revenues. Thus, a more meaningful financial
comparison of MMT results is against prior year proforma combined operating
results of STI and Brunswick. All comparisons against proforma combined results
exclude one-time, non-recurring merger related costs.
MERIDIAN MEDICAL TECHNOLOGIES, INC.
PROFORMA COMBINED STATEMENT OF OPERATIONS
$THOUSANDS
1997 1996 1995
---- ---- ----
Net Sales $40,665 $35,015 $28,390
Gross Margin 15,044 10,606 9,464
% of Sales 37.0% 30.3% 33.3%
Selling, general, and administrative expenses 5,330 5,378 6,015
Research and development expenses 2,783 2,154 1,641
Depreciation and amortization 3,142 3,104 3,022
Product exchange program 1,539 0 0
Restructuring charges 0 322 450
------- ------- -------
Total 12,794 10,958 11,128
------- ------- -------
Operating income $2,250 ($352) ($1,664)
======= ======= =======
EBITDA (1) $5,564 $2,754 $1,551
======= ======= =======
(1) EBITDA represents proforma operating income plus other income and
depreciation and amortization. EBITDA is not a measure of performance or
financial condition under generally accepted accounting principles, but is
presented to provide additional information related to debt service capability.
EBITDA should not be considered in isolation or as a substitute for other
measures of financial performance or liquidity under generally accepted
accounting principles. While EBITDA is frequently used as a measure of
operations and the ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other companies due
to potential inconsistencies in the method of calculation.
The Proforma Combined Statement of Operations assumes the merger of Brunswick
and STI was in effect for the three years shown and excludes one-time, merger
related costs in 1996 totaling $4.5 million and STI in 1997 totaling $3.9
million. The merger costs consisted of excess purchase price over the book value
paid by Brunswick which was allocated to in-process R&D amounting to $4.5
million in 1996 and $2.7 million in 1997. A total of $1.2 million of transaction
costs were paid in 1997 by STI.
19
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Year in Review -- Proforma Basis
1997 financial results improved over 1996 and 1995 on a proforma basis. Sales
increased 16% to $40.7 million from $35.0 million in fiscal 1996 and increased
43% from $28.4 million in 1995. Operating income was $2.3 million compared to
losses in both fiscal 1996 and 1995. Gross margins were 37% in 1997 compared to
30% in 1996 and 33% in 1995. Operating expenses were $1.8 million higher in 1997
primarily because of the non-recurring charge for the EpiEZPen(TM) Product
Exchange Program amounting to $1.5 million. Results for 1997 benefited from
record sales of EpiPen(R) brand products and cost reduction and fixed cost
controls initiated after the merger. These improvements resulted in operating
income increasing by $2.6 million compared to 1996 and $3.9 million over 1995.
EBITDA was $5.6 million in 1997, double the 1996 EBITDA and 3.6 times the 1995
EBITDA.
Drug Delivery business sales were $20.1 million in 1997, 32% higher than 1996
primarily from record EpiPen(R) brand sales. STI Military business sales were
$17.8 million, 10% higher than 1996 as sales to foreign countries continued to
grow. Cardiopulmonary sales were $2.7 million in 1997, down from $3.6 million in
1996 primarily reflecting the absence of a significant one-time product sales
promotion which occurred in 1996 and the disposition of a non-strategic business
in late 1997.
Net sales were $35.0 million in 1996, $6.6 million or 23% higher than 1995. Most
of the increased 1996 sales was in STI Military business as the Diazepam
auto-injector and the base maintenance prestocking programs were introduced and
contributed a combined $4.6 million in higher sales. 1996 Drug Delivery sales
were $15.2 million, slightly higher than 1995 sales of $15.0 million. Higher
sales of the newly launched EpiEZPen(TM) of $1.7 million were nearly offset by
lower revenues, particularly for the Cytoguard aerosol protection device (which
has now been discontinued). Cardiopulmonary sales were $3.6 million, $0.7
million higher than 1995 mostly from a significant one-time CardioBeeper(R)
sales promotion.
Gross margins were 37% of sales in 1997 compared to 30% in 1996 and 33% in 1995.
The increased gross margins in 1997 resulted mostly from higher sales volume and
cost reduction programs initiated after the merger which lowered variable costs
and maintained fixed costs. Automation projects reduced labor and a full level
of management was eliminated at our St. Louis facility. Gross margins in 1996
were 30% of sales, down from 33% of sales in 1995. The lower gross margin
percentage reflected a product mix change where STI Military sales were a larger
proportion of total sales in 1996 than in 1995 and the St. Louis facility
experienced plant supply disruptions during the first quarter, 1996.
Operating costs were $12.8 million in 1997, an increase of $1.8 million over
1996. Most of the increased cost was from a non-recurring charge for the
voluntary EpiEZPen(TM) Product Exchange Program ($1.5 million), higher
development cost in 1997 for the TruJect(TM) platform auto-injector and
continued development of the PRIME ECG(TM) cardiac analysis system.
The combination of increasing revenues, lower costs of sales and higher
operating costs resulted in operating income growing to $2.3 million in 1997
from losses of $352,000 and $1.7 million in 1996 and 1995 respectively.
20
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Nonoperating Costs (Actual cost basis)
Nonoperating expenses in 1997 were $2.4 million, significantly higher than the
$539,400 and $18,600 in 1996 and 1995 respectively. The higher costs reflects a
full year of higher interest expense ($2.6 million) to finance the merger
compared to only 2.5 months in 1996 (whose fiscal year ended June 30, 1996). The
interest cost includes amortization of warrants issued to finance the debt
amounting to $458,900 in 1997 and $0 in 1996. Partially offsetting the 1997
interest cost were other income items amounting to $172,000. The income tax
provision in 1997 was $45,400, slightly higher than the $26,900 provision in
1996. Minority interest in 1997 was $265,000 compared to $16,700 in 1996
reflecting STI net income allocable to minority shareholders of STI prior to the
merger.
In October, 1997, the Company initiated a voluntary EpiEZPen(TM) Product
Exchange Program to replace all EpiEZPen(TM) sold since introduction in
1996 with EpiPens(R). The exchange program was in response to a very small
number of EpiEZPens(TM) (less than 0.001%) which had self activated in the
package. While the exchange was not required by the FDA, the Company took the
action to protect its customers and the quality reputation of the Meridian name.
The Company does not expect any significant sales impact from this action and is
planning reintroduction of the EpiEZPen(TM) after all corrective actions are
in place. The Company made its best estimate of the costs of the exchange
program and recorded a provision in 1997 amounting to $1.5 million. Although no
assurance can be given that the reserved amount is adequate, it is intended to
cover all cost of the product exchange.
Line of Business Discussion
Drug Delivery sales were $20.1 million in 1997, 32% higher than 1996 mostly from
record sales of $15.0 million for the EpiPen(R) family of products.
Additionally, higher development revenue was achieved, mostly for a migraine
auto-injector and licensing fees notably from strategic partners, Mylan
Laboratories and Genpharm Laboratories, to develop a line of generic injectable
drugs. Backlog at year-end was $5.4 million, an increase of 10% over July 31,
1996 reflecting strong demand for the EpiPen(R) brand products. EBITDA generated
from Drug Delivery products increased 38% in 1997 to $5.1 million reflecting the
higher EpiPen(R) revenues and increased margins from cost reduction programs
partially offset by the product exchange reserve.
STI Military revenues increased 10% in 1997 over the prior year to $17.8
million. The increase reflects higher sales particularly to foreign allied
governments and increased pre-stocking for the USDoD. At year end, the STI
Military backlog was $7.8 million, an increase of 150% from July 31, 1996
reflecting contract awards from an allied country and the third year of the US
DoD Base Maintenance Contract. EBITDA generated from STI Military Systems
products was $1.5 million reflecting higher revenues and a reduction of costs
compared to 1996.
Cardiopulmonary product revenues were $2.7 million, a decline from 1996 sales of
$3.6 million. The reduction was due to the absence of a special one-time
CardioBeeper(R) sales promotion in 1996 and from disposition of the assets of a
non-strategic business. EBITDA from Cardiopulmonary Systems strengthened after
the merger as cost reduction activities were implemented. Margins remained
steady and development costs, particularly for PRIME ECG(TM), continued.
21
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources
Total cash balance at July 31, 1997 was $23,300, a reduction of $511,800 during
fiscal 1997. The Company generated $3.6 million of cash from operations in 1997.
Cash flow was positive despite the net loss for the year primarily because of
noncash expenses for depreciation and amortization and the write-off of
in-process R&D. Investing activities used $2.4 million of cash in fiscal 1997
with capital additions amounting to $3.3 million. The majority of capital was
for cost reduction projects, including molds for new lower cost products.
Financing activities required $1.7 million consisting of $1.0 million for
paydown on the bridge loan upon completion of the merger between Brunswick and
STI in November, 1996 and $838,400 for payments of debt principal. These uses
were partially offset by a net increase in borrowings of $112,600 to finance
equipment purchases and $40,200 from the working capital line.
In fiscal 1998, principal and interest payments on long-term debt will total
approximately $3.5 million. The Company recently increased its asset based
working capital credit line with ING CAPITAL to a maximum of $6.5 million from
$5.0 million and had $2.7 million available at July 31, 1997. Senior debt
financial covenants with ING CAPITAL have been adjusted and the Company believes
it can comply with such covenants at least through fiscal 1998. The Company is
in active discussion with ING CAPITAL to restructure the existing ING CAPITAL
term loan and to assist the Company in a broader refinancing of its long-term
debt. No assurances can be made that the Company will be successful in this
effort and a delay in such restructuring could have an adverse effect on the
Company's liquidity. Management believes that existing financing sources and
other actions available, such as reducing discretionary spending on research and
development, capital expenditures and other costs if necessary, will enable it
to meet its financing obligations through the end of fiscal 1998. However,
additional capital is needed to fund its long-term planned strategic initiatives
and growth objectives.
