<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
------------------ TO
------------------
COMMISSION FILE NUMBER 000-22909
------------------------
STERIGENICS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-3323502
(STATE OF OTHER JURISDICTION OF I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER
4020 CLIPPER COURT FREMONT, CA 94538-6540
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(510) 770-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate number of shares outstanding of each of the issuer's classes of
common stock, at the latest practicable date:
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF: NOVEMBER 11, 1997
- --------------------------------------------------------------------------------------------
<S> <C>
Common Stock 6,829,039
</TABLE>
================================================================================
<PAGE> 2
STERIGENICS INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements...............................
Condensed Consolidated Balance Sheets as of September 30, 1997 and March
31, 1997.................................................................. 3
Condensed Consolidated Statements of Operations for the Three Months and
Six Months Ended September 30, 1997 and 1996.............................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1997 and 1996............................................... 5
Notes to Condensed Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition....................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 21
Item 2. Changes in Securities..................................................... 21
Item 3. Defaults Upon Senior Securities........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders....................... 21
Item 5. Other Information......................................................... 21
Item 6. Exhibits and Reports on Form 8-K.......................................... 21
Signatures .......................................................................... 22
</TABLE>
2
<PAGE> 3
STERIGENICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997(1)
------------- ---------
<S> <C> <C>
Current Assets
Cash and cash equivalents:
Unrestricted.................................................... $ 24,810 $ 1,072
Restricted...................................................... 906 885
Accounts receivable, net of allowance of $154 and $253 at September
30, 1997 and March 31, 1997..................................... 5,628 4,592
Prepaid expenses and other current assets.......................... 1,279 801
Deferred income taxes................................................ 1,109 1,109
-------- -------
Total current assets................................................. 33,732 8,459
Property, plant and equipment, net................................... 80,284 80,330
Other assets......................................................... 3,281 2,878
-------- -------
Total assets......................................................... $ 117,297 $91,667
======== =======
LIABILITY & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................................... $ 1,561 $ 1,462
Income taxes payable................................................. 1,452 677
Accrued liabilities.................................................. 5,291 6,097
Current portion of capital lease obligations......................... 3,052 3,152
Current portion of long-term debt.................................... 250 250
-------- -------
Total current liabilities............................................ 11,606 11,638
Capital lease obligations, less current portion...................... 4,580 6,140
Long-term debt, less current portion................................. 37,000 32,000
Deferred income taxes................................................ 9,409 9,409
Series A redeemable preferred stock $0.001 par value
Authorized shares -- 100,000
Issued and outstanding shares -- None as of
September 30, 1997 and 15,000 as of March 31, 1997................. -- 1,500
Stockholders' equity:
Convertible preferred stock, Series B and C, $0.001 par value:
Authorized, issued and outstanding shares -- None at
September 30, 1997 and 1,772,727 at March 31, 1997.............. -- 2
Common stock, $0.001 par value:
Authorized shares -- 15,000,000 at September 30, 1997
Issued and outstanding shares -- 6,829,039 at
September 30, 1997 and 3,056,312 at March 31, 1997................. 7 3
Additional paid-in capital........................................... 36,146 14,727
Notes receivable from sale of common stock........................... (69) (88)
Retained earnings.................................................... 18,618 16,336
-------- -------
Total stockholders' equity........................................... 54,702 30,980
-------- -------
Total liabilities and stockholders' equity........................... $ 117,297 $91,667
======== =======
</TABLE>
- ---------------
(1) The balance sheet at March 31, 1997, has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial information.
