<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1998
REGISTRATION NO. 333-45563
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STERIGENICS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 7389 95-3323502
<S> <C> <C>
(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:
<TABLE>
<S> <C>
CARLA S. NEWELL, ESQ. JEFFREY S. MARCUS, ESQ.
WILLIAM A. HOLMES, ESQ. HANS J. BRASSELER, ESQ.
BRANDI L. GALVIN, 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
(650) 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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
==================================================================================================
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
- --------------------------------------------------------------------------------------------------
Common Stock, $0.001 par
value......................... 2,350,000 shares $17.75 $41,712,500 $12,306(3)
==================================================================================================
</TABLE>
(1) Includes 300,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended.
The above calculation is based on the average of the reported high and low
prices of the Common Stock on the Nasdaq National Stock Market on February
20, 1998.
(3) The Registrant previously paid a registration fee of $13,000.
------------------------
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 FEBRUARY 25, 1998
2,050,000 SHARES
LOGO
COMMON STOCK
------------------------
Of the 2,050,000 shares of Common Stock offered hereby, 575,000 shares are
being sold by SteriGenics International, Inc. and 1,475,000 shares are being
sold by the Selling Stockholders. See "Principal and Selling Stockholders." The
Company will not receive any proceeds from the sale of the shares of Common
Stock by the Selling Stockholders.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "STER." On February 20, 1998, the last reported sale price of the
Common Stock as quoted on the Nasdaq National Market was $17.75 per share. See
"Price Range of Common Stock and Dividend Policy."
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.
<TABLE>
<S> <C> <C> <C> <C>
=======================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- -------------------------------------------------------------------------------------------------------
Per Share........................ $ $ $ $
- -------------------------------------------------------------------------------------------------------
Total............................ $ $ $ $
- -------------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-Allotment Option(3)....... $ $ $ $
=======================================================================================================
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $450,000, which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by certain of the
Selling Stockholders to the Underwriters to purchase up to 300,000
additional shares, on the same terms, solely to cover over-allotments. 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 , 1998.
------------------------
PAINEWEBBER INCORPORATED PIPER JAFFRAY INC.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
ADDITIONAL INFORMATION
SteriGenics International, Inc. (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 of 1933, as amended (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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith, files reports,
proxy or information statements, and other information with the Commission. Such
reports, proxy or information statements and other information can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as
well as at the following Regional Offices: 7 World Trade Center, 13th Floor, New
York, New York 10048; and Northwestern Atrium Center, 500 W. Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials also can be
obtained from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, by mail at
prescribed rates. In addition, the Commission has a web site on the World Wide
Web at http://www.sec.gov, containing registration statements, reports, proxy
and information statements and other information that registrants, such as the
Company, file electronically with the Commission. The Common Stock is traded on
the Nasdaq National Market, and the Company's reports, proxy or information
statements and other information may be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
------------------------
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."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE AND OTHER
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M OF THE SECURITIES ACT. SEE
"UNDERWRITING."
2
<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 and (ii) assumes that the Underwriters' over-allotment option will not
be exercised.
THE COMPANY
SteriGenics International, Inc. ("SteriGenics" or the "Company") is a
provider of high quality contract sterilization and radiation processing
services, with over 19 years of experience in the operation, design and
development of Gamma irradiation ("Gamma") facilities. The Company operates 12
Gamma facilities and one electron beam radiation ("E-Beam") facility nationwide
serving over 1,000 customers, primarily in the medical products market. In
recent years, the Company has expanded into various non-medical sterilization
and processing markets and has over 200 non-medical customers. The Company
expanded its technology base into E-Beam with its acquisition in December 1997
of certain assets of the Nicolet Electron Services Division of ThermoSpectra
Corporation (the "Nicolet Acquisition"). The Company's objective is to be the
leading provider of high quality contract sterilization and radiation processing
services.