Working capital at July 31, 1997 was $844,700, down from $4.1 million at June
30, 1996. Most of the decrease resulted from higher accounts payable and accrued
liabilities of $2.1 million, increased current portions of long-term debt of
$1.8 million partially offset by increased inventories ($719,900). Accounts
receivable was $7.5 million representing 67 days-sales-outstanding and inventory
was $6.0 million and represented a 4.3 turnover ratio for the year. Accounts
payable at year end was $7.7 million, up $2.1 million from June 30, 1996
reflecting higher business levels and costs related to the merger. Borrowings
under working capital lines were $4.1 leaving $2.7 million available credit at
July 31, 1997.
Total debt at fiscal year-end 1997 was $21.9 million or 64% of total
capitalization of $34.2 million.
Recent Events-Sale of Non-Core Assets
The Company has entered into agreements to sell two non-core assets previously
included in the Cardiopulmonary business unit. The first asset being divested,
emergency care products generated revenues of approximately $1.5 million and
EBITDA of approximately $250,000 in the latest 12 months. The second asset being
divested is an esothoracic technology, which is still in the development stage.
It is currently generating no revenue and negative cash flow. The Company has
closed on the sale of emergency care product's assets and anticipates closing on
the sale of esothoracic technology during the second quarter of fiscal 1998.
The Company expects to realize gross proceeds of not more than $0.5 million.
There was no impairment of related assets at July 31, 1997.
22
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Inflation
In the view of management, the low levels of inflation in recent years and
changing prices have had no significant effect on the Company's financial
condition and results of operations. Generally, the Company is able to mitigate
the effects of inflation on operating costs and expenses through price increases
and productivity gains.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CONSOLIDATED BALANCE SHEETS
MERIDIAN MEDICAL TECHNOLOGIES
July 31, June 30,
1997 1996
- --------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 23,300 $ 511,800
Restricted cash 264,400 958,200
Receivables, less allowance for doubtful
accounts of $247,800 and $45,000 July 31, 1997
and June 30, 1996 respectively 7,507,600 7,536,700
Inventories 6,046,600 5,326,700
Prepaid expenses and other assets 531,000 800,200
Deferred income taxes 1,658,600 1,217,500
---------------- ---------------
Total Current Assets 16,031,500 16,351,100
---------------- ---------------
Fixed assets 17,246,300 27,016,100
Less accumulated depreciation 1,468,400 12,025,800
---------------- ---------------
Total fixed assets (net) 15,777,900 14,990,300
---------------- ---------------
Excess of cost over net assets acquired, net 9,168,000 6,849,300
Other intangible assets, net 3,104,800 3,503,100
---------------- ---------------
$ 44,082,200 $ 41,693,800
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities 7,733,000 $ 5,652,900
Note payable to bank 4,112,800 4,072,600
Note payable to Syntex -- 588,400
Current portion of long-term debt 2,299,400 516,800
Customer deposits 917,800 736,000
Restructuring reserve 123,800 640,400
---------------- ---------------
Total Current Liabilities 15,186,800 12,207,100
Long-term debt:
Notes payable 13,062,600 14,872,300
Other long-term debt 859,000 1,184,300
Deferred revenue 314,900 --
Other noncurrent liabilities 625,000 616,500
Deferred income taxes 1,741,100 1,605,500
Long-term capital lease obligations -- 32,800
---------------- --------------
Total Liabilities 31,789,400 30,518,500
---------------- ---------------
Minority interest in consolidated subsidiary -- 6,788,500
Shareholders' equity:
Common Stock $.10 par, 18,000,000 shares authorized,
2,912,502 and 68,417 issued and outstanding 291,300 700
Additional capital 28,659,900 15,866,100
Preferred stock, Series A-F -- 7,500
Warrants 2,072,900 2,072,900
Accumulated deficit (18,311,800) (13,393,300)
Unearned stock option compensation (139,600) (181,800)
Foreign currency translation adjustment (67,000) 26,200
Treasury stock, at cost (212,900) (11,500)
---------------- ---------------
Total shareholder's equity 12,292,800 4,386,800
---------------- ---------------
$ 44,082,200 $ 41,693,800
================ ===============
See Notes to Consolidated Financial Statements
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
MERIDIAN MEDICAL TECHNOLOGIES
Year Ended Month Ended Year Ended Year Ended
July 31 July 31 June 30 June 30
1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Net Sales $40,664,700 $ 4,510,600 $10,375,300 $ 2,903,500
Cost of Goods 25,620,900 2,609,200 6,955,200 1,698,400
------------ ----------- ----------- -----------
Gross Profit 15,043,800 1,901,400 3,420,100 1,205,100
Selling, general, and administrative
expense 5,330,200 429,400 2,414,000 1,844,400
Research and development expenses 2,782,600 295,000 1,724,900 698,000
Depreciation and amortization 3,142,100 268,700 803,400 244,200
Write off in-process R&D 2,702,200 -- 4,464,000 --
Write off merger transaction costs 1,246,300 -- -- --
Product exchange program 1,539,400 -- -- --
Restructuring charges -- -- 225,800 --
----------- ----------- ----------- -----------
16,742,800 993,100 9,632,100 2,786,600
Operating (loss) income (1,699,000) 908,300 (6,212,000) (1,581,500)
Other (expense) income:
Interest expense (2,567,000) (153,800) (550,700) (18,600)
Other income 172,000 14,000 11,300 --
------------ ----------- ----------- -----------
(2,395,000) (139,800) (539,400) (18,600)
------------ ----------- ----------- -----------
(Loss) income before provision for
income and minority interest (4,094,000) 768,500 (6,751,400) (1,600,100)
Provision for income taxes 45,400 439,800 26,900 --
Minority interest in income of
consolidated subsidiary 265,200 327,400 16,700 --
------------ ---------- ----------- -----------
Net (loss) income $(4,404,600) $ 1,300 $(6,795,000) $(1,600,100)
============ ========== =========== ===========
Weighted average shares outstanding: 2,040,000 68,417 68,417 68,417
============ ========== ========== ===========
Net (loss) income per share $ (2.16) $ 0.02 $ (99.32) $ (23.39)
============ ========== =========== ===========
See Notes to Consolidated Financial Statements
25
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
MERIDIAN MEDICAL TECHNOLOGIES
Number Number Additional
of Shares Par Value of Shares Par Value Capital Warrants
--------- --------- --------- --------- ------- --------
Balance at June 30, 1994 468,300 $ 4,700 68,400 $ 700 $8,098,200 $ --
Issuance of nonqualified
stock options 209,700
Amortization of stock
option compensation
Issuance of treasury stock in
exchange for services 3,500
Cummulative translation
adjustment
Net loss
---------------------------------------------------------------------------
Balance at June 30, 1995 468,300 4,700 68,400 700 8,311,400 --
Sales of Series D preferred stock
net of issuance costs of $19,929 45,700 500 1,238,600
Sales of Series E preferred stock
net of issuance costs of $10,607 24,300 200 659,200
Sales of Series F preferred stock
net of issuance costs $91,019 208,700 2,100 5,656,900
Warrants issued with notes payable 2,072,900
Amortization of stock
option compensation
Cummulative translation
adjustment
Net loss
---------------------------------------------------------------------------
Balance June 30, 1996 747,000 7,500 68,400 700 15,866,100 2,072,900
Cummulative translation
adjustment
Amortization of stock
option compensation
Adjust for STI earnings previously
recorded
Net income
---------------------------------------------------------------------------
Balance July 31, 1996 747,000 7,500 68,400 700 15,866,100 2,072,900
Merger with STI (747,000) (7,500) 2,843,900 290,600 12,793,800
Exchange of treasury stock for assets
Amortization of stock
option compensation
Cummulative translation
adjustment
Net loss
---------------------------------------------------------------------------
Balance July 31, 1997 -- $ -- 2,912,300 $291,300 $28,659,900 $2,072,900
===========================================================================
See Notes to Consolidated Financial Statements
26
Treasury Stock Unearned
Foreign ---------------- Stock
Accumulate Currency Number Option Shareholders'
Deficit Adjustment of Shares Cost Compensation Equity
---------- ---------- --------- ---- ------------ ------------
Balance at June 30, 1994 $(4,998,300) $ 29,400 1,900 $(13,000) $(104,900) $ 3,016,800
Issuance of nonqualified (209,700) --
stock options
Amortization of stock
option compensation 59,400 59,400
Issuance of treasury stock in
exchange for services (200) 1,500 5,000
Cummulative translation
adjustment (9,800) (9,800)
Net loss (1,600,100) (1,600,100)
----------------------------------------------------------------------------------
Balance at June 30, 1995 (6,598,400) 19,600 1,700 (11,500) (255,200) 1,471,300
Sales of Series D preferred stock 1,239,100
net of issuance costs of $19,929
Sales of Series E preferred stock
net of issuance costs of $10,607 659,400
Sales of Series F preferred stock
net of issuance costs $91,019 5,659,000
Warrants issued with notes payable 2,072,900
Amortization of stock
option compensation 73,400 73,400
Cummulative translation
adjustment 6,600 6,600
Net loss (6,749,900) (6,794,900)
----------------------------------------------------------------------------------
(13,393,300) 26,200 1,700 (11,500) (181,800) (4,386,800)
Balance June 30, 1996
Cummulative translation
adjustment (35,200) (35,200)
Amortization of stock
option compensation 6,200 6,200
Adjust for STI earnings previously
recorded (515,200) (515,200)
Net income 1,300 1,300
----------------------------------------------------------------------------------
Balance July 31, 1996 (13,907,200) (9,000) 1,700 (11,500) (175,600) 3,843,900
Merger with STI 13,076,900
Exchange of treasury stock for assets (201,400) (201,400)
Amortization of stock
option compensation 36,000 36,000
Cummulative translation
adjustment (58,000) (58,000)
Net loss (4,404,600) (4,404,600)
-----------------------------------------------------------------------------------