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
STERIGENICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues............................................ $11,271 $ 9,863 $22,022 $18,027
Cost of revenues.................................... 5,895 4,846 11,696 9,143
------- ------- ------- -------
5,376 5,017 10,326 8,884
Costs and expenses:
General and administrative........................ 1,623 1,820 3,260 3,237
Marketing and selling............................. 859 708 1,682 1,268
Research, development and engineering............. 294 386 606 659
------- ------- ------- -------
2,776 2,914 5,548 5,164
------- ------- ------- -------
Income from operations.............................. 2,600 2,103 4,778 3,720
Other income (expense):
Interest expense, net............................. (472) (472) (1,053) (931)
Other income (expense)............................ 14 (293) 29 (286)
------- ------- ------- -------
Income before provision for income taxes............ 2,142 1,338 3,754 2,503
Provision for income taxes.......................... 835 528 1,472 989
------- ------- ------- -------
Net income.......................................... $ 1,307 $ 810 $ 2,282 $ 1,514
======= ======= ======= =======
Net income per share................................ $ 0.21 $ 0.16 $ 0.40 $ 0.29
Shares used in computing net income per share....... 6,373 5,165 5,770 5,165
Fully diluted net income per share.................. $ 0.20 $ 0.16 $ 0.39 $ 0.29
Shares used in computing net income per share....... 6,420 5,165 5,794 5,165
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
STERIGENICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Cash flows from operating activities:
Net income............................................................. $ 2,282 $ 1,514
Reconciliation to net cash provided by operating activities:
Depreciation and amortization....................................... 4,696 3,948
Deferred income tax asset........................................... -- (14)
Changes in assets and liabilities:
Accounts receivable............................................... (1,036) (995)
Prepaid expenses and other current assets......................... (316) (595)
Accounts payable and accrued liabilities.......................... 68 886
Net assets of discontinued operations............................. -- 11
------- -------
Net cash provided by operating activities................................ 5,694 4,755
INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................... (4,600) (14,088)
Loss from investment in joint venture.................................... -- 300
Other assets............................................................. (596) (543)
------- -------
Net cash used in investing activities.................................... (5,196) (14,331)
FINANCING ACTIVITIES:
Issuance of common stock................................................. 21,421 --
Redemption of preferred stock............................................ (1,500) --
Borrowings under industrial revenue bonds................................ 5,000 8,750
Borrowings under term loan and line of credit............................ 700 2,081
Borrowings under cobalt financing agreements............................. -- 1,549
Repayments on term loan, line of credit, industrial revenue bonds and
capital leases......................................................... (2,360) (9,568)
Increase in restricted cash.............................................. (21) (22)
------- -------
Net cash provided by financing activities................................ 23,240 2,790
------- -------
Net increase (decrease) in cash and cash equivalents..................... 23,738 (6,786)
Unrestricted cash and cash equivalents at beginning of period............ 1,072 9,062
------- -------
Unrestricted cash and cash equivalents at end of period.................. $24,810 $ 2,276
======= =======
NONCASH FINANCING ACTIVITIES:
Assets acquired under capital leases..................................... $ -- $ 1,549
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
I. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
include the accounts of SteriGenics International, Inc. ("SteriGenics" or "the
Company") and its wholly owned subsidiaries, SteriGenics East Corporation,
SteriGenics International Holding Corporation, Inc. and RSI Leasing, Inc. All
significant intercompany accounts and transactions have been eliminated.
The accompanying interim unaudited condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with generally accepted accounting principles may have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the financial statements
and notes included as part of the Company's Registration Statement on Form S-1
as declared effective by the SEC on August 13, 1997, (Reg. No. 33-30047).
II. INTERIM FINANCIAL STATEMENTS:
In the opinion of management, the unaudited interim financial statements at
September 30, 1997, and for the quarters ended September 30, 1996 and 1997
include all adjustments, consisting of normal recurring accruals, necessary to
present fairly the Company's financial position at September 30, 1997, and
results of operations and cash flows for the quarters ended September 30, 1996
and 1997. Results for the quarter ended September 30, 1997 are not necessarily
indicative of the results to be expected for the entire year.
III. 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.
IV. BASIS OF NET INCOME PER SHARE:
Net income 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.)
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 expected to increase primary earnings per share for the
three and six month periods ended September 30, 1996 and 1997 to $0.26, $0.26,
$0.25 and $0.29 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.
6
<PAGE> 7
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
V. INITIAL PUBLIC OFFERING:
In August 1997, the Company completed its initial public offering and
issued 2,000,000 shares of its common stock to the public at a price of $12.00
per share. The Company received proceeds from the offering of approximately
$21.4 million, net of underwriting discounts, commissions and offering costs.
