<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1997
REGISTRATION NO. 333-30047
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STERIGENICS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7389 95-3323502
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
4020 CLIPPER COURT
FREMONT, CALIFORNIA 94538-6540
(510) 770-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES F. CLOUSER
CHIEF EXECUTIVE OFFICER
STERIGENICS INTERNATIONAL, INC.
4020 CLIPPER COURT
FREMONT, CALIFORNIA 94538-6540
(510) 770-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
CARLA S. NEWELL, ESQ. JEFFREY S. MARCUS, ESQ.
OLUFUNMILAYO B. AREWA, ESQ. HANS J. BRASSELER, ESQ.
WILLIAM A. HOLMES, ESQ. MORRISON & FOERSTER LLP
GUNDERSON DETTMER STOUGH 1290 AVENUE OF THE AMERICAS
VILLENEUVE FRANKLIN & HACHIGIAN, LLP NEW YORK, NEW YORK 10104
155 CONSTITUTION DRIVE (212) 468-8000
MENLO PARK, CALIFORNIA 94025
(415) 321-2400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 30, 1997
2,000,000 SHARES
LOGO
COMMON STOCK
------------------------
All the 2,000,000 shares of Common Stock offered hereby are being sold by
SteriGenics International, Inc. Prior to the offering, there has been no public
market for the Common Stock of the Company. It is currently estimated that the
initial public offering price will be between $12.00 and $14.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol STER.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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=====================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
- -----------------------------------------------------------------------------------------------------
Per Share...................................... $ $ $
- -----------------------------------------------------------------------------------------------------
Total(3)....................................... $ $ $
=====================================================================================================
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $850,000, which are payable by the
Company.
(3) Certain stockholders of the Company (the "Selling Stockholders") have
granted to the Underwriters a 30-day option to purchase up to 300,000
additional shares of Common Stock solely to cover over-allotments, if any.
If all such shares are purchased, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
------------------------
The Shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about ,
1997.
------------------------
PAINEWEBBER INCORPORATED
PIPER JAFFRAY INC.
WHEAT FIRST BUTCHER SINGER
------------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
MEDICAL PRODUCTS
SteriGenics provides contract
sterilization services to manufacturers
of a broad range of single-use medical
products including syringes, scalpels,
gloves, gowns, cotton balls, surgical
kits, orthopedic implants, blood
collection devices, petri dishes, drug
packaging materials and eyecare
solutions.
NON-MEDICAL PRODUCTS
SteriGenics processes a variety of
non-medical products including
spices and herbs, cosmetics, food
ingredients, fruit and vegetable
products, food packaging, consumer
[SteriGenics Logo] products and polymers.
- --------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO STABILIZE ITS
MARKET PRICE, THE PURCHASE OF THE COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results and the timing of certain events could differ materially from
those anticipated in such forward-looking statements as a result of certain
factors discussed in this Prospectus, including those set forth in "Risk
Factors." Prospective investors should consider carefully the factors discussed
in "Risk Factors." Unless otherwise indicated, all information in this
Prospectus (i) gives effect to the reincorporation of the Company in Delaware in
July 1997, (ii) gives effect to the conversion of all outstanding shares of
Convertible Preferred Stock into shares of Common Stock effective upon the
closing of the offering, (iii) gives effect to the redemption of all outstanding
shares of Series A Redeemable Preferred Stock upon the closing of the offering
and, (iv) assumes that the Underwriters' over-allotment option will not be
exercised.
THE COMPANY
SteriGenics International, Inc. ("SteriGenics" or the "Company") is a
leading provider of high quality contract sterilization services, with over 18
years of experience in the operation, design and development of Gamma
irradiation ("Gamma") facilities. The Company operates 12 Gamma facilities in
six states serving over 850 customers, predominantly in the medical products
market. In recent years, the Company has expanded into various non-medical
sterilization and processing markets. The Company's objective is to be the
leading provider of high quality contract sterilization services for
manufacturers of medical and non-medical products.
Sterilization is an essential step in the manufacturing process across a
number of industries for health, safety, regulatory and economic reasons. A
broad range of single-use, pre-packaged medical products as well as consumer
products are required under government regulations in the U.S. and many other
developed countries to be sterile or to have minimal microbial levels. In
addition, other products such as spices and herbs, cosmetics and food packaging
materials, are sterilized to improve shelf-life and address potential product
liability concerns. There are also a number of potential markets for the
sterilization of food products, including red meat, poultry, shellfish, animal
feed and fresh fruits and vegetables. The development of these potential markets
is subject to regulatory approvals and consumer acceptance of irradiated foods.
The market for commercial sterilization is divided between independent
suppliers of sterilization and processing services ("contract sterilizers") such
as the Company and certain large manufacturers that have in-house sterilization
capabilities ("captive sterilizers"). Although there are no published industry
statistics and precise numbers are difficult to determine, the Company estimates
that the U.S. market for contract sterilization was approximately $170 million
in 1996 and that a similar volume of product was processed by captive
sterilizers. There is also a significant market for contract sterilization
services outside of the U.S.
The two primary methods of commercial sterilization are Gamma and
fumigation using ethylene oxide gas ("EtO"). Although there are no published
industry statistics and precise numbers are difficult to determine, the Company
estimates that in 1996, 40 to 45% of the U.S. contract sterilization market was
Gamma. SteriGenics believes that Gamma has significant advantages under normal
operating conditions over EtO including uniform dosing, predictability, shorter
processing times, enhanced flexibility, ease of handling and less environmental
impact. As a result, the use of Gamma sterilization has increased significantly
over the past ten years as medical products manufacturers have converted the
sterilization method used for certain products from EtO to Gamma and have
increasingly used radiation compatible materials in the development of new
products and packaging.
The Company has developed an integrated strategy intended to increase its
share of the existing sterilization market as well as to develop new markets.
First, the Company will seek to increase its share of the medical products
sterilization market by promoting the conversion from EtO to Gamma and from
captive to contract sterilization. Further, the Company is seeking to expand its
presence in non-medical markets,
3
<PAGE> 5
including the markets for spices and herbs, cosmetics, food and drug packaging
materials and materials processing. The Company will also evaluate potential
markets as they develop. A third element of the Company's strategy is geographic
expansion using the MiniCell, a smaller, single cell irradiator based upon a
proprietary design. The MiniCell takes substantially less time to construct and
is significantly less expensive to construct and operate than a standard
irradiation facility. The Company believes that the economics of the MiniCell
will allow the Company to serve smaller industrial centers, both domestically
and internationally, that could not support a full-size facility. The Company is
also seeking to lease MiniCells with support services to manufacturers with high
volume sterilization needs. The Company also seeks to increase its market share
by offering higher margin, premium services such as GammaSTAT and GammaReserve,
which guarantee rapid turn-around time, and the ExCell, which provides precision
dosing. SteriGenics intends to continue to leverage its engineering and design
capabilities to continue to improve its existing processes and designs and to
create and utilize innovative designs and services. Finally, SteriGenics intends
to pursue strategic acquisitions, both domestically and internationally.
SteriGenics has over 700 customers in the medical products market including
manufacturers of health care and medical devices, pharmaceuticals, labware and
eyecare products. Sales to these customers accounted for approximately 80% of
the Company's revenues in the fiscal year ended March 31, 1997. The Company has
over 150 customers in the non-medical market producing a variety of products
including spices and herbs, cosmetics, food ingredients, food packaging,
consumer products and polymers.
The Company's principal executive offices are located at 4020 Clipper
Court, Fremont, California 94538-6540 and its telephone number is (510)
770-9000. The Company was incorporated in California on August 29, 1978 and was
reincorporated in Delaware in July 1997 . Unless the context otherwise requires,
the term "Company" when used herein shall mean SteriGenics International, Inc.,
a Delaware corporation, its California predecessor and its subsidiaries.
GammaSTAT is a registered trademark of the Company. ExCell, GammaReserve,
Gemini, MiniCell and SteriGenics are trademarks of the Company.
THE OFFERING
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Common Stock Offered by the Company.............. 2,000,000 shares
Common Stock to be Outstanding after the
Offering....................................... 6,829,039 shares(1)
Use of Proceeds.................................. To fund capital expenditures, to redeem
the Company's outstanding Series A
Preferred Stock and for working capital
and general corporate purposes.
Nasdaq National Market Symbol.................... STER
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of June 30, 1997. Excludes an
aggregate of 706,550 shares subject to outstanding options as of June 30,
1997 at a weighted average exercise price of $5.10 per share under the
Company's Second Amended and Restated 1986 Stock Option Plan. Since June 30,
1997, the Company has granted options to purchase an aggregate of 351,750
shares at an exercise price of $10.80 per share under the 1997 Equity
Incentive Plan and the 1997 Stock Plan. See "Capitalization,"
"Management -- Stock Plans" and Note 5 of Notes to Consolidated Financial
Statements.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements, quarterly reports
containing unaudited consolidated financial statements and such other periodic
reports as the Company may determine to be appropriate or as may be required by
law.
4
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $21,603 $24,585 $28,661 $30,241 $ 37,668 $ 8,164 $ 10,751
Cost of revenues.................... 11,896 11,679 16,389 16,978 20,425 4,297 5,801
------- ------- ------- ------- --------- --------- ---------
9,707 12,906 12,272 13,263 17,243 3,867 4,950
Costs and expenses:
General and administrative........ 1,628 3,266 5,664 5,213 6,345 1,417 1,637
Marketing and selling............. 1,002 1,258 1,583 1,761 2,482 560 823
Research, development and
engineering..................... 473 518 685 890 1,381 273 312
------- ------- ------- ------- --------- --------- ---------
3,103 5,042 7,932 7,864 10,208 2,250 2,772
------- ------- ------- ------- --------- --------- ---------
Income from operations.............. 6,604 7,864 4,340 5,399 7,035 1,617 2,178
Other income (expense):
Write-down of investments in joint
ventures........................ -- -- (3,011) -- -- -- --
Interest expense, net............. (1,164) (916) (2,402) (1,846) (1,836) (459) (581)
Other income...................... 315 256 139 47 115 7 15
------- ------- ------- ------- --------- --------- ---------
Income (loss) before provision for
income taxes, equity in joint
ventures and discontinued
operations........................ 5,755 7,204 (934) 3,600 5,314 1,165 1,612
Provision for income taxes.......... 2,045 2,479 1,185 1,448 2,099 461 637
------- ------- ------- ------- --------- --------- ---------
Income (loss) before equity in joint
ventures and discontinued
operations........................ 3,710 4,725 (2,119) 2,152 3,215 704 975
Equity in net loss of joint
ventures.......................... (204) (720) (1,360) -- -- -- --
------- ------- ------- ------- --------- --------- ---------
Income (loss) from continuing
operations........................ 3,506 4,005 (3,479) 2,152 3,215 704 975
Discontinued operations:
Income (loss) from discontinued
operations...................... 494 189 (115) -- -- -- --
Loss on disposition of
discontinued operations......... -- -- (1,173) -- -- -- --
------- ------- ------- ------- --------- --------- ---------
Net income (loss)................... $ 4,000 $ 4,194 $(4,767) $ 2,152 $ 3,215 $ 704 $ 975
======= ======= ======= ======= ========= ========= =========
Pro forma net income per share(1)... $ 0.62 $ 0.14 $ 0.19
========= ========= =========
Shares used in computing pro forma
net income per share(1)........... 5,164,679 5,164,679 5,166,679
========= ========= =========
OTHER OPERATING DATA:
Capital expenditures................ $ 9,331 $14,462 $16,549 $ 7,207 $ 18,613 $ 2,821 $ 2,953
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------
AS
ACTUAL ADJUSTED(2)
------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................................... $ 1,501 $ 23,331
Working capital (deficit)..................................................... (3,837) 17,993
Total assets.................................................................. 92,103 113,933
Total liabilities............................................................. 58,645 58,645
Redeemable preferred stock.................................................... 1,500 --
Stockholders' equity.......................................................... 31,957 55,287
</TABLE>
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(1) See Note 1 of Notes to Consolidated Financial Statements included herein for
a description of the computation of pro forma net income per share.
(2) As adjusted to give effect to the sale of shares of Common Stock at an
assumed initial public offering price of $13.00 per share and the
application of the net proceeds therefrom. See "Use of Proceeds."
5
<PAGE> 7
RISK FACTORS
These securities involve a high degree of risk. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results and the timing of certain events could differ materially from
those anticipated by such forward-looking statements as a result of certain
factors discussed in this Prospectus, including the risk factors set forth
below. Prospective purchasers of the Common Stock should consider carefully the
risk factors set forth below, as well as the other information set forth in this
Prospectus, prior to investing in the Common Stock offered hereby.
UNPREDICTABILITY OF FUTURE OPERATING RESULTS; LIKELY FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
significant fluctuations in revenues and operating results from quarter to
quarter. As a result, the Company believes that period-to-period comparisons of
its operating results are not necessarily meaningful, and that such comparisons
cannot be relied upon as indicators of future performance. In addition, there
can be no assurance that the Company's revenues will grow or be sustained in
future periods or that the Company will maintain its current profitability in
the future. A significant component of such quarterly fluctuations results from
fluctuations in the demand by the Company's customers for Gamma sterilization
services due to varying manufacturing cycles, changes in demand for customers'
products and seasonality related to growth cycles for spices and herbs and the
deferral of elective surgery procedures during the year-end holiday season.
Other factors that could cause the Company's operating results to vary
significantly from period to period include volatility in the market for medical
devices; the ability of the Company to deliver sterilization services in a
timely and cost effective manner; the ability of the Company to expand
successfully in the non-medical sterilization services market; the timing and
size of orders from the Company's customer base; the ability of the Company to
obtain supplies of Cobalt 60 on a timely basis and at a reasonable cost;
fluctuations in currency exchange rates between the U.S. dollar and the Canadian
dollar which affect the Company's interest expense; the costs associated with
customer product being damaged as a consequence of overdosing and other factors;
changes in interest rates; regulatory matters; seasonality associated with
historical decreases in medical procedures during the fourth calendar quarter;
and litigation, acquisitions and other extraordinary events. The Company's
results of operations are also influenced by competitive factors, including the
pricing and availability of the Company's and competing sterilization services;
the acceptance of Gamma sterilization as a means of sterilizing products as
opposed to other methods of sterilization; the ability of the Company's
competitors to obtain orders from the Company's customers; the establishment of
in-house sterilization capabilities by the Company's customers; the acquisition
of the Company's customers by entities that do not use the Company's
sterilization services; the timing of new service or technology announcements
and releases by the Company and its competitors; and the entry of new
competitors into the market for sterilization and radiation processing services.
A large portion of the Company's expenses are fixed and difficult to reduce in a
short period of time. If revenues do not meet the Company's expectations, the
Company's fixed expenses would exacerbate the effect of such a shortfall on net
income.
Additional factors that have a significant impact on the Company's results
of operations are the timing of construction and commencement of operations of
new facilities. Building new facilities requires significant capital investments
in construction, equipment and Cobalt 60. In addition to incurring costs
associated with building and equipping such facilities, the Company also incurs
costs related to Cobalt 60 and higher personnel costs in the months preceding
initial operation. In the past, as a result of their own internal procedures,
customers have delayed qualification and use of new facilities until they had
been operational for a specified period of time of up to 12 months. As a result,
the Company failed to realize a portion of anticipated revenues for the facility
pending such qualification, while incurring significant start-up costs, both of
which adversely affected the Company's results of operations. The Company does
not currently have any specific plans for new facilities. See " -- Substantial
Debt."
Due to these factors, as well as other unanticipated factors, it is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts or investors. In such event, the price of
the Company's Common Stock would be materially adversely affected. See "-- No
Prior
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Trading Market; Potential Volatility of Stock Price," "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE ON MEDICAL PRODUCTS CUSTOMERS
The Company derives a substantial portion of its revenues from the sale of
sterilization services to manufacturers of medical devices, labware and eyecare
products ("medical products"), and the Company expects that the sterilization of
medical products will continue to account for a significant portion of the
Company's revenues for the foreseeable future. Sales to medical products
customers accounted for approximately 80% of the Company's revenues in fiscal
1997. The future success of the Company thus depends to a considerable extent
upon the continued growth of the market for medical products. In particular, a
significant aspect of the Company's medical products business is the
sterilization of single-use medical devices. As a result, the future success of
the Company depends in part on continued growth in the market for single-use
medical devices. There has recently been an increasing focus on reusable medical
devices and, therefore, there can be no assurance that use of reusable medical
devices will not increase. Any significant increase in the use of reusable
medical devices would decrease the use of single use devices of the type
sterilized by the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes that continued growth in the use of medical products depends on a
number of factors, including the impact of health reform proposals. The Company
believes that government and private insurance company efforts to contain or
reduce health care costs are likely to continue. These trends may lead to fewer
medical procedures being performed or the increased use of reusable medical
devices, either of which could negatively impact the demand for the Company's
services. Loss of significant business from medical products manufacturers,
including reductions caused by large customers establishing captive facilities,
changes in such customers' competitive position, a decision to purchase contract
sterilization services from other suppliers or a downturn in the medical
products market, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Industry Background."
COMPETITION
The market for sterilization services is intensely competitive and is
characterized by significant price competition. The Company's market is
fragmented as a result of geographical limitations on the transportation of
products for sterilization, multiple technologies and the mix of captive and
contract sterilization facilities. The Company competes with other companies
that provide Gamma sterilization services, the most significant of which is
Isomedix, Inc. ("Isomedix"). In addition, many products that can be sterilized
using Gamma can also be sterilized using either EtO or electron beam ("E-Beam")
sterilization. As a result, the Company also competes with companies that
process products using EtO or E-Beam technology. Companies processing products
using EtO include Cosmed Group, Inc., Griffith Micro Science, Inc. and Isomedix.
Certain of the Company's competitors and potential competitors have
substantially greater financial, marketing, distribution, technical and other
resources than the Company or offer multiple sterilization technologies, which
may enable them to address a broader range of the sterilization requirements of
individual customers. In addition, the Company competes with manufacturers that
have or are considering establishing in-house sterilization capabilities. The
Company may also in the future face competition from suppliers of Cobalt 60
radioisotope, particularly MDS Nordion, Inc. ("Nordion"), as well as foreign
providers of sterilization services. In addition, Isomedix has announced its
intention to enter the California market for sterilization services, which would
increase competition in that market. To the extent that the Company expands into
international markets it will also be faced with competition from existing
providers of sterilization in those markets.
In recent years, price competition in the sterilization services industry
has intensified. The Company may in the future face increased competition from
companies that employ new or improved technologies or that offer sterilization
services that are more effective or less costly than those developed and
marketed by the Company. Such competition could have a material adverse effect
on the Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to continue to compete
effectively or that the competitive pressures faced by the Company will not have
a material adverse
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<PAGE> 9
effect on the Company's business, financial condition and results of operations.
See "Business -- Competition."
UNCERTAINTY OF EXPANSION IN NON-MEDICAL MARKETS
While the Company has traditionally focused primarily on the medical
products market, it has recently increased its efforts in the non-medical
contract sterilization services market. The Company currently sterilizes a wide
range of food ingredients and consumer products, including cosmetics, spices and
herbs. In addition, the Company processes various industrial compounds. These
services accounted for 20% of the Company's revenues in fiscal 1997. Many of the
non-medical markets for Gamma sterilization and processing are new and emerging,
and there can be no assurance that any of these markets will develop at the
anticipated rate, if at all. See "Business -- Markets and Customers."
Approval for the irradiation of food products is regulated by the United
States Food and Drug Administration (the "FDA") and the United States Department
of Agriculture (the "USDA"). The FDA has approved radiation for the processing
of a variety of foods, including pork, poultry and fresh fruits and vegetables.
However, only limited commercial sales of irradiated food have taken place. The
FDA is currently considering a petition to approve the irradiation of fresh
packaged red meats in order to eliminate E. coli and other harmful pathogens.
Any irradiation processing of meat or poultry is also regulated by the USDA,
which requires preapproval of the irradiation process. Although the Company may
in the future seek to take advantage of opportunities to sterilize meat and
poultry products, the sterilization of fresh food products such as meat and
poultry would require significant changes in the Company's processing
techniques, including the redesign of facilities and the addition of
refrigeration capabilities. In addition, current FDA rules and regulations
require the labeling of any retail food product that is irradiated, and to date
there has been significant consumer resistance to irradiated food. As a result,
there can be no assurance that Gamma sterilization of food products will gain
public acceptance or will ultimately prove commercially feasible in the U.S. or
that the Company would undertake to expand its irradiation activities to include
meat and poultry.
RISKS RELATED TO GEOGRAPHIC EXPANSION USING THE MINICELL; RISKS RELATED TO
INTERNATIONAL OPERATIONS
A key element of the Company's strategy is to expand geographically into
smaller regional markets and internationally using the MiniCell. There can be no
assurance that manufacturers in these markets will use the Company's facilities,
that such manufacturers will pay higher sterilization prices in exchange for
lower transportation costs and a decrease in turn-around time or that the
Company will receive enough volume of product to operate such facilities on a
profitable basis. In addition, many manufacturers in these smaller markets
currently use EtO to sterilize their products and would need to convert their
products to Gamma. Failure of the Company to successfully introduce and operate
MiniCells in these new markets could materially adversely affect the Company's
business, financial condition and results of operations.
If the Company is successful in expanding into international markets, it
will be subject to a number of risks related to foreign operations, including
fluctuations in currency exchange rates, political and economic conditions in
various jurisdictions, unexpected changes in regulatory requirements, tariffs
and other trade barriers, difficulties in staffing and managing foreign
operations, longer accounts receivable payment cycles and potentially adverse
tax consequences. There can be no assurance that such factors will not have a
material adverse effect on the Company's future operations outside the U.S. In
addition, in the past the Company has been unsuccessful in its attempts to
penetrate international markets and in fiscal 1995 wrote-off a total of $3.0
million invested in joint ventures in Taiwan and Indonesia. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNCERTAINTIES RELATED TO MINICELL LEASING
The Company's ability to successfully lease its MiniCell will depend upon
the acceptance of the Company's technology and the concept of "in-house
outsourcing" (utilizing third party contractors to provide services within a
manufacturer's own facility) by manufacturers with high volume sterilization
needs, as well as upon the Company's ability to enter into favorable leasing
terms with potential customers. The Company
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has not yet leased a MiniCell, and there can be no assurance that manufacturers
will elect to lease a MiniCell in lieu of relying on traditional in-house
sterilization operations and contract sterilization providers or that any such
leases will be on terms favorable to the Company. In addition, the leasing of
the MiniCell will involve a significant commitment of management attention and
resources by prospective customers and may require input from and approval at
multiple levels of a customer's organization. Accordingly, the Company
anticipates that the MiniCell leasing process will be subject to long sales
cycles typically associated with significant capital expenditures. Delay in or
the failure to lease the MiniCell could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- The SteriGenics Approach."
DEPENDENCE ON A SINGLE TECHNOLOGY
The Company performs all of its sterilization services using Gamma
radiation. Because of its use of a single technology, a decline in the demand
for, or the pricing of, Gamma sterilization services would have a material
adverse effect on the Company's business, financial condition and results of
operations. To remain competitive, the Company may also need to respond quickly
to technological changes and innovations in the sterilization services market,
including changes in the technologies used to perform sterilization services
that could render Gamma sterilization obsolete or noncompetitive. The Company is
also dependent upon continued consumer acceptance of the Gamma sterilization of
medical products. Failure by the Company to quickly and effectively respond to
changes in the sterilization market, including the development of new
technologies, or a significant increase in consumer resistance to products
sterilized by Gamma, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Competition."
SUBSTANTIAL DEBT
As of June 30, 1997, the Company's total consolidated liabilities were
$58.6 million, of which $41.1 million represents long-term debt (including
current portion), its total consolidated assets were $92.1 million and its total
stockholders' equity was $32.0 million. The Company's substantial level of debt
presents the risk that the Company might not generate sufficient cash to service
the Company's indebtedness, including its Industrial Revenue Bonds ("IRBs"), or
that its debt level could limit its ability to finance an acquisition and
develop additional projects, to compete effectively or to operate successfully
under adverse economic conditions. As of June 30, 1997, the Company had $31.5
million of tax-free IRBs outstanding with interest rates as of June 30, 1997 of
4.0% and 4.4% and a $750,000 tax-free IRB with a fixed interest rate of 10.0%.
On July 30, 1997, the Company issued a tax-free IRB in the amount of $5.0
million to finance its new Fort Worth, Texas facility. The maximum aggregate
amount of tax-free IRBs that the Company may issue is $40.0 million. Once the
Company has issued the maximum amount of tax-free IRBs, it will be required to
obtain any additional financing through higher cost funding sources. Each of the
Company's IRBs is collateralized by certain assets of the Company. See
"Capitalization," "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 3 of Notes to the Consolidated Financial Statements.
RISKS RELATED TO GOVERNMENT REGULATION AND STANDARDS COMPLIANCE
The Company's business is subject to various federal, state and local laws,
regulations, agency actions and court decisions. Although the Company believes
it has received all licenses and permits necessary to conduct its current
sterilization business, there can be no assurance that the Company will not be
found in violation of applicable requirements or that governmental bodies will
not seek to impose regulatory requirements not now anticipated on the Company
and its business. In addition, the long-term course of regulatory policy cannot
be predicted and, there can be no assurance that laws and regulations will not
be applied in a manner that adversely affects the Company. The imposition of
such regulatory requirements could force the Company to alter or cease
operations of its facilities and could otherwise have a material adverse effect
on the Company's business, financial condition and results of operations.
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The design, construction, use and operation of commercial irradiation
facilities such as those operated by the Company, and byproduct materials used
in such facilities, are extensively regulated by the United States Nuclear
Regulatory Commission (the "NRC"), or in some cases by various state regulatory
agencies and authorities that undertake comparable regulatory functions from the
NRC (the "Agreement States"). In addition, the Company is subject to various
local zoning and permit rules in the construction of its facilities. The
Company's facilities are subject to regulation by additional regulatory bodies
at the federal, state and local levels, depending upon the type of product that
is being irradiated. The Company's facilities are subject to the requirements of
the FDA when irradiating medical devices, foods, cosmetics or food or drug
packaging materials. In addition, if the Company were to begin processing meat
or poultry products, it would become subject to the requirements of the Food
Safety and Inspection Service of the USDA, which would require preapproval of
the irradiation process for meat and poultry. The Company is also subject to the
requirements of other federal agencies, such as the United States Occupational
Safety and Health Administration and the United States Environmental Protection
Agency (the "EPA"). In addition, the Company is subject to the regulatory
requirements of the state and local agencies in the jurisdictions where the
various irradiation facilities are located.
In addition to extensive regulation by various governmental bodies and
agencies, the Company is subject to standards, guidelines and requirements
established by industry organizations and other non-governmental bodies, such as
the International Standards Organization ("ISO") and the Association for the
Advancement of Medical Instrumentation ("AAMI"). The ISO 9002 Standard is an
international quality standard that requires the Company to implement and
document an effective quality assurance program which is subject to quality
systems surveillance audits every six months.
Changes in, or reinterpretations of, existing requirements and standards or
adoption of new requirements beyond those described below or the failure at any
time to comply with any applicable material regulations and standards could have
a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not incur
significant costs to comply with laws, regulations and other requirements in the
future or that such laws, regulations and other requirements will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Violations of or noncompliance with applicable governmental requirements
may result in an enforcement action including, among other things, a notice of
violation, imposition of civil penalties, suspension, modification or revocation
of any applicable license, criminal prosecution, or withholding or recall of the
nuclear byproduct material held by the Company. Any such action would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Regulatory and Environmental Matters"
and "Business -- Quality Assurance and Safety."
RISKS OF OPERATING FACILITIES USING RADIOACTIVE MATERIAL
The operation of the Company's commercial irradiation facilities involves
special safety risks, potential liabilities related to exposure to radioactive
material, and specific regulatory, radiological health and safety and
environmental requirements and may raise concerns with respect to both worker
safety and community reaction. Should an incident involving unplanned exposure
beyond regulatory limits to radioactive materials occur at any of the Company's
facilities, the resultant liability could be substantial. Such an incident would
also result in adverse community reaction, which could impact the Company's
ability to continue to operate any facility involved in such an incident, as
well as similar facilities. In the event any losses or liabilities related to
such an incident are underinsured or exceed accumulated funds, or adequate
recovery is not possible, the Company's business, financial condition and
results of operations would be materially adversely affected.
There is potential risk that workers in the Company's facilities may be
exposed to radiation beyond regulatory limits. In addition, the Company may
encounter resistance from those in the communities where it seeks to build
additional facilities or be subject to protests or other actions in areas where
it has facilities based on perceived risk of exposure to radiation on the part
of those living in the communities surrounding the Company's facilities. Any
actual or perceived exposure to radiation as a result of the Company's
activities or a
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failure related to the Company's safety procedures could have a material adverse
effect on the Company's business, financial condition and results of operations.
On June 6, 1988, the Company discovered that one or more of the Cesium
capsules which it used as a radioactive source at that time had leaked
radioactive Cesium, which is water soluble, into the water shielding pool,
contaminating the Company's Decatur, Georgia facility. The Company is not aware
of any ongoing environmental or other legal liabilities related to the Cesium
incident. However, there can be no assurance that unspecified third parties,
including former employees, would not in the future, assert claims against the
Company in connection with the contamination of the Decatur facility. See
"-- Environmental Risks."
The Cobalt 60 stored in water shielding pools at each of the Company's
facilities is double encapsulated in stainless steel. There can be no assurance
that these stainless steel capsules will not corrode. In 1995, the Company
encountered minor corrosion in the outer encapsulation of certain of its Cobalt
60 rods, requiring their replacement. Since the quantity of Cobalt 60 in a
facility is the key determinant of the amount of product that can be processed,
any significant delay in the replacement of such Cobalt 60 could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if the Company is determined to be responsible for the
corrosion, it could be required to bear the costs of transportation and
reencapsulation of the Cobalt 60. Furthermore, such corrosion, if undetected,
could result in radioactive material being released into the water shielding
pool, which could cause contamination of the pool and potentially the related
facility. Any contamination resulting from such release and the related
decontamination process would have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Government
Regulation and Standards Compliance," "Business -- Facilities,"
"Business -- Quality Assurance and Safety" and "Business -- Regulatory and
Environmental Matters."
ENVIRONMENTAL AND RELATED RISKS
The Company's operations are subject to regulation by the EPA as well as
state and local governmental agencies. Although there can be no assurance, the
Company believes it currently maintains all licenses and permits necessary to
conduct its current business and that it is in material compliance with
applicable environmental, health and safety laws and regulations. The loss of
any of the Company's licenses or permits could force the Company to suspend or
terminate operations at one or more of its facilities or could otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations.
Pursuant to an Asset Acquisition Agreement effective August 8, 1996 (the
"Asset Agreement"), the Company purchased certain assets of RTI, including
property located in Haw River, North Carolina and leasehold interests in
property located in Salem, New Jersey and Rockaway, New Jersey (the "Rockaway
Property"). The Rockaway Property was previously owned and operated by Thiokol
Chemical Corporation ("Thiokol"), and is listed on the Superfund National
Priorities List ("NPL"). In 1992, RTI and Thiokol entered into an Administrative
Consent Order ("ACO") with the New Jersey Department of Environmental Protection
(the "NJDEP") requiring, among other things, implementation of a groundwater
remedy estimated to exceed $2.0 million in costs.
Under the Asset Agreement, RTI retained ownership of the Rockaway Property
and all associated environmental liabilities as of the closing date. RTI agreed
to indemnify and hold the Company harmless from and against any and all claims
which may arise directly or indirectly from any use or release of hazardous
substances on or under the leased premises as of the closing date. In addition,
the Company obtained a letter from the NJDEP stating that the NJDEP will not
institute either judicial or administrative civil proceedings against the
Company for any discharge, deposit, release or disposal of hazardous substances
or pollutants existing at the Rockaway Property, emanating therefrom, or
occurring before the closing. However, the Company is required by the NJDEP to
maintain a standby letter of credit in the amount of $500,000, contingent upon
the continued clean up efforts required of RTI. The required amount of the
letter of credit decreases over the life of the leasehold interest, and/or as
the NJDEP requires. The Company believes, based on present information available
to it, including the indemnification from RTI, the ACO among RTI, Thiokol and
the NJDEP, and the NJDEP's letter stating that it will not seek recovery or
remediation costs from the
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Company for contamination that predates the purchase of RTI's assets, that it
does not face any significant environmental liability with respect to the
Rockaway Property. However, there can be no assurance that the Company will not
be subject to environmental liability relating to the remediation of the
Rockaway Property or liability for losses suffered by adjacent property owners
or other third parties, and such liability could have a material adverse effect
on its business, financial condition or results of operations.
In the spring of 1985, the Company leased over 400 stainless steel capsules
of radioactive Cesium from the DOE for use at the Company's Decatur, Georgia and
Westerville, Ohio irradiation facilities. On June 6, 1988, the Company
discovered one or more of DOE's Cesium capsules had leaked radioactive Cesium,
which is water soluble, contaminating the Company's Decatur, Georgia facility.
As a result of the contamination, the Company's Decatur irradiation facility was
completely shut down. The decontamination activities were conducted by the DOE
and its contractors, and the Company filed an administrative claim with the DOE
for damages the Company incurred as a result of the Cesium contamination. The
DOE did not pay or deny the Company's claim within the required six month
period. As a result, the Company filed suit against the U.S. government in June
1991. Although the DOE had orally offered to fund the costs of the cleanup, the
government subsequently asserted a substantial counterclaim against the Company
alleging that the Company had been negligent in its handling and use of the
Cesium capsules. A settlement was reached between the parties to this litigation
on April 9, 1997, following a trial and notice of appeals filed by both
SteriGenics, the U.S. government and two of its contractors. The presiding court
entered a stipulation of dismissal effective May 9, 1997. While the litigation
resulted in significant expenses and was a significant diversion of management
attention, the Company is not aware of any ongoing environmental or other legal
liabilities associated with the Cesium incident. However, there can be no
assurance that unspecified third parties, including former employees, would not,
in the future, assert claims against the Company in connection with the
contamination of the Decatur facility. After the decontamination activities were
completed, final survey reports were prepared by both a contractor for DOE and
by a third party consultant on behalf of the Georgia Department of Human
Resources, which regulates such matters in Georgia, to allow for the
unrestricted use of the Decatur facility consistent with the requirements of the
Georgia Department of Human Resources. The documentation and data prepared by
such third party indicated that any residual radioactivity at the Decatur
facility was beneath that of regulatory concern to the applicable regulatory
authority. While the Company no longer uses Cesium in any of its facilities,
there can be no assurance that it will not experience any incidents of
radioactive contamination resulting from its use of Cobalt 60. See "-- Risks of
Operating Facilities Using Radioactive Materials."
RISKS RELATED TO COBALT 60 SUPPLY
To date, the Company has obtained its supply of the Cobalt 60 radioactive
isotope from three sources. The Company's primary sources of Cobalt 60 are
Nordion, a Canadian company and the world's principal source of Cobalt 60, and
REVISS Services (UK) Limited ("REVISS"), a United Kingdom company and formerly a
division of Amersham International plc. In addition, the Company has purchased
smaller amounts of its Cobalt 60 requirements from Neutron Products Inc., a
Maryland corporation. While the Company has not experienced any shortages in
Cobalt 60 supply since the mid-1980s and has various supply contracts in place,
there can be no assurance that it will be able to obtain sufficient supplies of
Cobalt 60 from Nordion, REVISS or other suppliers on acceptable terms or that it
will be able to identify and qualify alternative sources. In addition, there is
no assurance that Nordion will not in the future become a competitor of the
Company in the delivery of sterilization services, which could result in a
decrease in the availability of Cobalt 60 from Nordion. Recently, Nordion
announced a joint venture with Griffith Micro Science, Inc. to provide
sterilization services in Mexico. If interruptions in the supply or increases in
the price of Cobalt 60 were to occur for any reason, including a decision by any
of the Company's suppliers to decrease or discontinue supplies of Cobalt 60 to
the Company, trade restrictions with Canada or the United Kingdom, political
unrest, labor disputes or other factors, the Company's business, financial
condition and results of operations would be materially adversely affected.
Since the Company pays for Cobalt 60 primarily in Canadian dollars, and the
Canadian dollar is currently trading at levels significantly lower than it has
in recent years, the Company's results of operations may be adversely affected
by fluctuations in currency exchange rates. In addition, the availability and
price of Cobalt 60 to the Company and its suppliers is dependent in part
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on the political situation in countries with large deposits of Cobalt 59 (the
material that is processed into Cobalt 60), such as the Democratic Republic of
Congo and the republics of the former Soviet Union. Such countries have recently
experienced political unrest. In addition, since mined Cobalt 59 must be
converted into Cobalt 60 in nuclear reactors, the supply of Cobalt 60 to the
Company's suppliers is dependent upon the availability of nuclear reactors to
convert Cobalt 59 to Cobalt 60. An interruption in the Company's supply of
Cobalt 60 or significant increase in the price the Company is required to pay
for Cobalt 60 would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Cobalt 60."
RISKS OF BUSINESS INTERRUPTION
Any prolonged disruption in the operations at any of the Company's
facilities, whether due to technical or labor difficulties, regulatory action,
destruction of or damage to any facility or other reasons, would have a material
adverse effect on the Company's business, financial condition and results of
operations. This risk is increased since customers generally seek to have their
products sterilized within a 300 mile radius of their production or distribution
facilities and, therefore, it is often not feasible to transfer products to
other facilities in the event of a prolonged disruption in any facility. The
Company is also susceptible to natural disasters, including earthquakes,
hurricanes and tornadoes, as well as other catastrophic events such as fire.