$(18,311,800) (67,000) 1,700 $(212,900) $(139,600) $12,292,800
Balance July 31, 1997 ====================================================================================
27
CONSOLIDATED STATEMENT OF CASH FLOWS
MERIDIAN MEDICAL TECHNOLOGIES
Year ended Month ended Year ended Year ended
July 31, July 31, June 30, June 30,
1997 1996 1996 1995
----------------------------------------------------
Operating activities:
Net (loss) income $ (4,404,600) $ 1,300 (6,795,000) $(1,600,100)
Adjustments to reconcile net (loss) income
to net cash provided by (used for)
operating activities -- -- -- --
Depreciation and amortization 3,142,100 268,700 803,400 244,200
Amortization of deferred compensation 36,000 6,200 73,400 59,400
Amortization of notes payable discount 458,900 -- -- --
Issuance of treasury stock for payment
of services -- -- -- 5,100
Loss on fixed asset disposals 347,000 -- -- --
Deferred income taxes (305,000) (36,100) -- --
Write off of in-process R&D 2,702,200 -- 4,464,000 --
Write off of patents and other intangibles 340,000 -- -- --
Minority interest 265,200 327,400 16,700 --
Changes in assets and liabilities
Receivables (68,300) (1,911,700) 929,400 (264,200)
Inventories (716,200) 153,900 (998,800) 150,300
Prepaid expenses and other assets 203,000 (72,900) -- 22,900
Accounts payable 1,959,800 530,100 500 365,500
Restructuring reserve (516,600) -- 185,400 --
Other liabilities and accrued expenses (647,900) (69,800) 572,500 (4,400)
Deferred revenue 314,900 -- -- --
Other noncurrent assets 489,100 -- (356,000) --
Other noncurrent liabilities (30,500) -- 56,000 (109,400)
------------------------------------------------------
Net cash provided by (used for)
operating activities 3,569,100 (802,900) (1,048,500) (1,130,700)
------------------------------------------------------
Investing activities:
Purchases of fixed assets (3,286,500) (548,300) (463,300) (34,800)
Purchases of patents and licenses (58,600) -- (800) --
Decrease (increase) in restricted cash 696,800 (3,000) (958,200) --
Purchase of STI -- -- (21,589,400) --
Purchase of Telemedicine division -- -- -- (2,063,000)
Sale (purchase) of short - term investments 257,500 (257,500) -- --
Proceeds from sale of fixed assets 2,900 -- -- --
------------------------------------------------------
Net cash used for
investing activities (2,387,900) (808,800) (23,011,700) (2,097,800)
------------------------------------------------------
Financing activities:
Proceeds from line of credit 40,200 1,660,200 361,300 7,900
(Net payment) proceeds on note payable
(long-term) (1,838,400) -- 14,672,200 200,000
(Net payment) proceeds on other long-term debt 112,600 65,200 (86,200) (35,900)
Payment under noncompete agreement -- -- (57,500) (180,000)
Proceeds from issuance of warrants -- -- 2,072,900 --
Proceeds from issuance of preferred stock -- -- 7,557,600 --
----------------------------------------------------
Net cash (used for) provided by
financing activities (1,685,600) 1,725,400 24,520,300 (8,000)
----------------------------------------------------
Ajustment for STI cash flows previously recorded -- (97,800) -- --
----------------------------------------------------
Net (decrease) increase in cash (504,400) 15,900 460,100 (3,236,500)
Cash at beginning of period 527,700 511,800 51,700 3,288,200
----------------------------------------------------
Cash at end of period $ 23,300 $ 527,700 $ 511,800 $ 51,700
====================================================
See Notes to Consolidated Financial Statements
28
ITEM 8. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Meridian Medical Technologies, Inc.
1. Business and Summary of Significant Accounting Policies
Meridian Medical Technologies, Inc. ("Company") is a technology-based health
care company that designs, develops and produces a broad range of automatic
injectors, prefilled syringes, cardiopulmonary products, and other innovative
health care devices, with a major focus on safe and convenient participation by
the patient in injection therapy and cardiac monitoring. The Company also
supplies customized drug delivery system design, pharmaceutical research and
development and Good Manufacturing Practices GMP-approved sterile product
manufacturing to pharmaceutical and biotechnology companies.
On November 20, 1996, Brunswick Biomedical Corporation ("Brunswick") was merged
into Survival Technology, Inc. ("STI") to form the Company. At the time of the
merger, Brunswick held approximately 61% of STI's outstanding common stock,
which it had purchased from the estate of STI's late founder on April 15, 1996.
Upon completion of the merger, the Company's fiscal year end was changed from
June 30 to July 31.
Although STI was the surviving corporation of the merger as a legal matter, the
merger was treated as a purchase of STI by Brunswick for financial accounting
purposes. As a result, Brunswick's historical financial statements became the
Company's financial statements, STI's assets and liabilities have been revalued
to their respective fair values and the Company's historical financial
statements reflect the combined operations of STI and Brunswick after April 15,
1996 (subject to minority interests). The minority interests were eliminated
upon completion of the merger on November 20, 1996.
Liquidity
The Company's liquidity at July 31, 1997 and for the first quarter of 1998 has
been adversely impacted by the Company's current obligations under its senior
debt and the voluntary exchange program (see note 13). The Company expects its
liquidity to improve substantially in 1998 upon the completion of an anticipated
restructuring of its debt. The restructuring is anticipated to extend principal
payments and/or increase the Company's borrowing capacity. A delay in the
restructuring of the Company's debt could have an adverse effect on the
Company's liquidity.
The Company and International Nederlanden (U.S.) Capital Corporation ("ING"),
its primary lender, have agreed to modifications of certain debt covenants
through the maturity of the term loan. Management believes that these
modifications will enable the Company to operate in compliance with all
covenants through at least July 31,1998. The Company believes it has a good
working relationship with ING and that ING will continue to work with the
Company.
The Company is pursuing the restructuring of its debt structure, and, if
necessary, would consider other alternatives such as reductions in discretionary
spending. Management believes that debt restructuring and additional capital is
needed to continue with its planned strategic initiatives and growth objectives.
29
Principles of Consolidation
All intercompany balances and transactions have been eliminated in
consolidation.
Inventories
Inventories relating to commercial and military products are stated at the lower
of cost (first-in, first-out) or market.
Fixed Assets
Fixed assets are stated at cost. The Company computes depreciation and
amortization under straight-line and accelerated methods using the following
estimated useful lives:
Furniture and equipment 2 to 15 years
Capital leases and leasehold improvements 4 to 20 years
The Company uses either the units of production method or the straight line
method over a 10-year life (whichever period is shorter) to depreciate
production molds and tooling over their estimated production life cycle.
Intangible Assets
Intangible assets consist of the following:
July 31, 1997 June 30, 1996
------------- -------------
Excess of cost over net assets acquired $10,350,700 $ 7,017,900
Patents and licenses 2,417,600 2,523,500
Other 1,479,200 1,654,700
----------- -----------
14,247,500 11,196,100
Less: accumulated amortization (1,974,700) (843,700)
----------- -----------
$12,272,800 $10,352,400
=========== ===========
Excess of cost over net assets acquired and other intangible assets are
amortized over 10 years. Legal costs incurred in connection with patent
applications and costs of acquiring patents and licenses are capitalized and
amortized on a straight-line basis over the shorter of the patent life (not to
exceed seventeen years) or the period of expected benefit.
30
Revenue Recognition
Sales of medical products are recorded when shipments are made to customers.
Revenues from the U.S. Department of Defense ("DoD") industrial base maintenance
contract are recorded ratably throughout the contract term with the exception of
revenue from the component prestocking program that is recorded upon component
receipt in MMT's warehouse and product sales which are recorded upon acceptance
by the customer. Revenues from license fees are recorded when the fees are due
and non-refundable. Revenues from research and development arrangements are
recognized in the period related work has been substantially completed.
Foreign Currency
Assets and liabilities of foreign operations are translated at the exchange rate
in effect at the balance sheet date. Revenue and expense accounts are translated
using a weighted average of exchange rates in effect during the year. Cumulative
translation adjustments are shown in the accompanying consolidated balance
sheets as a separate component of shareholders' equity.
Research and Development
Research and development expenses are charged to operations in the period
incurred.
Income Taxes
The Company accounts for income taxes using the asset and liability approach as
prescribed by Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes". The asset and liability approach requires the
recognition of deferred tax assets and liabilities for expected future tax
consequences of temporary differences between carrying amounts and the tax basis
of assets and liabilities.
Value of Financial Instruments
Other than described below, the Company considers the recorded value of its
financial assets and liabilities, which consist primarily of cash, accounts
receivable, accounts payable and other accrued liabilities to approximate the
fair value of the respective assets and liabilities at July 31, 1997 and June
30, 1996. Management believes the principal balance of its term note payable
with ING, which is $1.6 million higher than the carrying value, is a better
estimate of the fair value of that note.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates and assumptions.