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, prepackaged medical products as well as consumer
products are required under government regulations in the United States 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. The United States Food and Drug Administration
(the "FDA") has approved radiation as a safe and effective means of processing
poultry, pork, certain animal feed and fresh fruits and vegetables. The FDA has
also recently approved the radiation of red meat. The development of these
potential markets is subject, in the case of red meat and certain other food
products, to approvals of other regulatory agencies, such as the United States
Department of Agriculture (the "USDA"), and consumer acceptance of irradiated
foods.
The market for commercial sterilization and radiation processing is divided
between independent suppliers of sterilization and processing services
("contract processors") such as the Company and certain large manufacturers that
have in-house sterilization capabilities ("captive processors"). 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 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 and radiation processing services
outside of the United States.
The two most widely used 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 Gamma to process newly developed products. E-Beam is also used
for certain sterilization applications and is the primary technology in many
segments of the radiation processing market.
3
<PAGE> 5
The Company's integrated strategy is intended to increase its share of the
existing sterilization and radiation processing markets as well as to develop
new markets. Key elements of the Company's strategy include: (i) increasing its
share of the medical products sterilization market; (ii) expanding its
non-medical business in both sterilization and radiation processing; (iii)
pursuing strategic acquisitions of sterilization and radiation processing
facilities and businesses both domestically and internationally; (iv) exploiting
the MiniCell opportunity; (v) expanding premium services; and (vi) leveraging
its leading engineering and design capabilities.
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 in August 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
<TABLE>
<S> <C>
Common Stock Offered by the Company.......................... 575,000 shares
Common Stock Offered by the Selling Stockholders............. 1,475,000 shares
Common Stock to be Outstanding after the Offering............ 7,514,846 shares(1)
Use of Proceeds.............................................. To fund capital expenditures
including the construction of
new facilities, for potential
acquisitions and for general
corporate purposes. See "Use
of Proceeds."
Nasdaq National Market Symbol................................ STER
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of December 31, 1997. Excludes
an aggregate of 1,076,640 shares subject to outstanding options as of
December 31, 1997 at a weighted average exercise price of $7.29 per share
under the Company's 1997 Equity Incentive Plan, 1997 Stock Plan and Second
Amended and Restated 1986 Stock Option Plan. Since December 31, 1997, the
Company has granted options to purchase an aggregate of 50,250 shares at an
average exercise price of $20.38 per share under the 1997 Equity Incentive
Plan. See "Capitalization," "Management -- Stock Plans" and Note 5 of Notes
to Consolidated Financial Statements.
4
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................ $21,603 $24,585 $28,661 $30,241 $37,668 $27,684 $33,871
Cost of revenues........................ 11,896 11,679 16,389 16,978 20,425 14,641 18,019
------- ------- ------- ------- ------- ------- -------
9,707 12,906 12,272 13,263 17,243 13,043 15,852
Costs and expenses:
General and administrative............ 1,628 3,266 5,664 5,213 6,345 4,764 5,048
Marketing and selling................. 1,002 1,258 1,583 1,761 2,482 1,844 2,533
Research, development and
engineering......................... 473 518 685 890 1,381 1,040 914
------- ------- ------- ------- ------- ------- -------
3,103 5,042 7,932 7,864 10,208 7,648 8,495
------- ------- ------- ------- ------- ------- -------
Income from operations.................. 6,604 7,864 4,340 5,399 7,035 5,395 7,357
Other income (expense):
Write-down of investments in joint
ventures............................ -- -- (3,011) -- -- -- --
Interest expense, net................. (1,164) (916) (2,402) (1,846) (1,836) (1,456) (1,368)
Other income (expense)................ 315 256 139 47 115 (72) 32
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
income taxes, equity in joint ventures
and discontinued operations........... 5,755 7,204 (934) 3,600 5,314 3,867 6,021
Provision for income taxes.............. 2,045 2,479 1,185 1,448 2,099 1,528 2,356
------- ------- ------- ------- ------- ------- -------
Income (loss) before equity in joint
ventures and discontinued
operations............................ 3,710 4,725 (2,119) 2,152 3,215 2,339 3,665
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 2,339 3,665
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 $ 2,339 $ 3,665
======= ======= ======= ======= ======= ======= =======