Furthermore, if additional capacity is required as a result of unplanned
increases in demand for the Company's services, the Company may suffer delays
and increased costs in establishing other facilities or increasing production at
existing facilities that could adversely affect customer relationships, cause a
loss of market opportunities and have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
failure to effectively implement any design or process changes could disrupt the
sterilization process, which could also adversely affect customer relationships,
cause a loss of market opportunities and have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Facilities."
MANAGING GROWTH; POTENTIAL ACQUISITIONS
The Company has recently experienced a period of revenue growth and an
expansion in the number of its employees, the scope of its operating and
financial systems and the geographic area of its operations. This growth has
resulted in and may continue to result in new and increased responsibilities for
management personnel and has placed additional demands upon the Company's
management, operating and financial systems and resources. In order to
successfully integrate its expanded operations and to manage future growth, if
any, the Company will be required to implement new and expanded business and
financial systems, procedures and controls, and to improve its accounting and
other internal management systems. There can be no assurance that the Company's
systems, procedures, controls and staffing will be successfully managed or will
be adequate to successfully support the Company's operations. Failure to manage
any future growth properly would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company may in the future undertake acquisitions that could present
challenges to the Company's management, such as integrating and incorporating
new operations, technologies and personnel. If the Company's management is
unable to effectively manage these challenges, the Company's business, financial
condition and results of operations could be materially adversely affected.
Furthermore, there can be no assurance that any acquisitions will result in
increased revenue or positively impact the Company's profitability. Moreover,
any new acquisition, depending on its size, could result in the use of a
significant portion of the Company's available cash or the acquisition of
additional debt or, if such acquisition is made utilizing the Company's
securities, could result in significant dilution to the Company's stockholders.
The Company does not currently have any understandings, commitments or
agreements with respect to any potential acquisition or corporate partnering
arrangements. While it is an element of the Company's strategy to pursue
strategic acquisitions, the Company believes that the number of potential
acquisition candidates in the domestic market is limited. Therefore, there can
be no assurance that the Company will successfully complete any such
transaction.
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DEPENDENCE ON KEY PERSONNEL
The Company's progress to date has been highly dependent upon the skills of
its key technical and management personnel, many of whom would be difficult to
replace. To reach its future business objectives, the Company will need to hire
additional qualified personnel in the areas of sales, engineering and
management. There can be no assurance that the Company will be able to hire such
personnel, as the Company must compete with other companies, academic
institutions, government entities and other agencies. The number of persons with
experience in the Gamma sterilization industry is limited, and as a result,
competition for such personnel is intense. There can be no assurance that the
Company can retain such personnel or that it can attract or retain other highly
qualified personnel in the future. The Company maintains $2.0 million of key
person life insurance on James F. Clouser, the Company's Chief Executive Officer
and President. The loss of any of the Company's senior management, facilities
managers or other key research, regulatory, technical or sales and marketing
personnel, particularly if lost to competitors, or the failure of any key
employee to perform well in his or her current position, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In particular, the loss of James F. Clouser could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Employees" and "Management."
FINANCIAL EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company faces the risk of financial exposure to product liability
claims alleging that the Company's failure to adequately perform its services
resulted in adverse effects. While the Company's customers are responsible for
determining the appropriate dosage of radiation their products should receive,
the Company is required to certify that such dose level was achieved. There can
be no assurance that the Company will not be held liable for damages that are
alleged to result from improper dosing or incorrect dosage instructions received
from a customer. The Company currently maintains product liability insurance
with a claims limit of $5.0 million per claim and $5.0 million in the aggregate.
However, there can be no assurance that the Company will avoid significant
product liability claims and attendant adverse publicity. Furthermore, there can
be no assurance that the Company's product liability insurance is adequate or
that such insurance coverage will remain available at acceptable costs. A
successful claim brought against the Company in excess of its insurance coverage
could have a material adverse effect on the Company's business, financial
condition and results of operations. Additionally, adverse product liability
actions could negatively affect market acceptance of the Company's services and
the Company's ability to obtain and maintain regulatory approval for its
products.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the offering, the Company's officers, directors and
principal stockholders, and certain of their affiliates, will beneficially own
approximately 74% of the Company's outstanding Common Stock (approximately 70%
assuming the Underwriter's over-allotment option is exercised in full). Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. Additionally, these stockholders will have
significant influence over the election of directors of the Company. This
concentration of ownership may allow significant influence and control over
decisions by the Board of Directors and corporate actions. See "Principal and
Selling Stockholders."
NEED FOR ADDITIONAL CAPITAL
The Company requires substantial working capital to fund its business,
particularly for capital expenditures, including the construction of its
facilities and acquisition of Cobalt 60. The Company believes that the net
proceeds from the offering, together with existing cash balances, funds expected
to be generated from operations and available credit facilities, will be
adequate to fund its operations at least through the end of fiscal 1999. There
can be no assurance, however, that as a result of acquisitions, lower than
anticipated cash flows or other unforeseen events the Company will not require
additional debt or equity financing during such period or thereafter. Further,
there can be no assurance that additional financing, if required, will be
available to the Company on acceptable terms, if at all. If adequate funds are
not available, the Company may be
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required to delay, scale back or eliminate its planned expansion, research,
development and engineering programs or obtain funds through arrangements with
partners or others that may require the Company to relinquish rights to certain
of its technologies or other assets. Accordingly, the inability to obtain or
difficulty in obtaining such financing could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company relies on a combination of copyright and trade secret
protection and nondisclosure agreements to protect its proprietary rights. In
addition, the Company has a U.S. patent application pending on its MiniCell.
There can be no assurance, however, that patent and copyright law and trade
secret protection will be adequate to deter misappropriation of its technology,
that any patents issued to the Company will not be challenged, invalidated or
circumvented, that the rights granted thereunder will provide competitive
advantages to the Company, or that the claims under any patent application will
be allowed. Furthermore, there can be no assurance that others will not
independently develop similar processes or designs, duplicate the Company's
processes or design around any patents issued to the Company. The Company may be
subject to or may initiate interference proceedings in the United States Patent
and Trademark Office, which can demand significant financial and management
resources. The process of seeking patent protection can be time consuming and
expensive and there can be no assurance that patents will be issued from
currently pending or future applications or that any new patents that may be
issued will be sufficient in scope or strength to provide meaningful protection
or any commercial advantage to the Company.
The Company may in the future receive communications from third parties
asserting that the Company is infringing certain patents and other intellectual
property rights of others or seeking indemnification against such alleged
infringement. No assurance can be given that any of these claims will not result
in protracted and costly litigation, that damages for infringement will not be
assessed or that should it be necessary or desirable to obtain a license
relating to one or more of the Company's services or current or future
technologies, the Company will be able to do so on commercially reasonable terms
or at all.
NO PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the offering, there has been no public market for the Common Stock
of the Company, and there can be no assurance that an active trading market will
develop or, if one does develop, that it will be maintained. The initial public
offering price of the Common Stock offered hereby will be determined through
negotiations among the Company and the representatives of the Underwriters, and
may not be indicative of future market prices. There can be no assurance that
the market price of the Common Stock will not be highly volatile or that it will
not decline below the initial public offering price. Factors such as variations
in the Company's financial results, comments by securities analysts, changes in
earnings estimates by securities analysts, fluctuations in the stock prices of
the Company's competitors, the Company's ability to successfully sell its
services in the U.S. and overseas, any loss of key management, adverse
regulatory actions or decisions, evidence regarding the safety or efficacy of
Gamma radiation sterilization activities, announcements of extraordinary events
such as litigation or acquisitions, announcements of technical innovations or
changes in pricing policies by the Company or its competitors, the development
of in-house sterilization capabilities by manufacturers, changing government
regulations or industry standards and developments with respect to FDA or NRC or
other government regulations, developments with respect to patents or other
proprietary rights or public concern as to the safety of sterilization services
performed by the Company, as well as changes in the market for medical products
and general economic, political and market conditions, may have a significant
effect on the market price of the Company's Common Stock. In addition, stock
markets have experienced extreme price and volume trading volatility in recent
years. This volatility has had a substantial effect on the market prices of
securities of many companies for reasons frequently unrelated or
disproportionate to the operating performance of the specific companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. See "Underwriting."
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ANTITAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the Company's Certificate of Incorporation may have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire control of the Company.
The Company's Certificate of Incorporation allows the Board of Directors to
issue and determine the rights, powers and preferences of Preferred Stock
without any vote or further action by the stockholders, and certain provisions
of the Company's Certificate of Incorporation and Bylaws eliminate the right of
stockholders to act by written consent without a meeting, and specify procedures
for director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings. Certain provisions of Delaware law could
also delay or make more difficult a merger, tender offer or proxy contest
involving the Company, including Section 203 of the Delaware General Corporation
Law, which prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years unless
certain conditions are met. The possible issuance of Preferred Stock, the
procedures required for director nominations and stockholder proposals and
Delaware law could have the effect of delaying, deferring or preventing a change
in control of the Company, including without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of the
Company's Common Stock. These provisions could also limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock. See "-- Control by Existing Stockholders" and "Description of
Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering and based on the shares outstanding as of
June 30, 1997, there will be 6,829,039 shares of Common Stock outstanding. Of
these shares, the 2,000,000 shares sold in the offering (assuming no exercise of
the Underwriters' over-allotment option) will be freely tradable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), unless purchased by "affiliates" of the Company, as that
term is defined in Rule 144 of the Securities Act. The remaining shares will be
"restricted securities" as that term is defined under Rule 144 (the "Restricted
Shares").
Of the Restricted Shares, an aggregate of 5,327,445 shares of Common Stock
(including 563,838 shares issuable upon exercise of vested stock options), will
be eligible for sale in the public market subject to Rule 144 and Rule 701 under
the Securities Act and the expiration of a contractual lock-up ending 180 days
after the date of the Prospectus, unless an earlier release of the lock-up is
consented to, in whole, or in part, by PaineWebber Incorporated.
The Company intends to register on a Form S-8 registration statement under
the Securities Act, during the 180-day lock-up period, a total of 2,312,416
shares of Common Stock which are subject to outstanding options or reserved for
issuance under the Company's stock option plans and stock purchase plan. As of
June 30, 1997, there were options to purchase 706,550 shares of Common Stock
outstanding of which 511,976 were vested and exercisable. See "Shares Eligible
for Future Sale."
After the offering, the holders of approximately 1,104,945 shares of Common
Stock are entitled to certain rights with respect to registration of such shares
under the Securities Act. Registration of such shares under the Securities Act
would result in such shares becoming freely tradable without restriction under
the Securities Act (except for shares purchased by affiliates of the Company)
immediately upon the effectiveness of such registration. If the holders, by
exercising their demand registration rights, cause a large number of securities
to be registered and sold in the public market, such sales could have an adverse
effect on the market price for the Common Stock. If the Company were to include
in a Company-initiated registration, any registrable securities pursuant to the
exercise of piggyback registration rights, such sales may have an adverse effect
on the Company's ability to raise needed capital. See "Description of Capital
Stock -- Registration Rights."
DILUTION AND ABSENCE OF DIVIDENDS
The public offering price is substantially higher than the book value per
share of the Common Stock. Assuming a public offering price of $13.00 per share,
investors purchasing shares of Common Stock in the offering, based upon the net
tangible book value per share of Common Stock as of June 30, 1997, will incur
16
<PAGE> 18
immediate and substantial dilution in the amount of $4.98 per share. Future
equity financings may cause further dilution to investors. The Company has never
paid dividends on its Common Stock and does not expect to pay dividends in the
foreseeable future. See "Dilution" and "Dividend Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$23.3 million, at an assumed initial public offering price of $13.00 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The Company currently expects to use approximately $14.0 million of the net
proceeds of the offering for capital expenditures, including new facilities,
equipment and the purchase of additional Cobalt 60, and $1.5 million of the net
proceeds of the offering for redemption of the 15,000 shares of Series A
Redeemable Preferred Stock currently outstanding. The balance of net proceeds
will be used for working capital and general corporate purposes.
The Company may also use a portion of the net proceeds to pursue strategic
acquisitions of sterilization facilities and businesses, both domestically and
internationally, although the Company does not have any agreements or
understandings with respect to any such acquisition, and no portion of net
proceeds has been allocated for any specific acquisition. Pending such uses, the
Company intends to invest the net proceeds from the offering in short-term,
government securities and other investment-grade, interest-bearing securities.
The Company estimates the net proceeds of the offering, together with existing
cash balances, funds expected to be generated from operations and available
credit facilities, will be sufficient to fund the Company's anticipated
operations at least through the end of fiscal 1999.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to do so in the foreseeable future. The payment of
cash dividends on the Company's Common Stock is limited by the terms of the
Company's revolving line of credit.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on an actual basis, (ii) on a pro forma basis to reflect the
conversion of all outstanding shares of Convertible Preferred Stock into shares
of Common Stock and (iii) as adjusted to give effect to the redemption of all
outstanding shares of Series A Redeemable Preferred Stock and the sale of the
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $13.00 per share and the application of the estimated
net proceeds therefrom, after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company, as described in "Use of
Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
---------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, including current portion:
Borrowings under Industrial Revenue Bonds, capital leases and
line of credit............................................. $41,075 $41,075 $41,075
------- ------- -------
Series A Redeemable Preferred Stock, $0.001 par value:
100,000 shares authorized, actual and pro forma; 15,000 shares
issued and outstanding, actual and pro forma; no shares
authorized, issued and outstanding, as adjusted............... 1,500 1,500 --
------- ------- -------
Stockholders' equity:
Preferred Stock, $0.001 par value:
10,000,000 shares authorized, actual; 1,000,000 shares
authorized, pro forma and as adjusted; no shares issued and
outstanding, actual, pro forma and as adjusted............. -- -- --
Convertible Preferred Stock, Series B and C, $0.001 par value:
1,772,728 shares authorized, actual; 1,772,727 shares
issued and outstanding, actual; no shares authorized,
issued and outstanding, pro forma and as adjusted.......... 2 -- --
Common Stock, $0.001 par value:
15,000,000 shares authorized, 3,056,312 shares issued and
outstanding, actual; 4,829,039 shares issued and
outstanding, pro forma; 6,829,039 shares issued and
outstanding, as adjusted(1)................................ 3 5 7
Additional paid-in capital.................................... 14,728 14,728 38,056
Notes receivables from stockholders........................... (87) (87) (87)
Retained earnings............................................. 17,311 17,311 17,311
------- ------- -------
Total stockholders' equity................................. 31,957 31,957 55,287
------- ------- -------
Total capitalization.................................. $74,532 $74,532 $96,362
======= ======= =======
</TABLE>
- ---------------
(1) Excludes as of June 30, 1997 (i) 706,550 shares of Common Stock issuable
upon exercise of outstanding options and 5,866 shares of Common Stock which
remained available for option grants under the Company's Second Amended and
Restated 1986 Stock Option Plan, (ii) 1,025,000 shares of Common Stock
reserved for future issuance under the Company's 1997 Equity Incentive Plan
and (iii) 400,000 shares of Common Stock reserved for future issuance under
the Company's 1997 Employee Stock Purchase Plan. Since June 30, 1997, the
Company has granted options to purchase an aggregate of 351,750 shares under
the 1997 Equity Incentive Plan and the 1997 Stock Plan. See "Management --
Stock Plans."
18
<PAGE> 20
DILUTION
The net tangible book value of the Company at June 30, 1997 was $31.4
million or $6.50 per share of Common Stock. "Net tangible book value" per share
represents the amount of total tangible assets of the Company less its total
liabilities, divided by the total number of shares of Common Stock outstanding,
after giving effect to the conversion of the outstanding shares of Preferred
Stock (except for the 15,000 shares of Series A Preferred Stock currently
outstanding) into Common Stock upon the closing of the offering. After giving
effect to the sale of 2,000,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $13.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company, the pro forma net tangible book value of the Company as of June
30, 1997 would have been $54.7 million or $8.02 per share. This represents an
immediate increase in net tangible book value of $1.52 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$4.98 per share to purchasers of Common Stock in the offering.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $ 13.00
Net tangible book value per share before the offering..... $ 6.50
Increase per share attributable to new investors.......... 1.52
-----
Pro forma net tangible book value per share after the
offering.................................................. 8.02
------
Dilution in net tangible book value per share to purchasers
in the offering........................................... $ 4.98
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by new investors in the offering:
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing
stockholders......... 4,829,039 70.7% $14,733,146 36.2% $ 3.05
New investors.......... 2,000,000 29.3 26,000,000 63.8 $ 13.00
--------- ----- ----------- -----
Total........ 6,829,039 100.0% $40,733,146 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables do not give effect to the exercise of any options
subsequent to June 30, 1997. At June 30, 1997, 706,550 shares of Common Stock
were issuable upon exercise of outstanding options at a weighted average
exercise price of $5.10 per share. Since June 30, 1997, the Company has granted
options to purchase an aggregate of 351,750 shares under the 1997 Equity
Incentive Plan and the 1997 Stock Plan. To the extent outstanding options are
exercised, there will be further dilution to new investors. See "Management
- -- Stock Plans" and Note 5 of Notes to Consolidated Financial Statements.
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of March 31, 1996 and
1997 and for each of the three years in the period ended March 31, 1997 are
derived from the Consolidated Financial Statements of the Company which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this Prospectus. The selected statement of operations data for the
years ended March 31, 1993 and 1994 and balance sheet data as of March 31, 1993,
1994 and 1995 are derived from audited Consolidated Financial Statements not
included herein. The selected statement of operations data for the quarters
ended June 30, 1996 and 1997 and balance sheet data as of June 30, 1997 are
derived from the Company's unaudited financial statements included elsewhere in
this Prospectus, and include, in the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position as of that date and results of
operations for those periods. The results of operations for the quarter ended
June 30, 1997 are not necessarily indicative of the results for any future
periods. The financial data are qualified by reference to and should be read in
conjunction with the Company's Consolidated Financial Statements, related Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $21,603 $24,585 $28,661 $30,241 $ 37,668 $ 8,164 $ 10,751
Cost of revenues................................ 11,896 11,679 16,389 16,978 20,425 4,297 5,801
------- ------- ------- ------- --------- --------- ---------
9,707 12,906 12,272 13,263 17,243 3,867 4,950
Costs and expenses:
General and administrative.................... 1,628 3,266 5,664 5,213 6,345 1,417 1,637
Marketing and selling......................... 1,002 1,258 1,583 1,761 2,482 560 823
Research, development and engineering......... 473 518 685 890 1,381 273 312
------- ------- ------- ------- --------- --------- ---------
3,103 5,042 7,932 7,864 10,208 2,250 2,772
------- ------- ------- ------- --------- --------- ---------
Income from operations.......................... 6,604 7,864 4,340 5,399 7,035 1,617 2,178
Other income (expense):
Write-down of investments in joint ventures... -- -- (3,011) -- -- -- --
Interest expense, net......................... (1,164) (916) (2,402) (1,846) (1,836) (459) (581)
Other income.................................. 315 256 139 47 115 7 15
------- ------- ------- ------- --------- --------- ---------
Income (loss) before provision for income taxes,
equity in joint ventures and discontinued
operations.................................... 5,755 7,204 (934) 3,600 5,314 1,165 1,612
Provision for income taxes...................... 2,045 2,479 1,185 1,448 2,099 461 637
------- ------- ------- ------- --------- --------- ---------
Income (loss) before equity in joint ventures
and discontinued operations................... 3,710 4,725 (2,119) 2,152 3,215 704 975
Equity in net loss of joint ventures............ (204) (720) (1,360) -- -- -- --
------- ------- ------- ------- --------- --------- ---------
Income (loss) from continuing operations........ 3,506 4,005 (3,479) 2,152 3,215 704 975
Discontinued operations:
Income (loss) from discontinued operations.... 494 189 (115) -- -- -- --
Loss on disposition of discontinued
operations.................................. -- -- (1,173) -- -- -- --
------- ------- ------- ------- --------- --------- ---------
Net income (loss)............................... $ 4,000 $ 4,194 $(4,767) $ 2,152 $ 3,215 $ 704 $ 975
======= ======= ======= ======= ========= ========= =========
Pro forma net income per share.................. $ 0.62 $ 0.14 $ 0.19
========= ========= =========
Shares used in computing pro forma net income
per share..................................... 5,164,679 5,164,679 5,166,679
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, JUNE
--------------------------------------------------- 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 914 $ 5,945 $ 1,673 $ 9,906 $ 1,957 $ 1,501
Working capital (deficit)............................... 1,306 2,246 (3,576) 3,296 (3,179) (3,837)
Total assets............................................ 47,692 66,861 74,588 84,729 91,667 92,103
Total liabilities....................................... 28,863 35,161 47,546 55,464 59,187 58,645
Redeemable preferred stock.............................. 1,500 1,500 1,500 1,500 1,500 1,500
Stockholders' equity.................................... 17,329 30,200 25,542 27,765 30,980 31,957
</TABLE>
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ materially from
those anticipated by the forward-looking statements as a result of certain
factors, including, but not limited to, those set forth in Risk Factors and
elsewhere in this Prospectus. The Company's fiscal year ends on March 31. The
fiscal year ended March 31, 1995 is referred to as fiscal 1995, the fiscal year
ended March 31, 1996 is referred to as fiscal 1996, the fiscal year ended March
31, 1997 is referred to as fiscal 1997 and the fiscal year ending March 31, 1998
is referred to as fiscal 1998.
OVERVIEW
Since its inception, SteriGenics has engaged primarily in the business of
operating, designing and developing Gamma facilities to provide contract
sterilization and radiation processing services to manufacturers of medical and
non-medical products. The Company currently operates 12 Gamma facilities in six
states. In fiscal 1995, the Company opened mega-facilities in Corona, California
and Charlotte, North Carolina. In fiscal 1997, the Company opened a
mega-facility in Gurnee, Illinois and began operating three additional
facilities in connection with its acquisition of certain assets of RTI. In
fiscal 1998, the Company began operation of its first MiniCell facility in
Hayward, California and opened its second Fort Worth, Texas facility. With the
addition of these facilities, the Company's maximum Cobalt 60 capacity has
increased from 32 million curies at the end of fiscal 1994 to a current level of
101 million curies.
In order to more effectively address its customer base, the Company has
divided its operations into two divisions: medical products and non-medical.
While the Company's primary market continues to be the sterilization of medical
products, the Company has increased its focus on the sterilization and
processing of non-medical products. The percentage of the Company's revenues
generated from the non-medical market increased from 17% in fiscal 1996 to 20%
in fiscal 1997. The Company has dedicated four of its facilities to processing
primarily non-medical products.
The Company's revenues have increased significantly from fiscal 1995 to
fiscal 1997 as the Company opened and acquired additional facilities, increased
its loaded curies of Cobalt 60 and expanded its customer base. In addition, in
recent years the Company generated incremental revenues by offering its
customers premium services such as ExCell and GammaSTAT. Revenues are recognized
upon completion of the sterilization or processing services.
The Company's cost of revenues is comprised primarily of the depreciation
of Cobalt 60, facilities and equipment; direct labor costs; facilities rental;
and costs associated with facility quality assurance personnel. Since Cobalt 60
represents a significant portion of the Company's cost of revenues, Cobalt 60
efficiency and utilization are key determinants of the Company's gross margin.
Cobalt 60 is amortized using an accelerated method (approximately 12.3% of net
book value per year), which corresponds to its natural decay rate. As the
Company periodically increases its installed capacity of Cobalt 60 in existing
facilities or when it opens a new facility, it typically has excess capacity for
some period of time which can adversely affect gross margin. Correspondingly,
since costs associated with Cobalt 60 are fixed costs, once a facility reaches
its break-even point for a given amount of Cobalt 60 there are relatively low
costs associated with incremental revenues. The Company's gross margin is also
affected by the mix of standard services and higher margin premium services such
as ExCell and GammaSTAT.
From time to time, the Company has built or expanded facilities. The cost
of construction of a facility is reflected as construction-in-progress until
start-up of the facility, at which time depreciation commences. Building new
facilities requires significant capital investments in building construction,
equipment and Cobalt 60. In addition to incurring costs associated with Cobalt
60, the Company also incurs incremental personnel costs in the months preceding
initial operation and typically incurs substantial personnel and other operating
21
<PAGE> 23
expenses during the first several months of operations. These costs have
historically exceeded revenues during the initial months of operation.
In the past, as a result of their own internal procedures, certain
customers have delayed qualification and use of a new facility until it had been
operational for periods of up to 12 months. As a result, the Company failed to
realize a portion of anticipated revenues for the facility pending such
qualification. Qualification generally requires the completion of various audit
procedures by a customer's quality assurance personnel. Customers' decisions on
timing of qualification of new facilities are based on various issues including
internal policies and procedures, work load of internal quality assurance audit
personnel and the need for amendments of certain FDA approvals. Certain
customers will qualify a new facility shortly after opening, while others may
delay for three, six, nine or 12 months depending on various internal issues.
The Company generally does not have the ability to expedite this qualification
process as the decisions are made independently by the individual customers. See
"Risk Factors -- Unpredictability of Future Operating Results; Likely
Fluctuations in Quarterly Operating Results."
RESULTS OF OPERATIONS
The following table provides a breakdown of the Company's consolidated
statements of operations on a percentage of revenues basis for the periods
indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------- ----------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................ 57.2 56.1 54.2 52.6 54.0
------ ---- -- ---- -- ---- -- ---- --
42.8 43.9 45.8 47.4 46.0
Costs and expenses:
General and administrative................ 19.8 17.2 16.8 17.4 15.2
Marketing and selling..................... 5.5 5.8 6.6 6.9 7.7
Research, development and engineering..... 2.4 3.0 3.7 3.3 2.9
------ ---- -- ---- -- ---- -- ---- --
27.7 26.0 27.1 27.6 25.8
------ ---- -- ---- -- ---- -- ---- --
Income from operations...................... 15.1 17.9 18.7 19.8 20.2
Other income (expense):
Write-down of investments in joint
ventures............................... (10.5) - - - -
Interest expense, net..................... (8.4) (6.1) (4.9) (5.7) (5.3)
Other income.............................. 0.5 0.1 0.3 0.1 0.1
------ ---- -- ---- -- ---- -- ---- --
Income (loss) before provision for income
taxes, equity in joint ventures and
discontinued operations................... (3.3) 11.9 14.1 14.2 15.0
Provision for income taxes.................. 4.1 4.8 5.6 5.6 5.9
------ ---- -- ---- -- ---- -- ---- --
Income (loss) before equity in joint
ventures and discontinued operations...... (7.4) 7.1 8.5 8.6 9.1
Equity in net loss of joint ventures........ (4.7) - - - -
------ ---- -- ---- -- ---- -- ---- --
Income (loss) from continuing operations.... (12.1) 7.1 8.5 8.6 9.1
Discontinued operations:
Loss from discontinued operations......... (0.4) - - - -
Loss on disposition of discontinued
operations............................. (4.1) - - - -
------ ---- -- ---- -- ---- -- ---- --
Net income (loss)........................... (16.6%) 7.1% 8.5% 8.6% 9.1%
====== ====== ====== ====== ======
</TABLE>
QUARTERS ENDED JUNE 30, 1996 AND 1997
Revenues. Revenues increased 31.7%, from $8.2 million in the first quarter
of fiscal 1997 to $10.8 million in the first quarter of fiscal 1998 primarily as
a result of the addition of the former RTI facilities, the increase in installed
curies of Cobalt 60 in its existing facilities which enabled the Company to
process a higher volume
22
<PAGE> 24
of products, the expansion of both the Company's medical and non-medical
businesses and, to a lesser extent, an increase in revenues from the Company's
premium services. The Company believes that the trend toward increased
non-medical sterilization services is likely to continue.
Cost of revenues. Cost of revenues increased from $4.3 million in the first
quarter of fiscal 1997 to $5.8 million in the first quarter of fiscal 1998.
Gross margin decreased from 47.4% in the first quarter of fiscal 1997 to 46.0%
in the first quarter of fiscal 1998, due primarily to costs associated with the
opening and initial operation of new facilities in Gurnee, Hayward and Fort
Worth, which were offset in part by greater utilization of the Company's
existing facilities and a higher percentage of revenue attributable to premium
services. Gross margin is not impacted significantly by the mix of revenue
derived from the Company's medical and non-medical customers.
General and administrative. General and administrative expenses increased
15.5%, from $1.4 million in the first quarter of fiscal 1997 to $1.6 million in
the first quarter of fiscal 1998. As a percentage of revenues, these expenses
decreased from 17.4% in the first quarter of fiscal 1997 to 15.2% in the first
quarter of fiscal 1998. The increase in absolute dollars from the first quarter
of fiscal 1997 to the first quarter of fiscal 1998 was primarily attributable to
the addition of the former RTI facilities, the Gurnee facility, the Hayward
facility and the new Fort Worth facility. The decrease in general and
administrative expenses as a percentage of revenues was primarily due to
economies of scale achieved as the Company's revenues increased.
Marketing and selling. Marketing and selling expenses increased 47.0%, from
$560,000 in the first quarter of fiscal 1997 to $823,000 in the first quarter of
fiscal 1998. As a percentage of revenues, these expenses increased from 6.9% in
the first quarter of fiscal 1997 to 7.7% in the first quarter of fiscal 1998.
These increases were primarily attributable to the addition of sales and
marketing personnel at the facility and corporate level and, to a lesser extent,
higher travel costs.
Research, development and engineering. Research, development and
engineering expenses increased 14.5%, from $273,000 in the first quarter of
fiscal 1997 to $312,000 in the first quarter of fiscal 1998. As a percentage of
revenues, these expenses decreased from 3.3% in the first quarter of fiscal 1997
to 2.9% in the first quarter of fiscal 1998. The increase in absolute dollars is
primarily attributable to salary and related expenses for additional design and
systems engineers as the Company expanded its internal process and design
engineering capabilities. The decrease in research, development and engineering
expenses as a percentage of revenue was primarily due to economies of scale
achieved as the Company's revenues increased.
Interest expense, net. Net interest expense increased 26.7%, from $459,000
in the first quarter of fiscal 1997 to $581,000 in the first quarter of fiscal
1998. The increase in net interest expense is a result of lower average cash
balances in the first quarter of fiscal 1998 due to the Company's funding of the
development of new facilities and increased interest rates on the Company's
IRBs.
FISCAL YEARS ENDED MARCH 31, 1995, 1996 AND 1997
Revenues. Revenues increased 5.5%, from $28.7 million in fiscal 1995 to
$30.2 million in fiscal 1996 and 24.6% to $37.7 million in fiscal 1997. Revenues
increased from fiscal 1995 to fiscal 1996 primarily as a result of a full year
of operations for the Company's Charlotte, North Carolina and Corona, California
facilities and increased installed capacity of Cobalt 60 in its existing
facilities, which enabled the Company to process higher volumes of products.
Revenues in fiscal 1997 increased primarily as a result of the addition of the
former RTI facilities and the Gurnee facility, increased installed capacity of
Cobalt 60 in its existing facilities which enabled the Company to process higher
volumes of products, the expansion of the Company's non-medical business and an
increase in revenues from the Company's premium services. Growth in revenues
attributable to premium services in fiscal 1997 contributed to the Company's
ability to maintain its revenues per curie despite opening new facilities. One
customer, Baxter International Inc. ("Baxter"), accounted for approximately 13%
of revenues during fiscal 1995 and 1996. No customer accounted for more than 10%
of revenues during fiscal 1997 due to a restructuring of Baxter, which resulted
in its processing volume being divided between two companies.
23
<PAGE> 25
Cost of revenues. Cost of revenues increased from $16.4 million in fiscal
1995 to $17.0 million in fiscal 1996 and $20.4 million in fiscal 1997. Gross
margin increased from 42.8% in fiscal 1995 to 43.9% in fiscal 1996 and 45.8% in
fiscal 1997. The increase in gross margin from fiscal 1995 to fiscal 1996 was
primarily attributable to greater utilization of facilities opened in fiscal
1995 that enabled the Company to leverage the fixed costs associated with such
facilities. The increase in gross margin from fiscal 1996 to fiscal 1997 was
primarily attributable to greater utilization of the Company's existing
facilities and a higher percentage of revenue attributable to premium services,
which were offset in part by the impact of the opening of the Gurnee facility
and transition of the former RTI facilities. The Company expects gross margin to
fluctuate in future periods, and that it may be negatively impacted to the
extent the Company adds facilities and continues to expand its installed
capacity of Cobalt 60.
General and administrative. General and administrative expenses decreased
8.0%, from $5.7 million in fiscal 1995 to $5.2 million in fiscal 1996 and
increased 21.7% to $6.3 million in fiscal 1997. As a percentage of revenues,
these expenses decreased from 19.8% to 17.2% and 16.8% in fiscal 1995, 1996 and
1997, respectively. The decrease from fiscal 1995 to fiscal 1996 was primarily
attributable to higher legal expenses in fiscal 1995 relating to the Company's
litigation with the DOE. The increase in absolute dollars from fiscal 1996 to
fiscal 1997 was primarily attributable to increased headcount at the facility
level as four new facilities (including the three former RTI facilities) were
added during the fiscal year and, to a lesser extent, related increases in
corporate overhead. The decrease in general and administrative expenses as a
percentage of revenue from fiscal 1996 to fiscal 1997 was primarily due to
economies of scale achieved as the Company's revenues increased, which were
offset in part by costs related to the Company's acquisition of certain assets
of RTI. The Company expects general and administrative expenses will increase in
absolute dollars as the Company adds facilities and incurs additional costs
related to being a public company.
Marketing and selling. Marketing and selling expenses increased 11.2%, from
$1.6 million in fiscal 1995 to $1.8 million in fiscal 1996 and increased 40.9%
to $2.5 million in fiscal 1997. As a percentage of revenues, these expenses
increased from 5.5% to 5.8% and 6.6% in fiscal 1995, 1996 and 1997,
respectively. The increase from fiscal 1995 to fiscal 1996 was primarily
attributable to the addition of sales and marketing personnel at the facility
level and, to a lesser extent, higher travel and advertising expenses. The
increase in fiscal 1997 was primarily attributable to increased sales and
marketing personnel at the facility and corporate level and, to a lesser extent,
higher travel and advertising expenses. Additional headcount at the corporate
level enabled the Company to focus on large national customers as well as new
non-medical markets. The Company expects marketing and selling expenses will
continue to increase in absolute dollars.
Research, development and engineering. Research, development and
engineering expenses increased 29.9%, from $685,000 in fiscal 1995 to $890,000
in fiscal 1996 and increased 55.2% to $1.4 million in fiscal 1997. As a
percentage of revenues, these expenses increased from 2.4% to 3.0% and 3.7% in
fiscal 1995, 1996 and 1997, respectively. The increase from fiscal 1995 to
fiscal 1996 is primarily attributable to salary and related expenses for
additional design and systems engineers as the Company expanded its internal
process and design engineering capabilities. The increase in fiscal 1997 was
primarily attributable to the addition of engineering personnel and, to a lesser
extent, increased travel expenses related to the installation of new systems.
The Company expects research, development and engineering expenses will continue
to increase in absolute dollars.
Investments in joint ventures. Through December 1994, the Company had
invested a total of approximately $4.7 million for 35% of the common stock of
China Biotech Corporation ("China Biotech"), a joint venture formed to provide
contract sterilization services in Taichung, Taiwan. During fiscal 1995, based
upon revised market data and issues related to the Company's minority position
in the joint venture, the Company determined that the carrying value of this
investment would not be realized. Accordingly, the Company recorded a write-down
of the carrying value of $2.2 million in fiscal 1995. The Company's investment
in China Biotech was accounted for under the equity method with losses of $1.3
million recorded through fiscal 1995. During fiscal 1996 and 1997, although
China Biotech generated losses, the Company did not record its share of these
losses as the carrying value of the investment continued to be less than its
share of the net assets of China Biotech. In January 1997, the Company sold the
majority of its holdings in China Biotech for $1.2 million, resulting in no gain
or loss.
24
<PAGE> 26
As of March 31, 1995, the Company had invested a total of approximately
$1.8 million for 35% of the common stock of PT Perkasa SteriGenics, a joint
venture formed to provide sterilization services in Indonesia. The Company's
investment in PT Perkasa SteriGenics was also accounted for under the equity
method with losses of $960,000 recorded through fiscal 1995. During fiscal 1995,
the Company decided to withdraw from its investment in PT Perkasa SteriGenics
and wrote off the remaining carrying value of its investment of $860,000 to
reflect what it believed to be a total and permanent impairment in the value of
the asset.
Interest expense, net. Net interest expense decreased 23.2%, from $2.4
million in fiscal 1995 to $1.8 million in fiscal 1996 and remained relatively
unchanged at $1.8 million in fiscal 1997. The majority of the decrease from
fiscal 1995 to fiscal 1996 relates to interest charges recorded in fiscal 1995
associated with various potential tax liabilities. Net interest expense remained
relatively unchanged from fiscal 1996 to fiscal 1997 as higher levels of
borrowings were offset by lower interest rates on tax-free IRB financing ($31.5
million at 3.6% and 3.7% and $750,000 at a fixed interest rate of 10.0% at March
31, 1997), which replaced higher rate bank financing and other debt. As a
percentage of revenue, interest expense decreased from 8.4% to 6.1% and 4.9% in
fiscal 1995, 1996 and 1997, respectively. The maximum aggregate amount of
tax-free IRBs that the Company may issue is $40.0 million. Once the Company has
issued the maximum amount of tax-free IRBs, it will be required to obtain any
additional financing through higher cost funding sources. The Company's interest
expense fluctuates with changes in currency exchange rates between the U.S.
dollar and the Canadian dollar. The Company does not currently engage in hedging
transactions to mitigate this risk.