31
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed on the weighted average number of
common and common equivalent shares outstanding which were as follows: 2,040,000
for the year ended July 31, 1997 , 68,417 for the one month ended July 31, 1996,
and 68,417 for the years ended June 30 1996 and 1995. Stock options and warrants
are considered to be common equivalent shares when dilutive.
Reclassification
Certain reclassifications have been made to prior year financial statements in
order to conform with the current year presentation.
Accounting Standards Not Adopted
In February 1997, the Financial Accounting Standards Board issued (FASB)
Statement No. 128, "Earnings per Share" which is required to be adopted in the
Company's quarter ending January 31, 1998. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating primary
basic per share, the dilutive effect of stock options will be excluded. The
Company does not expect the impact of adopting this new accounting standard to
be significant.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. This statement is effective for fiscal
years beginning after December 15, 1997.
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments of
an Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes the standards for related disclosures about
products and services, geographic areas and major customers. This Statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. The financial information
is required to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for financial statements for
periods beginning after December 15, 1997.
Management is currently evaluating the requirements of Statements No. 130 and
No. 131, respectively.
32
2. Inventories
Inventories as of July 31, 1997 and June 30, 1996 consist of the following:
July 31, June 30
1997 1996
---- ----
Components and subassemblies $4,788,000 $3,217,200
Work in process 1,459,500 1,436,900
Finished goods 345,400 966,100
---------- ----------
6,592,900 5,620,200
Inventory valuation allowance (546,300) (293,500)
---------- ----------
$6,046,600 $5,326,700
========== ==========
3. Fixed Assets
Fixed assets as of July 31, 1997 and June 30,1996 consist of the following:
July 31, June 30
1997 1996
---- ----
Furniture and equipment $10,676,100 $18,191,000
Leasehold improvements 3,957,900 6,707,200
Construction in progress 2,612,300 2,117,900
----------- -----------
17,246,300 27,016,100
Less: accumulated depreciation (1,468,400) (12,025,800)
----------- -----------
$15,777,900 $14,990,300
=========== ===========
The Company capitalized interest costs of $153,200 and $90,300 on internally
constructed fixed assets in years ended July 31, 1997 and June 30, 1996,
respectively.
4. Restructuring Charge
In fiscal 1995, STI's Board of Directors approved a restructuring plan which
resulted in a $450,000 charge against earnings for the relocation of the
corporate headquarters. As part of this plan, STI initiated certain
organizational changes during 1996 and 1997 resulting in additional charges
related to employee severance benefits provided to certain employees terminated
during fiscal 1996 and 1997. The Company's fiscal 1996 consolidated financial
statements include a charge of $225,800 related to restructuring charges
incurred subsequent to the acquisition of STI. The restructuring reserve was
$123,800 and $640,400 as of July 31, 1997 and June 30, 1996, respectively.
Reductions were related to cash payments for severance, moving costs and the
differential on the lease cost of STI's former headquarters office and the
income from the sublease of the facility.
33
5. Merger of STI and Brunswick Biomedical Corporation
The acquisition of 61% of STI's common stock and subsequent merger of Brunswick
and STI to form the Company were accounted for as a purchase. The purchase price
was allocated first to tangible assets and identifiable intangible assets and
liabilities of STI based on an independent assessment of their fair market
values with the remainder allocated to the excess of cost over the fair value of
net assets acquired. The purchase price and the purchase price allocation are as
follows:
61% Interest 39% Interest Total
------------ ------------ -----
Cash consideration paid $16,069,386 $ 0 $16,069,386
Promissory note to the founder's estate 4,700,000 0 4,700,000
Stock exchanged 11,885,000 11,885,000
Transaction expenses 820,019 1,200,000 2,020,019
----------- ------------ -----------
Purchase price 21,589,405 13,085,000 34,674,405
Historical book value of net assets acquired 10,680,600 6,788,500 17,469,100
----------- ------------ -----------
Excess of purchase price over historical
book value of net assets acquired $10,908,805 $ 6,296,500 $17,205,305
=========== ============ ===========
The excess purchase price was allocated as follows:
Property, plant and equipment $ (2,689) $ (308,991) $ (311,680)
In-process research and development 4,464,007 2,702,234 7,166,241
Other intangible assets 942,230 570,387 1,512,617
Excess of cost over fair value of
net assets acquired 5,505,257 3,332,870 8,838,127
----------- ------------ -----------
$10,908,805 $ 6,296,500 $17,205,305
=========== ============ ===========
The intangible assets are amortized on a straight-line basis over their
estimated life of 10 years. The allocation of excess purchase price to
in-process research and development represents the independent assessment of the
fair value of a number of research and development projects whose technological
feasibility has not yet been established. These research and development
projects have no alternative future use and, therefore, have been charged to
expense as of the date of consummation of the transactions.
34
Pursuant to the Merger Agreement, each outstanding share of Brunswick's common
stock was exchanged for 2.1 shares of STI's common stock and STI's common stock
remained outstanding and unchanged. Each of Brunswick's outstanding shares of
preferred stock was converted into 2.1 shares of STI's common stock and the
preferred shareholders received a warrant to purchase 0.4 of a share of STI's
common stock at an exercise price of $11.00 per share for each preferred share
owned, exercisable for a period of five years following the merger. In addition,
STI assumed Brunswick's obligations under outstanding option and warrant
agreements.
Prior to the merger, there were 3,091,700 shares of STI common stock issued and
outstanding. In connection with the merger, STI issued 1,708,928 shares of
common stock in exchange for all of the outstanding common and preferred stock
of Brunswick. In addition, each of the 1,888,126 shares of STI common stock
previously owned by Brunswick were retired. Following the merger, the Company
(previously STI) had 2,912,502 shares outstanding.
Upon completion of the merger, the Company assumed Brunswick's indebtedness
under a senior bridge loan of $11 million, a subordinated promissory note
("Note") of $4.7 million, and a subordinated loan ("Subordinated Loan") of $1
million. Upon completion of the merger the senior bridge loan converted into a
$10 million Term Loan ("Term Loan") and $1 million of the outstanding principal
amount was repaid. In addition, the lenders of the senior bridge loan made
available to the Company a $5 million revolving credit loan, a portion of which
was used to discharge the Company's existing debt under its previous line of
credit. (See Note 6).
A total of $2,446,332 in transaction expenses were incurred by Brunswick and STI
to complete the merger. Of these costs, $1,200,000 was included as transaction
expenses in the determination of the purchase price. The remaining costs,
amounting to $1,246,332 and consisting primarily of costs incurred by STI, were
expensed during fiscal 1997.
The following unaudited pro forma information adjusts the operating results as
shown in the consolidated financial statements of operations to give the effect
to the merger as if the transaction had occurred at the beginning of each of the
years presented. The unaudited information below is not necessarily indicative
of the results which would have occurred had the companies been actually merged
during the periods presented.
Year ended Year ended
July 31, 1997 June 30, 1996
------------- -------------
Net Sales $40,665,000 $35,015,000
Pro forma net loss (5,978,900) (6,900,600)
Pro forma loss per share (2.05) (2.37)
35
6. Debt
Line of Credit
Prior to the merger, STI had a revolving credit agreement with Merrill Lynch
Business Financial Services, Inc. ("MLBFS") for a maximum commitment of $5
million. Upon completion of the merger (see Note 5), the Company terminated the
agreement with MLBFS and entered into a credit agreement with International
Nederlanden (U.S.) Capital Corporation ("ING") for a new $5 million line of
credit and a $10 million long- term loan. The Company increased its available
line of credit with ING, subject to certain limitations, to $6.5 million as of
September 2, 1997.
An additional line of credit exists for the operation in N. Ireland. The line of
credit is for 145,000 pounds and is secured by an irrevocable standby Letter of
Credit. The line of credit matures annually each December and bears interest at
the banks published rate approximately 8% at July 31, 1997.
The MLBFS line of credit had an interest rate equal to the 30 day commercial
paper rate plus 265 basis points (8.04% at July 31, 1996). The MLBFS line of
credit was secured by substantially all of STI's assets and general intangibles.
The ING line of credit accrues interest at either the greater of the Prime Rate
plus 1.25% (9.75% at July 31, 1997) or the federal funds rate plus 1.75%; or the
eurodollar loan rate plus 3.25%. The ING line is secured by certain accounts
receivable and inventory. The outstanding borrowings on the Company's lines of
credit were $4.1 million at both July 31, 1997 and June 30,1996. The Company
pays a commitment fee to ING of .0025% per month on the average unused portion
of the line of credit.
Long-Term Debt (ING)
In April 1996, in order to finance a portion of the acquisition of STI,
Brunswick entered into a credit agreement with ING for a $11 million bridge
loan, of which $1 million was held in escrow. Upon completion of the merger (See
Note 5), the Company assumed Brunswick's obligation, repaid the $1 million held
in escrow and converted the remaining balance into a $10 million term loan. The
term loan accrues interest at either the Eurodollar loan rate plus 3.5%; or the
greater of the prime rate plus 1.5% or the federal funds rate plus 2.00%, (10.0%
at July 31, 1997) with quarterly principal payments of $250,000 beginning in
June 1997 increasing to $500,000 in December 1997 and maturing on October 31,
2001. The outstanding balance on the term debt was $9,750,000 at July 31, 1997.
Warrants were issued to ING in the financing described above. The Company
allocated $2,072,900 of the note proceeds to the warrants based on the relative
fair value of the warrants and the note at the agreement date. Accordingly, the
note is carried at a discount from its maturity value. The Company is amortizing
the discount over the term of the debt using the effective interest rate method.