Pro forma basic net income per
share(1).............................. $ 0.66 $ 0.48 $ 0.63
======= ======= =======
Shares used in computing pro forma basic
net income per share(1)............... 4,861 4,861 5,846
======= ======= =======
Diluted net income per share(1)......... $ 0.62 $ 0.45 $ 0.58
======= ======= =======
Shares used in computing diluted net
income per share(1)................... 5,165 5,165 6,350
======= ======= =======
OTHER CONSOLIDATED OPERATING DATA:
Capital expenditures.................... $ 9,331 $14,462 $16,549 $ 7,207 $18,613 $18,342 $ 7,589
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 22,183 $ 31,403
Working capital........................................................... 16,364 25,584
Total assets.............................................................. 121,486 130,707
Total liabilities......................................................... 63,329 63,329
Stockholders' equity...................................................... 58,157 67,378
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements included herein for
a description of the computation of pro forma basic and diluted net income
per share.
(2) As adjusted to give effect to the sale of shares of Common Stock at an
assumed public offering price of $17.75 per share and the application of the
estimated 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 sterilization and
radiation processing services due to varying manufacturing cycles, changes in
demand for customers' products and seasonality related to growth cycles for
spices and herbs and decreased demand during the third fiscal quarter and the
first part of the fourth fiscal quarter due to the 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 services in a timely and cost effective
manner; the ability of the Company to expand successfully in the non-medical
sterilization and radiation processing market; the ability to effectively
integrate and successfully expand its recently acquired E-Beam business; 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 because payments under certain of
the Company's Cobalt 60 capital and operating leases are payable in Canadian
dollars; fluctuations in the costs of electricity for the Company's E-Beam
business; loss of processing time due to maintenance; the costs associated with
customer product being damaged as a consequence of overdosing and other factors;
changes in interest rates; regulatory matters; 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 and radiation processing services; the acceptance of Gamma and
E-Beam radiation as a means of sterilizing and processing products as opposed to
other technologies; 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 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
adverse 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 and equipment and, for Gamma facilities, in 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. As a result of their
own internal procedures, customers often delay qualification and use of new
facilities until they have been operational for a specified period of time of up
to 12 months. As a result, in the past, the Company has 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. See "-- Substantial Debt."
6
<PAGE> 8
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
"-- 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. 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
Company is dependent 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. In addition, the Company is dependent on the ongoing conversion of
products from EtO to Gamma or E-Beam sterilization and there can be no assurance
that such conversion will continue at the rate currently anticipated by the
Company. Loss of significant business from medical products manufacturers,
including reductions caused by large customers establishing captive facilities,
changes in such customers' competitive position or a decision to purchase
contract sterilization services from other suppliers, a downturn in the medical
products market, or a failure of the conversion of products from EtO to Gamma at
the anticipated rate 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" and
"Business -- Industry Background."
COMPETITION
The market for sterilization and radiation processing 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 facilities. In particular, the Company currently faces
competition from four other providers of contract Gamma sterilization services,
the most significant of which is Isomedix, Inc., a subsidiary of Steris
Corporation ("Isomedix"), and six other providers of contract E-Beam
sterilization services including The Titan Corporation, E-Beam Services Inc. and
Iotron Industries Canada Inc. In addition, many products that can be sterilized
using Gamma or E-Beam can also be sterilized using EtO. As a result, the Company
also competes with companies that process products using EtO technology,
including 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 a broader range of sterilization technologies, which may
enable them to address more 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 and radiation processing services in those markets.