Provision for income taxes. The provision for income taxes for fiscal 1995
relates primarily to unbenefited capital losses related to investments in
foreign joint ventures. In fiscal 1996 and fiscal 1997, the total provision for
income taxes differs from the statutory rate primarily due to state income taxes
and increased consecutively from fiscal 1995 as a result of the Company's
increasing profitability. The Company's net deferred tax liabilities in fiscal
1996 and fiscal 1997 relate primarily to tax depreciation taken in excess of
book depreciation.
Discontinued operations. The Company entered into the aerosol business as
an ancillary business to its sterilization of eyecare solutions in its Decatur
facility. This business was profitable until the Company was required to shut
down the irradiator at its Decatur facility due to Cesium contamination. During
fiscal 1995, the Company discontinued its manufacture and sale of aerosol saline
solution for contact lens care and sold the associated assets. During fiscal
1995 the Company recorded losses of $1.3 million associated with the disposal
and discontinuation of this operation. See "Risk Factors -- Environmental
Risks."
25
<PAGE> 27
QUARTERLY RESULTS
The following tables set forth consolidated statements of operations data
for the eight quarters in the period ended June 30, 1997. This information has
been derived from unaudited consolidated financial statements that, in the
Company's opinion, reflect all normal recurring adjustments that the Company
considers necessary for a fair presentation of the results of operations in the
quarterly periods. The data set forth should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. The operating results for any quarter are not necessarily indicative
of results for future quarters.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $7,239 $ 7,359 $8,105 $ 8,164 $9,863 $ 9,657 $9,984 $10,751
Cost of revenues...... 4,150 4,211 4,385 4,297 4,846 5,498 5,784 5,801
------ ------ ------ ------ ------ ------ ------ ------
Gross margin.......... 3,089 3,148 3,720 3,867 5,017 4,159 4,200 4,950
As a percentage of
revenues.......... 42.7% 42.8% 45.9% 47.4% 50.9% 43.1% 42.1% 46.0%
Costs and expenses:
General and
administrative.... 1,264 1,356 1,384 1,417 1,820 1,527 1,581 1,637
Marketing and
selling........... 449 389 528 560 708 576 638 823
Research,
development and
engineering....... 227 227 218 273 386 381 341 312
------ ------ ------ ------ ------ ------ ------ ------
1,940 1,972 2,130 2,250 2,914 2,484 2,560 2,772
------ ------ ------ ------ ------ ------ ------ ------
Income from
operations.......... 1,149 1,176 1,590 1,617 2,103 1,675 1,640 2,178
As a percentage of
revenues.......... 15.9% 16.0% 19.6% 19.8% 21.4% 17.3% 16.4% 20.2%
Other income
(expense):
Interest expense,
net............... (465) (432) (435) (459) (472) (525) (380) (581)
Other income
(expense)......... 15 10 7 7 (293) 214 187 15
------ ------ ------ ------ ------ ------ ------ ------
Income before
provision for income
taxes............... 699 754 1,162 1,165 1,338 1,364 1,447 1,612
Provision for income
taxes............... 276 293 485 461 528 539 571 637
------ ------ ------ ------ ------ ------ ------ ------
Net income............ $ 423 $ 461 $ 677 $ 704 $ 810 $ 825 $ 876 $ 975
====== ====== ====== ====== ====== ====== ====== ======
As a percentage of
revenues.......... 5.8% 6.3% 8.4% 8.6% 8.2% 8.5% 8.8% 9.1%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Quarterly Fluctuations. Revenues increased from the first to the second
quarter of fiscal 1997, primarily as a result of the addition of the three
former RTI facilities. General and administrative expenses also increased
between these periods due to additional legal and accounting expenses incurred
in the RTI acquisition. Gross margin decreased in the third quarter of fiscal
1997 due to expenses relating to the new Gurnee facility. Gross margin increased
from the fourth quarter of fiscal 1997 to the first quarter of fiscal 1998
primarily as a result of greater utilization of the Company's new and existing
facilities. Marketing and selling expenses increased from the fourth quarter of
fiscal 1997 to the first quarter of fiscal 1998 due primarily to the addition of
sales and marketing personnel at both the corporate and facility levels and, to
a lesser extent, increased travel expenses.
The Company has experienced, and expects to continue to experience,
significant fluctuations in revenues and operating results from quarter to
quarter. As a result, the Company believes that period-to-period comparisons of
its operating results are not necessarily meaningful, and that such comparisons
cannot be relied upon as indicators of future performance. In addition, there
can be no assurance that the Company's revenues will grow or be sustained in
future periods or that the Company will maintain its current profitability in
the future. A significant component of such quarterly fluctuations results from
fluctuations in the demand by the Company's customers for Gamma sterilization
services due to varying manufacturing cycles, changes in demand for customers'
products and seasonality related to growth cycles for spices and herbs and the
deferral of elective surgery procedures during the year-end holiday season.
Other factors that could cause the Company's operating results to vary
significantly from period to period include volatility in the market for medical
devices; the ability of the Company to deliver sterilization services in a
timely and cost effective manner; the ability of the Company to expand
successfully in the non-medical sterilization services market; the timing and
size of orders from the Company's customer base; the ability of the Company to
obtain supplies
26
<PAGE> 28
of Cobalt 60 on a timely basis and at a reasonable cost; fluctuations in
currency exchange rates between the U.S. dollar and the Canadian dollar which
affect the Company's interest expense; the costs associated with customer
product being damaged as a consequence of overdosing and other factors; changes
in interest rates; regulatory matters; seasonality associated with historical
decreases in medical procedures during the fourth calendar quarter; and
litigation, acquisitions and other extraordinary events. Another factor that has
a significant impact on the Company's results of operations is the timing of
construction and commencement of operations of new facilities. The Company's
results of operations are also influenced by competitive factors, including the
pricing and availability of the Company's and competing sterilization services;
the acceptance of Gamma sterilization as a means of sterilizing products as
opposed to other methods of sterilization; the ability of the Company's
competitors to obtain orders from the Company's customers; the establishment of
in-house sterilization capabilities by the Company's customers; the acquisition
of the Company's customers by entities that do not use the Company's
sterilization services; the timing of new service or technology announcements
and releases by the Company and its competitors; and the entry of new
competitors into the market for sterilization and radiation processing services.
A large portion of the Company's expenses are fixed and difficult to reduce in a
short period of time. If revenues do not meet the Company's expectations, the
Company's fixed expenses would exacerbate the effect of such a shortfall on net
income. See "Risk Factors -- Unpredictability of Future Operating Results;
Likely Fluctuations in Quarterly Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date with cash flow from
operations, capital leases, IRB and bank financing, and the private placement of
equity securities. At June 30, 1997, the Company had $1.5 million in cash and
cash equivalents and a $3.8 million working capital deficit. This working
capital deficit is a result of costs incurred in the construction of the
Company's new Fort Worth facility. The Company financed the Fort Worth facility
through the issuance of a $5.0 million IRB in the second quarter of fiscal 1998.
Net cash provided by operating activities was $8.7 million, $11.0 million,
$12.2 million and $3.2 million in fiscal 1995, 1996 and 1997 and the quarter
ended June 30, 1997, respectively. Net cash provided by operating activities in
fiscal 1995 consisted primarily of depreciation and amortization, a write-down
of investments in joint ventures and a deferred tax liability, which were offset
in part by losses from operations and a deferred tax asset. Net cash provided by
operating activities in fiscal 1996, fiscal 1997 and the quarter ended June 30,
1997 was primarily attributable to net income plus depreciation and
amortization.
Net cash used in investing activities was $15.6 million, $7.6 million,
$19.1 million and $3.2 million in fiscal 1995, 1996 and 1997 and the quarter
ended June 30, 1997, respectively, primarily attributable to the purchase of
property, plant and equipment (including Cobalt 60).
Net cash provided by (used in) financing activities was $2.6 million, $4.7
million, $(1.0) million and $(471,000) in fiscal 1995, 1996 and 1997 and the
quarter ended June 30, 1997, respectively. Net cash provided by financing
activities in fiscal 1995 was generated primarily from the financing of Cobalt
60 purchases from Nordion. Net cash provided by financing activities in fiscal
1996 was generated primarily from an increase in IRB financing ($9.0 million)
offset in part by the repayment of bank and Cobalt 60 financing. Net cash used
in financing activities in fiscal 1997 was primarily attributable to repayment
of a term loan and Cobalt 60 financing, offset in part primarily by increases in
IRB financing. Net cash used in financing activities for the quarter ended June
30, 1997 was primarily attributable to the repayment of Cobalt 60 financing
which was offset in part by an increase in borrowings under the Company's line
of credit.
Noncash financing activities included the acquisition of Cobalt 60 through
capital leases totaling $7.8 million, $2.4 million and $2.5 million in fiscal
years 1995, 1996 and 1997, respectively. These leases have terms of 15 years.
The Company has a $3.5 million revolving line of credit with a bank, with a
variable interest rate (8.5% at June 30, 1997), collateralized by certain assets
of the Company. The line of credit is payable on demand, and at June 30, 1997,
approximately $400,000 was outstanding under this line of credit.
At June 30, 1997, the Company had $31.5 million in IRB financing which
bears interest at market rates (4.0% and 4.4% at June 30, 1997) and $750,000 in
IRB financing which bears interest at a fixed rate of 10.0%.
27
<PAGE> 29
For a description of the terms of the individual IRBs, see "Business -- Leases
and Financing Terms". The IRBs are collateralized by certain assets of the
Company and by letters of credit with a bank. Following the issuance of the IRB
for the second Fort Worth facility, the Company is able to issue only $2.7
million of additional tax-free IRBs until it reaches the maximum aggregate
tax-free IRB limit of $40.0 million. Thereafter, the Company will be required to
obtain any additional financing through higher cost funding sources. See "Risk
Factors -- Substantial Debt."
The Company had capital expenditures of $16.5 million, $7.2 million, $18.6
million and $3.0 million in fiscal 1995, 1996 and 1997 and the quarter ended
June 30, 1997, respectively. The Company currently expects to make additional
capital expenditures of approximately $2.5 million during the remainder of
fiscal 1998.
SteriGenics believes that the net proceeds of the offering, together with
existing cash balances, cash expected to be generated from operations and
available credit facilities, will be sufficient to fund the Company's
anticipated capital expenditures and operations at least through the end of
fiscal 1999. There can be no assurance that the adequate sources of capital will
be available in the future or, if available, will be on terms acceptable to the
Company. See "Risk Factors -- Need for Additional Capital."
28
<PAGE> 30
BUSINESS
OVERVIEW
SteriGenics International, Inc. ("SteriGenics" or the "Company") is a
leading provider of high quality contract sterilization services, with over 18
years of experience in the operation, design and development of Gamma
irradiation ("Gamma") facilities. The Company operates 12 Gamma sterilization
facilities in six states serving over 850 customers. SteriGenics has expanded
its presence in the medical products sterilization market through the opening
and acquisition of new facilities, addition of new customers and conversion of
products of new and existing customers from ethylene oxide gas ("EtO")
sterilization to Gamma sterilization. In recent years, the Company has expanded
into various non-medical sterilization and processing markets. The Company's
objective is to be the leading provider of high quality contract sterilization
services for manufacturers of medical and non-medical products.
INDUSTRY BACKGROUND
COMMERCIAL STERILIZATION
Sterilization is an essential step in the manufacturing process across a
number of industries for health, safety, regulatory and economic reasons. A
broad range of single-use, pre-packaged medical products as well as consumer
products are required under government regulations in the U.S. and many other
developed countries to be sterile or to have minimal microbial levels. In
addition, other products such as spices and herbs, cosmetics and food packaging
material are sterilized to improve shelf-life and address potential product
liability concerns. In order to provide safe and sterile products and to comply
with applicable government regulations, manufacturers have either developed
their own in-house or "captive" sterilization capabilities or have had their
products processed by a provider of contract sterilization services. The two
primary methods of commercial sterilization are Gamma and EtO sterilization. A
third alternative, electron beam ("E-Beam") sterilization, is utilized for
certain limited market applications.
Gamma Sterilization. Gamma sterilization is accomplished by exposing
products to Cobalt 60, an isotope that emits Gamma radiation. The exposure
sterilizes the product by disrupting the DNA structure of microorganisms on or
within the product, thereby eliminating their ability to reproduce. Gamma
radiation is generated by the spontaneous decay of radioactive isotopes. Because
Cobalt 60 decays at a constant rate, its effect on exposed products is highly
predictable. While Cobalt 60 emits radioactive energy, this energy does not
cause exposed substances to become radioactive. As a result, products exposed to
Cobalt 60 have no residual radioactivity and can be safely shipped to customers
immediately after processing.
Gamma sterilization is a one-step process that does not require any
preconditioning or post-processing treatment of the product. In a typical
commercial Gamma facility, packaged products are loaded onto conveyer systems
which transport the products through an irradiation chamber or "cell." The
radiation dose applied to the product is determined by the amount of Cobalt 60
(measured in curies) in the cell, the distance from the radiation source and the
duration of exposure to the radiation source. The dose received is verified by
reading a dose monitor ("dosimeter") that is placed on product containers.
Commercial use of Gamma as a means of sterilization began in the early
1960s as several large medical products manufacturers installed irradiators at
their facilities. However, widespread use of Gamma sterilization did not occur
until the 1980s when radiation compatible plastics became readily available for
use in products and packaging materials. The use of Gamma sterilization has
increased significantly over the past 10 years as medical products manufacturers
have converted the sterilization method used for certain products from EtO to
Gamma and have increasingly used radiation compatible materials in the
development of new products.
EtO Sterilization. EtO sterilization is accomplished by exposing products
to EtO gas in a three-step process: (i) preconditioning, involving an increase
in temperature and humidity to ensure that microorganisms are active and
therefore more susceptible to the effects of gas sterilization, (ii) fumigation
of the product in a vacuum chamber and (iii) aeration of the product to allow
the gas residue to dissipate to acceptable levels.
29
<PAGE> 31
During the fumigation phase, active microorganisms that absorb a sufficient
amount of the EtO gas are killed. EtO processing requires careful monitoring and
control of numerous variables including time, temperature, humidity, pressure,
gas concentration and vacuum. Because of these multiple variables, biological
indicators need to be placed in a number of locations within the product
containers and tested in a biological laboratory to verify the desired reduction
in microbial levels.
Through the early 1980s, the volume of medical products, consumer products
and spices and herbs processed with gas fumigation steadily increased. During
this time, a large number of medical products manufacturers built EtO
sterilization chambers in their facilities. Beginning in the late 1970s, several
governmental limitations were placed on gas fumigation due to the discovery that
EtO was a mutagenic substance with possible carcinogenic properties and that
freon, a stabilizing agent mixed with EtO, was a major cause in the depletion of
the ozone layer. Increased governmental regulation eventually led to higher
costs and longer processing times for EtO sterilization. The subsequent U.S. ban
on the production and importation of freon increased the risks and costs of
handling and storing EtO since EtO is more volatile in its pure form. As a
result of these increased costs and concerns of manufacturers about worker
exposure, many manufacturers sought to outsource their sterilization processes
to contract sterilizers using either Gamma or EtO.
E-Beam Sterilization. E-Beam sterilization is accomplished by exposing a
product for a predetermined time to a high-energy electron beam. The electron
beam is produced by an accelerator that converts electricity into an electron
beam. To provide a shield from the energy produced, products are processed in a
concrete cell. Exposure to E-Beam disrupts various chemical and biological bonds
in a microorganism, rendering the exposed product sterile. The first E-Beam
sterilization system was developed in the 1950s. Although the use of E-Beam
systems has increased in recent years with the development of improved high
voltage accelerators, the use of E-Beam sterilization has been limited due to
the complexity of the machinery required, the limited ability of E-Beam to
penetrate various materials and related dosimetry problems. Poor penetration
limits the applicability of E-Beam for large scale commercial applications, such
as the sterilization of high volume medical devices. As a result, the principal
use of E-Beam to date has been in the area of materials alteration, such as
crosslinking polymers.
COMPARISON OF PRIMARY STERILIZATION TECHNOLOGIES
Gamma has a number of advantages over the use of EtO under normal operating
conditions, including uniform dosing, predictability, reduced processing times,
enhanced flexibility, ease of handling and less environmental impact. Gamma is
able to penetrate all forms of materials, including metals and glass, thereby
providing uniform dosing throughout a given container. In addition, the effect
of Gamma sterilization is inherently more predictable than the effect of EtO
sterilization since, for a given amount of Cobalt 60, time and distance from the
source are the only variables that must be controlled in the process. In
contrast, EtO sterilization requires more complex monitoring and control of
variables such as temperature, humidity pressure and gas concentration.
Furthermore, while industry average turn-around time (measured from intake of
the product to shipment back to the manufacturer) for Gamma sterilization is
three to five working days, products are typically processed using Gamma in less
than eight hours. Due to the three-step EtO process, the processing time for EtO
generally ranges from seven to 14 days, with turn-around time being slightly
longer. The significantly shorter processing time required for Gamma provides
far greater flexibility for both processors and their customers. Gamma also has
less environmental impact than EtO under normal operating conditions since there
are no chemical residuals on the sterilized product or emissions released by
either the process or the sterilized product. Gamma does however require the
disposal of the spent Cobalt 60. The potential liabilities associated with EtO
include worker exposure to the EtO gas and the risk of fire or explosion due to
the volatile nature of the EtO gas. Potential liabilities associated with Gamma
include worker exposure and radioactive contamination resulting from the use of
Cobalt 60. The Company believes that the total processing cost to sterilize
products using EtO or Gamma does not differ significantly based on current
market conditions.
One factor that has limited the use of Gamma to date has been the
compatibility of radiation with certain plastics and other materials that may
discolor, deform or become brittle when exposed to Gamma. In addition,
30
<PAGE> 32
Gamma cannot be used to sterilize multiple product surgical kits if they contain
any item that is not Gamma compatible or medications that have not been approved
by the United States Food and Drug Administration (the "FDA") for Gamma
sterilization. However, as a result of the many benefits of Gamma, there has
been an ongoing conversion of existing products from EtO to Gamma, and new
medical products are increasingly being developed using radiation compatible
materials.
The following table sets forth various comparisons of Gamma and EtO:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
CONSIDERATION GAMMA ETO
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Industry average turn-around 3-5 days 8-15 days
time
- ----------------------------------------------------------------------------------------------
Total processing time Less than 8 hours 7-14 days
- Preconditioning - None - 1-3 days
- Processing - Less than 8 hours - 1-2 days
- Post-processing - None - 5-10 days of aeration
- ----------------------------------------------------------------------------------------------
Product design No restrictions Limited sealed cavities
- ----------------------------------------------------------------------------------------------
Materials compatibility Must be radiation compatible Can be used on variety of
materials
- ----------------------------------------------------------------------------------------------
Product packaging Must be radiation compatible Permeable materials only
No stress placed on seals Seals must withstand pressure
and vacuum
- ----------------------------------------------------------------------------------------------
Processing variables Time Time
Distance from Cobalt 60 source Temperature
Curies of Cobalt 60 Humidity
Pressure
Gas concentration
Vacuum
- ----------------------------------------------------------------------------------------------
Post-sterilization testing Dosimeter reading at end of Biological indicators tested
for processing in
dose verification laboratory
- ----------------------------------------------------------------------------------------------
Environmental impact of No residue on product EtO residue remains on product
processing No release into the atmosphere Release of EtO during aeration
Disposal of spent Cobalt 60 Handling of flammable and
explosive EtO gas
- ----------------------------------------------------------------------------------------------
Price of services 0.1-3.0% of unit manufacturing 0.1-3.0% of unit manufacturing
cost cost
- ----------------------------------------------------------------------------------------------
</TABLE>
THE STERILIZATION AND RADIATION PROCESSING MARKET
The sterilization and radiation processing market consists of independent
suppliers of sterilization and processing services ("contract sterilizers") and
certain large manufacturers that have in-house sterilization capabilities
("captive sterilizers"). Although there are no published industry statistics and
precise numbers are difficult to determine, the Company estimates that the U.S.
market for contract sterilization and radiation processing services (including
Gamma, EtO and E-Beam) was approximately $170 million in 1996 and that a similar
volume of product was processed by captive sterilizers. Of the U.S. contract
sterilization market, the Company estimates that in 1996 approximately 40-45%
was Gamma, 50-55% was EtO and 5% was E-Beam. There is also a significant market
for sterilization services outside of the U.S. In the international market, EtO
maintains a significantly larger share of the market than Gamma.
In determining the total cost of various sterilization services,
manufacturers must consider not only the cost of the actual sterilization
services, but also the cost of transportation and cost of processing time. As a
result, manufacturers typically do not send product for sterilization beyond a
300 mile radius since the cost of transportation would likely exceed the cost of
sterilization, which typically ranges from 0.1% to 3.0% of unit
31
<PAGE> 33
manufacturing cost for medical products. Because of these limitations, contract
sterilizers have needed to strategically locate their facilities in close
proximity to their customer base.
The Company believes there are a number of manufacturing trends that may
have a significant impact on contract providers of Gamma sterilization services.
The first trend is closer coordination between manufacturers and their suppliers
in order to reduce inventory exposure, improve the manufacturer's level of
service to its customers and to facilitate new product launches. By closely
coordinating the sterilization process with the manufacturing process, the
planning of production is simplified and the number of days of raw materials and
finished goods inventory can be reduced. As a result, manufacturers are
increasingly demanding shorter turn-around times for sterilization services. The
second of such trends is the "outsourcing" of non-core elements of the
manufacturing process where services can be obtained from third party providers
on a more cost-effective basis. While several large corporations continue to
perform either all or a portion of their sterilization in-house, the trend has
been away from building in-house sterilization capacity due to cost, safety,
flexibility and regulatory issues associated with maintaining an in-house
irradiator or EtO chamber. Finally, an emerging concept is "in-house
outsourcing," utilizing third party contractors to provide services within a
manufacturer's own facility. This emerging concept has the potential to provide
the cost advantages and core-business focus of outsourcing, while also providing
benefits such as reduction of finished goods inventory, elimination of
transportation costs and greater control associated with a captive facility.
MEDICAL PRODUCTS MARKET
The medical portion of the sterilization market includes manufacturers of
single-use medical products. The types of products sterilized include items such
as syringes, needles, scalpels, dental implants, hospital packs, gloves, gowns,
bandages, cotton balls, cotton swabs, cotton gauze, cotton towels, surgical
drapes, surgical kits, suture staples, specimen bottles, intravenous tubes and
bottles, blood collection devices, drug packaging materials, orthopedic
implants, petri dishes, contact lenses, and eyecare solutions. Based upon
industry sources, the Company estimates that the U.S. market for contract
sterilization of these types of medical products was approximately $130 million
in 1996.
NON-MEDICAL MARKETS
The market for sterilization and processing of non-medical products
includes a diverse group of products. Growth in these markets is primarily being
driven by concerns over health risks and potential product liability as well as
economic considerations such as losses due to infestation and spoilage. In
addition, concerns over foodborne illnesses have contributed to an increased
awareness of the need for sterilization. While the vast majority of the
processing of non-medical products is currently done with EtO, the percentage
being processed using Gamma sterilization has increased in recent years. A
number of manufacturers have converted to Gamma sterilization for their products
since Gamma does not leave any chemical residues and is better able to penetrate
products such as spices and cosmetics which are often processed in bulk. The
following are the primary non-medical products being processed using all of the
various methods:
Spices and Herbs. Spices and herbs constitute the largest portion of the
current non-medical sterilization market. According to The American Spice Trade
Association, of the approximately 850 million pounds of spices sold in the U.S.
in 1995, approximately 300 million pounds were processed using Gamma or EtO to
extend shelf-life and/or reduce microorganisms. Examples include black pepper,
garlic, nutmeg, mustard seed, paprika and cinnamon.
Cosmetics. Cosmetics often require processing to reduce microorganisms in
either finished goods or certain cosmetic ingredients that have naturally high
microbial content. Examples include shampoo, eye make-up remover, mascara and
compounds used in lipstick.
Food Packaging Products. As the market for pre-packaged foods has grown,
increasing the shelf-life of these products has become a critical economic
issue. By reducing the microbial count in the packaging material, producers are
able to reduce the risk that microorganisms contained in the packaging material
will come into contact with the food product and reduce its shelf-life. Examples
include milk cartons and meat packaging materials.
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<PAGE> 34
Materials Processing. Materials processing involves the use of Gamma
irradiation to alter the physical properties of a specific material at the
molecular level. For example, irradiation is used to strengthen certain plastics
as well as to break down teflon.
POTENTIAL MARKETS
According to the World Health Organization, illness due to contaminated
food is one of the most widespread health problems in the world and a cause of
reduced economic productivity. As a consequence, the Company believes that there
are a number of large potential markets for the sterilization of food products
such as red meat, poultry, shellfish, animal feed, and fresh fruit and
vegetables. The FDA has approved radiation as a safe and effective means of
processing a variety of foods including pork, poultry, fresh fruits and
vegetables. Currently, the FDA has not approved the use of radiation to control
food-borne pathogens in red meat and shellfish, although there is a petition
before the FDA to grant approval for the irradiation of red meat. The USDA would
also have to authorize the use of irradiation in the treatment of red meat, and
it would also likely require preapproval of the irradiation process. In
addition, the FDA and USDA both require any retail foods that have been
irradiated to be labeled and, to date, there has been only a minimal amount of
food processed using Gamma radiation. While there is increased interest in
evaluating food irradiation in light of the heightened public concern over
recent outbreaks of E. coli and salmonella, the development of these potential
markets is subject to regulatory approvals and consumer acceptance of irradiated
foods. In addition, if these markets do develop, facilities will have to be
built or modified to address the specific requirements of these markets. These
modifications would include the addition of refrigeration facilities, changes in
material handling equipment and alterations in processing techniques to
accommodate higher volumes of low dosage products. In addition, facilities would
have to be constructed in close proximity to customers' facilities given the
perishable nature of fresh food products.
THE STERIGENICS APPROACH
SteriGenics is a leading provider of high quality Gamma sterilization
services, with over 18 years of experience in the operation, design and
development of Gamma facilities. The Company operates 12 facilities in six
states serving over 850 customers. The Company has expanded its presence in the
medical products market through the opening of new facilities, addition of new
customers and conversion of products of new and existing customers from EtO to
Gamma sterilization. In recent years, the Company has begun to expand into
various non-medical sterilization and processing markets. While SteriGenics
expects the majority of its revenues to continue to be derived from the
processing of medical products, it believes that non-medical markets offer
significant opportunities for expansion.
SteriGenics has always strived to be the innovator in its industry,
maintaining the only internal engineering and design capability in the Gamma
sterilization market. The Company's engineering and design expertise includes
the design and development of major facets of the irradiation system, from basic
conveyor systems to proprietary software systems. This expertise has allowed the
Company to introduce several innovations to the industry including the first
multi-cell facilities designed to provide improved turn-around times, increase
processing volume and improve operational efficiencies. Other innovations
include the Gemini cell, a dual-sided irradiator that enhances processing
flexibility and increases operating efficiencies by allowing the Company to
simultaneously process products with two different dose requirements in the same
cell, and the ExCell, the industry's first automated precision dose irradiation
system. The Company has also been able to introduce service innovations
including GammaSTAT, the industry's first guaranteed variable time-based
sterilization program.
SteriGenics is continuing its leadership in providing flexible approaches
to sterilization with its recent introduction of the MiniCell. Based upon a
proprietary design, the MiniCell allows a smaller single cell irradiator to be
constructed in an existing manufacturing facility or warehouse. The Company
plans to use the MiniCell to provide contract sterilization services to smaller
regional and international markets as well as to offer an in-house outsourcing
alternative to large manufacturers that want to maintain greater control of the
sterilization process, but do not want to incur the expense and regulatory
burden of owning and operating a captive facility. The MiniCell requires
significantly less capital investment and can generally be constructed in
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<PAGE> 35
four to six months as opposed to the 18 to 24 month construction period that is
typical for the Company's larger facilities. The Company has installed its first
MiniCell in Hayward, California to serve the Northern California market.
STRATEGY
The Company's objective is to be the leading provider of high quality
contract sterilization and processing services for manufacturers of medical and
non-medical products. Key elements of the Company's strategy include the
following:
Increase Share of Medical Products Sterilization Market. The Company is
seeking to expand its share of the medical products sterilization market through
its continued focus on Gamma sterilization, promotion of increased use of
outsourcing by manufacturers and introduction of new and innovative services
such as GammaSTAT and GammaReserve. As a key element of its focus on Gamma
sterilization, the Company actively promotes the conversion of products from EtO
to Gamma. In addition, although the Company intends to maintain its focus on
Gamma sterilization and processing, it will evaluate new technologies as they
emerge.
Expand Non-medical Business. The Company is seeking to expand its presence
in various non-medical sterilization and processing markets, such as the markets
for spices and herbs, cosmetics, food packaging and materials processing. To
effectively address these markets, the Company has created its non-medical
products division, with an independent sales and marketing organization and four
processing facilities dedicated primarily to processing non-medical products.
SteriGenics also continually monitors developments in other potential markets
such as the sterilization of poultry, red meat, shellfish, animal food and fresh
fruits and vegetables.
Exploit MiniCell Opportunity. The Company intends to use its new MiniCell
design to continue to expand geographically, primarily into smaller regional and
international markets. SteriGenics believes that the economics of the MiniCell
will allow the Company to serve smaller industrial centers which could not
support a full-size Gamma irradiation facility. The Company believes that by
offering manufacturers in these markets decreased transportation costs and
reduced total turn-around time, it has an opportunity to convert a portion of
the dollars currently spent on transportation into sterilization revenues. The
Company's first MiniCell became operational in April 1997. This MiniCell is
currently in a start up phase and is not operating at full capacity. The Company
currently has no plans to install additional MiniCells in specific locations.
The Company is also seeking to provide an in-house outsourcing alternative
by leasing MiniCells to manufacturers with high volume sterilization needs that
want to have sterilization processing capability within their own facilities.
The Company would also provide varying levels of staffing and management,
depending on customer requirements, as well as manage the Cobalt 60 in the
MiniCell. The Company believes that MiniCell leasing offers manufacturers the
cost advantages and core-business focus associated with outsourcing, while also
providing advantages of in-house facilities, including reduced costs associated
with inventory and transportation and greater control over the sterilization
process. The Company has recently introduced this program and has not yet leased
a MiniCell.
Expand Premium Services. SteriGenics seeks to differentiate itself from its
competitors by offering its customers a variety of higher margin premium
services, such as GammaSTAT, a guaranteed variable time-based service, and
ExCell precision dosing and validation services. The Company recently introduced
GammaReserve, a new service that utilizes proprietary software to allow
customers to reserve processing time on a specific day.
Leverage Leading Engineering and Design Capabilities. SteriGenics is
seeking to leverage its leading internal engineering and design capabilities to
continue to improve its existing processes and designs and to create and utilize
innovative designs and services. The Company is the only provider of Gamma
contract sterilization services with an in-house engineering and design staff.
The Company's engineering staff continually evaluates new processing methods,
equipment requirements and software options to increase operating efficiencies,
optimize Cobalt 60 utilization and improve flexibility. The Company's
engineering expertise will also play a critical role in the Company's plans to
construct and lease its MiniCells.
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<PAGE> 36
Pursue Strategic Acquisitions. SteriGenics intends to pursue strategic
acquisitions of sterilization facilities and businesses both domestically and
internationally. The Company began to implement this strategy with the
acquisition of certain assets of RTI Inc. ("RTI") in August 1996, which added
three facilities in the Eastern U.S. and significantly expanded the Company's
presence in certain non-medical markets. The Company does not currently have any
agreements or understandings with respect to any such acquisition.
SERVICES
SteriGenics offers a number of services to its customers including its
standard processing services, time-based services and value-added services such
as validation and testing. In addition, the Company is seeking to lease its
MiniCells to large medical products manufacturers or other customers with high
product volumes for installation in such customers' facilities.
STANDARD SERVICE
SteriGenics' standard service is a five working day turn-around time on the
product, which is an industry standard. The processing time of any particular
product is dependent upon several factors, including the dose required, the
density of the product and the number of curies of Cobalt 60 present in the
cell. In general, a higher dose requirement or density of material has the
effect of increasing the amount of time the product needs to be exposed to Gamma
radiation. Once these elements are determined, the Company determines the
processing time for the specified product. It is the responsibility of the
Company's customers to determine the level of microorganisms or other
contamination that exists in their respective products, as well as the dose of
Gamma radiation that will reduce such microorganisms or contamination to the
required levels. After performing sterilization services, dosimeter readings are
taken and documented to verify that the customer's dose requirements were
attained. The Company then issues a certification that the product received the
specified dosage. The fee charged for this service is dependent primarily upon
the required dose of Gamma radiation, density of the product, permissible dose
range and the volume of product to be processed.
GAMMASTAT I AND II SERVICES
GammaSTAT I and II are premium services that guarantee a turn-around time
of 23 or 48 hours, respectively. The Company does not limit the volume or type
of product to be processed. Pricing for both GammaSTAT services is at a premium
to standard service and is based upon the time (23 hours or 48 hours) in which
the customer requires the product to be processed and available for shipment.
GammaSTAT was introduced in fiscal 1996 and revenues resulting from GammaSTAT
increased significantly in fiscal 1997.
GAMMARESERVE SERVICES
GammaReserve is a premium service that utilizes proprietary software to
allow customers to reserve processing time on a specific day. The customer is
then charged for the reserved processing time whether or not it is used. The
Company began offering GammaReserve in April 1997.
EXCELL SERVICES
The ExCell is an automated precision dose irradiator. SteriGenics has an
ExCell in operation in both Charlotte, North Carolina and Corona, California.
The ExCell service can be used for several different purposes, including
production services for finished goods that require a very limited dose range,
dosage auditing to allow customers to verify their dosage requirements,
validation work and materials testing. ExCell services are offered at a premium
price based upon the nature of the service being provided.
MINICELL LEASING
The Company plans to lease MiniCells to larger medical products
manufacturers for installation in their existing facilities. SteriGenics is
offering the MiniCells pursuant to an operating lease which would include Cobalt
60 replenishment, dosimetry management and maintenance. If the customer so
desires, SteriGenics will provide operating personnel, as well as a radiation
safety officer, relieving the customer of many regulatory
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<PAGE> 37
burdens. The Cobalt 60 will be disposed of through the Company's existing
agreements with its suppliers providing for the disposal of "spent" Cobalt 60.
The monthly lease payment will be based upon the level of service and the curies
of Cobalt 60 required. The Company recently began to offer the MiniCell for
lease and, to date, no MiniCells have been leased.
FACILITIES
The Company has a network of 12 Gamma facilities, of which eight perform
sterilization services for the medical products market. The Company processes
its non-medical products primarily in its non-medical facilities since certain
medical products customers prefer that their products be segregated from
non-medical products such as herbs and spices. The remaining four facilities
provide services primarily to non-medical customers. These 12 facilities have an
aggregate design capacity of 101 million curies of Cobalt 60. All of the
Company's medical products facilities (other than the Gurnee and Hayward
facilities) are ISO 9002 certified. The Company expects the Gurnee and Hayward
facilities to receive ISO 9002 certification upon satisfaction of the 12 month
minimum operating period requirement. See "-- Quality Assurance and Safety."
The Company's sterilization facilities are designed on stand alone sites of
various sizes and capacities. The Company has three basic types of facilities:
mega-facilities, mid-facilities and mini-facilities. Mega-facilities have two or
more cells and a Cobalt 60 capacity of approximately 14 to 20 million curies,
and mid-facilities have one cell with a Cobalt 60 capacity of approximately 8
million curies. Both mega-facilities and mid-facilities generally require 18 to
24 months to construct. Mini-facilities are facilities that (i) have one cell
which can be a standard cell or the MiniCell and (ii) have a Cobalt 60 capacity
of approximately three million curies. All of the Company's facilities are
designed to operate 24 hours a day, seven days a week.
The Company was the first in the Gamma sterilization industry to build
multi-cell facilities with Cobalt 60 capacities in excess of 14 million curies
and has strategically placed them in markets that have a high demand for
sterilization of services. The Company believes that the number of additional
U.S. markets that can support mega-facilities, based on current market
conditions, is limited. To continue its geographic expansion, the Company has
designed the MiniCell which it believes will enable it to address smaller
regional markets and to take advantage of international opportunities.
The following table sets forth information regarding the Company's
facilities as of June 30, 1997:
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
DESIGN
CAPACITY APPROXIMATE
LOCATION (IN CURIES)(1) SQUARE FEET TYPE OF FACILITY NUMBER/TYPE OF CELLS
- -------------------------------------------------------------------------------------------------------
MEDICAL PRODUCTS FACILITIES
Corona, California (2) 19,000,000 100,000 Mega-Facility 3 cells (1 ExCell)
Hayward, California 3,000,000 25,000 Mini-Facility 1 cell (MiniCell)
Fort Worth I, Texas(2) 8,000,000 22,000 Mega-Facility(3) 1 cell
Fort Worth II, Texas(2) 6,000,000 58,000 Mega-Facility(3) 1 cell (Gemini cell)
Gurnee, Illinois 17,000,000 78,000 Mega-Facility 3 cells (will have 4 when
fully equipped)
Westerville, Ohio(2) 8,000,000 22,000 Mid-Facility 1 cell
Charlotte, North 15,000,000 64,000 Mega-Facility 2 cells (1 ExCell)
Carolina(2)
Haw River, North 3,000,000 25,000 Mini-Facility 2 cells (pallet and under-
Carolina(2)
water systems)
- -------------------------------------------------------------------------------------------------------
NON-MEDICAL FACILITIES
Tustin, California(2) 8,000,000 32,000 Mid-Facility 1 cell
Schaumburg, Illinois(2) 8,000,000 32,000 Mid-Facility 1 cell
Rockaway, New Jersey 3,000,000 25,000 Mini-Facility 1 cell (batch system)
Salem, New Jersey 3,000,000 20,000 Mini-Facility 1 cell (pallet system)
- -------------------------------------------------------------------------------------------------------
</TABLE>
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- ---------------
(1) Shows maximum design capacity. The Company currently does not utilize a
substantial portion of its Cobalt 60 design capacity. See "-- Cobalt 60."