This resulted in a charge against operations of $458,900 in fiscal 1997. Any
extinguishment of this debt will result in a charge against earnings for the
unamortized amount remaining when extinguishment occurs. The Company is required
to maintain certain financial covenants and is restricted from paying cash
dividends.
36
Subordinated Promissory Note Payable to Sarnoff Estate
In April 1996, in order to finance the initial phase of the STI acquisition,
Brunswick signed a $4.7 million promissory note to the founder's estate. The
promissory note matures on the fifth anniversary of the merger with STI
(November 2001). The loan is unsecured and has an interest rate of 12% through
April 1998 and 13% thereafter. Prior to April 1998, accrued interest on the note
will be added to the principal balance, and as of April 1998, interest will be
payable monthly. Accrued interest added to principal as of July 31, 1997 and
June 30, 1996 was $809,600 and $169,100, respectively, resulting in an
outstanding balance as of July 31, 1997 and June 30, 1996 of $5,509,600 and
$4,869,100, respectively.
EM Industries, Inc. Subordinated Loan
In April 1996, in order to finance a portion of the STI acquisition, Brunswick
obtained a $1 million loan from EM Industries, Inc. The loan matures in November
2001. Seven consecutive quarterly installment payments of $125,000 commence
April 1999 and the remaining loan balance is due upon maturity. The loan is
unsecured and has an interest rate of 12% through April 1998 and 13% thereafter.
Accrued interest is to be added to the principal through April 1998 and is to be
paid monthly thereafter. The balance at July 31, 1997 and June 30, 1996 was
$1,167,400 and $1,025,500, respectively.
Other Long-Term Debt
In April 1991, STI borrowed $5.4 million from Syntex Laboratories, Inc.
("Syntex"). Principal repayments commenced August 1, 1991 through credits
against amounts invoiced to Syntex for products delivered under a Manufacturing
and Packaging Agreement between the parties. Outstanding principal as of July
31, 1997 and June 30, 1996 was $0 and, $588,400, respectively.
In May 1995, the Company entered into a loan agreement with the CIT
Group/Equipment Financing, Inc. ("CIT") to assist in financing the Company's
capital investment programs. This arrangement consists of a series of loans for
the acquisition of production molds, high-speed component preparation and
filling equipment and facility renovations. Loan principal outstanding was $1.1
million and $1.2 million as of July 31, 1997 and June 30, 1996, respectively.
The interest rate in both years was approximately 8.8%. Repayment of each loan
is due in sixty (60) equal monthly installments. The agreement with CIT is
collateralized by the asset financed with the loan.
In January 1996, the Company received a non-interest bearing loan in the amount
of $375,000 from Center Laboratories, Inc. -- Center, now Dey Laboratories,
(Dey) STI's exclusive distributor for the EpiPen(R) and EpiE-ZPen(TM). The
proceeds from this loan assisted the Company in purchasing high-speed filling
and automated packaging equipment which will reduce the cost of manufacturing
the EpiE-Zpen(TM). Repayment of this loan commenced during the first quarter of
fiscal 1997 with an agreed upon credit per unit of product shipments to Dey. The
Company anticipates loan repayment to be completed by fiscal 1999. The balance
at July 31, 1997 and June 30, 1996 was $281,200 and $375,000, respectively.
37
Maturities of all long term-debt are as follows:
1998 - $2,299,400
1999 - 2,845,300
2000 - 3,132,300
2001 - 8,808,000
2002 - 750,000
Thereafter - 0
----------
Sub-total $17,835,000
Discount on term loans (1,614,000)
----------
Total debt per balance sheet $16,221,000
===========
Interest paid for the year ended July 31, 1997 and the month ended July 31, 1996
was $2,466,700 and $26,100.
7. Shareholders Equity
Common Stock
The average number of common shares outstanding for the year ended July 31, 1997
reflects the weighted average of Brunswick shares through the merger date and
the Company's shares thereafter. The number of Brunswick common shares
outstanding as of June 30, 1996 was 68,417. The number of the Company's weighted
average shares outstanding for year ended July 31, 1997 was 2,040,000.
Stock Options
In November 1993, Brunswick adopted the 1993 Stock Option Plan ("the 1993
Plan"). As of June 30, 1996, 124,720 Brunswick options were outstanding. At the
merger date, the Company assumed Brunswick's obligations with respect to such
options, and all Brunswick options were converted to stock options of the
Company at a rate of 2.1 to 1 resulting in 258,100 options.
Pursuant to the merger, the Company assumed STI's 293,800 outstanding options.
The Company has adopted two Stock Option Plans ("the Plans") which reserve
500,000 shares for granting of options through 2001 and 500,000 shares, subject
to shareholder approval, for granting of options through 2007. The Plans provide
for issuance of non-qualified stock options, incentive stock options, stock
appreciation rights, incentive shares and restricted stock.
Options granted to employees, officers and directors pursuant the Company's
stock option plans generally have been exercisable in varying amounts in
cumulative annual installments up to ten years from the date of grant. The
exercise price on all options granted during year ended July 31, 1997 was
equivalent to the market value of the Company's stock on the date of grant.
38
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which recommends a fair value based methodology of accounting for
all stock option plans. Under SFAS No. 123, companies may account for stock
options under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related Interpretations and provide pro forma
disclosure of net income, as if the fair value based method of accounting
defined in SFAS No. 123 had been applied. The Company has elected to follow APB
25 and related Interpretations in accounting for its employee stock options and
provide pro forma fair value disclosure under SFAS 123. The Company recognized
$36,000, $73,400 and $59,400 of expense in fiscal 1997, 1996 and 1995,
respectively, as a result of options issued in prior years with exercise prices
less than fair market value at the date of grant.
For SFAS 123, the fair value of options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997: Risk-free interest rate of 6.5%; no dividends; a
volatility factor of the expected market price of the Company's common stock of
.53 and a weighted-average expected life of the options of approximately 4
years. Options assumed in the merger have been included in the fair value
estimates assuming the original grant date and adjusted exercise price.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For the purpose of pro forma disclosures, the estimated fair value of the stock
options is amortized to expense over the options' vesting periods. The Company's
pro forma net loss and net loss per share calculated using the provisions of FAS
123 were as follows:
Year ended
July 31, 1997
-------------
Net (loss) $(4,404,600)
Pro Forma FAS 123 expense (153,400)
-----------
Pro forma net (loss) income $(4,558,000)
===========
Weighted average shares
outstanding 2,040,000
Pro forma net loss per share ($2.23)
===========
39
The following table summarizes stock options activity for the year ended July
31, 1997. Amounts presented reflect the combined option plans of Brunswick and
STI with the adjustments as necessary to reflect the exchange ratio in
connection with the November 1996 merger of Brunswick and STI.
Year ended
Number of Shares 1997
- ---------------- ----
Options outstanding
at beginning of year 551,900
Granted during the year 57,600
Exercised during the year (8,800)
Expired or terminated (47,400)
-------
Options outstanding at
end of year 553,300
At July 31, 1997 the price range of options outstanding are as follows:
Less than $1.00 148,512
$1.00-$5.00 111,000
$5.00-9.00 120,475
$9.00 + 173,313
-------
553,300
Options exercisable at July 31, 1997 were 380,200. The average contractual life
of the Company's options is approximately 6 years.
The weighted average fair value of options granted during 1997 was $5.85.
Common Stock Warrants
Outstanding warrants to acquire the Company's common stock as of July 31, 1997
are as follows:
Number of
Exercise Price Shares
- -------------- ---------
Less than $1.00 153,655
At $11.00 534,635
At $27.55 76,226
-------
764,516
=======
The warrants outstanding begin to expire in 2000 with the majority expiring in
2001.
40
Convertible Redeemable Preferred Stock
In April 1996, Brunswick issued 208,710 shares of Series F preferred stock for
$27.55 per share, resulting in net proceeds of $5,568,950. In connection with
the series F preferred stock financing, all shares of Series D and E preferred
stock automatically converted into an equal number of shares of Series F
preferred stock.
In March 1996, Brunswick issued 45,695 shares of Series D preferred stock and
24,319 shares of Series E preferred stock for $27.55 per share, resulting in net
proceeds of $1,239,059 and $659,492, respectively.
In November 1993, Brunswick issued 374,462 shares of Series C preferred stock in
exchange for cash and the conversion of certain notes payable.
In connection with the merger of Brunswick and STI in November 1996, each share
of preferred stock was converted into shares of the Company's common stock(See
Note 5).
8. Income Taxes
As a result of net operating losses incurred by Brunswick in fiscal 1995, there
was no provision for income taxes. In fiscal 1996, a provision for income taxes
of $26,900 was recorded to provide for the earnings of STI subsequent to the
acquisition of 61% of STI's common stock by Brunswick.