7
<PAGE> 9
In recent years, price competition in the sterilization and radiation
processing 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. To the extent such increase in
competition were to occur, the Company may explore alternative sterilization
technologies as necessary to enhance its competitive position. 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. 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 and radiation processing market. The Company currently
sterilizes a wide range of food ingredients and consumer products, including
cosmetics, spices and herbs. The Company also processes various industrial
compounds and other materials using both Gamma and E-Beam technologies. In
addition, as a result of the Company's recently acquired E-Beam business, the
Company has begun to process other non-medical products such as semiconductors
and gemstones. 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 FDA and
the USDA. While the FDA has approved radiation for the processing of a variety
of foods, including pork, poultry and fresh fruits and vegetables, only limited
commercial sales of irradiated food have taken place. The FDA has recently
approved the radiation of red meat, meat byproducts and food products in order
to eliminate E. coli and other harmful foodborne pathogens. However, before
irradiated red meat can be sold commercially, the USDA must set certain minimum
standards for processors to follow. The USDA is currently reviewing the issue
and is expected to set such standards later in 1998, although there can be no
assurance it will do so. 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. The radiation of
red meat could also result in an increase in the cost of such products to a
level which may be unacceptable to most consumers. As a result, there can be no
assurance that sterilization of fresh food products will gain public acceptance
or will ultimately prove commercially feasible in the United States or that the
Company would undertake to expand its irradiation activities to include red
meat. To the extent that the Company seeks to take advantage of future
opportunities in this market, such activities would require significant changes
in the Company's processing techniques, including the redesign of facilities and
the addition of refrigeration capabilities. Furthermore, to accommodate the
perishable nature of red meat and the high processing volume that may result
from the commercial irradiation of red meat, the Company could be required to
expend significant capital to build specially equipped processing facilities
near customer facilities.
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 either
through the use of the MiniCell or otherwise, 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
8
<PAGE> 10
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 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 GAMMA TECHNOLOGY
Historically, the Company has performed all of its sterilization and
radiation processing services using Gamma radiation. Because of its reliance on
Gamma technology, a decline in the demand for, or the pricing of, Gamma 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 and radiation processing market, including changes in the
technologies used to perform sterilization or radiation processing services that
could render Gamma obsolete or noncompetitive. The Company is also dependent
upon continued consumer acceptance of the Gamma sterilization of medical
products and the ongoing conversion of products from EtO to Gamma sterilization.
There can be no assurance that such conversion will occur at the rate
anticipated by the Company. Failure by the Company to quickly and effectively
respond to changes in the sterilization and radiation processing 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" and "-- Risks Associated With Entry Into E-Beam
Business."
RISKS ASSOCIATED WITH ENTRY INTO E-BEAM BUSINESS
On December 31, 1997, the Company expanded into E-Beam technology as a
result of the Nicolet Acquisition. The Company's senior management has no
experience operating an E-Beam facility or marketing E-Beam services and there
can be no assurance that the Company will successfully operate the E-Beam
business. Achieving the anticipated benefits of the Nicolet Acquisition will
depend in part upon whether the integration of the Gamma and E-Beam businesses
is accomplished in an efficient and effective manner. There can be no assurance
that the Company will be able to effectively integrate the operations, systems,
technology and personnel of the E-Beam business. The failure to do so could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, any significant diversion of management
resources required in connection with the operation or integration of the E-Beam
business could have a material adverse effect upon the Company's business,
financial condition and results of operations.
9
<PAGE> 11
SUBSTANTIAL DEBT
As of December 31, 1997, the Company's total consolidated liabilities were
$63.3 million, of which $43.9 million represented long-term debt (including
current portion), its total consolidated assets were $121.5 million and its
total stockholders' equity was $58.2 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 December 31, 1997,
the Company had $36.5 million of tax-free IRBs outstanding with variable
interest rates as of December 31, 1997 of either 4.4% or 4.5% and a $500,000
tax-free IRB with a fixed interest rate of 10.0%. The Company intends to repay
the fixed-interest rate IRB on March 2, 1998. Under federal regulations, 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. 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.