(2) ISO-9002 Certified facilities.
(3) The two Fort Worth facilities together constitute a Mega-Facility and
operate under the same license.
The sterilization systems in each of the Company's facilities consist of
four major components: the biological shield, the source system, the conveyor
system and the safety system.
The Biological Shield. The cell where the Cobalt 60 is maintained is also
known as the "biological shield." The Company utilizes a steel reinforced
concrete cell with a ceiling and walls that are over six feet thick (other than
the MiniCell which utilizes a three-foot thick steel wall) which provides a
complete shield from any Gamma radiation. Each cell (other than the MiniCell)
has a maze at its entrance and exit to prevent radiation from escaping from the
cell. Because of its small dimensions, the MiniCell uses a two foot-thick lead
door in lieu of the maze.
The Source System. Inside the cell, stainless steel rods containing Cobalt
60 isotope sources are positioned on source racks, which when not in use are
stored inside a shielding pool containing 18 to 30 feet of water. The water
shielding pool provides a complete shield from any Gamma radiation. Once the
sources are removed from the water, the product within the cell is exposed to
Gamma radiation.
The Conveyor System. The main operating component of the Company's
sterilization system is the conveyor system comprised of either stainless steel
or aluminum rectangular containers or totes, in which the customer's material is
placed. After being loaded, the totes are placed on specially designed three
level overhead conveyor systems used to transport customer products and
materials into the cell and around the source racks. The conveyer system passes
through the cell making periodic stops at specific locations to provide uniform
dose distribution to the product being sterilized. The conveyor system is
controlled by programmable logic controllers interconnected with diagnostic
computers that monitor all conveyor functions.
The Safety System. Each cell has separate and redundant safety systems that
the Company believes meet or exceed all applicable regulations. The safety
system is designed to prevent entry into the cell when the source racks are
exposed and to automatically lower the Cobalt 60 into the water in the event of
a system failure.
COBALT 60
The quantity of Cobalt 60 in a cell is the primary factor in determining
the amount of product that can be processed in that cell. As additional curies
of Cobalt 60 are added, processing times decrease allowing for the processing of
increased volumes of products. In addition to being the primary determinant of
capacity, Cobalt 60 also represents a substantial cost element in operating a
sterilization facility. As a result, the point at which a facility becomes
profitable depends, to a significant extent, on the amount of Cobalt 60 that is
loaded and the efficiency of the Cobalt 60 utilization. Correspondingly, since
costs associated with Cobalt 60 are fixed costs, once the break-even point is
reached for a given amount of Cobalt 60 there are relatively low costs
associated with incremental volume. Since Cobalt 60 continuously decays, the
Company generally operates its facilities 24 hours a day, seven days a week, at
a Cobalt 60 capacity which is significantly less than maximum design capacity.
As a result, the Company has the ability to significantly increase the volume of
product it can process by adding more Cobalt 60 to existing facilities.
Cobalt 60 has a useable life of approximately 20 years with the energy
level declining at approximately 12.3% of the then current capacity per year. To
account for this natural decay and to increase processing capacity, the Company
acquires additional Cobalt 60 on a regular basis. Cobalt 60 capsules are shipped
to the facility in licensed shipping containers from one of the Company's
suppliers. Each facility is equipped with a custom set of tools and equipment
designed to handle both the shipping containers and Cobalt 60 source capsules.
Specially trained corporate staff and facility personnel perform the actual
loading process. All loading work is performed underwater in a facility's source
storage pool. Each capsule loaded into a facility has a unique serial number
that is tracked by both SteriGenics and its suppliers. Because the loading
process
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usually takes two to three days, during which the facility is not operational,
loading is performed at each facility only once every 12 to 18 months depending
on business activity. Cobalt 60 is loaded upon delivery to the Company's
facility. To account for the decay of Cobalt 60, the conveyer system cycles at
each facility are reset monthly.
The Company's primary suppliers of Cobalt 60 are MDS Nordion, Inc.
("Nordion"), a Canadian company, and REVISS Services (UK) Limited ("REVISS"), a
United Kingdom company and formerly a division of Amersham International plc.
The Company also purchases a smaller amount of Cobalt 60 from Neutron Products,
Inc., a Maryland corporation. The Company acquires Cobalt 60 from its suppliers
under a variety of purchase arrangements, capital leases and operating leases.
The Company's Cobalt 60 leases have terms of three to 15 years. All of the
Company's agreements provide for the suppliers to handle the eventual disposal
of "spent" Cobalt 60. The Company has not experienced Cobalt 60 shortages in the
last decade, and based on current conditions, the Company believes that
sufficient supplies of Cobalt 60 will continue to be available for the
foreseeable future. However, there were shortages of Cobalt 60 in the mid-1980s
and there can be no assurance that the Company will not experience shortages of
Cobalt 60 in the future. Such shortages could result in a decrease in the
availability of Cobalt 60 supplies or a significant increase in the price the
Company is required to pay for Cobalt 60, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Risks Related to Cobalt 60 Supply."
STERIGENICS' PROCESS AND DESIGN TECHNOLOGY
The Company is the only provider of contract Gamma sterilization services
with in-house engineering and design capabilities. The Company's in-house
engineering expertise and continual interaction with its customers have enabled
it to develop technological innovations in facility and process design that have
increased the Company's Cobalt 60 efficiency and utilization to meet its market
and customer requirements.
Product Overlap Design. The Company's irradiation system utilizes a product
overlap design as opposed to the more commonly used source overlap design. In a
product overlap system, the source racks in which the Cobalt 60 is stored are
smaller in height than in a source overlap system. In a source overlap system,
the source racks extend above and below the conveyor system. The product overlap
system makes more efficient use of Cobalt 60 by moving the level at which the
product passes by the source racks, which results in greater consistency in
dosing and tighter maximum to minimum dose ratios. A product overlap design is
incorporated in nine of the Company's facilities.
Continuous Flow Technology. The standard SteriGenics conveyor system is a
continuous flow system in which the conveyer system is continuously moving the
product into and out of the cell during processing. In contrast, most
irradiation systems are batch systems, which operate by placing the number of
totes designed for the system in the cell housing the source racks and moving
the totes around the source racks. The SteriGenics continuous flow system
improves Cobalt 60 efficiency by constantly having product in the cell being
exposed to Gamma radiation. In contrast, in a batch system, the source racks are
lowered into the water shielding pool when the product inside the cell is ready
to be removed. A batch system is used in one of the Company's standard
facilities. Due to its compact design and cost considerations, the MiniCell also
uses a batch system.
Proprietary Software. The Company uses proprietary software systems to
automate product handling. These software systems handle both the actual
operation of the irradiation systems as well as the overall facility process
control. The irradiator in each facility is controlled by a programmable logic
controller system. The software designed for this purpose has been both
installed and validated for FDA purposes. This control system provides all the
critical controls for both the actual irradiator mechanism as well as all safety
systems in the irradiator. The process control software used by each facility is
an Oracle-based software system called STARS (SteriGenics Tracking and
Reservation System), which was written, tested and validated for FDA purposes by
the Company. This STARS system operates on a local area network at each facility
and is designed to provide control of all aspects of the operation from product
receiving to shipping. The STARS system also generates and tracks customer
billing and collection information.
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Cell Design. The cell design innovations developed by the Company include
the MiniCell, Gemini cell and ExCell:
- MiniCell. The MiniCell, introduced in 1997, is a product overlap, batch
irradiator developed to combine the benefits of a large-scale production
system with the specialized features of a smaller batch irradiator. The
cell is constructed of three foot-thick steel and uses a two level
conveyor system. Instead of a maze, the MiniCell uses a lead door that is
two feet-thick. The computer control systems on the MiniCell are
substantially similar to the Company's larger systems, with a few
modifications to accommodate the MiniCell's conveyor system.
- Gemini Cell. The Gemini cell, introduced in 1996, is a double-sided cell,
allowing two separate conveyor systems to operate in the same cell on
opposite sides of the source rack. The Gemini design enables the Company
to process products with two different dose requirements in the same cell
simultaneously by varying the speeds of the two conveyor systems. The
system gives the Company additional flexibility in scheduling its
sterilization services, increases the efficiency of the Company's Cobalt
60 utilization and enhances the Company's ability to offer time-based
processing services. The Company installed its first Gemini cell in its
Gurnee, Illinois facility.
- ExCell. The ExCell, introduced in 1995, was the industry's first
automated precision dose irradiator system. The ExCell technology offers
the ability to achieve a more precise dose range than a standard
commercial irradiator. The ExCell was designed to conduct various
required audit and validation functions for medical device manufacturers.
The ExCell also enables the Company to offer customers high precision
dosing for certain dose sensitive products.
MARKETS AND CUSTOMERS
MEDICAL PRODUCTS MARKET
The medical products market is comprised of manufacturers of healthcare and
single-use medical products. The medical products division of the Company had
over 700 customers in fiscal 1997, including many of the largest manufacturers
of single-use medical products. Sales to medical products customers accounted
for approximately 80% of the Company's revenues in fiscal 1997. One customer,
Baxter International Inc. ("Baxter"), accounted for approximately 13% of
revenues during fiscal 1995 and 1996. No customer accounted for more than 10% of
revenues during fiscal 1997 due to a restructuring of Baxter, which resulted in
its processing volume being divided between two companies. The following is a
representative list of the Company's medical products customers:
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------
REPRESENTATIVE CUSTOMERS
- ----------------------------------------------------------------------------------------------
Alcon Laboratories, Inc. Medical Action Industries Inc.
Allegiance Healthcare Corporation Nalge Nunc International
Allergan, Inc. Orion Life Systems, Inc.
Ansell Perry Inc. Regent Medical (a division of London
International Group, Inc.)
Aramark Cleanroom Services Inc.
Richard-Allan Medical Industries
Conco Medical Company (a division of UROHEALTH
Systems, Inc.)
ConvaTec (a division of E.R. Squibb
& Sons, Inc.) Smith & Nephew Orthopedics, Inc.
DePuy Orthopedics, Inc. WEL Industries, Inc.
Endodent, Inc. Zimmer (a subsidiary of Bristol-Myers
Squibb Company)
Lincoln Training Center
- ----------------------------------------------------------------------------------------------
</TABLE>
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NON-MEDICAL MARKET
The non-medical division of the Company provided services in fiscal 1997 to
over 150 customers producing a variety of products, including spices and herbs,
cosmetics, food ingredients, fruit and vegetable products, food packaging,
consumer products and polymers. Sales to non-medical customers accounted for
approximately 20% of the Company's revenues in fiscal 1997.
The Company does not have a standard form of agreement for customer
contracts. The Company's agreements with customers vary from purchase order
arrangements to multiple year contracts. Certain of these contracts provide
pricing terms based upon volume or product line commitments from its customers.
In addition, the Company enters into contracts providing for guaranteed
turn-around times and special services.
SALES AND MARKETING
The Company has separate sales and marketing groups servicing the medical
products and non-medical markets. The Company's services are sold primarily by
its direct sales force, based throughout the country. Facilities managers and
other personnel at the Company's facilities also take an active role.
SteriGenics maintains a customer service and support operation within each of
its facilities.
The Company's marketing of its Gamma services emphasizes technical
assistance to customers in all aspects of the sterilization process, including
product conversion from other sterilization methods and material compatibility
studies and participation by facility and corporate staff members on technical
committees responsible for the implementation of industry standards pertaining
to the sterilization of products and materials. The Company's salespersons and
senior management draw upon their backgrounds in radiation, engineering,
microbiology, packaging, material compatibility and regulatory compliance to
provide customers a full range of services. SteriGenics' promotional activities
consist of printed media advertising (primarily trade journals), participation
in trade shows, mailing campaigns to selected territories, addressing industry
organizations and sponsoring promotional events. In addition, as part of its
efforts to expand its potential markets, the Company has sponsored and supported
FDA petitions related to the sterilization of various products and product
labeling.
In 1996, the Company introduced a new program to further encourage the
conversion of medical products from EtO to Gamma. Through this program the
Company provides technical assistance to customers and potential customers who
are interested in converting their products to Gamma. These technical assistance
services are provided at no charge to the customer. The conversion program has
been successful both with customers who have in-house EtO sterilization
facilities and with those using an EtO contract sterilizer. During fiscal 1997,
the first year of the program, SteriGenics converted slightly over 2 million
cubic feet of product to Gamma sterilization.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company believes its future competitive position will depend, in part,
on its ability to develop and introduce process and design innovations in Gamma
radiation systems. Research, development and engineering expenses for the fiscal
years ended March 31, 1995, 1996 and 1997, were $685,000, $890,000 and $1.4
million, respectively, and $312,000 for the quarter ended June 30, 1997. The
Company intends to continue to make significant investments in research,
development and engineering for the foreseeable future. Although the Company
maintains an active research, development and engineering program to improve its
process and design technology, there can be no assurance such efforts will be
successful or the Company's process and design innovations will enable it to
offer new services that will achieve customer acceptance. Failure to develop, or
introduce on a timely basis, such new process and design technology could
adversely affect the Company's business, financial condition and results of
operations. See "Risk Factors -- Competition."
QUALITY ASSURANCE AND SAFETY
The Company has quality assurance departments at both the corporate and
facility levels. The corporate quality assurance group has the primary
responsibility for structuring the Company's quality system,
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developing quality assurance policies, operating procedures and work
instructions and ensuring that such policies, procedures and work instructions
are in compliance with national and international standards, federal, state and
local regulations, as well as customer requirements. The department is also
responsible for monitoring quality related activities at all locations, changes
in the federal, state and local regulatory environment, each facility's
compliance with the quality system, national standards working groups and
technical assistance to customers. At the facility level, quality assurance
personnel are given the authority and responsibility to ensure compliance within
that facility with SteriGenics' quality policies, procedures, work instructions
and customer specifications.
Eight of SteriGenics' facilities are certified to International Standards
Organization ("ISO") 9002, Quality System -- Model for Quality Assurance in
Production, Installation and Servicing. Certification to the ISO 9002 standard
demonstrates that the Company has implemented the essential elements necessary
for an effective quality control system. The Company received its initial
certification in 1993 from Det Norske Veritas ("DNV"), an approved Quality
Registrar, and is subject to quality system surveillance audits every six months
by DNV. The Company plans to schedule ISO 9002 certification audits for the
Rockaway and Salem facilities in the fourth quarter of fiscal 1998, and the
Company plans to schedule ISO 9002 certification audits for the Hayward and
Gurnee facilities in the fourth and second quarters of fiscal 1998,
respectively, after they have been in operation for one year (an ISO 9002
requirement).
The Company has implemented a number of safety procedures for its workers.
Each cell has a separate safety system designed to ensure that no individual is
exposed to the Gamma radiation. The Company believes it has redundant safety
precautions that meet or exceed all applicable safety regulations imposed by
federal regulations. Safety backup precautions also exist in the event of power
outages and natural disasters. In the event of a failure of electric power, the
Cobalt 60 source racks are automatically lowered into the pool on a gravity feed
basis. There can be no assurance that such safety precautions will prove
effective under normal operating conditions or in the event of a power outage or
natural disaster. A failure in safety precautions would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Risks of Operating a Facility Using Radioactive Material."
COMPETITION
The market for sterilization services is intensely competitive and is
characterized by significant price competition. The Company's market is
fragmented as a result of geographical limitations on the transportation of
products for sterilization, multiple technologies and the mix of captive and
contract sterilization facilities. The Company competes with other companies
that provide Gamma sterilization services, the most significant of which is
Isomedix, Inc. ("Isomedix"). In addition, many products that can be sterilized
using Gamma can also be sterilized using either EtO or E-Beam sterilization. As
a result, the Company also competes with companies that process products using
EtO or E-Beam technology. Companies processing products using EtO include Cosmed
Group, Inc., Griffith Micro Science, Inc. and Isomedix. Certain of the Company's
competitors and potential competitors have substantially greater financial,
marketing, distribution, technical and other resources than the Company or offer
multiple sterilization technologies, which may enable them to address a broader
range of the sterilization requirements of individual customers. In addition,
the Company competes with manufacturers that have or are considering
establishing in-house sterilization capabilities. The Company may also in the
future face competition from suppliers of Cobalt 60 radioisotope, particularly
Nordion, as well as foreign providers of sterilization services. In addition,
Isomedix has announced its intention to enter the California market for
sterilization services, which would increase competition in that market. To the
extent that the Company expands into international markets it will also be faced
with competition from existing providers of sterilization in those markets.
In recent years, price competition in the sterilization services industry
has intensified. The Company may in the future face increased competition from
companies that employ new or improved technologies or that offer sterilization
services that are more effective or less costly than those developed and
marketed by the Company. Such competition could have a material adverse effect
on the Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to continue to
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<PAGE> 43
compete effectively or that the competitive pressures faced by the Company will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company believes that price, processing time, quality of services and
sterilization method are the primary factors upon which it competes. The Company
believes that it compares favorably on all of these factors. In order to be
successful in the future, the Company must continue to respond promptly and
effectively to the challenges of technical change and competitors' innovations.
Performance in these areas will, in turn, depend upon the Company's ability to
attract and retain highly qualified technical and sales personnel. See "Risk
Factors -- Competition."
REGULATORY AND ENVIRONMENTAL MATTERS
The design, construction, use and operation of commercial irradiation
facilities such as those operated by the Company, and byproduct materials used
in such facilities, are extensively regulated by the United States Nuclear
Regulatory Commission (the "NRC"), or in some cases by various state regulatory
agencies and authorities that undertake a comparable regulatory function from
the NRC (the "Agreement States"). In addition, the Company is subject to various
local zoning and permit rules in the construction of its facilities. The
Company's facilities are subject to regulation by additional regulatory bodies
at the federal, state and local levels, depending upon the type of product that
is being irradiated. The Company's facilities are subject to the requirements of
the FDA when irradiating foods, cosmetics or food and drug packaging materials.
In addition, if the Company were to begin processing meat or poultry products,
it would become subject to the requirements of the Food Safety and Inspection
Service of the USDA, which requires preapproval of the irradiation process for
meat and poultry. The Company is also subject to the requirements of other
federal agencies, such as the United States Occupational Safety and Health
Administration and the United States Environmental Protection Agency (the
"EPA"). In addition, the Company is subject to the regulatory requirements of
the state and local agencies in the jurisdictions where the various irradiation
facilities are located.
In addition to extensive regulation by various governmental bodies and
agencies, the Company is subject to standard guidelines and requirements
established by industry organizations and other non-governmental bodies, such as
ISO and the Association for the Advancement of Medical Instrumentation.
Changes in, or reinterpretations of, existing requirements or adoption of
new requirements beyond those described below or the failure at any time to
comply with any applicable material regulations and standards could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not incur
significant costs to comply with laws, regulations and other requirements in the
future or that such laws, regulations and other requirements will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.
NRC REGULATION OF IRRADIATION FACILITIES
The receipt, acquisition, ownership, transfer, possession, use,
transportation and disposal of nuclear byproduct material, as well as the
construction, operation, transfer, closure and decommissioning of commercial
irradiation facilities such as those operated by the Company, are subject to
extensive and rigorous government regulation by the NRC or, in some cases, by
the Agreement States.
The Company believes it has received all licenses and permits necessary for
the conduct of its business. Commercial irradiation facilities, such as those
owned or operated by the Company are subject to both regularly scheduled and
unannounced inspections by the NRC or the Agreement States, with regard to all
aspects of their operation, recordkeeping, compliance with health and safety
regulations and all aspects of the utilization, storage, transfer, possession
and transportation of regulated byproduct materials. Noncompliance with the
health and safety regulations of the NRC and most Agreement States are generally
ranked according to levels of severity. Since 1993, the Company has received
notices of violation from the NRC and the Agreement States concerning items of
noncompliance at four of its facilities, which were not in such categories where
utilized as to be of "significant regulatory concern." The Company believes that
it has taken appropriate corrective actions in response to each such notice. In
addition, the regulatory history of the former
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<PAGE> 44
RTI facilities, as operated by RTI, involved very significant regulatory
compliance problems, which involved among other things, the payment of civil and
criminal penalties by RTI, as well as a facility license suspension for a period
of approximately 80 days. As a consequence of this regulatory history, there can
be no assurance that the former RTI facilities will not be subject to heightened
regulatory scrutiny and inspections for an extended period of time. Such
heightened regulatory scrutiny and a failure by the Company to address concerns
raised from such scrutiny and inspection could result in civil penalties or the
suspension or termination of operations at one or more of the Company's
facilities or could otherwise have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has no
knowledge of any circumstances which would constitute a present significant
violation of any applicable state or federal laws or regulations. However, there
can be no assurance that the Company will not in the future be determined to be
in violation of any such laws or regulations.
The terms and conditions of the Company's licenses may be amended, revised
or modified by reason of changes in the applicable laws, rules, regulations, or
agency orders. Any such action may have a material adverse effect on the
Company's business, financial condition and results of operations.
Violations of or noncompliance with applicable governmental requirements
may result in an enforcement action including, among other things, a notice of
violation, imposition of civil penalties, suspension, modification or revocation
of any applicable license, criminal prosecution, or withholding or recall of the
nuclear byproduct material held by the Company. Any such action would have
material adverse effect on the Company's business, financial condition and
results of operations.
FDA REGULATION OF IRRADIATION FACILITIES
The Company's irradiation facilities are subject to the requirements of the
FDA when irradiating medical devices, foods, cosmetics and food or drug
packaging materials. The FDA implements the Federal Food, Drug, and Cosmetic Act
("FFDCA"), which establishes premarket approval requirements for certain drugs
and medical devices and for all food additives. In addition, the Company is
subject to inspection by the FDA for compliance with the FDA's Good
Manufacturing Practices ("GMP") and other applicable FDA requirements. The FFDCA
also prohibits the introduction into interstate commerce of adulterated or
misbranded drugs, medical devices, foods and cosmetics. Products are deemed
adulterated if, for example, they are manufactured or processed in facilities
that fail to comply with GMP requirements.
Failure by the Company at any time to comply with applicable FDA
requirements could lead the FDA to institute materially adverse enforcement
actions against the Company and/or its customers, including, among other things,
warning letters, recall or seizure of products, fines, injunctions, civil
penalties, total or partial suspension of sterilization operations and criminal
prosecution. Such enforcement actions would also harm the Company's business
reputation and could cause the Company to lose customers to competitors with
better records of regulatory compliance.
Medical Device Regulation. The Company's contract sterilization of medical
devices is subject to pervasive and continuing regulation by the FDA. The FFDCA
defines a medical device, in part, as including an instrument, apparatus,
implement, machine, contrivance, implant or other similar or related article
that is intended for use in the mitigation, treatment, or prevention of disease
in man or other animals. The Company sterilizes finished devices made by other
manufacturers, who commercially distribute them.
The Company's contract sterilization activities render it a device
manufacturer for purposes of the FDA's Quality System Regulation ("QSR"), which
sets forth detailed GMP requirements. As a result, the Company is required to
adhere to the requirements of the QSR that apply to its contract sterilization
activities. The QSR revises the previous GMP regulation (which also applied to
the Company's activities) and imposes certain enhanced requirements that are
likely to increase the cost of compliance. There can be no assurance that the
FDA would find that the Company is in compliance with applicable GMP
requirements or that the Company will be found in compliance at all times in the
future. The Company may also be subject to other FDA requirements such as the
medical device reporting requirements.
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<PAGE> 45
Drug Regulation. Contract sterilizers used by manufacturers of aseptic
filled drug products are subject to applicable provisions of the FDA's drug
GMPs. There can be no assurance that the FDA would find that a contract
sterilizer is in compliance with applicable GMP requirements now or at any time
in the future.
Food Regulation. The FFDCA requires premarket approval for food additives.
Irradiation is regulated by the FDA and is considered to be a food additive.
Irradiation may only be used on foods and food packaging materials in accordance
with the requirements established in the food additive regulations. The existing
food additive regulations only approve the use of irradiation for a limited
variety of foods and food packaging materials that are used during the
irradiation of foods. Food packaging materials that are irradiated prior to
filling are exempt from the premarket approval requirements, provided that the
irradiated food packaging material is still suitable for use and complies with
the applicable indirect food additive regulations. Before the Company could
expand its sterilization services to certain foods or food packaging materials,
the food additive regulations would have to be amended to include the
irradiation of foods or food packaging materials not covered by the existing
regulations. There can be no assurance that the FDA would amend the food
additive regulations or that such regulations would be amended in a timely
manner. Irradiation currently is approved for use on a limited number of foods
and for disinfection of a variety of food packaging materials. Any use of food
irradiation outside of that covered in an existing food additive regulation is
prohibited.
The irradiation of foods must be conducted in accordance with the general
GMP requirements for foods. In addition, special labeling is required to appear
on foods that have been irradiated. The label and labeling of retail packages of
the irradiated food must bear an irradiated logo and a statement such as
"treated with radiation." No special labeling is required, however, on the label
of foods that contain irradiated food ingredients. For example, if a spice is
being irradiated, the irradiation logo and statement would need to appear on the
label of the spice when it is sold directly to the consumer, but no special
labeling would be required on the label of a pasta sauce that uses the
irradiated spice ingredient.
Cosmetics Regulation. Cosmetics are defined under the FFDCA as including
articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced
into, or otherwise applied to the human body or part thereof for cleansing,
beautifying, promoting attractiveness, or altering the appearance. There
currently are no statutory or regulatory provisions, other than the general
adulteration and misbranding provisions, that limit the use of radiation in the
processing or labeling of cosmetics.
ENVIRONMENTAL AND RELATED MATTERS
The Company's operations are subject to regulation by the EPA as well as
state and local governmental agencies. Although there can be no assurance, the
Company believes it currently maintains all licenses and permits necessary to
conduct its current business and that it is in material compliance with
applicable environmental, health and safety laws and regulations. The loss of
any of the Company's licenses or permits could force the Company to suspend or
terminate operations at one or more of its facilities or could otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations.
Pursuant to an Asset Acquisition Agreement effective August 8, 1996 (the
"Asset Agreement"), the Company purchased certain assets of RTI, including
property located in Haw River, North Carolina and leasehold interests in
property located in Salem, New Jersey and Rockaway, New Jersey (the "Rockaway
Property"). The Rockaway Property was previously owned and operated by Thiokol
Chemical Corporation ("Thiokol"), and is listed on the Superfund National
Priorities List ("NPL"). In 1992, RTI and Thiokol entered into an Administrative
Consent Order ("ACO") with the New Jersey Department of Environmental Protection
(the "NJDEP") requiring, among other things, implementation of a groundwater
remedy estimated to exceed $2.0 million in costs.
Under the Asset Agreement, RTI retained ownership of the Rockaway Property
and all associated environmental liabilities as of the closing date. RTI agreed
to indemnify and hold the Company harmless from and against any and all claims
which may arise directly or indirectly from any use or release of hazardous
substances on or under the leased premises as of the closing date. In addition,
the Company obtained a letter from the NJDEP stating that the NJDEP will not
institute either judicial or administrative civil proceedings
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<PAGE> 46
against the Company for any discharge, deposit, release or disposal of hazardous
substances or pollutants existing at the Rockaway Property, emanating therefrom,
or occurring before the closing. However, the Company is required by the NJDEP
to maintain a standby letter of credit in the amount of $500,000, contingent
upon the continued clean up efforts required of RTI. The required amount of the
letter of credit decreases over the life of the leasehold interest, and/or as
the NJDEP requires. The Company believes, based on present information available
to it, including the indemnification from RTI, the ACO among RTI, Thiokol and
the NJDEP, and the NJDEP's letter stating that it will not seek recovery or
remediation costs from the Company for contamination that predates the purchase
of RTI's assets, that it does not face any significant environmental liability
with respect to the Rockaway Property. However, there can be no assurance that
the Company will not be subject to environmental liability relating to the
remediation of the Rockaway Property or liability for losses suffered by
adjacent property owners or other third parties, and such liability could have a
material adverse effect on its business, financial condition or results of
operations.
In the spring of 1985, the Company leased over 400 stainless steel capsules
of radioactive Cesium from the DOE for use at the Company's Decatur, Georgia and
Westerville, Ohio irradiation facilities. On June 6, 1988, the Company
discovered one or more of DOE's Cesium capsules had leaked radioactive Cesium,
which is water soluble, contaminating the Company's Decatur, Georgia facility.
As a result of the contamination, the Company's Decatur irradiation facility was
completely shut down. The decontamination activities were conducted by the DOE
and its contractors, and the Company filed an administrative claim with the DOE
for damages the Company incurred as a result of the Cesium contamination. The
DOE did not pay or deny the Company's claim within the required six month
period. As a result, the Company filed suit against the U.S. government in June
1991. Although the DOE had orally offered to fund the costs of the cleanup, the
government subsequently asserted a substantial counterclaim against the Company
alleging that the Company had been negligent in its handling and use of the
Cesium capsules. A settlement was reached between the parties to this litigation
on April 9, 1997, following a trial and notice of appeals filed by both
SteriGenics, the U.S. government and two of its contractors. The presiding court
entered a stipulation of dismissal effective May 9, 1997. While the litigation
resulted in significant expenses and was a significant diversion of management
attention, the Company is not aware of any ongoing environmental or other legal
liabilities associated with the Cesium incident. However, there can be no
assurance that unspecified third parties, including former employees, would not,
in the future, assert claims against the Company in connection with the
contamination of the Decatur facility. After the decontamination activities were
completed, final survey reports were prepared by both a contractor for DOE and
by a third party consultant on behalf of the Georgia Department of Human
Resources, which regulates such matters in Georgia, to allow for the
unrestricted use of the Decatur facility consistent with the requirements of the
Georgia Department of Human Resources. The documentation and data prepared by
such third party indicated that any residual radioactivity at the Decatur
facility was beneath that of regulatory concern to the applicable regulatory
authority. While the Company no longer uses Cesium in any of its facilities,
there can be no assurance that it will not experience any incidents of
radioactive contamination resulting from its use of Cobalt 60. See "-- Risks of
Operating Facilities Using Radioactive Material."
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company relies on a combination of copyright and trade secret
protection and nondisclosure agreements to protect its proprietary rights. In
addition, the Company has a U.S. patent application pending on its MiniCell.
There can be no assurance, however, that patent and copyright law and trade
secret protection will be adequate to deter misappropriation of its technology,
that any patents issued to the Company will not be challenged, invalidated or
circumvented, that the rights granted thereunder will provide competitive
advantages to the Company, or that the claims under any patent application will
be allowed. Furthermore, there can be no assurance that others will not
independently develop similar processes or designs, duplicate the Company's
processes or design around any patents issued to the Company. The Company may be
subject to or may initiate interference proceedings in the United States Patent
and Trademark Office, which can demand significant financial and management
resources. The process of seeking patent protection can be time consuming and
expensive and there can be no assurance that patents will be issued from
currently pending or
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<PAGE> 47
future applications or that any new patents that may be issued will be
sufficient in scope or strength to provide meaningful protection or any
commercial advantage to the Company.
The Company may in the future receive communications from third parties
asserting that the Company is infringing certain patents and other intellectual
property rights of others or seeking indemnification against such alleged
infringement. No assurance can be given that any of these claims will not result
in protracted and costly litigation, that damages for infringement will not be
assessed or that should it be necessary or desirable to obtain a license
relating to one or more of the Company's services or current or future
technologies, the Company will be able to do so on commercially reasonable terms
or at all.
LEASES AND FINANCING TERMS
The following is a summary of the terms for the Company's leased facilities
and financing for facilities owned by the Company. All obligations of the
Company under the Industrial Revenue Bonds ("IRBs") are secured by certain
assets of the Company and by letters of credit with a bank:
Fremont, California -- Fremont is the location of the Company's
headquarters. The building is subject to a lease with a term that expires in
July 1999.
Corona, California -- The Corona facility is subject to a lease with an
initial lease term that expires in 2004. After the initial lease term the
Company has four five-year renewal options.
Hayward, California -- The Hayward facility is subject to a lease with a
term that expires in 2001.
Tustin, California -- The Tustin facility is subject to a lease with a term
that expires in 2002. The owner of the Tustin property is Charles King &
Associates, of which Charles W. King, Jr., a director of the Company, is an
affiliate. See "Certain Transactions."
Fort Worth I, Texas -- The Fort Worth I facility is owned by the Company.
The facility was financed through the issuance of two IRBs. These IRBs were
issued in 1985 in an aggregate amount of $4.6 million, with interest payable
monthly and principal due in full in 2005. The interest rate on the IRBs adjusts
monthly, based upon market conditions. The interest rate as of June 30, 1997 was
4.0%.
Fort Worth II, Texas -- The Fort Worth II facility is owned by the Company.
The Company financed this facility through the issuance of a $5.0 million IRB in
the second quarter of fiscal 1998. The interest rate as of July 30, 1997 (the
date of the issuance of the IRB) was 3.9%.
Schaumburg, Illinois -- The Schaumburg facility is subject to a lease with
a term that expires in 2002. The owner of the Schaumburg property is Charles
King & Associates, of which Charles W. King, Jr., a director of the Company, is
an affiliate. See "Certain Transactions."
Gurnee, Illinois -- The Gurnee facility is owned by the Company. The
facility was financed through the issuance of an IRB. The IRB was issued in 1996
in an aggregate amount of $7.8 million. The IRB has a 20 year maturity with an
18 year repayment schedule with interest payable monthly. The interest rate is
adjustable weekly, based upon market conditions. The interest rate as of June
30, 1997 was 4.4%.
Westerville, Ohio -- The Westerville facility is owned by the Company. The
facility was financed through the issuance of an IRB. The IRB was issued in 1984
in an aggregate amount of $4.9 million with interest payments due monthly and
principal due in 2004. The interest rate is adjustable monthly, based upon
market conditions. The interest rate as of June 30, 1997 was 4.0%.
Charlotte, North Carolina -- The Charlotte facility is owned by the
Company. The facility was financed through the issuance of an IRB. The IRB was
issued in 1996 in the aggregate amount of $9.0 million and has a 20 year
maturity with an 18 year repayment schedule with interest payable monthly. The
interest rate is adjustable weekly, based upon market conditions. The interest
rate as of June 30, 1997 was 4.4%.
Haw River, North Carolina -- The Haw River facility is owned by the
Company. There is no debt outstanding on this facility.
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Rockaway, New Jersey -- The Rockaway facility is leased from RTI. The lease
is for a six year period beginning in August 1996, with a five year renewal
option exercisable by the Company. The Company has an option to purchase the
Rockaway facility at the end of the initial lease term. See "Risk Factors --
Environmental Risks."
Salem, New Jersey -- The Salem facility is a leased facility. The lease is
a 20 year lease which expires in the year 2004. All lease payments have been
prepaid and there are no further payments due on the lease. The lessor is the
issuer of the associated IRB financing which has a fixed interest rate of 10.0%
with interest payable monthly and principal repaid annually through 1999. The
proceeds of the IRB financing were used to construct and equip the leased
premises.
Decatur, Georgia -- The Decatur facility is owned by the Company. The
facility was financed through issuance of an IRB. The IRB was issued in 1985 in
the aggregate amount of $5.3 million with interest payments due monthly and
principal due in full in 2005. The interest rate is adjustable monthly, based
upon market conditions and was 4.0% as of June 30, 1997. The facility is
currently being leased to a third party. See "Risk Factors -- Environmental
Risks."
EMPLOYEES
At June 30, 1997, the Company had 283 employees. The Company's progress to
date has been highly dependent upon the skills of its key technical and
management personnel, many of whom would be difficult to replace. To reach its
future business objectives, the Company will need to hire additional qualified
personnel in the areas of sales, engineering and management. There can be no
assurance that the Company will be able to hire such personnel, as the Company
must compete with other companies, academic institutions, government entities
and other agencies. The number of persons with experience in the Gamma
sterilization industry is limited, and as a result, competition for such
personnel is intense. There can be no assurance that the Company can retain such
personnel or that it can attract or retain other highly qualified personnel in
the future. No employee of the Company is represented by a collective bargaining
agreement, nor has the Company experienced any work stoppage. The Company
considers its relations with its employees to be good. See "Risk
Factors -- Dependence on Key Personnel."
LITIGATION
The Company is not currently subject to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------
<S> <C> <C>
James F. Clouser................... 46 President, Chief Executive Officer and
Director
Eric W. Beers...................... 37 Senior Vice President of Engineering
Donald A. Currie................... 40 Vice President of Operations, Non-medical
Eugene C. Davis.................... 49 Vice President of Operations, Western Region
Lisa C. Foster..................... 36 Vice President of Quality Assurance
David E. Meyer..................... 46 President of Medical Products Division
Edward M. Miller, Jr............... 46 Vice President of Finance
Charles W. King, Jr................ 62 Chairman of the Board
Walter G. Kortschak(1)............. 38 Director
Thomas F. Stephenson(1)............ 55 Director
</TABLE>
- ---------------
(1) Member of Audit Committee and Compensation Committee.
All directors hold office until the next annual meeting of the stockholders
and until their successors have been duly elected and qualified. Officers are
elected by and serve at the direction of the Board of Directors. There are no
family relationships among the directors or officers of the Company.