Upon the closing of the initial public offering, all outstanding shares of its
convertible preferred stock were automatically converted into shares of common
stock. In addition, $1.5 million of net proceeds were used for the redemption of
15,000 shares of redeemable preferred stock then outstanding.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, beliefs, hopes, intentions or strategies regarding the
future. Forward-looking statements include statements regarding future sales,
market growth and competition. All forward-looking statements included in this
document are based upon information available to the Company as of the date
hereof, and the Company assumes no obligation to update any such forward-looking
statement. Actual results could differ materially from the Company's current
expectations. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors That May
Affect Future Results" as well as those discussed in this section in the
Company's Registration on Form S-1 as declared effective by the SEC on August
13, 1997 (Reg. No. 333-30047).
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 the former
facilities of RTI, Inc. ("RTI"). In fiscal 1998, the Company began operation of
its first MiniCell facility in Hayward, California and opened its second Fort
Worth, Texas facility.
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 Company has dedicated four of its
facilities to processing primarily non-medical products.
The Company's revenues have increased significantly from fiscal 1995 to the
second quarter of fiscal 1998 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
expenses during the first several months of operations. These costs have
historically exceeded revenues during the initial months of operation.
8
<PAGE> 9
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 United States Food and Drug
Administration ("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
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues. Revenues increased 14.3%, from $9.9 million in the second quarter
of fiscal 1997 to $11.3 million in the second quarter of fiscal 1998 primarily
as a result of the increase in the number of facilities, the increase in
installed curies of Cobalt 60 in its existing facilities which enabled the
Company to process a higher volume of products, the expansion of both the
Company's medical and non-medical businesses and an increase in revenues from
the Company's premium services. While there can be no assurance, the Company
believes that the trend toward increased non-medical sterilization services is
likely to continue. See "Risk Factors -- Uncertainty of Expansion in Non-medical
Markets."
Cost of revenues. Cost of revenues increased from $4.8 million in the
second quarter of fiscal 1997 to $5.9 million in the second quarter of fiscal
1998. Gross margin decreased from 50.9% in the second quarter of fiscal 1997 to
47.7% in the first quarter of fiscal 1998, due primarily to costs associated
with the opening and initial operation of new facilities in Gurnee, Illinois,
Hayward, California and Fort Worth, Texas, 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 has not, to date, been
impacted significantly by the mix of revenue derived from the Company's medical
and non-medical customers.
General and administrative. General and administrative expenses decreased
10.8%, from $1.8 million in the second quarter of fiscal 1997 to $1.6 million in
the second quarter of fiscal 1998. The decrease from the second quarter of
fiscal 1997 to the second quarter of fiscal 1998 was primarily attributable to
the reassignment in personnel from general and administrative to marketing and
sales positions which was partially offset by an increase in facility general
and administrative personnel and associated expenditures due to the addition of
new facilities. As a percentage of revenues, these expenses decreased from 18.4%
in the second quarter of fiscal 1997 to 14.3% in the second quarter of fiscal
1998. 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 21.3%, from
$708,000 in the second quarter of fiscal 1997 to $859,000 in the second quarter
of fiscal 1998. As a percentage of revenues, these expenses increased from 7.1%
in the second quarter of fiscal 1997 to 7.6% in the second quarter of fiscal
1998. These increases were primarily attributable to the addition of sales and
marketing personnel at the facility and corporate level as well as increased
travel and marketing costs.
Research, development and engineering. Research, development and
engineering expenses decreased 23.8%, from $386,000 in the second quarter of
fiscal 1997 to $294,000 in the second quarter of fiscal 1998. As a percentage of
revenues, these expenses decreased from 3.9% in the second quarter of fiscal
1997 to 2.6% in the second quarter of fiscal 1998. These decreases are primarily
attributable to a reduction in professional fees associated with project
development as well as a reduction in travel costs.
9
<PAGE> 10
Other income (expense). Net interest expense remained unchanged from the
second quarter of fiscal 1997 to the second quarter of fiscal 1998. Other
expense includes an estimated loss on investment for the three months ended
September 30, 1996.
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues. Revenues increased 22.2%, from $18.0 million in the first half of
fiscal 1997 to $22.0 million in the same period of fiscal 1998. This increase is
due primarily to the addition of the former facilities of RTI and the Gurnee,
Hayward and Fort Worth facilities, 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.