The provision for federal and state income taxes consist of the following:
Year ended Month ended
July 31, July 31,
1997 1996
---------- -----------
Current:
Federal $482,400 $374,800
State 71,000 65,000
Other 22,000 -
NOL utilization (225,000) -
--------- --------
350,400 $439,800
Deferred:
Federal (259,000) -
State (35,000) -
Other (11,000) -
-------- --------
(305,000) -
--------- --------
$ 45,400 $439,800
======== ========
41
The following is a reconciliation of the provision for income taxes to provision
calculated at the statutory rate:
Year ended Month ended
July 31, 1997 July 31, 1996
------------- --------------
Provision for income taxes at federal statutory rate ($1,498,000) $261,000
State taxes, net of federal income tax benefit (265,000) 46,000
Write off non-deductible in process R&D 1,024,607 -
Taxable income provided by STI not
available for Brunswick NOL's - 195,000
Non deductible merger costs 473,606 -
Non-deductible amortization costs 345,787 93,000
Other (35,600) (155,200)
----------- --------
$ 45,400 $439,800
=========== ========
The Company paid income taxes of $551,900, $0, $0 and $0 for the year ended July
31, 1997, month ended July 31, 1996 and years ended June 30, 1996 and 1995,
respectively.
The Company provides deferred income taxes for temporary differences between the
book basis of assets and liabilities for financial purposes and the book basis
assets and liabilities for tax return purposes. Deferred tax assets and
liabilities were as follows at July 31, 1997 and June 30, 1996:
July 31, June 30,
1997 1996
---- ----
Net operating loss and tax
credits carryforward $ 2,123,000 $ 2,378,000
Inventory valuation 90,600 255,600
Uniform inventory capitalization 373,400 322,300
Postretirement benefits 241,300 173,700
Deferred lease income - 64,200
Vacation expense 57,900 57,900
Restructuring charge 47,800 247,200
Product exchange reserve 594,900 -
Other 252,700 418,600
Valuation allowance (2,123,000) (2,700,000)
----------- -----------
Deferred tax asset $ 1,658,600 $ 1,217,500
=========== ===========
Depreciation $(1,601,900) $(1,492,700)
Patent costs (135,500) (112,800)
Other (3,700) -
----------- -----------
Deferred tax liability $(1,741,100) $(1,605,500)
At July 31, 1997, the Company has net operating losses (NOLs) available for
future use of approximately $6 million. These NOL's begin to expire in 2005.
42
9. Employee Retirement Plans
Pension and Savings Plans
The Company maintains a profit sharing thrift plan covering all full-time
employees not covered by a collective bargaining agreement. Annual contributions
under the plan may be made up to 6.6% of the base annual salary of all plan
participants. Plan benefit allocations are based on the participants' annual
compensation. The Company made no contributions in fiscal 1996 or 1997. As part
of this profit sharing thrift plan, eligible employees may elect to contribute
up to 12% of their base salary to the plan. The Company matches a portion of the
employee contributions which amounted $35,800 in fiscal 1996 and $152,000 in
fiscal 1997.
The Company also made payments to a pension plan for its full-time employees in
St. Louis, Missouri covered by a collective bargaining agreement. Contributions
to this plan resulted in expense of $16,400 (after the initial purchase of STI
common stock) in fiscal 1996 and $92,000 in fiscal 1997.
Other Postretirement Benefits
The Company sponsors a postretirement benefit plan (the "Plan") to provide
certain medical and life insurance benefits to retirees, their spouses and
dependents. Employees who terminated from active service after March 1992 and
are at least 60 years of age, but no more than age 65, with 20 years service,
are eligible for medical coverage. Employees who terminated from active service
prior to April 1, 1992 and were at least 55 years of age, but no more than age
65, with 10 years service, are eligible for medical and life insurance coverage.
The Plan is contributory for medical benefits based on the retiree's years of
service and is noncontributory for life insurance benefits. The Company funds
its obligations under the Plan as incurred.
The following table sets forth the Plan's funded status:
1997 1996
---- ----
Accumulated postretirement benefit obligation:
Retirees $448,000 $ 877,000
Fully eligible and other Plan participants 380,000 502,000
-------- ---------
828,000 1,379,000
Unrecognized prior service cost (51,000) (60,000)
Unrecognized net gain (loss) 544,000 (106,000)
Unrecognized transition obligation (718,000) (763,000)
-------- --------
Accrued postretirement benefit cost $603,000 $450,000
======== =========
43
In fiscal 1997, the Company recognized net periodic postretirement expense of
$153,000 as follows:
1997
----
Service cost-benefits attributed to service
during periods $ 48,000
Interest cost on accumulated postretirement
benefit obligation 112,000
Amortization of prior service 9,000
Amortization of net gain (61,000)
Amortization of transition obligation 45,000
--------
Net periodic postretirement benefit cost $153,000
========
The cost for fiscal 1996 (after the initial purchase of STI common stock) was $
42,700. For measurement purposes, a 9.0% annual rate of increase in cost of
health care was assumed for fiscal 1997; the rate was assumed to decrease
gradually to 5% by 2005 and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing assumed health care cost by 1% in each year would
increase the accumulated postretirement benefit obligation as of July 31, 1997
by $183,000 and the aggregate of the service and interest cost component of net
periodic postretirement benefit cost by $47,000 for the year ended July 31,
1997. The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8% for 1997 and 1996.
10. Commitments and Contingencies
Leases
The Company has various commitments under operating leases through 2009 relating
to computer hardware and software, its pharmaceutical manufacturing facility and
warehouses in St. Louis, Missouri, its facility in the United Kingdom and
administrative offices in Columbia, Maryland and St. Louis, Missouri.
Future minimum rentals as of July 31, 1997 under noncancellable leases are as
follows:
Operating Sublease
Year Ending July 31 Leases Revenue
------------------- ------ -------
1998 $1,131,000 $ 330,100
1999 1,064,000 330,100
2000 1,000,000 330,100
2001 860,000 330,100
2002 534,000 165,100
Thereafter 1,426,000 -
---------- ----------
$6,015,000 $1,485,500
========== ==========
The Company incurred rental expense of $825,400 in 1997 and $ 63,600 in July
1996.
44
Sales/Leaseback of Corporate Headquarters Building
In connection with the December 1988 sale of the Company's former headquarters
building in Bethesda, Maryland, the Company's obligations under the Leasehold
Deed of Trust ("Ground Lease") were assigned to and assumed by the purchaser of
the building. The Company remains contingently liable under the Ground Lease.
The annual commitment under the Ground Lease aggregated $147,000 in 1997
(adjusted for increases in the Consumer Price Index) and extends until the year
2042.
Litigation
Lawsuits and claims are filed from time to time against the Company and its
subsidiaries in the ordinary course of business. Management of the Company,
after reviewing developments to date with legal counsel, is of the opinion that
the outcome of such matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Government Contract Revenue
The Company's supply contracts with the Department of Defense ("DoD) are subject
to post-award audit and potential price redetermination. In the opinion of
management, adjustments, if any, on completed contracts would not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
Employee Contracts
The Company entered into agreements with certain key employees which provide for
certain benefits should the employee be terminated within the term of the
agreement for other than specified reasons. The Company also entered into
agreements with certain other key employees which provide for certain benefits
should the employee be terminated within a two year period subsequent to a
change of control (as defined by the agreements) for other than specified
reasons. Benefits to be provided under these agreements include continued life,
disability, accident and health insurance coverage for a period of two years and
a severance payment up to 200% of the employee's annual base compensation.
Additionally, all stock options held by the employee become immediately
exercisable and any restrictions on transfer of the Company's stock held by the
employee shall lapse. These arrangements renew for one-year periods unless
timely notice of non-renewal is given. The maximum contingent liability under
these agreements at July 31, 1997 aggregates $1.1 million.
11. Industry Segment Information
The Company operates in one industry segment which includes the design,
development, manufacture and sale of medical products and related services, with
a major focus on safe and convenient participation by the patient in injection
therapy and in Cardiopulmonary Analysis Systems. The Cardiopulmonary business
unit operates in N. Ireland with most of its revenue generated overseas.
45
12. Significant Customers
Financial information relating to major customers and export sales follows:
1997 1996 1995
---- ---- ----
Sales to major U.S. customers
U.S. Department of Defense $13,115,800 $2,535,700 $ -
Dey Laboratories, Inc. 15,027,900 2,515,800 -
Other 5,051,100 4,556,900 2,903,500
----------- ---------- ----------
Total $33,194,800 $9,608,400 $2,903,500
Export Sales:
Contract sales to the
Governments of foreign countries 4,709,400 680,600 -
Other 2,760,500 86,300 -
----------- ---------- ----------
Total export sales 7,469,900 766,900 -
----------- ---------- ----------
Total net sales $40,664,700 10,375,300 $2,903,500
=========== ========== ==========
The Company extends credit to domestic customers and generally requires a letter
of credit for export sales.
At July 31, 1997 the Company had 68% of its accounts receivable from two
customers, Dey and the U.S. government. Dey's parent is a shareholder of the
Company.
13. Subsequent Events
On October 8, 1997, the Company announced a product exchange program for all of
its EpiEZPen(R) product sold since March 1996 (approximately 500,000 units).
This exchange program was initiated after a minimal amount of units (less than
10 units) were returned for premature activation in the package. The estimated
cost of the exchange program is $1.5 million and is included in fiscal 1997
results of operations. Management has performed an analysis of potential costs
of the exchange program and made their best estimate regarding these costs.
Actual costs could differ materially from management's estimates. The Company
has not included any anticipated cost sharing of this exchange with potentially
responsible parties as the benefit and probability of such an arrangement are
not determinable at this time. The Company believes the exchange will be
substantially complete by the end of fiscal 1998.