James F. Clouser joined SteriGenics in June 1988 as President and Chief
Executive Officer. Previously, from 1984 to 1988 he served as Chief Operating
Officer of Attain, Inc., a high technology start-up manufacturer of automatic
test equipment for semiconductor devices. Mr. Clouser has a Bachelor of Science
degree in Electrical Engineering from Pennsylvania State University, a Masters
of Business Administration degree in Finance from Wayne State University, and a
Masters of Science degree from Rochester Institute of Technology.
Eric W. Beers joined SteriGenics in February 1994 as Senior Vice President
of Engineering. Prior to joining SteriGenics, Mr. Beers held several engineering
and managerial positions with Nordion, a supplier of Cobalt 60 and irradiation
equipment, since 1980, the most recent of which was as manager of the Industrial
Irradiation Engineering Department. Mr. Beers has a degree in
Mechanical/Aeronautical Engineering from Carleton University in Canada and is a
Member of the Association of Professional Engineers of Ontario, Canada.
Donald A. Currie joined SteriGenics in March 1991 as General Manager of the
Westerville facility. In August 1994, Mr. Currie became Director of Operations
overseeing the Westerville and Schaumburg facilities and was promoted to Vice
President of Operations, Non-medical in November 1996. Mr. Currie has a Bachelor
of Arts degree in Materials and Operations Management from Michigan State
University.
Eugene C. Davis joined SteriGenics in April 1994 as Vice President of
Quality Assurance and Regulatory Affairs. In January 1996, he became Vice
President of Sales and Marketing, and in July 1997, he became the Vice President
of Operations for the Western Region. From 1979 to 1993 Mr. Davis held various
positions with the Opthalmic Surgical Products Division of Optical Radiation
Corporation, an opthalmic surgical products company, the most recent of which
was Vice President of Quality Assurance. Mr. Davis has a Bachelor of Arts degree
from California State Polytechnic University at Pomona.
Lisa C. Foster joined SteriGenics in January 1989 as Quality Assurance
Manager at the Decatur facility. In February 1990, Ms. Foster transferred to the
Schaumburg facility as Quality Assurance Manager. Later that year she joined the
Corporate staff, assuming the responsibility of Corporate Quality Assurance
Manager. In April 1992, Ms. Foster was promoted to Director of Corporate Quality
Assurance and in June 1997 was promoted to Vice President of Quality Assurance.
Ms. Foster has a Bachelor of Science degree in Food and Nutrition from
Mississippi University for Women and a Masters of Science degree in Food
Chemistry from Mississippi State University.
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<PAGE> 50
David E. Meyer joined SteriGenics in November 1989 as General Manager of
the Schaumburg facility and in May 1991 was promoted to Senior Vice President of
Operations. In July 1997, Mr. Meyer was promoted to President of Medical
Products Division. From 1976 to 1989, Mr. Meyer held various positions with the
Barber-Greene Company, a producer of road construction equipment, most recently
that of Manufacturing Manager. Mr. Meyer has a Bachelor of Science degree in
Business Administration from Valparaiso University and a Masters of Science
degree in Management from Aurora University.
Edward M. Miller, Jr. joined SteriGenics in June 1994 as Vice President of
Finance and Assistant Secretary. Prior to joining SteriGenics, Mr. Miller served
as Vice President Finance and Corporate Secretary for Quality Technologies
Corporation, a producer of optoelectronic components, since 1990. Quality
Technologies Corporation was a subsidiary of General Instrument Corporation
until November 1990. Mr. Miller has a Bachelor of Arts degree in Finance from
Ohio University.
Charles W. King, Jr., a founder of the Company, has been Chairman of the
Board of SteriGenics since its inception. Mr. King is a private investor and
real estate developer and has been a Managing Partner in Charles King &
Associates since 1965.
Walter G. Kortschak became a director of the Company in September 1993. Mr.
Kortschak is a General Partner of Summit Partners, L.P., where he has been
employed since June 1989. Summit Partners and its affiliates manage a number of
venture capital funds, including Summit Ventures III, L.P. and Summit Investors
II, L.P., which are principal stockholders of the Company. Mr. Kortschak also
serves as a director of Aspec Technology, Inc., Diamond Multimedia Systems,
Inc., HMT Technology Corporation, Mecon, Inc., and Simulation Sciences Inc. Mr.
Kortschak formerly served as a director of McAfee Associates, Inc.
Thomas F. Stephenson became a director of the Company in September 1993.
Mr. Stephenson is a General Partner of Sequoia Capital, where he has been
employed since 1988. Sequoia Capital and its affiliates manage a number of
venture capital funds, including Sequoia Capital Growth Fund and Sequoia
Technology Partners III, which are principal stockholders of the Company. Mr.
Stephenson is a director of Sequana Therapeutics and several private companies.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
cash and non-cash compensation earned during the fiscal year ended March 31,
1997 by the Company's Chief Executive Officer and each of the Company's other
four highest paid executive officers whose total compensation for services in
all capacities to the Company exceeded $100,000 during such year (the "Named
Officers").
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1997
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
------------------------ OPTIONS
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) (#)
- ------------------------------------------------------- ---------- --------- ------------
<S> <C> <C> <C>
James F. Clouser....................................... 179,667 89,834 --
President, Chief Executive Officer and Director
Eric W. Beers.......................................... 95,918 43,163 5,000
Senior Vice President of Engineering
Eugene C. Davis........................................ 99,105 39,642 5,000
Vice President of Operations, Western Region
David E. Meyer......................................... 96,088 48,044 5,000
President of Medical Products Division
Edward M. Miller, Jr................................... 96,586 19,317 5,000
Vice President of Finance
</TABLE>
49
<PAGE> 51
STOCK OPTIONS GRANTED IN FISCAL 1997
The following table provides information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended March 31,
1997 to the Named Officers:
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES % OF TOTAL EXERCISE APPRECIATION FOR
UNDERLYING OPTIONS PRICE PER OPTION TERM (2)
OPTIONS GRANTED TO SHARE EXPIRATION ----------------
GRANTED(#) EMPLOYEES ($)(1) DATE 5%($) 10%($)
---------- ------------ --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
James F. Clouser................ -- -- -- -- -- --
Eric W. Beers................... 5,000 5.15 4.90 5/31/06 15,408 39,047
Eugene C. Davis................. 5,000 5.15 4.90 5/31/06 15,408 39,047
David E. Meyer.................. 5,000 5.15 4.90 5/31/06 15,408 39,047
Edward M. Miller, Jr............ 5,000 5.15 4.90 5/31/06 15,408 39,047
</TABLE>
- ---------------
(1) All options were granted at an exercise price equal to the fair market value
of the Company's Common Stock as determined by the Board of Directors of the
Company on the date of grant. The exercise price may be paid in cash, check,
promissory note or in shares of the Company's Common Stock valued at fair
market value on the exercise date. The options vest with respect to 24% of
the shares one year after the option grant date and with respect to 2% of
the shares on a monthly basis for the next 38 months.
(2) The assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future Common Stock
price. Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock, overall market conditions and the
option holders' continued employment through the vesting period. This table
does not take into account any appreciation in the price of the Common Stock
from the date of grant to the current date. Unless the market price of the
Common Stock appreciates over the option term, no value will be realized
from the option grants made to the Named Officers.
OPTION EXERCISES AND FISCAL 1997 YEAR-END VALUES
No options were exercised by the Named Officers in fiscal 1997. The
following table provides the specified information concerning unexercised
options held as of March 31, 1997 by the Named Officers:
FISCAL 1997 YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT MARCH 31, 1997(#) AT MARCH 31, 1997($)(1)
-------------------- -----------------------
NAME VESTED UNVESTED VESTED UNVESTED
- ---------------------------------------------------- ------- -------- --------- --------
<S> <C> <C> <C> <C>
James F. Clouser.................................... 289,043 10,957 1,012,584 39,445
Eric W. Beers....................................... 7,900 14,600 28,440 52,560
Eugene C. Davis..................................... 6,600 13,400 23,760 48,240
David E. Meyer...................................... 21,950 10,550 77,270 37,980
Edward M. Miller, Jr................................ 10,200 17,300 36,720 62,280
</TABLE>
- ---------------
(1) Calculated by subtracting the exercise price from the estimated fair market
value of the underlying securities as of March 31, 1997 of $8.50 per share.
50
<PAGE> 52
STOCK PLANS
1997 EQUITY INCENTIVE PLAN
The Company's 1997 Equity Incentive Plan (the "Plan") was adopted by the
Board on June 23, 1997 and amended on July 24, 1997, subject to stockholder
approval. The number of shares of Common Stock reserved for issuance under the
Plan is equal to (i) 1,025,000 plus (ii) the aggregate number of shares
remaining available for grants under the Company's Second Amended and Restated
1986 Stock Option Plan (the "Predecessor Plan") on June 23, 1997 plus (iii) the
aggregate number of shares remaining available for grants under the Company's
1997 Stock Plan. As of June 30, 1997, no options had been granted under the
Plan. Since June 30, 1997, options for an aggregate of 187,500 shares have been
granted under the Plan. Under the Plan, employees, non-employee members of the
Board ("Outside Directors") and consultants may be awarded options to purchase
shares of Common Stock, stock appreciation rights ("SARs"), restricted shares or
stock units. Options may be incentive stock options designed to satisfy Section
422 of the Internal Revenue Code of 1986, as amended (the "Code") or
nonstatutory stock options not designed to meet such requirements. If restricted
shares or shares issued upon the exercise of options granted under this Plan or
the Predecessor Plan are forfeited, then such shares will again become available
for awards under the Plan. If stock units, options or SARs granted under this
Plan or the Predecessor Plan are forfeited or terminate for any other reason
before being exercised, then the corresponding shares will again become
available for awards under the Plan. As of January 1 of each year, commencing
with the year 1999, the number of shares reserved for issuance under the Plan
will be increased automatically by the lesser of (i) 5% of the total number of
shares of Common Stock then outstanding or (ii) 250,000 shares.
The Plan is administered by the Company's Compensation Committee (the
"Committee"). The Committee has the complete discretion to determine which
eligible individuals are to receive any award, determine the type, number,
vesting requirements and other features and conditions of such award, interpret
the Plan and make all other decisions relating to the operation of the Plan.
The exercise price for options granted under the Plan may be paid in cash
or in outstanding shares of Common Stock. Options may also be exercised by using
a cashless exercise method, a pledge of shares to a broker or promissory note.
The payment for the award of newly issued restricted shares will be made in
cash, by promissory note or the rendering of past or future services.
The Committee has the authority to modify, extend or assume outstanding
options and SARs or may accept the cancellation of outstanding options or SARs
in return for the grant of new options or SARs for the same or a different
number of shares and at the same or a different exercise price.
Each Outside Director who first becomes a member of the Board after the
date of the offering will receive a one-time option grant for 15,000 shares of
Common Stock upon taking office. Upon the conclusion of each regular annual
meeting of the Company's stockholders held in the 1998 calendar year and
thereafter, each Outside Director who will continue to serve as a Board member
will receive an option for 3,000 shares of Common Stock, except that an Outside
Director will not receive an annual grant for 3,000 shares in the same year he
or she received the one-time option grant for 15,000 shares.
The Board may decide to implement a program that allows an Outside Director
to elect to receive his or her annual retainer payments and meeting fees from
the Company in the form of cash, options, restricted shares, stock units or a
combination thereof. The number and terms of such options, restricted shares or
stock units to be granted to Outside Directors in lieu of annual retainers and
meeting fees will be calculated in a manner determined by the Board.
The Committee may determine that upon a Change in Control (as defined in
the Plan) an award of an option, SAR, stock units or restricted shares will
become fully exercisable as to all shares subject to such award. A Change in
Control includes a merger or consolidation of the Company after which the
Company's then current stockholders own less than 50% of the surviving
corporation, sale of all or substantially all of the assets of the Company, a
proxy contest that results in replacement of more than one-third of the
directors over a 24-month period or acquisition of 30% or more of the Company's
outstanding stock by a person other than a trustee of any of the Company's
employee benefit plans, a corporation owned by the stockholders of the
51
<PAGE> 53
Company in substantially the same proportions as their stock ownership in the
Company or a person who owns stock of the Company before the effective date of
the offering. In the event of a merger or other reorganization, outstanding
options, SARs, restricted shares and stock units will be subject to the
agreement of merger or reorganization, which may provide for the assumption of
outstanding awards by the surviving corporation or its parent, for their
continuation by the Company (if the Company is a surviving corporation), for
accelerated vesting and accelerated expiration or for settlement in cash.
The Board may amend or terminate the Plan at any time. Amendments may be
subject to stockholder approval to the extent required by applicable laws.
1997 STOCK PLAN
The Company's 1997 Stock Plan (the "Stock Plan") was adopted by the Board
on July 24, 1997, subject to stockholder approval. The number of shares of
Common Stock reserved for issuance under the Stock Plan is equal to 175,000
shares. To the extent that any shares of Common Stock remain available for grant
after July 24, 1997, such shares shall be incorporated into the Company's Plan,
as discussed in the Plan description above. On July 24, 1997, the Board granted
a series of options under the Stock Plan such that options for 164,250 shares
are currently outstanding. However, the Board does not intend to grant any
additional options under the Stock Plan.
Only employees of the Company who are not executive officers may
participate in the Stock Plan. Under the Stock Plan, employees may be awarded
options to purchase shares of Common Stock or restricted stock. Options may be
incentive stock options designed to satisfy Section 422 of the Code or
nonstatutory stock options not designed to meet such requirements. Upon a Change
in Control (as defined in the Stock Plan), the options become fully vested and
the Company's repurchase right lapses entirely, unless the options are assumed
by, or the repurchase right is assigned to, the acquiring entity, in which case
no acceleration of vesting occurs.
1997 EMPLOYEE STOCK PURCHASE PLAN
The Board adopted the Company's 1997 Employee Stock Purchase Plan (the
"Purchase Plan") on June 23, 1997, subject to stockholder approval. A total of
400,000 shares of Common Stock have been reserved for issuance under the
Purchase Plan. The Purchase Plan is intended to qualify under Section 423 of the
Code. Each calendar year, two overlapping offering periods consisting of 24
months will commence on April 1 and October 1 (except that the first offering
period will commence on the effective date of the offering and end on September
30, 1999). Each offering period contains four six-month accumulation periods,
with purchases occurring at the end of each six-month accumulation period.
However, the initial accumulation period will begin on the effective date of the
offering and end on March 31, 1998. The Purchase Plan will be administered by
the Committee. Each employee will be eligible to participate if he or she is (i)
employed by the Company for at least 20 hours per week for more than five months
per year and (ii) is an employee on the effective date of the offering or has
been employed by the Company for at least three consecutive months. The Purchase
Plan permits each eligible employee to purchase Common Stock through payroll
deductions, which may not exceed 15% of an employee's compensation, nor more
than 5,000 shares on any purchase date. The price of each share of Common Stock
purchased under the Purchase Plan will be 85% of the lower of (i) the fair
market value per share of Common Stock on the date immediately prior to the
first date of the applicable accumulation period (except that in the case of the
first offering period, the price per share will be the price offered to the
public in the offering) or (ii) the date at the end of the applicable
accumulation period. Employees may end their participation in the Purchase Plan
at any time during the accumulation period, and participation ends automatically
upon termination of employment with the Company. In the event of a merger or
consolidation, all offering periods and accumulation periods will terminate and
each outstanding purchase right will be exercised. The Board may amend or
terminate the Purchase Plan at any time. However, the Board may not, without
stockholder approval, increase the number of shares of Common Stock reserved for
issuance under the Purchase Plan.
52
<PAGE> 54
COMPENSATION OF DIRECTORS
Directors receive no remuneration for serving on the Board of Directors,
although directors are reimbursed for all reasonable expenses incurred by them
in attending Board and Committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee consists of Messrs. Kortschak and Stephenson.
Neither of these individuals has at any time since the formation of the Company
been an officer or employee of the Company. No executive officer of the Company
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law (the
"Delaware Law"), the Company has adopted provisions in its Certificate of
Incorporation which provide that directors of the Company shall not be
personally liable for monetary damages to the Company or its stockholders for a
breach of fiduciary duty as a director, except for liability as a result of (i)
a breach of the directors' duty of loyalty to the Company or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) an act related to the unlawful stock
repurchase or payment of a dividend under Section 174 of the Delaware Law and
(iv) transactions from which the director derived an improper personal benefit.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the fullest extent permitted under the Delaware Law. The Company
has entered into separate indemnification agreements with its officers and
directors which are, in some cases, broader than the specific indemnification
provisions contained in the Delaware Law. The indemnification agreements require
the Company, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers, to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
53
<PAGE> 55
CERTAIN TRANSACTIONS
AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
The Company has leased its Tustin, California facility since April 1980
from Charles King & Associates, an entity of which Charles W. King, Jr., a
director and major stockholder of the Company, is an affiliate. In June 1997,
the Company executed a five year lease, with a term that expires in the year
2002, that provides for payments of $19,750 per month with 3% annual rent
increases in years two through five of the lease. Lease payments were $219,000
in each of the fiscal years ended March 31, 1995, 1996 and 1997.
The Company has leased its Schaumburg, Illinois facility since January 1982
from Charles King & Associates, an entity of which Charles W. King, Jr., a
director and major stockholder of the Company, is an affiliate. In June 1997,
the Company executed a five year lease, with a term that expires in the year
2002, that provides for payments of $13,100 per month with 3% annual rent
increases in years two through five of the lease. Lease payments were $253,000
in each of the fiscal years ended March 31, 1995, 1996 and 1997.
Through June 29, 1997, Charles W. King, Jr. guaranteed bank letters of
credit related to IRBs issued by the Company for approximately $31.5 million for
several of the Company's facilities. These IRBs have 20 year terms with interest
rates as of June 29, 1997 of 4.0% and 4.4% adjustable based upon market
conditions. Mr. King received no consideration for the guarantee of these IRBs.
As of June 30, 1997, Mr. King continues to guarantee a bank letter of
credit related to one IRB issued by the Company for approximately $5.3 million
for one of the Company's facilities. This IRB has a 20 year term with an
interest rate as of June 30, 1997 of 4.0%, adjustable based upon market
conditions. Mr. King received no consideration for the guarantee of this IRB.
The Company intends to use $1.5 million of the net proceeds of the offering
to redeem the 15,000 shares of Series A Preferred Stock currently outstanding.
The Charles W. King, Jr. Revocable Trust, of which Mr. King is the trustee and
beneficiary, is the sole holder of the Series A Preferred Stock. See "Use of
Proceeds."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans between the
Company and its officers, directors, principal stockholders and their affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested outside directors on the Board of
Directors, and will continue to be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
54
<PAGE> 56
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1997, and as adjusted to
reflect the sale of the shares offered hereby, (i) by each person who is known
by the Company to own beneficially more than 5% of the Company's Common Stock,
(ii) by each of the executive officers named in the table under "Executive
Compensation" and by each of the Company's directors, and (iii) by all officers
and directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL(1)(2)
------------------------
NUMBER OF SHARES BEFORE THE AFTER THE
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- ----------------------------------------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Summit Partners, L.P.(3)............................. 736,630 15.3% 10.8%
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301
Sequoia Capital(4)................................... 368,315 7.6 5.4
3000 Sand Hill Road
Suite 280, Building 4
Palo Alto, CA 94025
Charles W. King, III Trust(5)........................ 1,006,454 20.8 14.7
c/o King Asset Management Corporation
1999 South Bascom Avenue, Suite 925
Campbell, CA 95008
Michael J. King Trust(5)............................. 1,006,454 20.8 14.7
c/o King Asset Management Corporation
1999 South Bascom Avenue, Suite 925
Campbell, CA 95008
Patricia Morley King Trust(5)........................ 1,006,454 20.8 14.7
c/o King Asset Management Corporation
1999 South Bascom Avenue, Suite 925
Campbell, CA 95008
Charles W. King, Jr. Revocable Trust(6).............. 572,000 11.8 8.4
c/o King Asset Management Corporation
1999 South Bascom Avenue, Suite 925
Campbell, CA 95008
James F. Clouser(7).................................. 291,072 5.7 4.1
Eric W. Beers(8)..................................... 11,050 * *
Eugene C. Davis(9)................................... 9,500 * *
David E. Meyer(10)................................... 24,350 * *
Edward M. Miller, Jr.(11)............................ 13,850 * *
Charles W. King, Jr.(12)............................. 572,000 11.8 8.4
Walter G. Kortschak(13).............................. 736,630 15.3 10.8
Thomas F. Stephenson(14)............................. 368,315 7.6 5.4
All Officers and Directors as a group (11
persons)(15)....................................... 2,050,057 39.4 28.5
</TABLE>
- ---------------
* Represents less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of June 30, 1997 are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing percentage ownership of each other person. The
address for each listed director and officer is c/o SteriGenics
International, Inc., 4020 Clipper Court, Fremont, California 94538. Except
as set forth in the footnotes to this table and subject to applicable
community property laws, each person has sole voting and investment power
with
55
<PAGE> 57
respect to the shares set forth opposite such person's name. Information
with respect to beneficial ownership is based upon the Company's stock
records and data supplied to the Company by the holders.
(2) Percentage ownership is based on 4,829,039 shares of Common Stock
outstanding on June 30, 1997 and 6,829,039 shares of Common Stock
outstanding after completion of the offering. Shares owned do not include
15,000 shares of Series A Redeemable Preferred Stock, all shares of which
are owned by Charles W. King, Jr. Revocable Trust and none of which are
convertible into Common Stock. See "Description of Capital Stock." Assumes
no exercise of the Underwriters' over-allotment option.
(3) Includes 727,095 and 9,535 shares of Common Stock held of record by Summit
Ventures III, L.P. and Summit Investors II, L.P., respectively.
(4) Includes 346,216 and 22,099 shares of Common Stock held of record by
Sequoia Capital Growth Fund and Sequoia Technology Partners III,
respectively.
(5) The Charles W. King, III Trust, the Michael J. King Trust and the Patricia
Morley King Trust (the "Selling Stockholders") have each granted to the
Underwriters an over-allotment option to purchase up to 100,000 additional
shares of Common Stock. See "Underwriting." If the over-allotment option is
exercised in full, the number of shares beneficially owned by each of the
Selling Stockholders will be reduced to 906,454 shares, or 13.3% of shares
outstanding.
(6) Does not include 15,000 shares of Series A Preferred Stock, all shares of
which are owned by the Charles W. King, Jr., Revocable Trust and none of
which are convertible into Common Stock. Charles W. King, Jr., a director
of the Company, is the trustee and beneficiary of this trust.
(7) Includes 291,072 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of June 30, 1997.
(8) Includes 11,050 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of June 30, 1997.
(9) Includes 9,500 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of June 30, 1997.
(10) Includes 24,350 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of June 30, 1997.
(11) Includes 13,850 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of June 30, 1997.
(12) Includes 572,000 shares held by the Charles W. King, Jr. Revocable Trust.
Mr. King does not have any beneficial ownership of the Charles W. King, III
Trust, the Michael J. King Trust or the Patricia Morley King Trust.
(13) Includes 727,095 and 9,535 shares of Common Stock held of record by Summit
Ventures III, L.P. and Summit Investors II, L.P., respectively. Mr.
Kortschak, a director of the Company, is a general partner of Summit
Partners, L.P., which, with its affiliates, manages Summit Ventures III,
L.P. and Summit Investors II, L.P. (collectively, the "Summit Entities").
Mr. Kortschak disclaims beneficial ownership of shares held by the Summit
Entities, except for his pecuniary interest therein.
(14) Includes 346,216 and 22,099 shares of Common Stock held of record by
Sequoia Capital Growth Fund and Sequoia Technology Partners III,
respectively. Mr. Stephenson, a director of the Company, is a general
partner of Sequoia Partners (CF), which, with its affiliates, manages
Sequoia Capital Growth Fund and Sequoia Technology Partners III
(collectively, the "Sequoia Entities"). Mr. Stephenson disclaims beneficial
ownership of shares held by the Sequoia Entities, except for his pecuniary
interest therein.
(15) Includes 373,112 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of June 30, 1997.
56
<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 15,000,000 shares of Common Stock, $0.001 par value, and
1,000,000 shares of Preferred Stock, $0.001 par value.
COMMON STOCK
As of June 30, 1997, there were 4,829,039 shares of Common Stock
outstanding (assuming the conversion of the Company's Convertible Preferred
Stock into 1,772,727 shares of Common Stock) that were held of record by
approximately 29 stockholders. There will be 6,829,039 shares of Common stock
outstanding (assuming no exercise of the Underwriters' over-allotment option and
assuming no exercise after June 30, 1997 of outstanding options) after giving
effect to the sale of the shares of Common Stock to the public offered hereby
and the conversion of the Company's Convertible Preferred Stock into 1,772,727
shares of Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution, or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of Convertible
Preferred Stock will convert into one share of Common Stock. Additionally, all
15,000 outstanding shares of Series A Redeemable Preferred Stock will be
redeemed by the Company for $100.00 per share. See "Use of Proceeds" and
"Capitalization." Thereafter, the Board of Directors will have the authority to
issue up to 1,000,000 shares of Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. At
present, the Company has no plans to issue any of the Preferred Stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
The Certificate of Incorporation provides that, effective upon the closing
of this offering, all stockholder actions must be effected at a duly called
meeting and not by a consent in writing. Further, provisions of the Bylaws and
the Certificate of Incorporation provide that the stockholders may amend the
Bylaws or certain provisions of the Certificate of Incorporation only with the
affirmative vote of the holders of 75% of the Company's capital stock. These
provisions of the Certificate of Incorporation and Bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Directors and in the
policies formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal. The provisions also
57
<PAGE> 59
are intended to discourage certain tactics that may be used in proxy fights.
However, such provisions could have the effect of discouraging others from
making tender offers for the Company's shares and, as a consequence, they also
may inhibit fluctuations in the market price of the Company's shares that could
result from actual or rumored takeover attempts. Such provisions also may have
the effect of preventing changes in the management of the Company. See "Risk
Factors -- Antitakeover Effect of Certain Charter and Bylaw Provisions."
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware Law ("Section 203"),
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (i) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this offering, under that certain Investors' Rights Agreement dated
September 20, 1993, entities affiliated with Summit Partners, L.P. and Sequoia
Capital holding approximately 1,104,945 shares of Common Stock (the "Registrable
Securities") will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. Under the terms of the agreement
between the Company and the holders of such Registrable Securities, if the
Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, such holders are entitled to notice of such
registration and are entitled to include their Registrable Securities.
Additionally, such holders are also entitled to certain demand registration
rights pursuant to which they may require the Company to file a registration
statement under the Securities Act at its expense with respect to their
Registrable Securities, and the Company is required to use its best efforts to
effect such registration. Further, holders may require the Company to file
additional registration statements on Form S-3 at the Company's expense. All of
these registration rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration and the right of the Company not to effect
a requested registration within six months following an offering of the
Company's securities, including the offering made hereby.
58
<PAGE> 60
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be U.S. Stock
Transfer Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering and based on the shares outstanding as of
June 30, 1997, there will be 6,829,039 shares of Common Stock outstanding. Of
these shares, the 2,000,000 shares sold in the offering (assuming no exercise of
the underwriters' over-allotment option) will be freely tradeable without
restriction or further registration unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining shares will be "restricted securities" as that term is defined under
Rule 144 (the "Restricted Shares"). Sales of Restricted Shares in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the Common Stock.
Of the Restricted Shares, an aggregate of 5,327,445 shares of Common Stock
(including 563,838 shares issuable upon exercise of vested stock options) will
be eligible for sale in the public market subject to Rule 144 and Rule 701 under
the Securities Act and the expiration of a contractual lock-up ending 180 days
after the date of the Prospectus, unless an earlier release is consented to, in
whole or in part, by PaineWebber Incorporated.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year, including persons
who may be deemed to be "affiliates" of the Company, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 68,290 shares immediately after the
offering); or (ii) the average weekly trading volume of the Common Stock as
reported through the Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the Restricted Shares proposed to be sold for at least two
years (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares issued pursuant to certain compensatory
benefit plans and contracts and prior to the date the issuer becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subject to certain limitations on the aggregate offering
price of a transaction and certain other conditions, commencing 90 days after
the issuer becomes subject to the reporting requirements of the Exchange Act, in
reliance upon Rule 144, but without compliance with certain restrictions,
including the holding period requirements, contained in Rule 144. In addition,
the Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual lock-up restrictions described above, beginning
90 days after the date of this Prospectus, may be sold by persons other than
affiliates subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period requirements.
The Company has agreed that it will not issue, sell or grant options to
purchase or otherwise dispose of any shares of its Common Stock or securities
convertible into or exchangeable for its Common Stock, except in connection with
the exercise of options or other rights outstanding on the date of this
Prospectus or pursuant to the Company's stock plans, for a period of 180 days
after the date of this Prospectus, without the prior written consent of
PaineWebber Incorporated.
The Company intends to register on a Form S-8 registration statement under
the Securities Act, during the 180-day lock-up period, a total of 2,312,416
shares of Common Stock which are subject to outstanding
59
<PAGE> 61
options or reserved for issuance under the Company's stock option plans and
stock purchase plan. Such registration will permit the resale of shares so
registered by non-affiliates in the public market without restriction under the
Securities Act.
Prior to the offering, there has been no public market for the Common
Stock, and any sale of substantial amounts of Common Stock in the open market
may adversely affect the market price of the Common Stock offered hereby. In
addition, beginning 180 days after the date of this Prospectus, the holders of
approximately 1,104,945 shares of Common Stock are entitled to certain rights
with respect to registration of such shares under the Securities Act.
Registration of such shares under the Securities Act would result in such shares
becoming freely tradeable without restriction under the Securities Act (except
for shares purchased by affiliates of the Company) immediately upon the
effectiveness of such registration. See "Description of Capital Stock --
Registration Rights." If such holders, by exercising their demand registration
rights, cause a large number of securities to be registered and sold in the
public market, such sales could have an adverse effect on the market price for
the Common Stock. If the Company were to include in a Company-initiated
registration, any registrable securities pursuant to the exercise of piggyback
registration rights, such sales may have an adverse effect on the Company's
ability to raise needed capital.
60
<PAGE> 62
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom PaineWebber
Incorporated, Piper Jaffray Inc. and Wheat, First Securities, Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement among the Company, the
Selling Stockholders and the Underwriters (the "Underwriting Agreement"), to
purchase from the Company, and the Company has agreed to sell to the
Underwriters the number of shares of Common Stock set forth opposite their names
below at the price per share set forth on the cover page of this Prospectus
under "Proceeds to Company."
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITERS SHARES
------------------------------------------------------------ --------
<S> <C>
PaineWebber Incorporated....................................
Piper Jaffray Inc. .........................................
Wheat, First Securities, Inc................................
----------
Total.................................................. 2,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares of Common Stock listed above are subject to
certain conditions. The Underwriters are committed to purchase all of the shares
of Common Stock offered by this Prospectus, (other than those covered by the
over-allotment option described below), if any are purchased. The Underwriting
Agreement provides that, in the event of a default by an Underwriter, in certain
circumstances, the purchase commitments of non-defaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the public
offering price set forth on the cover of this Prospectus and to certain dealers
at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession to other
dealers not in excess of $ per share. After the initial public offering
of the Common Stock, the public offering price, the concessions to selected
dealers and reallowance to other dealers may be changed by the Representatives.
The Selling Stockholders have granted the Underwriters an option,
exercisable during the 30 business day period after the date of this Prospectus,
to purchase up to an additional 300,000 shares of Common Stock at the initial
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent the Underwriters exercise
such option, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as the percentage it was obligated to purchase pursuant
to the Underwriting Agreement. The Underwriters may exercise such option only to
cover over-allotments, if any, made in connection with the offering of the
shares of Common Stock offered hereby.
The Representatives have informed the Company that they do not expect the
Underwriters to confirm sales of Common Stock to any account over which they
exercise discretionary authority.
The Company and the Selling Stockholders, in the event the over-allotment
option is exercised, have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Company, each of its directors and executive officers and stockholders
holding approximately 4,763,607 shares of Common Stock have agreed, without the
prior written consent of PaineWebber Incorporated, not to offer to sell, sell,
contract to sell, grant any option to sell, or otherwise dispose of or require
the Company to file with the Securities and Exchange Commission a registration
statement under the Securities Act to register any shares of Common Stock or
securities convertible into or exchangeable for
61
<PAGE> 63
Common Stock or warrants or other rights to acquire shares of Common Stock owned
by any of them prior to the expiration of 180 days from the date of this
Prospectus, except (i) for shares of Common Stock offered hereby, and (ii) in
the case of the Company, the issuance of Common Stock upon the exercise of
outstanding options and the grant of options, at market value, to purchase
shares of Common Stock under the Company's 1997 Equity Incentive Plan.
Prior to the offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price, in addition to
prevailing market conditions, will be certain financial information of the
Company, the history of, and the prospects for, the Company and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company.
The initial public offering price set forth on the cover page of this
Prospectus should not, however, be considered an indication of the actual value
of the Common Stock. Such price is subject to change as a result of market
conditions and other factors. There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade in
the public market subsequent to the offering at or above the initial public
offering price.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing shares of Common Stock in the open
market. The Representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security before the distribution is completed.
Neither the Company nor any Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the Common Stock. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Wheat, First Securities, Inc., a Representative, has in the past served as
an underwriter, placement agent and the remarketing agent and currently serves
as the underwriter and remarketing agent with respect to certain of the
Company's IRBs, for which it has received customary compensation. See
"Business -- Leases and Financing Terms" and Note 3 of Notes to Consolidated
Financial Statements.
62
<PAGE> 64
LEGAL MATTERS
The validity of the shares offered hereby and general corporate legal
matters will be passed upon for the Company by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP ("Gunderson Dettmer"), Menlo Park,
California. Carla S. Newell, a partner of Gunderson Dettmer, is the Secretary of
the Company. Certain legal matters relating to the sale of the shares of Common
Stock in the offering will be passed upon for the Underwriters by Morrison &
Foerster LLP, New York, New York.
EXPERTS
The consolidated financial statements of SteriGenics International, Inc. at
March 31, 1996 and 1997, and for each of the three years in the period ended
March 31, 1997, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the Consolidated Financial Statements and related Notes filed as a
part thereof. Statements made in this Prospectus concerning the contents of any
document referred to herein are not necessarily complete. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved.
As a result of the offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended. As long as the Company is subject to such
periodic reporting and informational requirements, it will file with the
Commission all reports, proxy statements and other information required thereby.
The Registration Statement, as well as such reports and other information filed
by the Company with the Commission, may be inspected at the public reference
facilities maintained by the Commission at its principal office located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor New York, New York 10048. Copies of such material may
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov.
63
<PAGE> 65
STERIGENICS INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 66
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SteriGenics International, Inc.