The design, construction, use and operation of commercial Gamma 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"). While E-Beam is not regulated by the NRC, the Company's
E-Beam facility is subject to regulation by the California Department of Health
Services. The Company is currently operating its E-Beam facility under a
California Department of Health Services license held by ThermoSpectra
Corporation pending the approval of its application for a new radioactive
material license. The Company is also 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 the amendment of its regulations to
authorize this use of irradiation as well as the establishment of the applicable
manufacturing practices that must be followed when using such irradiation. 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
10
<PAGE> 12
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 Gamma and E-Beam 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 exposure of workers or others
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.
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 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. See
"-- Environmental and Related 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 "-- Risks Related
to Government Regulation and Standards Compliance," "Business -- Facilities,"
"Business -- Quality Assurance and Safety" and "Business -- Regulatory and
Environmental Matters."
Due to the high energy levels emitted from the electron accelerator in the
Company's E-Beam facility, some residual radiation remains in the cell after the
accelerator is turned off and items that are in the direct
11
<PAGE> 13
path of the beam, such as equipment and portions of the concrete, may become
radioactive for some period of time. Therefore, although the Company complies
with federal and state regulations with regard to worker safety, workers who
enter the E-Beam cell are exposed to low levels of radiation. Furthermore, the
Company may be required to incur costs in connection with disposal of
radioactive material in connection with the replacement of equipment or
upgrading or decommissioning of its E-Beam facility.
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, Inc. ("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 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 United States Department of Energy (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 from June 6,
1988 until July 1996, when the Company leased the facility to a third party for
a different purpose. 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,
12
<PAGE> 14
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 or persons owning or occupying nearby
properties, would not, in the future, assert claims against the Company in
connection with the contamination of the Decatur facility. In January 1993,
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.
Incidents involving radioactive contamination from use of Cobalt 60 would likely
differ from incidents involving Cesium contamination in a number of respects.
Cesium is a salt and water soluble, in contrast to Cobalt 60, which is a metal
and not water soluble. As a result, when Cesium contamination occurs, the
evaporation of contaminated water can result in Cesium being spread to a greater
extent than would be the case with substances that are not water soluble, such
as Cobalt 60. However, since Cobalt 60 is a metal and therefore any released
amount would remain in a more concentrated form, direct exposure could
potentially be more dangerous. See "-- Risks of Operating Facilities Using
Radioactive Material."
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. In July 1997, 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. See "Business -- Facilities."
13
<PAGE> 15
RISKS OF BUSINESS INTERRUPTION
Any prolonged disruption in the operations at any of the Company's
facilities, whether due to technical or labor difficulties, equipment
malfunction, 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; RECENT AND 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. In addition, the
Company has recently entered the E-Beam business through the Nicolet
Acquisition. This growth and expansion 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 upgrade 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 Gamma sterilization and E-Beam technology is limited, and as a
14
<PAGE> 16
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 43.8% of the Company's outstanding Common Stock (approximately
39.8% 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 required to delay, scale back or eliminate its
planned expansion, acquisitions or research, development and engineering
programs. 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."
15
<PAGE> 17
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.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated and may
continue to be subject to significant fluctuations in the future. 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 or E-Beam 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, 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."