14. Quarterly Operating Results (unaudited)
(in Thousands, except per share data)
Quarter Ended
--------------------------------------
Fiscal year 1997 Oct 31 Jan 31 Apr 30 July 31
- ----------------------- --------------------------------------
Net sales $10,197 $ 8,787 $10,680 $11,001
Cost of sales 6,416 5,552 6,875 6,778
--------------------------------------
Gross profit 3,781 3,235 3,805 4,223
Operating expenses 3,289 6,638 2,843 3,973
--------------------------------------
Operating Income 492 (3,403) 962 250
Other (expense) income, net (400) (1,082) (373) (540)
--------------------------------------
Income (loss) before income tax 92 (4,485) 589 (290)
Provision for income tax 415 (48) -- (321)
Minority interest 256 9 -- --
--------------------------------------
Net (loss) $ (579) (4,446) 589 $ 31
======================================
Net (loss) per share $ (8.51) (2.24) 0.2 $ 0.01
======================================
Fiscal year 1996 Sep 30 Dec 31 Mar 30 Jun 30
- ----------------------- --------------------------------------
Net sales $ 819 $ 664 $ 1,422 $ 7,470
Cost of sales 439 360 875 5,281
--------------------------------------
Gross profit 380 304 547 2,189
Operating expenses 657 737 607 7,631
--------------------------------------
Operating Income (277) (433) (60) (5,442)
Other (expense) income, net (56) (49) (49) (385)
-------------------------------------
Income (loss) before income tax (333) (482) (109) (5,827)
Provision for income tax -- -- -- 27
Minority interest -- -- -- 17
-------------------------------------
Net income (loss) $ (333) $ (482) $ (109) $(5,871)
=====================================
Net (loss) per share $ (4.90) $ (7.09) $ (1.60) $(86.34)
=====================================
During the quarters ended June 30, 1996 and January 31, 1997, the Company
recorded nonrecurring charges of $4.5 million and $3.9 million , respectively,
for the write off of in-process R&D and merger transaction costs related to the
acquisition of 61% of STI's common stock and subsequent merger of Brunswick and
STI.
During the quarter ended July 31, 1997, the Company recorded a charge of $1.5
million for the estimated cost of a product exchange program related to the
Company's EpiEZPen product. The Company's results from April 15, 1996 reflect
the inclusion of STI in the consolidated operating results. Shares used in net
income (loss) per share calculations are based on the outstanding shares of
Brunswick and STI on November 20, 1996. Subsequent to the merger of Brunswick
and STI on November 20, 1996, per share calculations are based on the
outstanding shares of the Company.
During the quarter ended January 31, 1997, the Company recorded an adjustment to
interest expense (included in other (expense) income net) to provide for the
cumulative amortization of debt discount related to debt incurred by Brunswick
in April 1996.
46
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Meridian Medical Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Meridian Medical
Technologies, Inc. and subsidiaries as of July 31, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended July 31, 1997 and the month ended July 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Meridian Medical
Technologies, Inc. and subsidiaries at July 31, 1997, and the results of their
operations and their cash flows for the year ended July 31, 1997 and the month
ended July 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Washington DC
September 4, 1997, except for Note 13, as to which the date is October 21, 1997
47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Brunswick Biomedical Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Brunswick
Biomedical Corporation and its subsidiaries at June 30, 1996 and the results of
their operations and their cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. The financial statements of
the Company for the years ended June 30, 1995 and 1994 were audited by other
independent accountants whose report dated August 24, 1995 expressed an
unqualified opinion on those statements.
PRICE WATERHOUSE LLP
Washington, DC
October 29, 1997
48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Brunswick Biomedical Corporation:
We have audited the consolidated statements of operations, stockholders' equity
(deficit) and cash flows of Brunswick Biomedical Corporation (a Massachusetts
Corporation) and subsidiaries for the year ended June 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Brunswick Biomedical
Limited, a subsidiary, which reflect total assets and total revenues of 11% and
3% in 1995 of the consolidated totals. Those statements were audited by other
audits whose reports has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Brunswick Biomedical Limited, is based
solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether statements of operations, stockholders' equity (deficit)
and cash flows are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
statements of operations, stockholders' equity (deficit) and cash flows. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
statements of operations, stockholders' equity (deficit) and cash flows referred
to above present fairly, in all material respects, the results of operations,
cash flows and changes in stockholders' equity (deficit) of Brunswick Biomedical
Corporation and subsidiaries for the year ended June 30, 1995, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 24, 1995
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEMS 10. through 13.
Information required by Part III (Items 10 through 13) of this form 10-K is
incorporated by reference to the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders for the fiscal year ended July 31, 1997, which
will be filed with the Securities and Exchange Commission not later than 120
days after the end of the fiscal year to which this report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS FORM 8-K
(a) The following documents are included under Item 8 in this report:
1. Financial Statements:
Consolidated Balance Sheets at July 31, 1997 and June 30, 1996
Consolidated Statements of Operations for the year ended July
31, 1997, month ended July 31, 1996, and years ended June 30,
1996 and June 30,1995.
Consolidated Statements of Shareholders Equity for the year
ended July 31, 1997, month ended July 31, 1996 and years ended
June 30, 1996 and June 30, 1995.
Consolidated Statements of Cash Flows for the year ended July
31, 1997, month ended July 31, 1996 and years ended June 30,
1996 and June 30, 1995.
Notes to Consolidated Financial Statements
Reports of Independent Accountants
The above-listed financial statements are included in Item 8 to this
Form 10-K.
2. Financial Statement Schedule:
The following financial statement schedule immediately follow the
signatures to this report:
Schedule II -- Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are immaterial, not
applicable or the required information is shown in the consolidated
financial statements or the notes thereto.
50
3. Exhibits:
Exhibit No. Description of Exhibit
- ----------- ----------------------
(2.1) Agreement and Plan of Merger dated September 11, 1996 (incorporated
by reference herein from Exhibit 6(a) to Amendment No. 1 to Schedule
13D filed by Brunswick dated September 13, 1996).
(2.2) Agreement and Plan of Merger dated September 11, 1996 between
Survival Technology, Inc. and Brunswick Biomedical Corporation.
Incorporated by reference to Exhibit 6(a) to amendment No. 1 to
Schedule 13D filed by Brunswick Biomedical Corporation dated
September 13, 1996.
(3.1) The Company's Bylaws (As Amended). Filed herewith.
(3.2) First Amended and Restated Certificate of Incorporation and
certification of the amendment of first amended and restated
Certificate of Incorporation. Filed herewith.
(3.3) Amendment to First Amended and Restated Certificate of Incorporation,
dated November 20, 1996. Incorporated by Reference 8K filed by
Meridian on December 5, 1996.
(4.1) Form of warrant to be issued by the Registrant to former holders of
Brunswick preferred stock. Incorporated by reference herein from
Exhibit 4.1 to Form 8-K filed by the Registrant dated December 5,
1996.
(4.2) Forms of warrants assumed and to be issued by the Registrant in
connection with the merger with Brunswick. Incorporated by reference
herein from Exhibit 4.1 to Form 8-K filed by the Registrant dated
December 5, 1996.
(4.3) Form of warrant issued to the Estate of Stanley J. Sarnoff, assumed
by the Registrant. Incorporated by reference herein from Exhibit 4b
to Schedule 13D filed by Brunswick dated April 15, 1996.
(10.1) Indenture of Lease, dated January 1, 1982, between Survival
Technology, Inc. and Abraham M. Morrison, Incorporated by reference
to Exhibit (10.1) to the Company's Annual Report on Form 10-K for the
year ended July 31, 1988 (File No. 0-5958).
(10.4) Survival Technology, Inc., 1982 Stock Option Plan. Incorporated by
reference to Exhibit (4.4) to Registration Statement No. 2-80908 on
Form S-8.*
(10.5) Survival Technology, Inc. 1986 Stock Option Plan (As Amended).
Incorporated by reference to Exhibit (4.2) to Registration Statement
No. 33-46981 on Form S-8.*
(10.6) Contract SP0200-96-D-001 dated October 27, 1995 between the U.S.
Government (Defense Personnel Support Center) and the Company.
Incorporated by reference to Exhibit (10.6) to the Company's Annual
Report on Form 10-K for the year ended July 31, 1996 (File No.
0-5958).
(10.6.1) Contract SP0200-96-D-0001 modification No. 8004 dated October 15,
1996 between the U.S. Government (Defense Personnel Support Center)
and the Company. Incorporated by reference to Exhibit (10.6) to the
Company's Annual Report on Form 10-K for the year ended July 31, 1996
(File No. 0-5958).
51
(10.7) Agreement dated as of January 1, 1987 between Center Laboratories, a
division of EM Industries, Inc. and the Company. Incorporated by
reference to Exhibit (10.11) to the Company's Annual Report on Form
10-K for the year ended July 31, 1988 (File No. 0-5958).
(10.7.1) Letter Agreement dated as of January 31, 1990 between Center
Laboratories, a division of EM Industries, Inc. and the
Company. Incorporated by reference to Exhibit (10.10.1) to the
Company's Annual Report on Form 10-K for the year ended July
31, 1990.
(10.8) Agreement dated June 23, 1981 between Survival Technology, Inc, and
American Home Products Corporation. Incorporated by reference to
Exhibit (10.12) to the Company's Annual Report on Form 10-K for the
year ended July 31, 1988 (File No. 0-5958).
(10.8.1) License Agreement dated April 20, 1982 between Survival Technology,
Inc. and American Home Products Corporation. Incorporated by
reference to Exhibit (10.12.1) to the Company's Annual Report on Form
10-K for the year ended July 31, 1988 (File No. 0-5958).