We have audited the accompanying consolidated balance sheets of SteriGenics
International, Inc. as of March 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. 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 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 SteriGenics
International, Inc. at March 31, 1996 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Jose, California
May 9, 1997,
except Note 14 as to which the
date is July 30, 1997
F-2
<PAGE> 67
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
MARCH 31, EQUITY AT
----------------------------- JUNE 30, JUNE 30,
1996 1997 1997 1997
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents:
Unrestricted...................................... $ 9,062,328 $ 1,072,342 $ 611,181
Restricted........................................ 844,169 885,058 889,909
Accounts receivable, net of allowance of $242,000,
$253,000 and $150,000 at March 31, 1996 and 1997 and
June 30, 1997....................................... 3,476,737 4,591,611 4,689,981
Prepaid expenses and other current assets........... 560,243 801,404 827,468
Deferred income taxes............................... 959,322 1,108,717 1,108,717
------------ ------------ ------------
Total current assets.................................. 14,902,799 8,459,132 8,127,256
Property, plant and equipment, net.................... 67,430,439 80,330,124 80,995,721
Other assets.......................................... 1,146,113 2,876,281 2,978,703
Investment in joint venture........................... 1,250,000 1,000 1,000
------------ ------------ ------------
Total assets.......................................... $ 84,729,351 $ 91,666,537 $ 92,102,680
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 382,031 $ 1,461,758 $ 1,152,092
Income taxes payable................................ 86,179 677,192 1,073,595
Accrued liabilities................................. 6,305,238 6,096,785 5,935,863
Borrowings under line of credit..................... - - 400,400
Current portion of capital lease obligations........ 2,543,965 3,152,394 3,152,394
Current portion of long-term debt................... 2,289,059 250,000 250,000
------------ ------------ ------------
Total current liabilities............................. 11,606,472 11,638,129 11,964,344
Capital lease obligations, less current portion....... 7,406,387 6,139,685 5,272,246
Long-term debt, less current portion.................. 27,783,641 32,000,000 32,000,000
Other long-term liabilities........................... 92,703 - -
Deferred income taxes................................. 8,574,879 9,408,691 9,408,691
Series A redeemable preferred stock $0.001 par value:
Authorized shares -- 100,000
Issued and outstanding shares -- 15,000 as of March
31, 1996 and 1997 and June 30, 1997............... 1,500,000 1,500,000 1,500,000
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares -- 10,000,000 actual, 1,000,000
pro forma
Issued and outstanding shares -- none at March 31,
1996 and 1997, June 30, 1997 and pro forma...... - - - $ -
Convertible preferred stock, Series B and C, $0.001
par value:
Authorized shares -- 1,772,728
Issued and outstanding shares -- 1,772,727 at
March 31, 1996 and 1997 and June 30, 1997 and
none pro forma.................................. 1,773 1,773 1,773 -
Common stock, $0.001 par value:
Authorized shares -- 15,000,000 at March 31, 1996
and 1997, June 30, 1997 and pro forma
Issued and outstanding shares -- 3,056,042 at
March 31, 1996 and 1997, 3,056,312 at June 30,
1996 and 4,829,039 pro forma.................... 3,056 3,056 3,056 4,829
Additional paid-in capital.......................... 14,726,994 14,726,994 14,728,317 14,728,317
Notes receivable from sale of common stock to
employees......................................... (88,170) (88,170) (87,153) (87,153)
Retained earnings................................... 13,121,616 16,336,379 17,311,406 17,311,406
------------ ------------ ------------ ------------
Total stockholders' equity............................ 27,765,269 30,980,032 31,957,399 $ 31,957,399
============
------------ ------------ ------------
Total liabilities and stockholders' equity............ $ 84,729,351 $ 91,666,537 $ 92,102,680
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 68
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues......................... $28,661,287 $30,240,840 $37,668,198 $ 8,164,453 $10,750,521
Cost of revenues................. 16,389,018 16,977,930 20,425,350 4,297,302 5,800,593
----------- ----------- ----------- ----------- -----------
12,272,269 13,262,910 17,242,848 3,867,151 4,949,928
Costs and expenses:
General and administrative..... 5,664,413 5,212,719 6,345,112 1,416,907 1,636,576
Marketing and selling.......... 1,582,875 1,761,026 2,482,124 560,110 822,932
Research, development and
engineering................. 685,154 889,815 1,380,821 272,704 312,249
----------- ----------- ----------- ----------- -----------
7,932,442 7,863,560 10,208,057 2,249,721 2,771,757
----------- ----------- ----------- ----------- -----------
Income from operations........... 4,339,827 5,399,350 7,034,791 1,617,430 2,178,171
Other income (expense):
Write-down of investments in
joint ventures.............. (3,011,022) -- -- -- --
Interest expense, net.......... (2,402,336) (1,846,141) (1,836,310) (458,733) (581,009)
Other income................... 139,578 46,741 115,347 6,732 14,453
----------- ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes, equity in
joint ventures and discontinued
operations..................... (933,953) 3,599,950 5,313,828 1,165,429 1,611,615
Provision for income taxes....... 1,185,000 1,447,888 2,099,065 460,957 636,588
----------- ----------- ----------- ----------- -----------
Income (loss) before equity in
joint ventures and discontinued
operations..................... (2,118,953) 2,152,062 3,214,763 704,472 975,027
Equity in net loss of joint
ventures....................... (1,359,983) -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations..................... (3,478,936) 2,152,062 3,214,763 704,472 975,027
Discontinued operations:
Loss from discontinued
operations (net of income
tax benefit of $51,271)..... (115,193) -- -- -- --
Loss on disposition of
discontinued operations (net
of income tax benefit of
$521,951)................... (1,172,694) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)................ $(4,766,823) $ 2,152,062 $ 3,214,763 $ 704,472 $ 975,027
=========== =========== =========== =========== ===========
Pro forma net income per share... $ 0.62 $ 0.14 $ 0.19
=========== =========== ===========
Shares used in computing pro
forma net income per share..... 5,164,679 5,164,679 5,166,679
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 69
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
CONVERTIBLE FROM SALE
PREFERRED STOCK COMMON STOCK ADDITIONAL OF COMMON TOTAL
------------------ ------------------ PAID-IN STOCK TO RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EMPLOYEES EARNINGS EQUITY
---------- ------ ---------- ------ ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994......... 1,772,727 $1,773 3,000,120 $3,000 $14,530,307 $(71,600) $15,736,377 $30,199,857
Issuance costs related to Series
C preferred stock............. - - - - (23,440) - - (23,440)
Repurchase of options........... - - (400) - (2,000) 2,000 - -
Income tax benefit from stock
option transactions........... - - - - 132,450 - - 132,450
Net loss........................ - - - - - - (4,766,823) (4,766,823)
--------- ------ --------- ------ ----------- -------- ----------- -----------
Balance at March 31, 1995......... 1,772,727 1,773 2,999,720 3,000 14,637,317 (69,600) 10,969,554 25,542,044
Exercise of options............. - - 56,322 56 89,677 (18,570) - 71,163
Net income...................... - - - - - - 2,152,062 2,152,062
--------- ------ --------- ------ ----------- -------- ----------- -----------
Balance at March 31, 1996......... 1,772,727 1,773 3,056,042 3,056 14,726,994 (88,170) 13,121,616 27,765,269
Net income...................... - - - - - - 3,214,763 3,214,763
--------- ------ --------- ------ ----------- -------- ----------- -----------
Balance at March 31, 1997......... 1,772,727 1,773 3,056,042 3,056 14,726,994 (88,170) 16,336,379 30,980,032
Repayment of notes receivable
(unaudited)................... - - - - - 1,017 - 1,017
Exercise of options
(unaudited)................... - - 270 - 1,323 - - 1,323
Net income (unaudited).......... - - - - - - 975,027 975,027
--------- ------ --------- ------ ----------- -------- ----------- -----------
Balance at June 30, 1997
(unaudited)..................... 1,772,727 $1,773 3,056,312 $3,056 $14,728,317 $(87,153) $17,311,406 $31,957,399
========= ====== ========= ====== =========== ======== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 70
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------------- --------------------------
1995 1996 1997 1996 1997
------------ ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Cash flows from operating activities:
Income (loss) from continuing operations........... $ (3,478,936) $ 2,152,062 $ 3,214,763 $ 704,472 $ 975,027
Income (loss) from discontinued operations......... (1,287,887) -- -- -- --
Reconciliation to net cash provided by operating
activities:
Depreciation and amortization from continuing
operations..................................... 5,879,670 7,575,835 8,271,016 1,915,539 2,311,047
Depreciation and amortization from discontinued
operations..................................... 1,365,044 -- -- -- --
Equity in net loss of joint ventures............. 1,359,983 -- -- -- --
Write-down of investments in joint ventures...... 3,011,022 -- -- -- --
Deferred income tax liability.................... 1,860,341 519,879 833,812 -- --
Deferred income tax asset........................ (1,624,710) 665,678 (149,395) -- --
Changes in assets and liabilities:
Accounts receivable............................ 506,696 28,640 (1,114,874) 8,783 (98,370)
Prepaid expenses and other current assets...... 252,022 (104,348) (241,161) (95,804) 107,235
Accounts payable and accrued liabilities....... 119,515 172,741 1,369,584 555,351 (74,185)
Net assets of discontinued operations.......... 723,276 -- -- 15,206 --
------------ ----------- ------------ ----------- -----------
Net cash provided by operating activities............ 8,686,036 11,010,487 12,183,745 3,103,547 3,220,754
INVESTING ACTIVITIES
Purchases of property, plant and
equipment -- continued operations.................. (16,546,736) (7,207,495) (18,613,378) (2,820,993) (2,952,539)
Purchases of property, plant and
equipment -- discontinued operations............... (2,205) -- -- -- --
Proceeds from sale of property -- continuing
operations......................................... 1,551,744 -- -- -- --
Proceeds from sale of property -- discontinued
operations......................................... 66,008 -- -- -- --
Investments in joint ventures........................ (590,792) -- -- -- --
Proceeds from sale of investment in joint venture.... -- -- 1,249,000 -- --
Other assets......................................... (28,548) (369,076) (1,779,364) (132,759) (258,809)
------------ ----------- ------------ ----------- -----------
Net cash used in investing activities................ (15,550,529) (7,576,571) (19,143,742) (2,953,752) (3,211,348)
FINANCING ACTIVITIES
Issuance costs related to Series C preferred stock... (23,440) -- -- -- --
Exercise of stock options............................ -- 71,163 -- -- 1,323
Borrowings under industrial revenue bonds............ -- 9,000,000 8,750,000 7,750,000 --
Borrowings under term loan and line of credit........ 7,322,726 -- 2,881,619 2,081,619 1,100,400
Repayments on term loan, line of credit, industrial
revenue bonds and capital leases................... (4,706,987) (4,271,103) (12,620,719) (2,064,122) (1,567,439)
Increase in restricted cash.......................... (12,300) (51,713) (40,889) (10,891) (4,851)
------------ ----------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities......................................... 2,579,999 4,748,347 (1,029,989) 7,756,606 (470,567)
------------ ----------- ------------ ----------- -----------
Net increase (decrease) in unrestricted cash and cash
equivalents........................................ (4,284,494) 8,182,263 (7,989,986) 7,906,401 (461,161)
Unrestricted cash and cash equivalents at beginning
of period.......................................... 5,164,559 880,065 9,062,328 9,062,328 1,072,342
------------ ----------- ------------ ----------- -----------
Unrestricted cash and cash equivalents at end of
period............................................. $ 880,065 $ 9,062,328 $ 1,072,342 $16,968,729 $ 611,181
============ =========== ============ =========== ===========
NONCASH FINANCING ACTIVITIES
Assets acquired under capital leases................. $ 7,818,369 $ 2,372,252 $ 2,508,127 $ -- $ --
Income tax benefit from stock options................ $ 132,450 $ -- $ -- $ -- $ --
Notes receivable issued on exercise of stock
options............................................ $ -- $ 18,570 $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-6
<PAGE> 71
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
SteriGenics International, Inc. (the "Company") was incorporated in the
state of California in 1978 to perform contract sterilization services using
Gamma radiation. The Company operates Gamma sterilization facilities in several
states. In addition, the Company also manufactured, sterilized, and marketed
aerosol saline solution for contact lens care (see Note 12). During fiscal 1995,
the Company discontinued its manufacture and sale of aerosol saline solution.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, SteriGenics East Corporation,
SteriGenics International Holding Corporation Inc. and RSI Leasing, Inc.
SteriGenics East Corporation includes three facilities located along the eastern
seaboard of the United States (see Note 13). SteriGenics International Holding
Corporation Inc. holds investments in the Company's joint venture in Taiwan (see
Note 11). RSI Leasing, Inc. leases Cobalt 60 to the Company. All significant
intercompany accounts and transactions have been eliminated.
Interim Financial Statements
In the opinion of management, the unaudited interim financial statements at
June 30, 1997 and for the quarters ended June 1996 and 1997 include all
adjustments, consisting only of normal recurring accruals, necessary to present
fairly the Company's financial position at June 30, 1997, and results of
operations and cash flows for the quarters ended June 30, 1996 and 1997. Results
for the quarter ended June 30, 1997 are not necessarily indicative of the
results to be expected for the entire year.
Use of Estimates in the Preparation of Financial Statements
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 the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
Revenue Recognition
Revenue from contract manufacturing is recognized upon the completion of
sterilization. One customer accounted for approximately 13% of net revenue
during fiscal 1995 and 1996. No customer accounted for more than 10% of net
revenue during fiscal 1997.
Advertising Costs
Advertising costs are recorded as an expense when incurred. Advertising
costs were approximately $134,000, $191,000, $243,000 and $82,000 for the years
ended March 31, 1995, 1996 and 1997, and for the quarter ended June 30, 1997,
respectively. The Company does not incur any direct response advertising costs.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity from the date of purchase of three months or less to be cash
equivalents. The Company maintains deposits with banks and invests excess cash
in a money market account. The Company has not experienced any losses on its
investments.
F-7
<PAGE> 72
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
Financial Instruments
The estimated fair values of financial instruments approximate the carrying
values at March 31, 1996 and 1997 and June 30, 1997, using available market
information and appropriate valuation methodologies. The fair value of long-term
debt is estimated using discounted cash flow analysis and the Company's current
incremental borrowing rate.
Risks, Uncertainties, and Significant Concentrations
The Company's trade receivables consist principally of amounts due from its
customers in the sterilization industry. The Company's trade customers are
primarily in the US. Management believes any concentration of credit risk is
substantially alleviated by the Company's credit evaluation and collection
practices. The Company generally requires no collateral. Bad debt experience and
expenses have been insignificant.
The Company's operations are dependent on its ability to obtain Cobalt 60
isotope or an equivalent radioactive material. Cobalt 60 isotope is a controlled
substance, supplied only by a limited number of vendors. If the Company is
unable to obtain adequate supplies of Cobalt 60 isotope at commercially
reasonable terms, its operations may be materially adversely affected.
Long-Lived Assets
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (FAS 121). FAS
121 requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. FAS 121 is effective for the fiscal years beginning
after December 15, 1995. The adoption of FAS 121 did not have a material impact
on the Company's financial position or results of operations.
Depreciation and Amortization
Cobalt 60 isotope is amortized using an accelerated method (approximately
12.3% of net book value per year) which relates to the natural decay of the
isotope. For all other property, plant, and equipment, depreciation is computed
using the straight-line method over estimated useful lives of three to thirty
years. Amortization is included with depreciation expense in the accompanying
consolidated financial statements.
Construction-In-Progress
From time to time, the Company will build or expand facilities. The cost of
construction of these facilities is reflected as construction-in-progress until
start-up of the facility, at which time the costs are reclassified to the
appropriate fixed asset category.
Stock-Based Compensation
In fiscal 1997, the Company implemented the disclosure requirements of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). As permitted under FAS 123, the Company continues to
account for its employee stock option plan in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25) and will provide pro forma disclosures of net
income and earnings per share as if the fair value basis method prescribed by
FAS 123 had been applied in measuring employee compensation expense (see Note
5).
F-8
<PAGE> 73
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
Net Income (Loss) Per Share
Except as noted below, net income (loss) per share is computed using the
weighted average number of shares of common stock and common equivalent shares,
when dilutive, from convertible preferred stock (using the as-if-converted
method) and from stock options (using the treasury stock method). Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued by the Company at prices below the initial
public offering price during the twelve-month period prior to the offering have
been included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method at an assumed initial public offering
price.)
Per share information calculated on the above noted basis is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED MARCH 31, JUNE 30,
--------------------------------- ---------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations.............................. $ (1.15) $ 0.43 $ 0.62 $ 0.14 $ 0.19
Loss from discontinued operations......... (0.42) - - - -
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ (1.57) $ 0.43 $ 0.62 $ 0.14 $ 0.19
========== ========== ========== ========== ==========
Shares used in computing net income (loss)
per share............................... 3,032,037 5,004,200 5,164,679 5,164,679 5,166,679
========== ========== ========== ========== ==========
</TABLE>
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128), which
is required to be adopted on December 31, 1997. 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 earnings per share, the dilutive effect of stock options will be
excluded. The impact is not expected to increase primary earnings per share for
the year ended March 31, 1995 but is expected to increase primary earnings per
share for the years ended March 31, 1996 and 1997, and the quarters ended June
30, 1996 and 1997 to $0.70, $1.04, $0.23 and $0.32 per share, respectively. The
impact of FAS 128 on the calculation of fully diluted earnings per share for
these periods is not expected to be material.
Pro Forma Net Income Per Share
Pro forma net income per share has been computed as described above and
also gives effect, even if antidilutive, to common equivalent shares from
convertible preferred stock that will automatically convert upon the closing of
the company's initial public offering (using the as-if-converted method).
F-9
<PAGE> 74
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
2. BALANCE SHEET COMPONENTS
Property, plant and equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------- JUNE 30,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Land............................................... $ 1,568,397 $ 1,605,245 $ 1,605,245
Buildings.......................................... 7,340,648 12,091,744 13,563,243
Cobalt 60 isotope.................................. 69,442,173 71,776,948 72,778,731
Furniture and fixtures............................. 2,704,230 3,932,708 4,066,395
Machinery and equipment............................ 18,341,205 24,846,155 24,812,826
Construction-in-progress........................... 6,563,966 9,016,290 9,395,189
------------ ------------ ------------
105,960,619 123,269,090 126,221,629
Accumulated depreciation and amortization.......... 38,530,180 42,938,966 45,225,908
------------ ------------ ------------
$ 67,430,439 $ 80,330,124 $ 80,995,721
============ ============ ============
</TABLE>
Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------- JUNE 30,
1996 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
Industrial revenue bond costs (net of
accumulated amortization of $406,000 in
1996, $455,000 in 1997 and $464,000 at
June 30, 1997)......................... $ 459,441 $ 791,477 $ 782,772
Goodwill................................. - 558,769 549,619
Investment in RTI Inc. (see Note 13)..... 236,000 - -
Other.................................... 479,742 1,576,735 1,697,012
---------- ---------- ----------
1,175,183 2,926,981 3,029,403
Less current portion of bond costs....... 29,070 50,700 50,700
---------- ---------- ----------
$1,146,113 $2,876,281 $2,978,703
========== ========== ==========
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------- JUNE 30,
1996 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
Compensation............................. $1,070,563 $1,717,429 $2,167,238
Property tax............................. 778,314 582,960 704,978
Legal and accounting..................... 198,469 418,463 359,189
Sales and other nonincome taxes.......... 2,088,948 1,628,539 1,714,810
Other.................................... 2,168,944 1,749,394 989,648
---------- ---------- ----------
$6,305,238 $6,096,785 $5,935,863
========== ========== ==========
</TABLE>
F-10
<PAGE> 75
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
3. BORROWING ARRANGEMENTS
Long-term debt at March 31 consists of:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Industrial revenue bond, due in March 2005, with
interest at the contract formula rate of 3.6% at
March 31, 1997.................................. $5,250,000 $5,250,000
Industrial revenue bond, due in December 2004,
with interest at the contract formula rate of
3.6% at March 31, 1997.......................... 4,900,000 4,900,000
Industrial revenue bond, due in November 2005,
with interest at the contract formula rate of
3.6% at March 31, 1997.......................... 4,600,000 4,600,000
Industrial revenue bond, due in annual principal
installments of $500,000 beginning in March
1999, with interest at the contract formula rate
of 3.7% at March 31, 1997....................... 9,000,000 9,000,000
Industrial revenue bond, due in annual principal
installments of $430,000 beginning in April
1999, with interest at the contract formula rate
of 3.7% at March 31, 1997....................... - 7,750,000
Industrial revenue bond, due in annual
installments of $250,000 with interest at a
fixed rate of 10.0%............................. - 750,000
Bank term loan, due in monthly installments of
$70,175, with interest at the bank's reference
rate plus 1.0% (9.25% at March 31, 1996)........ 1,052,632 -
Note payable, due in quarterly installments of
$30,442, with interest at 9.50% at March 31,
1996............................................ 306,451 -
Note payable, due in monthly installments of
$147,590, with interest at 9.75% at March 31,
1996............................................ 4,963,617 -
----------- -----------
30,072,700 32,250,000
Less current portion.............................. 2,289,059 250,000
----------- -----------
$27,783,641 $32,000,000
=========== ===========
</TABLE>
As of June 30, 1997 long-term debt outstanding was unchanged from March 31,
1997, with contract formula interest rates of 4.0% and 4.4%.
Industrial revenue bonds are collateralized by certain assets of the
Company and by letter of credit agreements with a bank, the majority of which
are guaranteed by the Chairman of the Board of Directors (who is also a
stockholder). The Company is required under certain industrial revenue bond
agreements to maintain cash reserves in the amount of the bond interest payments
due within one year. At March 31, 1996 and 1997, and June 30, 1997, there were
approximately $844,000, $885,000 and $890,000 recorded as restricted cash
associated with the outstanding industrial revenue bonds, respectively.
The Company has a $3,500,000 revolving line of credit with a bank, payable
on demand, with a variable interest rate of 8.5% at June 30, 1997,
collateralized by certain assets of the Company. At March 31 and June 30, 1997
$0 and $400,400 were outstanding under this line of credit, respectively.
Notes payable are collateralized by the Cobalt 60 isotope to which they
relate. Certain of the notes payable by the Company contain covenants pertaining
to profitability levels and certain other financial ratios. These notes were
voluntarily paid off during fiscal 1997.
F-11
<PAGE> 76
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
The bank term loan is subject to provisions that place restrictions on
fixed asset expenditures and require maintenance of specified net worth levels
and financial statement ratios. This loan was voluntarily paid off during fiscal
1997.
Payments of principal due on long-term debt for the five-year period from
March 31, 1997 are:
<TABLE>
<S> <C>
1998.......................................... $ 250,000
1999.......................................... 750,000
2000.......................................... 1,180,000
2001.......................................... 930,000
2002.......................................... 930,000
Thereafter.................................... 28,210,000
-----------
Total......................................... $32,250,000
===========
</TABLE>
Cash payments for interest in fiscal 1995, 1996 and 1997 and the quarter
ended June 30, 1997 were approximately $1,395,000, $996,000, $1,875,000 and
$511,000, respectively.
4. REDEEMABLE PREFERRED STOCK
Series A redeemable preferred stock is not convertible and has no voting
rights. Dividends may be declared at the discretion of the Board of Directors
and are noncumulative. In any fiscal year, dividends of $10.00 per share for
Series A preferred stock must be paid before any dividends on common stock. In
the event of liquidation, Series A stockholders are entitled to receive $100.00
per share plus all declared but unpaid dividends prior to any distribution to
the common stockholders. In the event of a merger or other reorganization, the
Series A preferred stock will be redeemed at $100.00 per share.
5. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Each share of Series B preferred stock is convertible into one share of the
Company's common stock, has voting rights, has a liquidation preference of $5.00
per share, is subordinate to the Series A preferred stock, and permits
noncumulative dividends to be declared at the discretion of the Board of
Directors. In any fiscal year, dividends of $0.50 per share for Series B
preferred stock must be paid before any dividends on common stock.
Each share of Series C preferred stock is convertible into one share of the
Company's common stock, has voting rights, has a liquidation preference of
$11.00 per share, is subordinate to the Series A and B preferred stock, and
permits noncumulative dividends to be declared at the discretion of the Board of
Directors. In any fiscal year, dividends of $1.10 per share for Series C
preferred stock must be paid before any dividends on common stock.
No dividends have been declared to date by the Board of Directors on any of
the outstanding preferred stock.
F-12
<PAGE> 77
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
Stock Option Plans
Under the 1985 Incentive Stock Option Plan and the Second Amended and
Restated 1986 Stock Option Plans the Board of Directors may grant options to key
employees to purchase up to 1,210,000 shares of common stock at not less than
fair value on the date of grant, as determined by the Board of Directors. The
options generally vest with respect to 24% of the shares one year after the
options grant date and with respect to 2% of the shares on a monthly basis for
the next 38 months. The option term is ten years, and options expire at the end
of the term.
Activity under the option plans was as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------
WEIGHTED
NUMBER AVERAGE PRICE
OF SHARES PER SHARE
--------- -------------
<S> <C> <C>
Balance at March 31, 1994............................ 591,458 $5.36
Granted............................................ 99,064 $9.15
Exercised.......................................... - $ -
Canceled........................................... (27,725) $7.81
-------
Balance at March 31, 1995............................ 662,797 $5.82
Granted............................................ 253,764 $4.90
Exercised.......................................... (56,322) $1.59
Canceled........................................... (221,314) $8.27
-------
Balance at March 31, 1996............................ 638,925 $4.98
Granted............................................ 97,000 $5.64
Exercised.......................................... - $ -
Canceled........................................... (33,000) $4.91
-------
Balance at March 31, 1997............................ 702,925 $5.07
Granted (unaudited)................................ 5,500 $8.50
Exercised (unaudited).............................. (270) $4.90
Canceled (unaudited)............................... (1,605) $4.94
-------
Balance at June 30, 1997 (unaudited)................. 706,550 $5.10
=======
</TABLE>
During fiscal 1996, the Company offered all optionees the right to amend
the terms of their outstanding options to lower the exercise price to the then
fair value of $4.90 per share, and to reset the vesting schedule. Included above
are options to purchase 172,564 shares of common stock canceled and regranted
during fiscal 1996 with the amended terms.
F-13
<PAGE> 78
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
At March 31, 1997, options outstanding under the stock option plans were as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$4.90-$5.00............................ 658,925 5.37 $ 4.96 477,014 $ 4.98
$6.18-$7.00............................ 44,000 8.19 6.81 10,000 6.18
------- ---- ----- ------- -----
702,925 5.54 $ 5.07 487,014 $ 5.01
======= ==== ===== ======= =====
</TABLE>
At March 31, 1996, options to purchase 433,095 shares of common stock were
exercisable at an average exercise price of $5.02 per share. At March 31, 1997
314,841 shares were available for future grant under the plans.
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB Opinion No. 25,
when the exercise price of the Company's employee stock options equals the fair
value of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of FAS 123 using the
following weighted average assumptions for the years ended March 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Risk-free interest rate(%)..................................... 5.91 6.37
Dividend yield................................................. - -
Expected option life (years)................................... 3.57 3.57
</TABLE>
The Minimum Value option valuation method may be used by nonpublic
companies to value an award. In addition, option valuation models require the
input of highly subjective assumptions, including the expected option life.
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.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FAS 123, the Company's net income and net
income per share would have been decreased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Pro forma net income................................ $2,076,193 $3,139,858
Pro forma net income per share...................... $0.41 $0.61
</TABLE>
The weighted average fair value of options granted in fiscal 1996 and 1997
was $0.90 and $1.10 per share, respectively.
F-14
<PAGE> 79
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
Because FAS 123 is applicable only to options granted subsequent to March
31, 1995, its pro forma effect will not be fully reflected until the year ending
March 31, 2000.
Notes Receivable From Sale of Common Stock to Employees
At March 31, 1997, the Company had notes receivable in the amount of
$88,170 arising from the sale of common stock to employees. Such notes bear
interest at 7% to 9%, are collateralized by the related stock of the Company and
are due between April 1998 and August 2000.
6. TAXES ON INCOME
The provision for income taxes for the years ended March 31 consists of the
following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current.............................. $ 602,000 $(419,606) $1,276,373
Deferred............................. 538,000 1,717,191 614,517
---------- ---------- ----------
1,140,000 1,297,585 1,890,890
State:
Current.............................. 4,000 334,236 138,274
Deferred............................. 41,000 (183,933) 69,901
---------- ---------- ----------
45,000 150,303 208,175
---------- ---------- ----------
$1,185,000 $1,447,888 $2,099,065
========== ========== ==========
</TABLE>
The total provision for income taxes differs from the amount computed by
applying the statutory federal income tax to income before taxes as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected provision at 34%.............. $(317,000) $1,223,983 $1,806,702
State taxes, net of federal benefit.... 30,000 99,200 137,395
Foreign joint venture losses........... 1,338,000 - -
Other.................................. 134,000 124,705 154,968
---------- ---------- ----------
$1,185,000 $1,447,888 $2,099,065
========== ========== ==========
</TABLE>
The provision for income taxes for the quarters ended June 30, 1996 and
1997 is based upon the Company's estimated annual effective tax rate for fiscal
1997 and 1998, respectively.
F-15
<PAGE> 80
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
deferred tax assets and liabilities at March 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Tax credit and loss carryforward................ $1,857,029 $2,530,896
Reserves and accruals........................... 1,461,013 1,626,070
Other........................................... 619,152 198,077
---------- ----------
Total deferred tax assets......................... 3,937,194 4,355,043
Deferred tax liabilities:
Depreciation.................................... 11,504,083 12,564,094
Other........................................... 48,669 90,923
---------- ----------
Total deferred tax liabilities.................... 11,552,752 12,655,017
---------- ----------
Net deferred tax liabilities...................... $7,615,558 $8,299,974
========== ==========
</TABLE>
Management has concluded that a valuation allowance against the deferred
tax assets is not required based on its assessment that current levels of
taxable income will be sufficient to realize the related tax benefits.
At March 31, 1997, the Company had federal and state alternative minimum
tax credit carryforwards of approximately $2,326,000 and $136,000, respectively,
which do not expire, and other carryforwards of approximately $173,000 expiring
in fiscal 2004. Utilization of the carryforwards may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions.
Cash payments made for income taxes during fiscal 1995, 1996 and 1997 were
$942,000, $11,000 and $805,000, respectively.
7. EMPLOYEE BENEFIT PLAN
Effective February 1, 1990, the Company established a defined contribution
retirement plan with 401(k) plan features. The plan covers all employees, age 21
or older, with at least six months of service. Employees may make contributions
by a percentage reduction in their salaries of up to a statutory limit of $9,500
per year for calendar 1996. Company contributions consist of matching funds
equal to 50% of the first 5% of employee eligible earnings contributed as well
as discretionary profit sharing amounts. Effective April 1, 1996, the Company
increased the matching contribution percentage from 25% to 50%. Company
contributions were $38,000, $44,000, $122,000 and $39,000 for fiscal 1995, 1996
and 1997 and for the quarter ended June 30, 1997, respectively.
F-16
<PAGE> 81
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES
The Company leases a portion of its Cobalt 60 isotope under capital leases
having terms of 15 years. Assets acquired by the Company under such lease
arrangements are included on the consolidated balance sheet as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------- JUNE 30,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cobalt 60 isotope, at cost.......................... $13,928,361 $16,389,051 $16,389,051
Less accumulated amortization....................... 2,426,047 3,995,319 4,387,876
----------- ----------- -----------
$11,502,314 $12,393,732 $12,001,175
=========== =========== ===========
</TABLE>
The Company leases certain facilities and a portion of its Cobalt 60
isotope under noncancelable operating leases. At March 31, 1997, future minimum
lease payments under operating leases and capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- ----------
<S> <C> <C>
1998............................................... $ 3,403,294 $1,851,748
1999............................................... 3,069,705 1,747,293
2000............................................... 1,437,627 1,156,281
2001............................................... 673,011 709,464
2002............................................... 316,343 593,620
Thereafter......................................... 1,185,799 866,320
----------- ----------
Total payments..................................... 10,085,779 $6,924,726
==========
Less amount representing interest.................. 793,700
-----------
Present value of minimum lease payments............ 9,292,079
Less current portion............................... 3,152,394
-----------
$ 6,139,685
===========
</TABLE>
In conjunction with the RTI Inc. Asset Acquisition Agreement (see Note 13)
the Company leases a facility in Rockaway, New Jersey and is required by the New
Jersey Department of Environmental Protection (NJDEP) to maintain a standby
letter of credit in the amount of $500,000, contingent upon the continued
environmental clean up efforts required of the property owners, RTI Inc. The
required amount of the letter of credit decreases over the life of the building
lease, and/or as the NJDEP deems required.
Additionally, RTI Inc. has the option to require the Company to purchase
the Rockaway land and buildings on the sixth anniversary of the lease
commencement date for a purchase price equal to $138,376. RTI Inc. may only
exercise the option upon receipt of proof that environmental remediation of the
property was complete to the extent that the Company would not have any material
liability for further environmental remediation and the property has been
removed from the national priorities list.
9. LITIGATION
In June 1988, management became aware that dissolved cesium 137 ("cesium")
was present in the containment pool at the Company's Decatur, Georgia
sterilization facility. As a result, the plant was closed and cesium removal and
cleanup procedures began. Since fiscal 1989, all of the Company's operations
have
F-17
<PAGE> 82
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
used Cobalt 60 isotope which management believes, due to its physical
properties, cannot cause the type of contamination experienced with cesium.
In 1991, the Company filed a suit against the U.S. Government seeking, as
amended, $280,000,000 for damages, including loss of future earnings, loss of
market value upon the sale of the Decatur facility, plant burial costs, cleanup
costs, and out-of-pocket expenses. In 1993, the government filed a counterclaim
against the Company seeking $105,000,000 for negligence, cost of cleanup,
recovery, testing of the cesium capsules, and for storage, collection, and
transportation of the capsules to the Department of Energy facilities. On
January 10, 1995, the government's counterclaim was reduced to $18,906,754 due
to the government's inability to produce documentation supporting an amount of
$105,000,000. On May 23, 1995, both of these suits were dismissed; however, both
parties filed notice of appeal. The Company's claim and the counterclaim filed
by the government went to mediation under the direction of a circuit court
mediator, and a settlement agreement was reached among the parties to this
litigation on April 9, 1997. The presiding court entered a stipulation of
dismissal effective May 9, 1997, confirming the settlement agreement between the
parties.
In the normal course of the Company's operations, it is subject to various
claims and litigation, the outcomes of which, in the opinion of management, will
not have a material adverse effect on the Company's financial position or
results of operations.
10. TRANSACTIONS WITH RELATED PARTIES AND MINORITY STOCKHOLDERS
The Company rents two sterilization facilities from its chairman on a month
to month basis (see Note 14. Subsequent Events). Rent expense attributable to
these related party leases was approximately $472,000 in each of the fiscal
years ended March 31, 1995, 1996 and 1997, as compared to total rent expense of
$1,131,000, $1,246,000 and $1,318,000 for fiscal 1995, 1996 and 1997,
respectively. Rent expense attributable to these related party leases was
$112,000 for the quarter ended June 30, 1997 compared to total rent expense of
$304,000 during this period. The Company also leases one facility and its
corporate offices from a publicly traded real estate investment trust of which
its chairman is a minority shareholder, but neither a director nor an officer.
Included in costs and expenses are approximately $1,414,000, $1,189,000,
$2,116,000 and $111,000 for fiscal 1995, 1996 and 1997 and for the quarter ended
June 30, 1997, respectively, relating to payments to a minority stockholder for
administrative, maintenance and engineering services.
11. INVESTMENTS IN JOINT VENTURES
Through the end of calendar 1994, the Company had invested approximately
$4,724,000 for 35% of the common stock of China Biotech Corporation (formerly
China Nuclear Corporation), a sterilization facility in Taiwan. This investment
was accounted for under the equity method. In fiscal 1995, the Company
determined that the carrying value of this investment would not be realized
through future cash flows. Accordingly, the Company recorded a write-down of the
carrying value of $2,150,000 in that year. Losses recognized by the Company on
the Taiwan joint venture amounted to $798,999, $0 and $0 in fiscal 1995, 1996
and 1997, respectively. During 1996 and 1997, although China Biotech generated
losses, the Company did not record its share of these losses as the carrying
value of its investment continued to be less than its share of the net assets of
China Biotech. In January 1997, the Company sold the majority of its holdings in
China Biotech for $1,249,000. No gain or loss was recorded related to this
transaction. The carrying value of the remaining investment was $1,000 at March
31, 1997 and June 30, 1997. Management fees recognized by the Company for
services provided to the Taiwan joint venture amounted to approximately $61,000,
$19,000 and $0 in fiscal 1995, 1996 and 1997, respectively.
At March 31, 1995, the Company had invested approximately $1,821,000 for
35% of the common stock of PT Perkasa SteriGenics, a sterilization facility in
Indonesia. This investment was accounted for under the
F-18
<PAGE> 83
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
equity method. Losses recognized by the Company on the Indonesian joint venture
amounted to $560,984 in fiscal 1995. During fiscal 1995, the Company decided to
withdraw from its investment in PT Perkasa SteriGenics and, accordingly, wrote
off the remaining carrying value of its investment (approximately $860,000) to
reflect what it believed to be a total and permanent impairment in the value of
the asset.
12. DISCONTINUED OPERATIONS-AEROSOL BUSINESS
In August 1994, the Company sold its aerosol business to a competitor for
cash and future consideration and recorded a loss of $1,172,694 (net of tax
benefit of $521,951) during fiscal 1995 associated with the sale of the aerosol
business.
13. RTI INC. ASSET ACQUISITION AGREEMENT
On February 26, 1996, the Company, through its subsidiary SteriGenics East
Corporation, entered into an agreement to acquire certain assets and liabilities
of RTI Inc., a New York corporation and its subsidiaries that operated three
irradiation facilities along the eastern seaboard of the US. At March 31, 1996,
the Company had an initial investment of $236,000 in RTI Inc. The acquisition
was finalized in August 1996 with a net purchase price of approximately
$4,872,000 and was accounted for as a purchase. The initial investment was
applied toward the purchase price upon completion of the acquisition. The
consolidated statements of operations include the results of operations of RTI
Inc. subsequent to the acquisition date. The Company recorded approximately
$580,000 of goodwill which is being amortized over a fifteen-year period.
Accumulated amortization of goodwill is approximately $21,000 at March 31, 1997.
The following unaudited pro forma summary represents the Company's
consolidated results of operations for the two years ended March 31, 1997 as if
the acquisition of RTI Inc. had occurred at the beginning of the periods
presented and does not purport to be indicative of what would have occurred had
the acquisitions been made as of those dates or the results which may occur in
the future.
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Pro forma net revenues............................ $34,592,867 $39,980,890
Pro forma net income.............................. 1,627,419 3,147,568
Pro forma income per share........................ 0.33 0.61
</TABLE>
14. SUBSEQUENT EVENTS
In June 1997, the Company entered into operating leases with its chairman
on the two sterilization facilities previously rented on a month to month
basis. The leases have 60 month terms which expire in June 2002 with annual
rent expense of approximately $252,000 and $167,000, respectively.
On June 23, 1997, the Board of Directors approved the following actions:
- The filing of a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to
the public. If the offering contemplated by this Prospectus is
consummated, all of the convertible Preferred Stock outstanding as of the
closing date will automatically be converted into an aggregate of
approximately 1,773,000 shares of common stock based on the shares of
convertible preferred stock outstanding at March 31, 1997. Unaudited pro
forma stockholders' equity at June 30, 1997, as adjusted for the
conversion of preferred stock, is disclosed on the consolidated balance
sheet.
F-19
<PAGE> 84
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
- The adoption of the 1997 Equity Incentive Plan, subject to stockholder
approval, under which a total of 1,200,000 shares of the Company's
authorized but unissued common stock have been reserved for issuance
thereunder. On July 24, 1997, subject to stockholder approval, the 1997
Equity Incentive Plan was amended to reduce the number of shares reserved
for issuance by 175,000 shares.
- The adoption of the 1997 Employee Stock Purchase Plan, subject to
stockholder approval, under which a total of 400,000 shares of the
Company's authorized but unissued common stock have been reserved for
issuance thereunder.
- The reincorporation of the Company in the State of Delaware.
- The redemption of the Series A Redeemable Preferred Stock.