Cost of revenues. Cost of revenues increased from $9.1 million in the first
half of fiscal 1997 to $11.7 million in the same period of fiscal 1998. Gross
margin decreased from 49.3% in the first half of fiscal 1997 to 46.9% in the
same period of fiscal 1998. The decrease in gross margin from the first half of
fiscal 1997 to the same period of fiscal 1998 was due primarily to costs
associated with the opening and initial operation of new facilities in Gurnee,
Illinois, Hayward, California and Fort Worth, Texas, 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 has not, to
date, been impacted significantly by the mix of revenue derived from the
Company's medical and non-medical customers. 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. The Company's cost of revenues is subject to fluctuations
based upon changes in currency exchange rates between the U.S. dollar and the
Canadian dollar because payments under certain of the Company's Cobalt 60
operating leases are payable in Canadian dollars.
General and administrative. General and administrative expenses increased
1.0%, from $3.2 million in the first half of fiscal 1997 to $3.3 million in the
same period of fiscal 1998. The increase from the first half of fiscal 1997 to
the same period of fiscal 1998 was primarily attributable to the addition of the
former RTI facilities, the Gurnee, Hayward and Fort Worth facilities. As a
percentage of revenues, these expenses decreased from 17.9% to 14.8% in the
first half of fiscal 1997 and 1998, respectively. The decrease in general and
administrative expenses as a percentage of revenue from the first half of fiscal
1997 to the same period of fiscal 1998 was primarily due to economies of scale
achieved as the Company's revenues increased. The Company expects general and
administrative expenses will increase as the Company adds facilities and incurs
additional costs related to being a public company.
Marketing and selling. Marketing and selling expenses increased 32.6%, from
$1.3 million in the first half of fiscal 1997 to $1.7 million in the same period
of fiscal 1998. As a percentage of revenues, these expenses increased from 7.0%
to 7.6% in the first half of fiscal 1997 and 1998, respectively. These increases
are primarily attributable to increased sales and marketing personnel at the
facility and corporate level and increased travel and advertising expenses. The
Company expects marketing and selling expenses will continue to increase in
absolute dollars.
Research, development and engineering. Research, development and
engineering expenses decreased 8.0%, from $659,000 in the first half of fiscal
1997 to $606,000 in the same period of fiscal 1998. The decrease from the first
half of fiscal 1997 to the same period of fiscal 1998 is primarily attributable
to a reduction in professional fees associated with project development as well
as a reduction in travel costs. As a percentage of revenues, these expenses
decreased from 3.7% to 2.8% in the first half of fiscal 1997 and 1998,
respectively. The Company expects research, development and engineering expenses
will increase in absolute dollars as new projects are developed.
Other income (expense). Net interest expense increased 13.1%, from $931,000
in the first half of fiscal 1997 to $1.1 million in the same period of fiscal
1998. The majority of the increase in net interest expense is a result of lower
average cash balances in the first half of fiscal 1998 due to the Company's
funding of the development of new facilities and increased interest rates on the
Company's Industrial Revenue Bonds ("IRBs"). Other expense includes an estimated
loss on investment for the six months ended September 30, 1996.
10
<PAGE> 11
Provision for income taxes. The provision for income taxes for fiscal 1998
and 1997 differs from the statutory rate primarily due to state income taxes.
The Company's net deferred tax liabilities in the first half of fiscal 1997 and
the same period of fiscal 1998 relate primarily to accelerated tax depreciation
taken in excess of book depreciation.
Adoption of new accounting standards. 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.
LIQUIDITY AND CAPITAL RESOURCES
In August 1997, the Company completed its initial public offering of Common
Stock, raising approximately $21.4 million, net of expenses. Prior to the
initial public offering, the Company has financed its operations with cash from
operations, capital leases, IRB and bank financing, and the private placement of
equity securities. At September 30, 1997, the Company had $25.7 million in cash
and cash equivalents and $22.1 million in working capital.
Net cash provided by operating activities was $5.7 million and $4.8 million
in the first half of fiscal 1998 and 1997, respectively. Net cash provided by
operating activities in the first half of fiscal 1998 and the same period of
fiscal 1997 was primarily attributable to net income plus depreciation and
amortization.