ANTI-TAKEOVER 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
16
<PAGE> 18
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 the completion of this offering, the Company will have outstanding
7,514,846 shares of Common Stock, of which 4,543,639 shares will be freely
tradable without restriction and 2,971,207 shares will be saleable subject to
certain volume and other restrictions of Rule 144 under the Securities Act of
1933, as Amended (the "Securities Act"). The Company's executive officers and
directors have agreed that without the prior written consent of PaineWebber
Incorporated they will not 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 Common Stock or warrants or other rights to acquire shares of
Common Stock until the earlier of May 15, 1998 or a period 75 days from the date
of this Prospectus. Thereafter, all shares can be sold in the public market
subject to certain volume and other restrictions of Rule 144 under the
Securities Act. In addition, upon completion of this offering, there will be
outstanding options to purchase a total of approximately 1,126,890 shares of the
Company's Common Stock under the Company's stock option plans. Sales of
substantial amounts of such shares in the public market or the prospect of such
sales could adversely affect the market price of the Company's Common Stock. The
Company has agreed, subject to certain exceptions in the Underwriting Agreement
that, without the prior written consent of PaineWebber Incorporated, it will not
issue, offer, sell, grant options to purchase or otherwise dispose of any of the
Company's equity securities or any other securities convertible into or
exchangeable for the Company's Common Stock or other equity securities for a
period of 75 days after the date of this Prospectus. The lock-up agreements may
be released at any time as to all or any portion of the shares subject to such
agreements at the sole discretion of PaineWebber Incorporated. See
"Underwriting."
17
<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 575,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$9.2 million, based upon an assumed public offering price of $17.75 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company. The Company will not receive any
proceeds from the sale of the shares of Common Stock by the Selling
Stockholders.
The Company currently expects to use approximately $6.0 million of the net
proceeds of the offering for capital expenditures, including construction of new
facilities, equipment and the purchase of additional Cobalt 60. 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. The balance of net proceeds will be used for working
capital and general corporate purposes.
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.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol STER since its initial public offering on August 13, 1997 at
$12.00 per share. The following table sets forth, for the periods indicated, the
high and low closing sale prices of shares of the Company's Common Stock on the
Nasdaq National Market.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31, 1998: HIGH LOW
------- -------
<S> <C> <C>
Second Quarter (beginning August 13, 1997)............... $17.875 $12.000
Third Quarter............................................ 23.000 16.125
Fourth Quarter (through February 20, 1998)............... 20.500 16.625
</TABLE>
As of December 31, 1997, there were 52 holders of record of the Company's
Common Stock. On February 20, 1998, the last reported sale price on the Nasdaq
National Market for the Company's Common Stock was $17.75. The Company has not
declared or paid cash dividends on its Common Stock since inception and does not
anticipate paying cash dividends 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.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on an actual basis and (ii) as adjusted to give effect to
the sale of the shares of Common Stock offered by the Company hereby at an
assumed public offering price of $17.75 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 DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current portion:
Borrowings under Industrial Revenue Bonds and
capital leases................................... $ 43,911 $ 43,911
------- -------
Stockholders' equity:
Preferred Stock, $0.001 par value:
1,000,000 shares authorized; no shares issued and
outstanding...................................... -- --
Common Stock, $0.001 par value:
15,000,000 shares authorized; 6,939,846 shares
issued and outstanding, actual; 7,514,846 shares
issued and outstanding, as adjusted(1)........... 7 8
Additional paid-in capital.......................... 38,217 47,437
Notes receivables from stockholders................. (68) (68)
Retained earnings................................... 20,001 20,001
------- -------
Total stockholders' equity.................. 58,157 67,378
------- -------
Total capitalization........................ $102,068 $ 111,289
======= =======
</TABLE>
- ---------------
(1) Excludes as of December 31, 1997 (i) 1,076,640 shares of Common Stock
issuable upon exercise of outstanding options and 827,386 shares of Common
Stock which remained available for option grants under the Company's 1997
Equity Incentive Plan and (ii) 400,000 shares of Common Stock reserved for
future issuance under the Company's 1997 Employee Stock Purchase Plan. Since
December 31, 1997, the Company has granted options to purchase an aggregate
of 50,250 shares under the 1997 Equity Incentive Plan and issued 32,111
shares under the 1997 Employee Stock Purchase Plan. See "Management -- Stock
Plans."