On July 24, 1997, subject to stockholder approval, the Company adopted the
1997 Stock Plan under which a total of 175,000 shares have been reserved for
issuance thereunder.
On July 30, 1997 the Company issued an industrial revenue bond in the
amount of $5 million which bears interest at 3.9%.
F-20
<PAGE> 85
Appendix--Description of Graphics
Inside Front Cover--Pictures of Miscellaneous Disposable Medical Products
Inside Front Cover--Pictures of Miscellaneous herbs and spices and other
non-medical products
Inside Back Cover--Picture of the Company's Schaumburg, Illinois facility
Inside Back Cover--Picture of a MiniCell irradiator
Inside Back Cover--Picture of a Mega Loading System
<PAGE> 86
============================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 6
Use of Proceeds............................. 17
Dividend Policy............................. 17
Capitalization.............................. 18
Dilution.................................... 19
Selected Consolidated Financial Data........ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 21
Business.................................... 29
Management.................................. 47
Certain Transactions........................ 53
Principal and Selling Stockholders.......... 54
Description of Capital Stock................ 56
Shares Eligible for Future Sale............. 58
Underwriting................................ 60
Legal Matters............................... 62
Experts..................................... 62
Additional Information...................... 62
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
============================================================
============================================================
2,000,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
PIPER JAFFRAY INC.
WHEAT FIRST BUTCHER SINGER
------------------------
, 1997
============================================================
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 9,758
NASD filing fee................................................... 3,720
Nasdaq National Market listing fee................................ 50,000
Printing and engraving expenses................................... 150,000
Legal fees and expenses........................................... 350,000
Accounting fees and expenses...................................... 200,000
Blue sky fees and expenses........................................ 11,000
Transfer agent fees............................................... 5,000
Miscellaneous fees and expenses................................... 70,522
--------
Total................................................... $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Certificate
of Incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Registrant and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
Indemnification Agreements with its officers and directors, a form of which is
attached as Exhibit 10.1 hereto and incorporated herein by reference. The
Indemnification Agreements provide the Registrant's officers and directors with
further indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is made to Section 6 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since April 1, 1994, the Registrant has issued and sold the following
unregistered securities:
1. The Registrant has issued and sold 54,822 and 1,720 shares
(assuming no exercise of stock options after June 30, 1997) of its Common
Stock to employees pursuant to exercises under its 1985 Incentive Stock
Option Plan and Second Amended and Restated 1986 Stock Option Plan,
respectively.
II-1
<PAGE> 88
2. The Registrant has granted options to purchase an aggregate of
455,328 shares of Common Stock to employees under its Second Amended and
Restated 1986 Stock Option Plan.
3. The Registrant has granted options to purchase an aggregate of
351,750 shares under the 1997 Equity Incentive Plan and the 1997 Stock
Plan.
The issuances of the securities set forth above were deemed to be
exempt from registration under the Securities Act in reliance upon Rule 701
promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement (preliminary form).
3.1++ Certificate of Incorporation of the Registrant, as amended to date.
3.2++ Form of Restated Certificate of Incorporation to be filed upon the closing of
the offering made pursuant to this Registration Statement.
3.3++ Bylaws of the Registrant.
4.1++ Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 Specimen Common Stock certificate.
4.3++ Investors' Rights Agreement, dated September 20, 1993 among the Registrant and
the investors and the founders named therein.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP.
10.1++ Form of Indemnification Agreement.
10.2++ Second Amended and Restated 1986 Stock Option Plan.
10.3++ 1997 Equity Incentive Plan.
10.4++ 1997 Employee Stock Purchase Plan.
10.5++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985A ($2,150,000) -- Loan Agreement.
10.6++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985B ($2,450,000) -- Loan Agreement.
10.7++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985A ($2,150,000) -- Trust Indenture Agreement.
10.8++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985B ($2,450,000) -- Trust Indenture Agreement.
10.9++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond -- Bond Purchase Agreement.
10.10++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985A ($2,150,000) -- Reimbursement Agreement.
10.11++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985B ($2,450,000) -- Reimbursement Agreement.
10.12++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985A ($2,150,000) -- Letter of Credit.
10.13++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985B ($2,450,000) -- Letter of Credit.
10.14++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985A ($2,150,000) -- Intercreditor Agreement.
</TABLE>
II-2
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------------------
<S> <C>
10.15++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985B ($2,450,000) -- Intercreditor Agreement.
10.16++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985A ($2,150,000) -- Pledge and Security
Agreement.
10.17++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985B ($2,450,000) -- Pledge and Security
Agreement.
10.18++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond -- General Continuing Guarantee.
10.19++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond -- Company Security Agreement.
10.20++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond -- Guaranty Security Agreement.
10.21++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue
Bonds ($4,900,000) -- Loan Agreement.
10.22++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue
Bonds ($4,900,000) -- Trust Agreement.
10.23++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue
Bonds ($4,900,000) -- Letter of Credit Agreement.
10.24++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue
Bonds ($4,900,000) -- General Continuing Guaranty.
10.25++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue
Bonds ($4,900,000) -- Pledge and Security Agreement.
10.26++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue
Bonds ($4,900,000) -- Bond Purchase Agreement.
10.27++ Mecklenburg County Industrial Facilities and Pollution Control Financing
Authority Industrial Development Revenue Bonds Series 1996
($9,000,000) -- Indenture of Trust.
10.28++ Mecklenburg County Industrial Facilities and Pollution Control Financing
Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Loan
Agreement.
10.29++ Mecklenburg County Industrial Facilities and Pollution Control Financing
Authority Industrial Development Revenue Bonds Series 1996
($9,000,000) -- Reimbursement Agreement.
10.30++ Mecklenburg County Industrial Facilities and Pollution Control Financing
Authority Industrial Development Revenue Bonds Series 1996
($9,000,000) -- Letter of Credit Agreement.
10.31++ Mecklenburg County Industrial Facilities and Pollution Control Financing
Authority Industrial Development Revenue Bonds Series 1996
($9,000,000) -- Pledge and Security Agreement.
10.33++ Development Authority of DeKalb County Variable Rate Demand Industrial
Development Revenue Bonds, Series 1985 ($5,250,000) -- Bond Purchase Agreement.
10.34++ Development Authority of DeKalb County Variable Rate Demand Industrial
Development Revenue Bonds, Series 1985 ($5,250,000) -- Loan Agreement.
10.35++ Development Authority of DeKalb County Variable Rate Demand Industrial
Development Revenue Bonds, Series 1985 ($5,250,000) -- Trust Indenture.
10.36++ Development Authority of DeKalb County Variable Rate Demand Industrial
Development Revenue Bonds, Series 1985 ($5,250,000) -- Letter of Credit
Agreement.
</TABLE>
II-3
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------------------
<S> <C>
10.37++ Development Authority of DeKalb County Variable Rate Demand Industrial
Development Revenue Bonds, Series 1985 ($5,250,000) -- Pledge and Security
Agreement.
10.38++ Development Authority of DeKalb County Variable Rate Demand Industrial
Development Revenue Bonds, Series 1985 ($5,250,000) -- Letter of Credit.
10.39++ Development Authority of DeKalb County Variable Rate Demand Industrial
Development Revenue Bonds, Series 1985 ($5,250,000) -- Security Agreement.
10.40++ Development Authority of DeKalb County Variable Rate Demand Industrial
Development Revenue Bonds, Series 1985 ($5,250,000) -- Agreement Re: Letter of
Credit and Assignment of Collateral.
10.41++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996
($7,750,000) -- Loan Agreement.
10.42++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996
($7,750,000) -- Indenture of Trust.
10.43++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996
($7,750,000) -- Reimbursement Agreement.
10.44++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996
($7,750,000) -- Letter of Credit.
10.45++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996
($7,750,000) -- Intercreditor Agreement.
10.46++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996
($7,750,000) -- Pledge and Security Agreement.
10.47++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996
($7,750,000) -- Placement and Remarketing Agreement.
10.48++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series
of 1984 ($2,500,000) -- Bond Purchase Agreement.
10.50++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series
of 1984 ($2,500,000) -- Letter of Credit Agreement.
10.51++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series
of 1984 ($2,500,000) -- Pledge and Security Agreement.
10.53++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series
of 1984 ($2,500,000) -- Trust Indenture.
10.54++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series
of 1984 ($2,500,000) -- Sublease and Security Agreement.
10.55++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series
of 1984 ($2,500,000) -- Irrevocable Letter of Credit.
10.56++ Facility lease dated February 8, 1993 between SCI Lt. Partnership and the
Registrant for the Fremont corporate facility.
10.57++ Facility lease dated June 25, 1997 between Charles King & Associates and the
Registrant for the Tustin facility.
10.58++ Facility lease dated June 25, 1997 between Charles King & Associates and the
Registrant for the Schaumburg facility.
10.59++ Facility lease dated December 2, 1991 between Galloway Industrial Properties and
the Registrant for the Westerville warehouse facility.
10.60++ Facility lease dated February 8, 1993 between Aetna Investment Group and the
Registrant for the Corona facility.
</TABLE>
II-4
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------------------
<S> <C>
10.61++ Facility lease dated August 16, 1996 between SCI Ltd. Partnership and the
Registrant for the Hayward facility.
10.62++ Facility lease dated August 8, 1996 between RTI Inc. and the Registrant for the
Rockaway facility.
10.63++ Asset Acquisition Agreement between RTI Inc. and the Registrant effective as of
August 8, 1996.
11.1++ Computation of Earnings Per Share.
21.1++ Subsidiaries of the Registrant.
23.1++ Consent of Ernst & Young LLP, Independent Auditors (see page II-7).
23.2++ Consent of Counsel. Reference is made to Exhibit 5.1.
24.1++ Power of Attorney (see page II-6).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
++ Previously Filed
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts (see page S-2)
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Fremont, State of California, on this 30th day of July 1997.
STERIGENICS INTERNATIONAL, INC.
By: /s/ EDWARD M. MILLER, JR.
------------------------------------
Edward M. Miller, Jr.
Vice President of Finance
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<C> <S> <C>
/s/ JAMES F. CLOUSER* President, Chief Executive July 30, 1997
- --------------------------------------------- Officer (Principal Executive
James F. Clouser Officer) and Director
/s/ EDWARD M. MILLER, JR. Vice President of Finance July 30, 1997
- --------------------------------------------- (Principal Financial and
Edward M. Miller, Jr. Accounting Officer)
/s/ CHARLES W. KING, JR.* Chairman of the Board July 30, 1997
- ---------------------------------------------
Charles W. King, Jr.
/s/ WALTER G. KORTSCHAK* Director July 30, 1997
- ---------------------------------------------
Walter G. Kortschak
/s/ THOMAS F. STEPHENSON* Director July 30, 1997
- ---------------------------------------------
Thomas F. Stephenson
*By: /s/ EDWARD M. MILLER, JR.
- ---------------------------------------------
Edward M. Miller, Jr.
Attorney-in Fact
</TABLE>
II-6
<PAGE> 93
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
May 9, 1997 (except Note 14, as to which the date is July 30, 1997), in
Amendment No. 1 to the Registration Statement (Form S-1) and related Prospectus
of SteriGenics International, Inc. for the registration of 2,300,000 shares of
its common stock.
ERNST & YOUNG LLP
San Jose, California
July 30, 1997
II-7
<PAGE> 94
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of SteriGenics
International, Inc. as of March 31, 1996 and 1997, and for each of the three
years in the period ended March 31, 1997, and have issued our report thereon
dated May 9, 1997 (except Note 14, as to which the date is July 30, 1997)
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, information required to be included
therein.
ERNST & YOUNG LLP
San Jose, California
July 30, 1997
S-1
<PAGE> 95
STERIGENICS INTERNATIONAL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
MARCH 31, 1997
<TABLE>
<CAPTION>
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGE TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) OF PERIOD
- ------------------------------------------- ---------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1997 deducted from
asset account:
Allowance for doubtful accounts............ $242 $ -- $ 23 $ (12) $253
---- ---- ---- ---- ----
Year ended March 31, 1996 deducted from
asset account:
Allowance for doubtful accounts............ $ 50 $ -- $ 192 $ -- $242
---- ---- ---- ---- ----
Year ended March 31, 1995 deducted from
asset account:
Allowance for doubtful accounts............ $ 30 $ -- $ 26 $ (6) $ 50
---- ---- ---- ---- ----
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
S-2
<PAGE> 96
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
------- --------------------------------------------------------------------
<S> <C> <C>
1.1 Form of Underwriting Agreement (preliminary form).
3.1++ Certificate of Incorporation of the Registrant, as amended to date.
3.2++ Form of Restated Certificate of Incorporation to be filed upon the
closing of the offering made pursuant to this Registration
Statement.
3.3++ Bylaws of the Registrant.
4.1++ Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 Specimen Common Stock certificate.
4.3++ Investors' Rights Agreement, dated September 20, 1993 among the
Registrant and the investors and the founders named therein.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP.
10.1++ Form of Indemnification Agreement.
10.2++ Second Amended and Restated 1986 Stock Option Plan.
10.3++ 1997 Equity Incentive Plan.
10.4++ 1997 Employee Stock Purchase Plan.
10.5++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985A
($2,150,000) -- Loan Agreement.
10.6++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985B
($2,450,000) -- Loan Agreement.
10.7++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985A
($2,150,000) -- Trust Indenture Agreement.
10.8++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985B
($2,450,000) -- Trust Indenture Agreement.
10.9++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond -- Bond Purchase Agreement.
10.10++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985A ($2,150,000) --
Reimbursement Agreement.
10.11++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985B ($2,450,000) --
Reimbursement Agreement.
10.12++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985A
($2,150,000) -- Letter of Credit.
10.13++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985B
($2,450,000) -- Letter of Credit.
10.14++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985A ($2,150,000) --
Intercreditor Agreement.
</TABLE>
<PAGE> 97
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
------- --------------------------------------------------------------------
<S> <C> <C>
10.15++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985B ($2,450,000) --
Intercreditor Agreement.
10.16++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985A
($2,150,000) -- Pledge and Security Agreement.
10.17++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond Series 1985B
($2,450,000) -- Pledge and Security Agreement.
10.18++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond -- General Continuing Guarantee.
10.19++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond -- Company Security Agreement.
10.20++ Trinity River Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bond -- Guaranty Security Agreement.
10.21++ County of Delaware, Ohio Variable Rate Demand Industrial Development
Revenue Bonds ($4,900,000) -- Loan Agreement.
10.22++ County of Delaware, Ohio Variable Rate Demand Industrial Development
Revenue Bonds ($4,900,000) -- Trust Agreement.
10.23++ County of Delaware, Ohio Variable Rate Demand Industrial Development
Revenue Bonds ($4,900,000) -- Letter of Credit Agreement.
10.24++ County of Delaware, Ohio Variable Rate Demand Industrial Development
Revenue Bonds ($4,900,000) -- General Continuing Guaranty.
10.25++ County of Delaware, Ohio Variable Rate Demand Industrial Development
Revenue Bonds ($4,900,000) -- Pledge and Security Agreement.
10.26++ County of Delaware, Ohio Variable Rate Demand Industrial Development
Revenue Bonds ($4,900,000) -- Bond Purchase Agreement.
10.27++ Mecklenburg County Industrial Facilities and Pollution Control
Financing Authority Industrial Development Revenue Bonds Series 1996
($9,000,000) -- Indenture of Trust.
10.28++ Mecklenburg County Industrial Facilities and Pollution Control
Financing Authority Industrial Development Revenue Bonds Series 1996
($9,000,000) -- Loan Agreement.
10.29++ Mecklenburg County Industrial Facilities and Pollution Control
Financing Authority Industrial Development Revenue Bonds Series 1996
($9,000,000) -- Reimbursement Agreement.
10.30++ Mecklenburg County Industrial Facilities and Pollution Control
Financing Authority Industrial Development Revenue Bonds Series 1996
($9,000,000) -- Letter of Credit Agreement.
10.31++ Mecklenburg County Industrial Facilities and Pollution Control
Financing Authority Industrial Development Revenue Bonds Series 1996
($9,000,000) -- Pledge and Security Agreement.
10.33++ Development Authority of DeKalb County Variable Rate Demand
Industrial Development Revenue Bonds, Series 1985
($5,250,000) -- Bond Purchase Agreement.
</TABLE>
<PAGE> 98
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
------- --------------------------------------------------------------------
<S> <C> <C>
10.34++ Development Authority of DeKalb County Variable Rate Demand
Industrial Development Revenue Bonds, Series 1985
($5,250,000) -- Loan Agreement.
10.35++ Development Authority of DeKalb County Variable Rate Demand
Industrial Development Revenue Bonds, Series 1985
($5,250,000) -- Trust Indenture.
10.36++ Development Authority of DeKalb County Variable Rate Demand
Industrial Development Revenue Bonds, Series 1985
($5,250,000) -- Letter of Credit Agreement.
10.37++ Development Authority of DeKalb County Variable Rate Demand
Industrial Development Revenue Bonds, Series 1985
($5,250,000) -- Pledge and Security Agreement.
10.38++ Development Authority of DeKalb County Variable Rate Demand
Industrial Development Revenue Bonds, Series 1985
($5,250,000) -- Letter of Credit.
10.39++ Development Authority of DeKalb County Variable Rate Demand
Industrial Development Revenue Bonds, Series 1985
($5,250,000) -- Security Agreement.
10.40++ Development Authority of DeKalb County Variable Rate Demand
Industrial Development Revenue Bonds, Series 1985
($5,250,000) -- Agreement Re: Letter of Credit and Assignment of
Collateral.
10.41++ Village of Gurnee, Illinois Industrial Development Revenue Bonds,
Series 1996 ($7,750,000) -- Loan Agreement.
10.42++ Village of Gurnee, Illinois Industrial Development Revenue Bonds,
Series 1996 ($7,750,000) -- Indenture of Trust.
10.43++ Village of Gurnee, Illinois Industrial Development Revenue Bonds,
Series 1996 ($7,750,000) -- Reimbursement Agreement.
10.44++ Village of Gurnee, Illinois Industrial Development Revenue Bonds,
Series 1996 ($7,750,000) -- Letter of Credit.
10.45++ Village of Gurnee, Illinois Industrial Development Revenue Bonds,
Series 1996 ($7,750,000) -- Intercreditor Agreement.
10.46++ Village of Gurnee, Illinois Industrial Development Revenue Bonds,
Series 1996 ($7,750,000) -- Pledge and Security Agreement.
10.47++ Village of Gurnee, Illinois Industrial Development Revenue Bonds,
Series 1996 ($7,750,000) -- Placement and Remarketing Agreement.
10.48++ City of Salem Municipal Port Authority, Port Development Revenue
Bonds, Series of 1984 ($2,500,000) -- Bond Purchase Agreement.
10.50++ City of Salem Municipal Port Authority, Port Development Revenue
Bonds, Series of 1984 ($2,500,000) -- Letter of Credit Agreement.
10.51++ City of Salem Municipal Port Authority, Port Development Revenue
Bonds, Series of 1984 ($2,500,000) -- Pledge and Security Agreement.
10.53++ City of Salem Municipal Port Authority, Port Development Revenue
Bonds, Series of 1984 ($2,500,000) -- Trust Indenture.
10.54++ City of Salem Municipal Port Authority, Port Development Revenue
Bonds, Series of 1984 ($2,500,000) -- Sublease and Security
Agreement.
10.55++ City of Salem Municipal Port Authority, Port Development Revenue
Bonds, Series of 1984 ($2,500,000) -- Irrevocable Letter of Credit.
10.56++ Facility lease dated February 8, 1993 between SCI Lt. Partnership
and the Registrant for the Fremont corporate facility.
</TABLE>
<PAGE> 99
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
------- --------------------------------------------------------------------
<S> <C> <C>
10.57++ Facility lease dated June 25, 1997 between Charles King & Associates
and the Registrant for the Tustin facility.
10.58++ Facility lease dated June 25, 1997 between Charles King & Associates
and the Registrant for the Schaumburg facility.
10.59++ Facility lease dated December 2, 1991 between Galloway Industrial
Properties and the Registrant for the Westerville warehouse
facility.
10.60++ Facility lease dated February 8, 1993 between Aetna Investment Group
and the Registrant for the Corona facility.
10.61++ Facility lease dated August 16, 1996 between SCI Ltd. Partnership
and the Registrant for the Hayward facility.
10.62++ Facility lease dated August 8, 1996 between RTI Inc. and the
Registrant for the Rockaway facility.
10.63++ Asset Acquisition Agreement between RTI Inc. and the Registrant
effective as of August 8, 1996.
11.1++ Computation of Earnings Per Share.
21.1++ Subsidiaries of the Registrant.
23.1++ Consent of Ernst & Young LLP, Independent Auditors (see page II-7).
23.2++ Consent of Counsel. Reference is made to Exhibit 5.1.
24.1++ Power of Attorney (see page II-6).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
++ Previously Filed
<PAGE> 1
EXHIBIT 1.1
2,000,000 Shares
SteriGenics International, Inc.
Common Stock
UNDERWRITING AGREEMENT
________ __, 1997
PAINEWEBBER INCORPORATED
PIPER JAFFRAY INC.
WHEAT, FIRST SECURITIES, INC.
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
SteriGenics International, Inc., a Delaware corporation (the
"Company"), proposes to sell an aggregate of 2,000,000 shares (the "Firm
Shares") of the Company's Common Stock, $0.001 par value per share (the "Common
Stock"), to you and to the other underwriters named in Schedule I
(collectively, the "Underwriters"), for whom you are acting as representatives
(the "Representatives"). Certain stockholders of the Company named in Schedule
II hereto (the "Selling Stockholders") have also agreed to grant to you and the
other Underwriters an option (the "Option") to purchase up to an additional
300,000 shares of Common Stock (the "Option Shares") on the terms and for the
purposes set forth in Section 1(b). The Firm Shares and the Option Shares are
hereinafter collectively referred to as the "Shares."
The initial public offering price per share for the Shares and the
purchase price per share for the Shares to be paid by the several Underwriters
shall be agreed upon by the Company, the Selling Stockholders and the
Representatives, acting on behalf of the several Underwriters, and such
agreement shall be set forth in a separate written instrument substantially in
the form of Exhibit A hereto (the "Price Determination Agreement"). The Price
Determination Agreement may take the form of an exchange of
<PAGE> 2
2
any standard form of written telecommunication among the Company and the
Representatives and shall specify such applicable information as is indicated
in Exhibit A hereto. If the Option is exercised, in addition to the other
agreements of the Selling Stockholders contained herein, the Selling
Stockholders will be subject to the representations and warranties, covenants,
agreements and indemnification provisions set forth in Exhibit B hereto. The
offering of the Shares will be governed by this Agreement, as supplemented by
the Price Determination Agreement. From and after the date of the execution
and delivery of the Price Determination Agreement, this Agreement shall be
deemed to incorporate, and, unless the context otherwise indicates, all
references contained herein to "this Agreement" and to the phrase "herein"
shall be deemed to include the Price Determination Agreement and, if the Option
is exercised, the provisions of Exhibit B hereto.
The Company and the Selling Stockholders confirm as follows their
respective agreements with the Representatives and the several other
Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and agreements of the
Company herein contained and subject to all the terms and conditions of this
Agreement, the Company agrees to sell to each Underwriter named below, and each
Underwriter, severally and not jointly, agrees to purchase from the Company at
the purchase price per share for the Firm Shares to be agreed upon by the
Representatives, the Selling Stockholders and the Company in accordance with
Section 1(c) or 1(d) hereof and set forth in the Price Determination Agreement,
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I, plus such additional number of Firm Shares which such Underwriter
may become obligated to purchase pursuant to Section 8 hereof. Schedule I may
be attached to the Price Determination Agreement.
(b) Subject to all the terms and conditions of this Agreement, the Selling
Stockholders grant the Option to the several Underwriters to purchase,
severally and not jointly, up to 300,000 Option Shares from the Selling
Stockholders at the same price per share as the Underwriters shall pay for the
Firm Shares. The Option may be exercised only to cover over-allotments in the
sale of the Firm Shares by the Underwriters and may be exercised in whole or in
part at any time (but not more than once) on or before the 30th day after the
date of the Prospectus (as hereinafter defined), upon written or telegraphic
notice (the "Option Shares Notice") by the Representatives to the Selling
Stockholders no later than 12:00 noon, New York City time, at least two and no
more than five business days before the date specified for closing in the
Option Shares Notice (the "Option Closing Date") setting forth the aggregate
number of Option Shares to be purchased and the time and date for such
purchase. On the Option Closing Date, the Selling Stockholders will sell to
the Underwriters the number of Option Shares set forth in the Option Shares
Notice, and each Underwriter will purchase such percentage of the Option Shares
as is equal to the percentage of Firm Shares that such Underwriter is
purchasing, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares.
<PAGE> 3
3
(c) The initial public offering price per share for the Firm Shares and
the purchase price per share for the Firm Shares to be paid by the several
Underwriters shall be agreed upon and set forth in the Price Determination
Agreement, if the Company has elected to rely on Rule 430A (as hereinafter
defined). In the event such price has not been agreed upon and the Price
Determination Agreement has not been executed by the close of business on the
fourteenth business day following the date on which the Registration Statement
(as hereinafter defined) becomes effective, this Agreement shall terminate
forthwith, without liability of any party to any other party except that
Section 6 shall remain in effect.
(d) If the Company has elected not to rely on Rule 430A, the initial
public offering price per share for the Firm Shares and the purchase price per
share for the Firm Shares to be paid by the several Underwriters shall be
agreed upon and set forth in the Price Determination Agreement, which shall be
dated the date hereof, and an amendment to the Registration Statement
containing such per share price information shall be filed before the
Registration Statement becomes effective.
2. Delivery and Payment. Delivery of the Firm Shares shall be made to
the Representatives for the accounts of the Underwriters at the office of
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York 10019
against payment of the purchase price by Federal Reserve Funds check payable in
immediately available funds to the order of the Company. Such payment shall be
made at 10:00 a.m., New York City time, on the third business day (or fourth
business day, if the Price Determination Agreement is executed after 4:30 p.m.,
New York City time) after the date on which the first bona fide offering of the
Shares to the public is made by the Underwriters or at such time on such other
date, not later than ten business days after such date, as may be agreed upon
by the Company and the Representatives (such date is hereinafter referred to as
the "Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment to, or for the account of, the Selling Stockholders by the
Underwriters (in the manner specified above) will take place at the offices
specified above for the Closing Date at the time and date (which may be the
Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company or to the Selling Stockholders, as the case may be. For the purpose of
expediting the checking and packaging of certificates for the Shares, the
Company or the Selling Stockholders, as the case may be, agree to make such
certificates available for inspection at least 24 hours prior to the Closing
Date or the Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares by the Company to the respective
Underwriters shall be borne
<PAGE> 4
4
by the Company. The cost of tax stamps, if any, in connection with the sale of
the Option Shares by the Selling Stockholders shall be borne by the Selling
Stockholders. The Company and the Selling Stockholders will pay and save each
Underwriter and any subsequent holder of the Firm Shares or the Option Shares,
as the case may be, harmless from any and all liabilities with respect to or
resulting from any failure or delay in paying Federal and state stamp and other
transfer taxes, if any, which may be payable or determined to be payable in
connection with the original issuance or sale to such Underwriter of the Firm
Shares or the Option Shares, as the case may be.
3. Representations and Warranties of the Company.
The Company represents, warrants and covenants to each Underwriter
that:
(i) A registration statement
(Registration No. 333-30047) on Form S-1 relating to the Shares, including a
preliminary prospectus and such amendments to such registration statement as
may have been required to the date of this Agreement, has been prepared by the
Company under the provisions of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (collectively referred to as the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission. The term "preliminary
prospectus" as used herein means a preliminary prospectus as contemplated by
Rule 430 or Rule 430A ("Rule 430A") of the Rules and Regulations included at
any time as part of the registration statement. Copies of such registration
statement and amendments and of each related preliminary prospectus have been
delivered to the Representatives. The term "Registration Statement" means the
registration statement as amended at the time it becomes or became effective
(the "Effective Date"), including financial statements and all exhibits and any
information deemed to be included by Rule 430A or Rule 434 of the Rules and
Regulations. If the Company files a registration statement to register a
portion of the Shares and relies on Rule 462(b) of the Rules and Regulations
for such registration statement to become effective upon filing with the
Commission (the "Rule 462 Registration Statement"), then any reference to the
"Registration Statement" shall be deemed to include the Rule 462 Registration
Statement, as amended from time to time. The term "Prospectus" means the
prospectus as first filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations or, if no such filing is required, the form of final
prospectus included in the Registration Statement at the Effective Date.
(ii) On the Effective Date, the date the
Prospectus is first filed with the Commission pursuant to Rule 424(b) (if
required), at all times subsequent to and including the Closing Date and, if
later, the Option Closing Date and when any post- effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did or will comply with all applicable
provisions of the Act and the Rules and Regulations and will contain all
<PAGE> 5
5
statements required to be stated therein in accordance with the Act and the
Rules and Regulations. On the Effective Date and when any post- effective
amendment to the Registration Statement becomes effective, no part of the
Registration Statement or any such amendment did or will contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. At the Effective Date, the date the Prospectus or any amendment or
supplement to the Prospectus is filed with the Commission and at the Closing
Date and, if later, the Option Closing Date, the Prospectus did not or will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
representations and warranties in this Section 3(b) do not apply to any
statements or omissions made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by the
Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. For all purposes of this
Agreement, the amounts of the selling concession and reallowance set forth in
the Prospectus under the caption "Underwriting" constitute the only information
relating to any Underwriter furnished in writing to the Company by the
Representatives specifically for inclusion in the Registration Statement, the
preliminary prospectus or the Prospectus. The Company has not distributed any
offering material in connection with the offering or sale of the Shares other
than the Registration Statement, the preliminary prospectus, the Prospectus or
any other materials, if any, permitted by the Act.
(iii) The only subsidiaries (as defined in
the Rules and Regulations) of the Company are the subsidiaries listed on
Exhibit 21 to the Registration Statement (the "Subsidiaries"). The Company and
each of its Subsidiaries is, and at the Closing Date will be, a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. The Company and each of its Subsidiaries has,
and at the Closing Date will have, full power and authority to conduct all the
activities conducted by it, to own or lease all the assets owned or leased by
it and to conduct its business as described in the Registration Statement and
the Prospectus. The Company and each of its Subsidiaries is, and at the
Closing Date will be, duly licensed or qualified to do business and in good
standing as a foreign corporation in all jurisdictions in which the nature of
the activities conducted by it or the character of the assets owned or leased
by it makes such licensing or qualification necessary. All of the outstanding
shares of capital stock of the Subsidiaries have been duly authorized and
validly issued and are fully paid and non-assessable and are owned by the
Company free and clear of all liens, encumbrances and claims whatsoever.
Except for the stock of the Subsidiaries and as disclosed in the Registration
Statement, the Company does not own, and at the Closing Date will not own,
directly or indirectly, any shares of stock or any other equity or long-term
debt securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity. Complete and correct
copies of the certificate of incorporation and of the by-laws of the Company
and each of its Subsidiaries and all amendments thereto have been delivered to
the Representatives,
<PAGE> 6
6
and no changes therein will be made subsequent to the date hereof and prior to
the Closing Date or, if later, the Option Closing Date.
(iv) The outstanding shares of Common
Stock have been, and the Shares to be issued and sold by the Company upon such
issuance will be, duly authorized, validly issued, fully paid and nonassessable
and will not be subject to any preemptive or similar right. The description of
the Common Stock in the Registration Statement and the Prospectus is, and at
the Closing Date will be, complete and accurate in all respects. Except as set
forth in the Prospectus, the Company does not have outstanding, and at the
Closing Date will not have outstanding, any options to purchase, or any rights
or warrants to subscribe for, or any securities or obligations convertible
into, or any contracts or commitments to issue or sell, any shares of Common
Stock, any shares of capital stock of any Subsidiary or any such warrants,
convertible securities or obligations.
(v) The financial statements and
schedules included in the Registration Statement or the Prospectus present
fairly the consolidated financial condition of the Company as of the respective
dates thereof and the consolidated results of operations and cash flows of the
Company for the respective periods covered thereby, all in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the entire period involved, except as otherwise disclosed in the
Prospectus. The pro forma financial statements and other pro forma financial
information included in the Registration Statement or the Prospectus (i)
present fairly in all material respects the information shown therein, (ii)
have been prepared in accordance with the Commission's rules and guidelines
with respect to pro forma financial statements and (iii) have been properly
computed on the bases described therein. The assumptions used in the
preparation of the pro forma financial information included in the Registration
Statement or the Prospectus are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein. No other financial statements or schedules of the Company are
required by the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. Ernst & Young LLP (the
"Accountants") who have reported on such financial statements and schedules,
are independent accountants with respect to the Company as required by the Act
and the Rules and Regulations. The statements included in the Registration
Statement with respect to the Accountants pursuant to Rule 509 of Regulation
S-K of the Rules and Regulations are true and correct in all material respects.
(vi) The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
<PAGE> 7
7
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(vii) Subsequent to the respective dates
as of which information is given in the Registration Statement and the
Prospectus and prior to the Closing Date, except as set forth in or
contemplated by the Registration Statement and the Prospectus, (i) there has
not been and will not have been any change in the capitalization of the
Company, or in the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company and its
Subsidiaries, arising for any reason whatsoever, (ii) neither the Company nor
any of its Subsidiaries has incurred nor will it incur any material liabilities
or obligations, direct or contingent, nor has it entered into nor will it enter
into any material transactions other than pursuant to this Agreement and the
transactions referred to herein and (iii) the Company has not and will not have
paid or declared any dividends or other distributions of any kind on any class
of its capital stock.
(viii) The Company is not an "investment
company" or an "affiliated person" of, or "promoter" or "principal underwriter"
for, an "investment company," as such terms are defined in the Investment
Company Act of 1940, as amended.
(ix) Except as set forth in the
Registration Statement and the Prospectus, there are no actions, suits or
proceedings pending or threatened against or affecting the Company or any of
its Subsidiaries or any of their respective officers in their capacity as such,
before or by any Federal or state court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, wherein
an unfavorable ruling, decision or finding might materially and adversely
affect the Company or any of its Subsidiaries or its business, properties,
business prospects, condition (financial or otherwise) or results of
operations.
(x) The Company and each of its
Subsidiaries has, and will at all times prior to the Closing Date have had, (i)
all governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to carry on its business as contemplated in the
Prospectus, (ii) complied in all respects with all laws, regulations and orders
applicable to it or its business and (iii) performed all its obligations
required to be performed by it, and is not, and at the Closing Date will not
be, in default, under any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement, lease, contract or
other agreement or instrument (collectively, a "contract or other agreement")
to which it is a party or by which its property is bound or affected. To the
best knowledge of the Company and each of its Subsidiaries, no other party
under any contract or other agreement to which it is a party is in default in
any respect thereunder. Neither the Company nor any of its Subsidiaries is,
nor at the Closing Date will any of them be, in violation of any provision of
its certificate of incorporation or by-laws or comparable instruments.
<PAGE> 8
8
(xi) No consent, approval, authorization
or order of, or any filing or declaration with, any court or governmental
agency or body is required in connection with the authorization, issuance,
transfer, sale or delivery of the Shares by the Company, in connection with the
execution, delivery and performance of this Agreement by the Company or in
connection with the taking by the Company of any action contemplated hereby,
except such as have been obtained under the Act or the Rules and Regulations
and such as may be required under state securities or Blue Sky laws or the
by-laws and rules of the National Association of Securities Dealers, Inc. (the
"NASD") in connection with the purchase and distribution by the Underwriters of
the Shares.
(xii) The Company has full corporate power
and authority to enter into this Agreement. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company and is enforceable against the Company in
accordance with the terms hereof. The performance of this Agreement and the
consummation of the transactions contemplated hereby and the application of the
net proceeds from the offering and sale of the Shares in the manner set forth
in the Prospectus under "Use of Proceeds" will not result in the creation or
imposition of any lien, charge or encumbrance upon any of the assets of the
Company or any of its Subsidiaries pursuant to the terms or provisions of, or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, or give any other party a right to terminate any of
its obligations under, or result in the acceleration of any obligation under,
the certificate of incorporation or by-laws of the Company or any of its
Subsidiaries, any contract or other agreement to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
or any of their respective properties is bound or affected, or violate or
conflict with any judgment, ruling, decree, order, statute, rule or regulation
of any court or other governmental agency or body applicable to the business or
properties of the Company or any of its Subsidiaries.
(xiii) The Company and each of its
Subsidiaries has good and marketable title to all properties and assets
described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are described in the
Prospectus or are not material to the business of the Company or its
Subsidiaries. The Company and each of its Subsidiaries has valid, subsisting
and enforceable leases for the properties described in the Prospectus as leased
by it, with such exceptions as are not material and do not materially interfere
with the use made and proposed to be made of such properties by the Company and
such Subsidiaries.
(xiv) There is no document or contract or
other agreement of a character required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement which is not described or filed as required. All such contracts or
other agreements to which the Company or any Subsidiary is a party have been
duly authorized, executed and delivered by the Company or such
<PAGE> 9
9
Subsidiary, constitute valid and binding agreements of the Company or such
Subsidiary and are enforceable against the Company or such Subsidiary in
accordance with the terms thereof.
(xv) No statement, representation,
warranty or covenant made by the Company in this Agreement or made in any
certificate or document required by this Agreement to be delivered to the
Representatives was or will be, when made, inaccurate, untrue or incorrect.
(xvi) Neither the Company nor any of its
directors, officers or controlling persons has taken, directly or indirectly,
any action intended, or which might reasonably be expected, to cause or result,
under the Act or otherwise, in, or which has constituted, stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares.