Net cash used in investing activities was $5.2 million and $14.3 million in
the first half of fiscal 1998 and 1997, respectively, primarily attributable to
the purchase of property, plant and equipment (including Cobalt 60).
Net cash provided by financing activities was $23.2 million and $2.8
million in the first half of fiscal 1998 and 1997, respectively. Net cash
provided by financing activities in the first half of fiscal 1998 was primarily
attributable to the Company's initial public offering as well as the issuance of
a $5.0 million IRB used to finance the Fort Worth II facility. Net cash provided
by financing activities in the first half of fiscal 1997 was generated primarily
from an increase in IRB financing and borrowings under term loan line of credit,
offset in part by the repayment of bank and Cobalt 60 financing.
Noncash financing activities included the acquisition of Cobalt 60 through
capital leases totaling $1.5 million in the first half of fiscal 1997 (none in
fiscal 1998). 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 (7.5% at September 30, 1997), collateralized by certain
assets of the Company. The line of credit is payable on demand, and at September
30, 1997, no balance was outstanding under this line of credit.
At September 30, 1997, the Company had $36.5 million in IRB financing which
bears interest at variable rates (4.1% and 3.75% at September 30, 1997), and
$750,000 in IRB financing which bears interest at a fixed rate of 10.0%. The
IRBs are collateralized by certain assets of the Company and by letters of
credit with a bank. 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.
The Company had capital expenditures of $4.6 million and $14.1 million in
the first half of fiscal 1998 and 1997, respectively. The Company currently
expects to make additional capital expenditures during the remainder of fiscal
1998.
SteriGenics believes that 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.
The Company believes that success in its industry requires substantial
capital in order to maintain the flexibility to take advantage of opportunities
as they may arise. The Company may, from time to time, invest
11
<PAGE> 12
in or acquire complementary businesses, products or technologies. The Company
may effect additional equity or debt financing to fund such activities. The sale
of additional equity or convertible debt could result in additional dilution to
the Company's shareholders.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's
Registration Statement on Form S-1 as declared effective by the SEC on August
13, 1997 (Reg. No. 333-30047).
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 and cost of revenues because
payments under certain of the Company's Cobalt 60 capital and operating leases
are payable in Canadian dollars; 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.
12
<PAGE> 13
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.
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. 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.
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. In particular, the Company currently faces
competition from four other providers of contract Gamma sterilization services,
five providers of contract electron beam ("E-Beam") sterilization services and a
significantly larger number of providers of contract EtO sterilization services.
The Company competes with other companies that provide Gamma sterilization
services, the most significant of which is STERIS Corporation's wholly-owned
subsidiary, 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 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.
On September 17, 1997, STERIS Corporation completed its announced
acquisition of Isomedix. STERIS Corporation is a leading provider of infection
prevention, contamination protection and surgical support systems, products,
services and technologies to health care, scientific, research and industrial
customers. The acquisition will increase Isomedix's financial, management and
marketing resources. STERIS
13
<PAGE> 14
Corporation has announced its intention to expand the combined entity into other
domestic market segments as well as the international sterilization services
market. As a result of these factors, the acquisition could increase pricing
pressure and competition in the sterilization services market.
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 effect on the Company's business, financial condition and
results of operations.
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. 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.
Approval for the irradiation of food products is regulated by 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.
14
<PAGE> 15
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 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.
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.
SUBSTANTIAL DEBT.
As of September 30, 1997, the Company's total consolidated liabilities were
$62.6 million, of which $44.9 million represents long-term debt (including
current portion), its total consolidated assets were $117.3 million and its
total stockholders' equity was $54.7 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 September 30,
1997, the Company had $36.5 million of tax-free IRBs outstanding with interest
rates as of September 30, 1997 of 4.1% and 3.75% and a $750,000 tax-free IRB
with a fixed interest rate of 10.0%. 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. The Company is also
required, under certain IRB agreements, to maintain cash reserves in the amount
of the bond interest payments due within one year. As a result, such cash is not
available to the Company for working capital or other purposes.
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
15
<PAGE> 16
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.
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 nongovernmental 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.
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
16
<PAGE> 17
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.
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.
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.
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 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.
17
<PAGE> 18
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.
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.
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
18
<PAGE> 19
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.
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 OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS.