(10.8.2) Supply Agreement dated August 3, 1993 between Survival Technology,
Inc. and Wyeth-Ayerst Laboratories (A Division of American Home
Products Corporation). Incorporated by reference to Exhibit (10.7.2)
to the Company's Annual Report on Form 10-K for the year ended July
31, 1993 (File No. 0-5948).
(10.9) Loan Agreement dated April 16, 1991 between Syntex Laboratories, Inc.
and the Company. Incorporated by reference to Exhibit (10.11.1) to
the Company's Current Report on Form 8-K dated April 16, 1991 (File
No. 0-5958).
(10.9.1) Agreement dated November 25, 1993 between Survival Technology, Inc.
and Syntex Laboratories, Inc. with respect to the termination of the
March 1, 1989 Manufacturing and Packaging Agreement. Incorporated by
reference to Exhibit (10.9.2) to the Company's Annual Report on Form
10-K for the year ended July 31, 1993.
(10.10) Development, Manufacturing and Supply Agreement between Mylan
Laboratories, Inc. and Survival Technology, Inc. dated August 31,
1993. Incorporated by reference to Exhibit (10.11) to the Company's
Annual Report on Form 10-K for the year ended July 31, 1993 (File No.
0-5958).
(10.10.1) Development, Manufacturing and Supply Amendment Agreement dated July
28, 1994 between Mylan Laboratories, Inc. and Survival Technology,
Inc. Incorporated by reference to Exhibit (10.12.1) to the Company's
Annual Report on Form 10-K for the year ended July 31, 1994.
(10.11) Lease Agreement dated August 26, 1991 between Pru Beta 2 and the
Company. Incorporated by reference to Exhibit (10.12) the Company's
Annual Report on Form 10-K for the year ended July 31, 1991 (File No.
0-5958).
52
(10.12.3) Change in Control Agreement dated January 10, 1996 between Mark D.
Ruby and the Company. Incorporated by reference to Exhibit (10.12.3)
to the Company's Annual Report on Form 10-K for the year ended July
31, 1996 (File No. 0-5958).
(10.13) Commitment letter dated May 4, 1995 between the CIT Group/Equipment,
Financing Inc., and the Company. Incorporated by reference to Exhibit
(10.15) to the Company's Annual Report on Form 10-K for the year
ended July 31, 1995 (File No. 0-5958).
(10.14) Letter dated March 15, 1996 from Brunswick Biomedical Corporation.
Incorporated by reference to Exhibit (10) to Form 8-K dated March 19,
1996.
(10.15) Credit Agreement, dated as of April 15, 1996, among Brunswick, as the
Borrower, Various Lenders and Internationale Nederlanden (U.S.)
Capital Corporation as the Agent for the Lenders (incorporated by
reference herein Exhibit 1 to Schedule 13D filed by ING (U.S.)
Investment Corporation dated December 2, 1996).
(10.16) Warrant Purchase Agreement, dated as of April 15, 1996, between
Brunswick and Internationale Nederlanden (U.S.) Capital Corporation
(incorporated by reference herein from Exhibit 2 to Schedule 13D
filed by ING (U.S.) Investment Corporation dated December 2, 1996)
(10.17) Registration Rights Agreement, dated as of April 15, 1996, between
Brunswick and Internationale Nederlanden (U.S.) Capital Corporation
(incorporation by reference herein from Exhibit 3 to Schedule 13D
filed by ING (U.S.) Investment Corporation dated December 2, 1996).
(10.18) First Amendment to Credit Agreement, dated as October 25, 1996,
between Brunswick and Internationale Nederlanden (U.S.) Capital
Corporation (incorporation by reference herein from Exhibit 4 to
Schedule 13D filed by ING (U.S.) Investment Corporation dated
December 2, 1996).
(10.18.1) Second Amendment to Credit Agreement, date September 2, 1997 between
Meridian Medical Technologies, Inc. and Internationale Nederlanden
(U.S.) Capital Corporation (filed herewith).
(10.19) First Amendment to warrant Purchase Agreement, dated as of October
25, 1996, between Brunswick and Internationale Nederlanden (U.S.)
Capital Corporation (incorporated by reference herein from Exhibit 5
to Schedule 13D filed by ING (U.S.) Investment Corporation dated
December 2, 1996).
(10.20) Assumption Agreement to the Credit Agreement, dated as of November
20, 1996, between Meridian Medical Technologies, Inc. and
Internationale Nederlanden (U.S.) Capital Corporation (incorporated
by reference herein from Exhibit 6 to Schedule 13D filed by ING
(U.S.) Investment Corporation dated December 2, 1996).
(10.21) Assumption Agreement to the Warrant Purchase Agreement, dated as of
November 20, 1996, between Meridian Medical Technologies, Inc. and
Internationale Nederlanden (U.S.) Capital Corporation (incorporated
by reference herein from Exhibit 7 to Schedule 13D filed by ING
(U.S.) Investment Corporation dated December 2, 1996).
(10.22) $10,000,000 Term Note of Meridian Medical Technologies, Inc. dated
November 20, 1996 (incorporated by reference herein from Exhibit 9 to
Schedule 13D filed by ING (U.S.) Investment Corporation dated
December 2, 1996).
53
(10.23) $15,000,000 Revolving Note of Meridian Medical Technologies, Inc.
dated November 20, 1996 (incorporated by reference herein from
Exhibit 10 to Schedule 13D filed by ING (U.S.) Investment Corporation
dated December 2, 1996).
(10.24) Warrant Certificate for 90,912 Warrants of Meridian Medical
Technologies, Inc. Certificate No. 1 (incorporated by reference
herein from Exhibit 10 to Schedule 13D filed by ING (U.S.) Investment
Corporation dated December 2, 1996).
(10.25) Warrant Certificate for 83,579 Warrants of Meridian Medical
Technologies, Inc. -- Certificate No. 1 (incorporated by reference
herein from Exhibit 11 to Schedule 13D filed by ING (U.S.) Investment
Corporation dated December 2, 1996).
(10.26) Employment agreement with James H. Miller, dated November 20, 1996.
Incorporated by reference to the Company's Form 10K for the year
ended July 31, 1996 (File No. 0-5958).
(10.27) Form of Registration Rights Agreement with former Brunswick
stockholders (Incorporated by reference to the Company's Form 10K for
the year ended July 31, 1996. (File No. 0-5958).
(22) A list of the Company's subsidiaries is not provided because they,
considered in the aggregate as a single subsidiary, would not
constitute a significant subsidiary as of the end of the year covered
by this report.
(24.1) Consent of Independent Accountant -- Ernst and Young LLP. Filed
herewith.
(24.2) Consent of Independent Accountant -- Price Waterhouse LLP. Filed
herewith
(24.3) Consent of Independent Accountant -- Arthur Anderson LLP. Filed
herewith
________________
*Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K:
There was no Current Reports on Form 8-K filed by Registrant during
the three months ended July 31, 1996.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MERIDIAN MEDICAL TECHNOLOGIES, INC.
(Registrant)
By /S/JAMES H. MILLER
James H. Miller
Chairman of the Board
President & CEO
Dated: October 22, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ JAMES H. MILLER Chairman of the Board October 27, 1997
- ------------------- President and Director
James H. Miller (Principal Executive Officer)
/s/ G. TROY BRASWELL Vice President of Finance October 27, 1997
- -------------------- (Principal Financial and
G. Troy Braswell Accounting Officer)
/s/ MARK D. RUBY Vice President of Marketing October 27, 1997
- ---------------- and Sales
Mark D. Ruby
/s/ BRUCE M. DRESNER Director October 27, 1997
- --------------------
Bruce M. Dresner
/s/ ROBERT G. FOSTER Director October 27, 1997
- --------------------
Robert G. Foster
/s/ DAVID L. LOUGEE Director October 27, 1997
- -------------------
David L. Lougee
/s/ E. ANDREWS GRINSTEAD, III Director October 27, 1997
- -----------------------------
E. Andrews Grinstead, III
55
MERIDIAN MEDICAL TECHNOLOGIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
Additions Additions
Balance at Charged to Charged to Balance
Beginning other Costs and Write-off at End
of Period Accounts(1) Expenses Deductions of Period
--------------------------------------------------------------
For the year ended
June 30, 1995
- -------------------------
Allowance for doubtful accounts $ 17,000 $ -- $ 49,000 $ -- $ 66,000
Inventory reserves $ -- $ -- $ -- $ -- $ --
Restructuring reserves $ -- $ -- $ -- $ -- $ --
========= ========== ========= ========== ========
For the year ended
June 30, 1996
- -------------------------
Allowance for doubtful accounts $ 66,000 $ 24,500 $ 20,600 $ 66,100 $ 45,000
Inventory reserves $ -- $ 640,400 $ 209,700 $ 556,600 $293,500
Restructuring reserves $ -- $ 481,600 $ 225,800 $ 67,000 $640,400
========= ========== ========= ========== ========
For the one month ended
July 31, 1996
- -------------------------
Allowance for doubtful accounts $ 45,000 $ -- $ -- $ -- $ 45,000
Inventory reserves $ 293,500 $ -- $ -- $ -- $293,500
Restructuring reserves $ 640,400 $ -- $ -- $ -- $640,400
========= =========== ========= ========== ========
For the year ended
July 31, 1997
- -------------------------
Allowance for doubtful accounts $ 45,000 $ -- $ 292,000 $ 89,200 $247,800
Inventory reserves $ 293,500 $ -- $ 695,200 $ 442,400 $546,300
Restructuring reserves $ 640,400 $ -- $ 64,300 $ 580,900 $123,800
========= =========== ========= ========== ========
(1) Additions resulting from the acquisition of STI by Brunswick