(xvii) No holder of securities of the
Company has rights to the registration of any securities of the Company because
of the filing of the Registration Statement.
(xviii) The Shares are duly authorized for
listing, subject to official notice of issuance, on The Nasdaq National Market.
(xix) The Company and its Subsidiaries are
in compliance with all federal, state and local employment and labor laws,
including, but not limited to, laws relating to non-discrimination in hiring,
promotion and pay of employees; no labor dispute with the employees of the
Company or any Subsidiary exists or, to the knowledge of the Company, is
imminent or threatened; and the Company is not aware of any existing, imminent
or threatened labor disturbance by the employees of any of its principal
suppliers, customers, manufacturers or contractors that could result in a
material adverse effect on the condition (financial or otherwise) or on the
earnings, business, properties, business prospects or operations of the Company
and its Subsidiaries, taken as a whole.
(xx) The Company and its Subsidiaries
own, or are licensed or otherwise have the full exclusive right to use, the
material patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary
or confidential information, systems or procedures), trademarks, services marks
and trade names (collectively, "patent and proprietary rights") presently
employed by them or which are necessary in connection with the conduct of the
business now operated by them, and neither the Company nor any of its
Subsidiaries has received any written notice or otherwise has actual knowledge
of any infringement of or conflict with asserted rights of others or any other
claims with respect to any patent or proprietary rights, or of any basis for
rendering any patent and proprietary rights invalid or inadequate to protect
the interest of the Company or any of its Subsidiaries.
<PAGE> 10
10
(xxi) Neither the Company nor any of its
Subsidiaries nor, to the Company's knowledge, any employee or agent of the
Company or any Subsidiary has made any payment of funds of the Company or any
Subsidiary or received or retained any funds in violation of any law, rule or
regulation or of a character required to be disclosed in the Prospectus.
(xxii) The Company has complied, and until
the completion of the distribution of the Shares will comply, with all of the
provisions of (including, without limitation, filing all forms required by)
Section 517.075 of the Florida Securities and Investor Protection Act and
Regulation 3E-900.001 issued thereunder with respect to the offering and sale
of the Shares.
(xxiii) At the Closing Date and at all times
prior thereto, the Company and its Subsidiaries have been in compliance with
any and all applicable foreign, federal, state and local laws and regulations
and non-governmental requirements relating to the protection of human health,
safety, and the environment or imposing liability or standards of conduct
concerning any Hazardous Material (as hereinafter defined) ("Environmental,
Health and Safety Requirements"). The term Environmental Health and Safety
Requirements shall include, without limitation, requirements administered,
imposed, or enforced by the U.S. Environmental Protection Agency ("EPA"), the
U.S. Nuclear Regulatory Commission ("NRC"), the U.S. Food and Drug
Administration ("FDA"), or the U.S. Department of Agriculture ("U.S.D.A."), any
corresponding or delegated state agency, and any non-governmental organization
from which the Company or its subsidiaries have applied for or obtained formal
certification or registration, which requirements govern the use and operation
of the Company's processes, facilities and equipment, whether or not those
requirements are imposed on the Company directly. The term "Hazardous
Material" means (A) any "hazardous substance" as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, (B)
any "hazardous waste" as defined by the Resource Conservation and Recovery Act,
as amended, (C) any petroleum or petroleum product, (D) any polychlorinated
biphenyl, (E) any radioactive or radiological material, substance, waste, or
by-product, and (E) any pollutant or contaminant or hazardous, dangerous, or
toxic chemical, material, waste or substance regulated under or within the
meaning of any other Environmental, Health and Safety Requirement.
(xxiv) At the Closing Date and at all times
prior thereto, the Company and its Subsidiaries have received all necessary
permits, licenses, certifications, registrations or other approvals under
applicable Environmental, Health and Safety Requirements to conduct their
respective businesses and have been in compliance with all terms and
conditions of permits, licenses, certifications, registrations or approvals
issued with respect to such businesses. Neither the Company nor its
Subsidiaries has received any notice or other communication alleging that any
of them is not in compliance with any Environmental, Health and Safety
Requirement. Except as set forth in the Registration Statement and the
Prospectus, neither the Company nor its Subsidiaries has generated,
manufactured, produced, transported, imported, used, treated,
<PAGE> 11
11
refined, processed, handled, stored, discharged, released, or disposed of any
Hazardous Material (whether lawfully or unlawfully) at any site owned, leased,
occupied, or controlled by the Company or its Subsidiaries on or at any time
prior to the Closing Date. There are not and have not been any releases or
threatened releases of any Hazardous Material in any quantity at, on, under,
from, or in the vicinity of any such site the Leased Premises. No former owner
or user of any such site engaged in any type of manufacturing or commercial
activity which might be reasonably expected to generate, manufacture, produce,
transport, import, use, treat, refine, process, handle, store, discharge,
release, or dispose of any Hazardous Material (whether lawfully or unlawfully)
on the Leased Premises.
(xxv) In the ordinary course of its
business, the Company conducts a periodic review of the effect of
Environmental, Health and Safety Requirements on the business, operations and
properties of the Company and its Subsidiaries, in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up,
closure of properties or compliance with Environmental, Health and Safety
Requirements or any permit, license, certification, registration or approval,
any related constraints on operating activities, and any potential liabilities
to third parties). Except as set forth in the Registration Statement and the
Prospectus there are no costs and liabilities associated with or arising in
connection with Environmental, Health and Safety Requirements as currently in
effect (including, without limitation, costs of compliance therewith) which
would, singly or in the aggregate have a material adverse effect on the
condition (financial or otherwise) or on the earnings, business, properties,
business prospects or operations of the Company and its Subsidiaries, taken as
a whole. There are no circumstances that may prevent or interfere with the
Company and its Subsidiaries compliance with any Environmental, Health and
Safety Law.
(xxvi) The Company maintains insurance with
respect to its properties and business of the types and in amounts generally
deemed adequate for its business and consistent with insurance coverage
maintained by similar companies and businesses, all of which insurance is in
full force and effect.
(xxvii) The Company has filed all material
federal, state and foreign income and franchise tax returns and has paid all
taxes shown as due thereon, other than taxes which are being contested in good
faith and for which adequate reserves have been established in accordance with
generally accepted accounting principles ("GAAP"); and the Company has no
knowledge of any tax deficiency which has been or might be asserted or
threatened against the Company. There are no tax returns of the Company or any
of its Subsidiaries that are currently being audited by state, local or federal
taxing authorities or agencies (and with respect to which the Company or any
Subsidiary has received notice), where the findings of such audit, if adversely
determined, would result in a material adverse effect on the condition
(financial or otherwise) or on the earnings, business, properties, business
prospects or operations of the Company and its Subsidiaries, taken as a whole.
<PAGE> 12
12
(xxviii) With respect to each
employee benefit plan, program and arrangement (including, without limitation,
any "employee benefit plan" as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) maintained or
contributed to by the Company, or with respect to which the Company could incur
any liability under ERISA (collectively, the "Benefit Plans"), no event has
occurred and, to the best knowledge of the Company, there exists no condition
or set of circumstances, in connection with which the Company could be subject
to any liability under the terms of such Benefit Plan, applicable law
(including, without limitation, ERISA and the Internal Revenue Code of 1986, as
amended) or any applicable agreement that could materially adversely affect the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries, taken as a whole.
4. Agreements of the Company and the Selling Stockholders. The Company
and the Selling Stockholders (as to Sections 5(i), (j), (k) and (m)) agree with
the several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or thereafter
during such period as the Prospectus is required by law to be delivered in
connection with sales of the Shares by an Underwriter or dealer, file any
amendment or supplement to the Registration Statement or the Prospectus, unless
a copy thereof shall first have been submitted to the Representatives within a
reasonable period of time prior to the filing thereof and the Representatives
shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly,
and will confirm such advice in writing, (1) when the Registration Statement
has become effective and when any post-effective amendment thereto becomes
effective, (2) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(3) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose or the threat thereof, (4) of the happening of any
event during the period mentioned in the second sentence of Section 4(e) that
in the judgment of the Company makes any statement made in the Registration
Statement or the Prospectus untrue or that requires the making of any changes
in the Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading and (5) of receipt by the Company or any representative or attorney
of the Company of any other communication from the Commission relating to the
Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. The Company will use its best efforts to comply with the
provisions of and make all requisite filings with the Commission pursuant to
Rule 430A and to notify the Representatives promptly of all such filings.
<PAGE> 13
13
(c) The Company will furnish to the Representatives, without charge, two
signed copies of the Registration Statement and of any post- effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto and will furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the Company
will deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representatives may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the judgment of the Company or counsel
to the Underwriters should be set forth in the Prospectus in order to make any
statement therein, in the light of the circumstances under which it was made,
not misleading, or if it is necessary to supplement or amend the Prospectus to
comply with law, the Company will forthwith prepare and duly file with the
Commission an appropriate supplement or amendment thereto, and will deliver to
each of the Underwriters, without charge, such number of copies thereof as the
Representatives may reasonably request.
(f) Prior to any public offering of the Shares by the Underwriters, the
Company will cooperate with the Representatives and counsel to the Underwriters
in connection with the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of such United States and
foreign jurisdictions as the Representatives may request; provided, that in no
event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to general service of process in any jurisdiction where it is not
now so subject.
(g) During the period of five years commencing on the Effective Date, the
Company will furnish to the Representatives and each other Underwriter who may
so request copies of such financial statements and other periodic and special
reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock, and will furnish to the
Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
(h) The Company will make generally available to holders of its securities
as soon as may be practicable but in no event later than the last day of the
fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but
shall be in reasonable detail) for a period of 12
<PAGE> 14
14
months ended commencing after the Effective Date, and satisfying the provisions
of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company and the Selling
Stockholders will pay, or reimburse if paid by the Representatives, all costs
and expenses incident to the performance of the obligations of the Company and
the Selling Stockholders under this Agreement, including but not limited to
costs and expenses of or relating to (1) the preparation, printing and filing
of the Registration Statement and exhibits to it, each preliminary prospectus,
the Prospectus and any amendment or supplement to the Registration Statement or
the Prospectus, (2) the preparation and delivery of certificates representing
the Shares, (3) the word processing, printing and reproduction of this
Agreement, the Agreement Among Underwriters, any Dealer Agreements and any
Underwriters' Questionnaire, (4) furnishing (including costs of shipping,
mailing and courier) such copies of the Registration Statement, the Prospectus
and any preliminary prospectus, and all amendments and supplements thereto, as
may be requested for use in connection with the offering and sale of the Shares
by the Underwriters or by dealers to whom Shares may be sold, (5) the listing
of the Shares on the Nasdaq National Market, (6) any filings required to be
made by the Underwriters with the NASD, and the fees, disbursements and other
charges of counsel for the Underwriters in connection therewith, (7) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions designated pursuant to
Section 4(f), including the fees, disbursements and other charges of counsel to
the Underwriters in connection therewith, and the preparation and printing of
preliminary, supplemental and final Blue Sky memoranda, (8) counsel to the
Company and counsel to the Selling Stockholders, (9) the transfer agent for the
Shares and (10) the Accountants.
(j) If this Agreement shall be terminated by the Company or the Selling
Stockholders pursuant to any of the provisions hereof (otherwise than pursuant
to Section 8) or if for any reason the Company or any Selling Stockholder
shall be unable to perform its obligations hereunder, the Company and the
Selling Stockholders will reimburse the several Underwriters for all
out-of-pocket expenses (including the fees, disbursements and other charges of
counsel to the Underwriters) reasonably incurred by them in connection
herewith.
(k) The Company and the Selling Stockholders will not at any time,
directly or indirectly, take any action intended, or which might reasonably be
expected, to cause or result in, or which will constitute, stabilization of the
price of the shares of Common Stock to facilitate the sale or resale of any of
the Shares.
(l) The Company will apply the net proceeds from the offering and sale of
the Shares to be sold by the Company in the manner set forth in the Prospectus
under "Use of Proceeds" and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.
<PAGE> 15
15
(m) During the period of 180 days commencing at the date of the
Prospectus, the Company and the Selling Stockholders will not, without the
prior written consent of PaineWebber Incorporated, directly or indirectly,
offer to sell, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, any Common Stock or securities convertible into or
exchangeable for Common Stock or warrants or other rights to acquire shares of
Common Stock, other than to the Underwriters pursuant to this Agreement and
other than pursuant to employee benefit plans, provided, that the Company will
not grant options to purchase shares of Common Stock pursuant to such employee
benefit plans at a price less than the initial public offering price. In
addition, the Selling Stockholders will not, without the prior written consent
of PaineWebber Incorporated during this period require the Company to file with
the Securities and Exchange Commission a registration statement under the
Securities Act of 1933, as amended (the "Act"), to register any shares of
Common Stock or securities convertible into or exchangeable for Common Stock or
warrants and other rights to acquire shares of Common Stock.
(n) The Company will not, and will cause each of its executive officers,
directors and each beneficial owner of more than 5% of the outstanding shares
of Common Stock to enter into agreements with the Representatives in the form
set forth in Exhibit C to the effect that they will not, for a period of 180
days after the date of the Prospectus, without the prior written consent of
PaineWebber Incorporated, directly or indirectly, offer to sell, sell, contract
to sell, grant any option for the sale of, or otherwise dispose of, any shares
of Common Stock or rights to acquire such shares (other than pursuant to
employee stock option plans or in connection with other employee incentive
compensation arrangements).
5. Conditions of the Obligations of the Underwriters. In addition to the
execution and delivery of the Price Determination Agreement, the obligations of
each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Representatives not later than 5:00 p.m., New York
City time, on the date of this Agreement or at such later date and time as
shall be consented to in writing by the Representatives and all filings
required by Rule 424 of the Rules and Regulations and Rule 430A shall have been
made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or
registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the
Commission or such authorities and (iv) after the date hereof, no amendment or
supplement to the Registration Statement or the Prospectus shall have been
filed unless a copy thereof was first submitted to the Representatives and the
<PAGE> 16
16
Representatives did not object thereto in good faith, and the Representatives
shall have received certificates, dated the Closing Date and the Option Closing
Date, as the case may be, and signed by the Chief Executive Officer or the
Chairman of the Board of Directors of the Company and the Chief Financial
Officer of the Company (who may, as to proceedings threatened, rely upon the
best of their information and belief), to the effect of clauses (i), (ii) and
(iii).
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been, and
no development shall have occurred which could reasonably be expected to result
in, a material adverse change in the general affairs, business, business
prospects, properties, management, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business, in
each case other than as set forth in or contemplated by the Registration
Statement and the Prospectus and (ii) neither the Company nor any of its
Subsidiaries shall have sustained any material loss or interference with its
business or properties from fire, explosion, flood or other casualty, whether
or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental or regulatory action, order or decree, which
is not set forth in the Registration Statement and the Prospectus, if in the
judgment of the Representatives any such development makes it impracticable or
inadvisable to consummate the sale and delivery of the Shares by the
Underwriters at the initial public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted or threatened against the Company or any of its
Subsidiaries or any of their respective officers or directors in their
capacities as such, before or by any Federal, state or local court, commission,
governmental or industry regulatory body, administrative agency or other
governmental body, domestic or foreign, in which litigation or proceeding an
unfavorable ruling, decision or finding would materially and adversely affect
the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries taken
as a whole.
(e) Each of the representations and warranties of the Company and, if the
Option is exercised, the Selling Stockholders contained herein shall be true
and correct in all material respects at the Closing Date and, with respect to
the Option Shares, at the Option Closing Date, as if made at the Closing Date
and, with respect to the Option Shares, at the Option Closing Date, and all
covenants and agreements herein contained to be performed on the part of the
Company and the Selling Stockholders and all conditions herein contained to be
fulfilled or complied with by the Company and the Selling Stockholders at or
prior to the Closing Date and, with respect to the Option Shares, at or prior
to the Option Closing Date, shall have been duly performed, fulfilled or
complied with.
(f) The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date, and
satisfactory in form and
<PAGE> 17
17
substance to counsel for the Underwriters, from Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, counsel to the Company, to the effect set
forth in Exhibit D.
(g) The Representatives shall have received an opinion, dated the Closing
Date and the Option Closing Date, from Morrison & Foerster LLP, counsel to the
Underwriters, with respect to the Registration Statement, the Prospectus and
this Agreement, which opinion shall be satisfactory in all respects to the
Representatives.
(h) If the Option is exercised, the Representatives shall have received an
opinion, dated the Option Closing Date, of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, counsel for the Selling Stockholders, dated the
Option Closing Date, to the effect set forth in Exhibit E.
(i) The Representatives shall have received an opinion, dated the Closing
Date and the Option Closing Date, from each of Hogan and Hartson, regulatory
counsel to the Company, to the effect set forth in Exhibit F, from Lowenstein
and Sandler, New Jersey environmental counsel to the Company, to the effect set
forth in Exhibit G, and from Akin, Gump, Strauss, Hauer and Feld, NRC counsel
to the Company, to the effect set forth in Exhibit H, which opinions shall be
satisfactory in all respects to the Representatives.
(j) On the date of the Prospectus, the Accountants shall have furnished to
the Representatives a letter, dated the date of its delivery, addressed to the
Representatives and in form and substance satisfactory to the Representatives,
confirming that they are independent accountants with respect to the Company as
required by the Act and the Rules and Regulations and with respect to the
financial and other statistical and numerical information contained in the
Registration Statement. At the Closing Date and, as to the Option Shares, the
Option Closing Date, the Accountants shall have furnished to the
Representatives a letter, dated the date of its delivery, which shall confirm,
on the basis of a review in accordance with the procedures set forth in the
letter from the Accountants, that nothing has come to their attention during
the period from the date of the letter referred to in the prior sentence to a
date (specified in the letter) not more than five days prior to the Closing
Date and the Option Closing Date which would require any change in their letter
dated the date of the Prospectus, if it were required to be dated and delivered
at the Closing Date and the Option Closing Date.
(k) At the Closing Date and, as to the Option Shares, the Option Closing
Date, there shall be furnished to the Representatives an accurate certificate,
dated the date of its delivery, signed by each of the Chief Executive Officer
and the Chief Financial Officer of the Company, in form and substance
satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has
carefully examined the Registration Statement and the Prospectus and (A) as of
the date of such certificate, such documents are true and correct in all
material respects and do not omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not untrue
or misleading and (B) since the Effective Date, no event has
<PAGE> 18
18
occurred as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein not untrue or misleading in
any material respect;
(ii) Each of the representations and
warranties of the Company contained in this Agreement were, when originally
made, and are, at the time such certificate is delivered, true and correct in
all material respects;
(iii) Each of the covenants required
herein to be performed by the Company on or prior to the delivery of such
certificate has been duly, timely and fully performed and each condition herein
required to be complied with by the Company on or prior to the date of such
certificate has been duly, timely and fully complied with; and
(iv) Since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
(A) there has not been, and no development has occurred which could reasonably
be expected to result in, a material adverse change in the general affairs,
business, business prospects, properties, management, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries, taken
as a whole, whether or not arising from transactions in the ordinary course of
business, in each case other than as set forth in or contemplated by the
Registration Statement and the Prospectus and (B) neither the Company nor any
of its Subsidiaries has sustained any material loss or interference with its
business or properties from fire, explosion, flood or other casualty, whether
or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree, which is not set
forth in the Registration Statement and the Prospectus;
and such other matters as the Representatives may reasonably request.
(l) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 4(n).
(m) The Shares shall be qualified for sale in such states and other
jurisdictions as the Representatives may reasonably request, each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Closing Date and the Option Closing Date.
(n) Prior to the Closing Date, the Shares shall have been duly authorized
for listing by the Nasdaq National Market upon official notice of issuance.
(o) The National Association of Securities Dealers, Inc. shall have
approved the underwriting terms and arrangements and such approval shall not
have been withdrawn or limited.
(p) If the Option is exercised, at the Option Closing Date there shall
have been furnished to the Representatives an accurate certificate, dated the
date of its delivery, signed by or on behalf of each of the Selling
Stockholders, in form and substance
<PAGE> 19
19
satisfactory to the Representatives, to the effect that the representations and
warranties of each of the Selling Stockholders contained herein are true and
correct in all material respects on and as of the date of such certificate as
if made on and as of the date of such certificate, and each of the covenants
and conditions required herein to be performed or complied with by the Selling
Stockholders on or prior to the date of such certificate has been duly, timely
and fully performed or complied with.
(q) The Company and the Selling Stockholders shall have furnished to the
Representatives such certificates, in addition to those specifically mentioned
herein, as the Representatives may have reasonably requested as to the accuracy
and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus, as to the accuracy
at the Closing Date and the Option Closing Date of the representations and
warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder, or as to the fulfillment of the conditions concurrent
and precedent to the obligations hereunder of the Representatives.
6. Indemnification.
(a) The Company will jointly and severally indemnify and hold harmless
each Underwriter, the directors, officers, employees and agents of each
Underwriter and each person, if any, who controls each Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), from and against any and all losses,
claims, liabilities, expenses and damages (including, but not limited to, any
and all investigative, legal and other expenses reasonably incurred in
connection with, and any and all amounts paid in settlement of, any action,
suit or proceeding between any of the indemnified parties and any indemnifying
parties or between any indemnified party and any third party, or otherwise, or
any claim asserted), as and when incurred, to which any Underwriter, or any
such person, may become subject under the Act, the Exchange Act or other
Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, liabilities, expenses or damages arise out of
or are based on (i) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus or in any application or other document executed by
or on behalf of the Company or the Selling Stockholders or based on written
information furnished by or on behalf of the Company or the Selling
Stockholders filed in any jurisdiction in order to qualify the Shares under the
securities laws thereof or filed with the Commission, (ii) the omission or
alleged omission to state in such document a material fact required to be
stated in it or necessary to make the statements in it not misleading or (iii)
any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Shares or the
offering contemplated hereby, and which is included as part of or referred to
in any loss, claim, liability, expense or damage arising out of or based upon
matters covered by clause (i) or (ii) above (provided that the Company shall
not be liable under this clause (iii) to the
<PAGE> 20
20
extent it is finally judicially determined by a court of competent jurisdiction
that such loss, claim, liability, expense or damage resulted directly from any
such acts or failures to act undertaken or omitted to be taken by such
underwriter through its gross negligence or willful misconduct); provided that
the Company will not be liable to the extent that such loss, claim, liability,
expense or damage arises from the sale of the Shares in the public offering to
any person by an Underwriter and is based on an untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives on behalf of any Underwriter expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus. This
indemnity agreement will be in addition to any liability that the Company might
otherwise have. The Company hereby acknowledges and agrees that its
indemnification obligations in this Section 6(a) shall be joint and several and
without limit with respect to all such losses, claims, liabilities, expenses or
damages arising in connection with the offer and sale of any of the Shares,
including, without limitation, the Option Shares, and the Company further
acknowledges and agrees that such indemnification is in the Company's interest
and necessary in order to induce the Underwriters to enter into this Agreement
and to offer and sell the Shares.
(b) Each Underwriter will indemnify and hold harmless the Company, each
person, if any, who controls the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act, each director of the Company and
each officer of the Company who signs the Registration Statement to the same
extent as the foregoing indemnity from the Company to each Underwriter, but
only insofar as losses, claims, liabilities, expenses or damages arise out of
or are based on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representatives on
behalf of such Underwriter expressly for use in the Registration Statement, the
Preliminary Prospectus or the Prospectus. This indemnity will be in addition
to any liability that each Underwriter might otherwise have; provided, however,
that in no case shall any Underwriter be liable or responsible for any amount
in excess of the underwriting discounts and commissions received by such
Underwriter.
(c) Any party that proposes to assert the right to be indemnified under
this Section 6 or under Section B3 of Exhibit B hereto will, promptly after
receipt of notice of commencement of any action against such party in respect
of which a claim is to be made against an indemnifying party or parties under
this Section 6 or under Section B3 of Exhibit B, notify each such indemnifying
party of the commencement of such action, enclosing a copy of all papers
served, but the omission so to notify such indemnifying party will not relieve
it from any liability that it may have to any indemnified party under the
foregoing provisions of this Section 6 or under Section B3 of Exhibit B unless,
and only to the extent that, such omission results in the forfeiture of
substantive rights or defenses by the indemnifying party. If any such action
is brought against any indemnified party and it notifies the indemnifying party
of its commencement, the indemnifying party will be entitled to participate in
and, to the extent that it elects by
<PAGE> 21
21
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel satisfactory to the indemnified party, and after
notice from the indemnifying party to the indemnified party of its election to
assume the defense, the indemnifying party will not be liable to the
indemnified party for any legal or other expenses except as provided below and
except for the reasonable costs of investigation subsequently incurred by the
indemnified party in connection with the defense. The indemnified party will
have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (2) the indemnified
party has reasonably concluded (based on advice of counsel) that there may be
legal defenses available to it or other indemnified parties that are different
from or in addition to those available to the indemnifying party, (3) a
conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (4) the indemnifying
party has not in fact employed counsel to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees, disbursements and other
charges of counsel will be at the expense of the indemnifying party or parties.
It is understood that the indemnifying party or parties shall not, in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the reasonable fees, disbursements and other charges of more than
one separate firm admitted to practice in such jurisdiction at any one time for
all such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred. An indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld). No indemnifying party shall, without the prior written
consent of each indemnified party, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action or proceeding
relating to the matters contemplated by this Section 6 or Section B3 of Exhibit
B hereto (whether or not any indemnified party is a party thereto), unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising or that may arise out of such
claim, action or proceeding. Notwithstanding any other provision of this
Section 6 (c), if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
<PAGE> 22
22
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 or Section B3 of Exhibit B hereto is applicable in
accordance with its terms but for any reason is held to be unavailable from the
Company, the Selling Stockholders or the Underwriters, the Company, the Selling
Stockholders and the Underwriters will contribute to the total losses, claims,
liabilities, expenses and damages (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company or the Selling Stockholders
from persons other than the Underwriters, such as persons who control the
Company or the Selling Stockholders within the meaning of the Act, officers of
the Company who signed the Registration Statement and directors of the Company,
who also may be liable for contribution) to which the Company or the Selling
Stockholders and any one or more of the Underwriters may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company and the Selling Stockholders on the one hand and the Underwriters
on the other. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page
of the Prospectus and the footnotes thereto. If, but only if, the allocation
provided by the foregoing sentence is not permitted by applicable law, the
allocation of contribution shall be made in such proportion as is appropriate
to reflect not only the relative benefits referred to in the foregoing sentence
but also the relative fault of the Company and the Selling Stockholders, on the
one hand, and the Underwriters, on the other, with respect to the statements or
omissions which resulted in such loss, claim, liability, expense or damage, or
action in respect thereof, as well as any other relevant equitable
considerations with respect to such offering. Such relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company, the Selling Stockholders or the
Representatives on behalf of the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Stockholders and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 6(d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by
any other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, liability, expense or damage,
or action in respect thereof, referred to above in this Section 6(d) shall be
deemed to include, for purpose of this Section 6(d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6(d), no Underwriter shall be required to contribute
any amount in excess of the underwriting discounts and commissions received by
it, no Selling Stockholder shall be required to contribute any amount in excess
of the net
<PAGE> 23
23
proceeds (before deducting expenses) received by it from the sale of Option
Shares, and no person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) will be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 6(d) are
several in proportion to their respective underwriting obligations and not
joint. For purposes of this Section 6(d), any person who controls a party to
this Agreement within the meaning of the Act will have the same rights to
contribution as that party, and each officer of the Company who signed the
Registration Statement will have the same rights to contribution as the
Company, subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 6(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 6 (d). Except for a settlement entered
into pursuant to the last sentence of Section 6 (c) hereof, no party will be
liable for contribution with respect to any action or claim settled without its
written consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in this Section 6
and in Section B3 of Exhibit B hereto and the representations and warranties of
the Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any investigation made by or on behalf of
the Underwriters, (ii) acceptance of the Shares and payment therefor or (iii)
any termination of this Agreement.
7. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time on or prior to the Closing Date (or,
with respect to the Option Shares, on or prior to the Option Closing Date), by
notice to the Company from the Representatives, without liability on the part
of any Underwriter to the Company or any Selling Stockholder, if, prior to
delivery and payment for the Shares (or the Option Shares, as the case may be),
in the sole judgment of the Representatives, (i) there has been, since the
respective dates as of which information is given in the Registration
Statement, any material adverse change in the Company's business, properties,
business prospects, condition (financial or otherwise) or results of
operations, (ii) trading in any of the equity securities of the Company shall
have been suspended by the Commission, the NASD, by an exchange that lists the
Shares or by the Nasdaq Stock Market, (iii) trading in securities generally on
the New York Stock Exchange or the Nasdaq Stock Market shall have been
suspended or limited or minimum or maximum prices shall have been generally
established on such exchange or over the counter market, or additional material
governmental restrictions, not in force on the date of this Agreement, shall
have been imposed upon trading in securities generally by such exchange or by
order of the Commission or the NASD or any court or other governmental
authority, (iv) a general banking moratorium shall have been declared by either
Federal or New York State authorities or (v) any material adverse change in the
financial or securities markets in the United States or in political, financial
or economic conditions in the United States or any
<PAGE> 24
24
outbreak or material escalation of hostilities or declaration by the United
States of a national emergency or war or other calamity or crisis shall have
occurred the effect of any of which is such as to make it, in the sole judgment
of the Representatives, impracticable or inadvisable to market the Shares on
the terms and in the manner contemplated by the Prospectus.
8. Substitution of Underwriters. If any one or more of the Underwriters
shall fail or refuse to purchase any of the Firm Shares which it or they have
agreed to purchase hereunder, and the aggregate number of Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase is not more than one-tenth of the aggregate number of Firm Shares, the
other Underwriters shall be obligated, severally, to purchase the Firm Shares
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase, in the proportions which the number of Firm Shares which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
number of Firm Shares which all such non-defaulting Underwriters have so agreed
to purchase, or in such other proportions as the Representatives may specify;
provided that in no event shall the maximum number of Firm Shares which any
Underwriter has become obligated to purchase pursuant to Section 1 be increased
pursuant to this Section 8 by more than one-ninth of the number of Firm Shares
agreed to be purchased by such Underwriter, without the prior written consent
of such Underwriter. If any Underwriter or Underwriters shall fail or refuse
to purchase any Firm Shares and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
exceeds one-tenth of the aggregate number of the Firm Shares and arrangements
satisfactory to the Representatives and the Company for the purchase of such
Firm Shares are not made within 48 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter,
the Selling Stockholders or the Company for the purchase or sale of any Shares
under this Agreement. In any such case either the Representatives or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken pursuant to this Section 8
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
<PAGE> 25
25
9. Miscellaneous. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the office of the Company, 4020 Clipper
Court, Fremont, California 94538-6540, Attention: President, (b) if to the
Selling Stockholders, in care of ___________, _________, or (c) if to the
Underwriters, to the Representatives at the offices of PaineWebber
Incorporated, 1285 Avenue of the Americas, New York, New York 10019, Attention:
Corporate Finance Department. Any such notice shall be effective only upon
receipt. Any notice under Section 7 or 8 may be made by telex or telephone,
but if so made shall be subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Selling Stockholders and the Company and of the
controlling persons, directors and officers referred to in Section 6, and their
respective successors and assigns, and no other person shall acquire or have
any right under or by virtue of this Agreement. The term "successors and
assigns" as used in this Agreement shall not include a purchaser, as such
purchaser, of Shares from any of the several Underwriters.
All representations, warranties and agreements of the Company and the
Selling Stockholders contained herein or in certificates or other instruments
delivered pursuant hereto, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
of its controlling persons and shall survive delivery of and payment for the
Shares hereunder.
Any action required or permitted to be taken by the Representatives
under this Agreement may be taken by them jointly or by PaineWebber
Incorporated.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS
PRINCIPLES OF SUCH STATE.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company, the Selling Stockholders and the Underwriters each hereby
irrevocably waive any right they may have to a trial by jury in respect of any
claim based upon or arising out of this Agreement or the transactions
contemplated hereby.
This Agreement may not be amended or otherwise modified or any
provision hereof waived except by an instrument in writing signed by the
Representatives, the Selling Stockholders and the Company.
<PAGE> 26
26
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
The Company:
STERIGENICS INTERNATIONAL, INC.
By: _______________________________
Title:
The Selling Stockholders:
CHARLES W. KING III TRUST
By: ______________________________
Title:
MICHAEL J. KING TRUST
By: ______________________________
Title:
PATRICIA MORLEY KING TRUST
By: ______________________________
Title:
Confirmed as of the date first
above mentioned:
The Representatives:
PAINEWEBBER INCORPORATED
PIPER JAFFRAY INC.
WHEAT, FIRST SECURITIES, INC.
Acting on behalf of themselves and as the
<PAGE> 27
27
Representatives of the other several
Underwriters named in Schedule I hereof.
By: PAINEWEBBER INCORPORATED
By: ____________________________
Title:
PIPER JAFFRAY INC.
By: _____________________________
Title:
WHEAT, FIRST SECURITIES, INC.
By: ______________________________
Title:
<PAGE> 28
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Name of Firm Shares
Underwriters to be Purchased
------------ ---------------
<S> <C>
PaineWebber Incorporated
Piper Jaffray Inc.
Wheat, First Securities, Inc.
---------
Total 2,000,000
=========
</TABLE>
<PAGE> 29
SCHEDULE II
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Number
Name of of Option
Selling Stockholders Shares to be Sold
-------------------- -----------------
<S> <C>
Charles W. King III Trust 100,000
Michael J. King Trust 100,000
Patricia Morley King Trust 100,000
-------
Total 300,000
=======
</TABLE>
<PAGE> 1
Number Shares
[STERIGENICS INTERNATIONAL, INC. LOGO]
STERIGENICS INTERNATIONAL, INC.
COMMON STOCK See reverse side for
certain definitions and
a statement as to the
rights, preferences,
priviliges and restrictions
of shares
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE $0.001 PER SHARE, OF
STERIGENICS INTERNATIONAL, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the
facsimile signatures of the duly authorized officers.
Dated:
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
By
Authorized Signature
AMERICAN BANK NOTE COMPANY JULY 23, 1997 sc
3504 ATLANTIC AVENUE
SUITE 12 051696fc
LONG BEACH, CA 90097
(Tel)
(Fax) (562) 426-7460 306-19x REV. 1
<PAGE> 2
STERIGENICS INTERNATIONAL, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entirety ---------------------------------------------
JT TEN - as joint tenants with right of ( ) (Minor)
survivorship and not as tenants in Under Uniform Gifts to Minors
common Act
-------------------------------------------
( )
UNIF TRF MIN ACT - Custodian (under age)
-------------------------------------------
( )
-------------- Under Uniform Transfers
(Minor)
to Minors Act.
-----------------------------
( )
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
--------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- ------------------------------------
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
---------------------------
-----------------------------------------------
NOTICE: The signature(s) to this assignment must
correspond with the name(s) as written upon the
face of the certificate in every particular,
without alteration or enlargement or any change
whatever.
Signature(s) Guaranteed:
By
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION, BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS OR CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURES GUARANTEE MEDALLION PROCEEDING,
PURSUANT TO S.E.C. RULE 17Ad-15
AMERICAN BANK NOTE COMPANY JULY 17, 1997 SE
3604 ATLANTIC AVENUE
SUITE 12 051696bk
LONG BEACH, CA 90607 NEW
( )
(FAX) ( )
<PAGE> 1
EXHIBIT 5.1
[GUNDERSON DETTMER LETTERHEAD]
July 30, 1997
SteriGenics International, Inc.
4020 Clipper Court
Fremont, CA 94538-6540
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
333-30047) originally filed by SteriGenics International, Inc. (the "Company")
with the Securities and Exchange Commission (the "Commission") on June 25, 1997,
as thereafter amended or supplemented (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of up to 2,300,000 shares of the Company's Common Stock (the "Shares"). The
Shares, which include an over-allotment option granted by certain stockholders
of the Company to the Underwriters to purchase up to 300,000 additional shares
of the Company's Common Stock, are to be sold to the Underwriters by the Company
and certain stockholders of the Company as described in the Registration
Statement for resale to the public. As your counsel in connection with this
transaction, we have examined the proceedings taken and are familiar with the
proceedings proposed to be taken by you in connection with the sale and issuance
of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares, when issued and sold in the
manner described in the Registration Statement and in accordance with the
resolutions adopted by the Board of Directors of the Company, will be legally
and validly issued, fully paid and non-assessable. The Shares being sold by the
stockholders of the Company have been validly issued, are non-assessable and, to
our knowledge, are fully paid. Our opinion with respect to the Shares being sold
by the stockholders of the Company being fully paid is based solely upon your
written representations to us with respect to the consideration received for
such Shares.
We consent to the use of this opinion as an exhibit to said Registration
Statement, and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.
Very truly yours,
/s/ Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,957
<SECURITIES> 0
<RECEIVABLES> 4,845
<ALLOWANCES> 253
<INVENTORY> 0
<CURRENT-ASSETS> 8,459
<PP&E> 123,269
<DEPRECIATION> 42,939
<TOTAL-ASSETS> 91,667
<CURRENT-LIABILITIES> 11,638
<BONDS> 32,000
1,500
2
<COMMON> 3
<OTHER-SE> 30,975
<TOTAL-LIABILITY-AND-EQUITY> 91,667
<SALES> 37,668
<TOTAL-REVENUES> 37,668
<CGS> 20,425
<TOTAL-COSTS> 20,425
<OTHER-EXPENSES> 3,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,836
<INCOME-PRETAX> 5,314
<INCOME-TAX> 2,099
<INCOME-CONTINUING> 3,215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,215
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