The Company's officers, directors and principal stockholders, and certain
of their affiliates beneficially own approximately 66% of the Company's
outstanding Common Stock. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. Additionally, these
stockholders 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.
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 initial public 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 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.
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
19
<PAGE> 20
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.
POTENTIAL VOLATILITY OF STOCK PRICE.
The trading price of the Company's Common Stock may be subject to wide
fluctuations in response to factors including 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.
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.
20
<PAGE> 21
PART II: OTHER INFORMATION
<TABLE>
<S> <C>
ITEM 1. LEGAL PROCEEDINGS -- NOT APPLICABLE
ITEM 2. CHANGES IN SECURITIES -- NOT APPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- NOT APPLICABLE
ITEM 5. OTHER INFORMATION -- NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
The exhibits listed in the accompanying Exhibit Index are filed or incorporated
by reference as part of this Report.
(b) REPORTS ON FORM 8-K.
There were no reports filed during the quarterly period ending September 30,
1997.
</TABLE>
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
STERIGENICS INTERNATIONAL, INC.
-------------------------------- -----------------------------------------------
Date James F. Clouser,
President and Chief Executive Officer
-------------------------------- -----------------------------------------------
Date James E. Williams,
Senior Vice President of Finance
and Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT TITLE
- ------- -----------------------------------------------------------------------------------
<C> <S>
3.2 Amended and Restated Certificate of Incorporation of Registrant -- incorporated
herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form
S-1 (File No. 333-30047)
3.3 Bylaws of Registrant -- incorporated herein by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-1 (File No. 333-30047).
4.1 Reference is made to Exhibits 3.2 and 3.3.
11.1 Statement Regarding Computation of Earnings Per Share
27.1 Financial Data Schedule
</TABLE>
23
<PAGE> 1
EXHIBIT 11.1
STERIGENICS INTERNATIONAL, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATE)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary net income per share
Shares used in computing net income per share:
Weighted Average common shares outstanding....... 4,943 3,058 4,000 3,056
Dilutive common share equivalents
Preferred stock using the if converted
method...................................... 886 1,773 1,330 1,773
Stock options using the treasury stock
method...................................... 528 304 416 304
Shares related to SAB No.s 55, 84 and 88
Stock options using the treasury stock method.... 16 32 24 32
------ ------ ------ ------
Total number of shares...................... 6,373 5,165 5,770 5,165
Net income............................................ $1,307 $ 810 $2,282 $1,514
Net income per share.................................. $ 0.21 $ 0.16 $ 0.40 $ 0.29
Fully diluted net income per share
Shares used in computing net income per share:
Weighted Average common shares outstanding....... 4,943 3,058 4,000 3,056
Dilutive common share equivalents
Preferred stock using the if converted
method...................................... 886 1,773 1,330 1,773
Stock options using the treasury stock
method...................................... 575 304 440 304
Shares related to SAB No.s 55,64 and 88
Stock options using the treasury stock
method...................................... 16 32 24 32
------ ------ ------ ------
Total number of shares...................... 6,420 5,165 5,794 5,165
Net income............................................ $1,307 $ 810 $2,282 $1,514
Net income per share.................................. $ 0.20 $ 0.16 $ 0.39 $ 0.29
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001009988
<NAME> STERIGENICS INTERNATIONAL INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 25,716
<SECURITIES> 0
<RECEIVABLES> 5,782
<ALLOWANCES> 154
<INVENTORY> 0
<CURRENT-ASSETS> 33,732
<PP&E> 125,824
<DEPRECIATION> 45,540
<TOTAL-ASSETS> 117,297
<CURRENT-LIABILITIES> 11,606
<BONDS> 37,250
0
0
<COMMON> 7
<OTHER-SE> 54,695
<TOTAL-LIABILITY-AND-EQUITY> 117,297
<SALES> 22,022
<TOTAL-REVENUES> 22,022
<CGS> 11,696
<TOTAL-COSTS> 11,696
<OTHER-EXPENSES> 606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,053
<INCOME-PRETAX> 3,754
<INCOME-TAX> 1,472
<INCOME-CONTINUING> 2,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,282
<EPS-PRIMARY> .40
<EPS-DILUTED> .39
</TABLE>