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 consolidated 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 consolidated statement of
operations data for the nine months ended December 31, 1996 and 1997 and balance
sheet data as of December 31, 1997 are derived from the Company's unaudited
consolidated 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 nine months ended December 31, 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>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................................ $21,603 $24,585 $28,661 $30,241 $37,668 $27,684 $33,871
Cost of revenues........................................ 11,896 11,679 16,389 16,978 20,425 14,641 18,019
------- ------- ------- ------- ------- ------- -------
9,707 12,906 12,272 13,263 17,243 13,043 15,852
Costs and expenses:
General and administrative............................ 1,628 3,266 5,664 5,213 6,345 4,764 5,048
Marketing and selling................................. 1,002 1,258 1,583 1,761 2,482 1,844 2,533
Research, development and engineering................. 473 518 685 890 1,381 1,040 914
------- ------- ------- ------- ------- ------- -------
3,103 5,042 7,932 7,864 10,208 7,648 8,495
------- ------- ------- ------- ------- ------- -------
Income from operations.................................. 6,604 7,864 4,340 5,399 7,035 5,395 7,357
Other income (expense):
Write-down of investments in joint ventures........... -- -- (3,011) -- -- -- --
Interest expense, net................................. (1,164) (916) (2,402) (1,846) (1,836) (1,456) (1,368)
Other income (expense)................................ 315 256 139 47 115 (72) 32
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for income taxes, equity
in joint ventures and discontinued operations......... 5,755 7,204 (934) 3,600 5,314 3,867 6,021
Provision for income taxes.............................. 2,045 2,479 1,185 1,448 2,099 1,528 2,356
------- ------- ------- ------- ------- ------- -------
Income (loss) before equity in joint ventures and
discontinued operations............................... 3,710 4,725 (2,119) 2,152 3,215 2,339 3,665
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 2,339 3,665
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 $ 2,339 $ 3,665
======= ======= ======= ======= ======= ======= =======
Pro forma basic net income per share(1)................. $ 0.66 $ 0.48 $ 0.63
======= ======= =======
Shares used in computing pro forma basic net income per
share(1).............................................. 4,861 4,861 5,846
======= ======= =======
Diluted net income per share(1)......................... $ 0.62 $ 0.45 $ 0.58
======= ======= =======
Shares used in computing diluted net income per
share(1).............................................. 5,165 5,165 6,350
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
------------------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 914 $ 5,945 $ 1,673 $ 9,906 $ 1,957 $ 22,183
Working capital (deficit)............................ 1,306 2,246 (3,576) 3,296 (3,179) 16,364
Total assets......................................... 47,692 66,861 74,588 84,729 91,667 121,486
Total liabilities.................................... 28,863 35,161 47,546 55,464 59,187 63,329
Redeemable preferred stock........................... 1,500 1,500 1,500 1,500 1,500 --
Stockholders' equity................................. 17,329 30,200 25,542 27,765 30,980 58,157
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements included herein for
a description of the computation of pro forma basic and diluted net income
per share.
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
nationwide. 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 Haw River, North Carolina, Rockaway, New Jersey and Salem, New
Jersey following 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 capacity of 101 million
curies.
On December 31, 1997, the Company acquired certain assets of the Nicolet
Electron Services Division of ThermoSpectra Corporation for approximately $5.0
million cash and 109,307 shares of the Company's Common Stock. As a result of
the acquisition, the Company currently operates one E-Beam facility, located in
San Diego, California. The acquisition was accounted for as a purchase.
In order to more effectively address its customer base, the Company has
divided its operations into two divisions: medical and non-medical products.
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 Gamma
facilities to processing primarily non-medical products. In addition, a
significant portion of the Company's revenues from its E-Beam facility is
generated from the processing of 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,
once a facility reaches its break-even point for a given amount of Cobalt 60,
there are relatively low costs associated with incremental revenues until such
time as the amount of Cobalt 60 is increased. The Company's gross margin is also
affected by the mix of standard services and higher margin premium services such
as ExCell and GammaSTAT.
21
<PAGE> 23
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, for Gamma facilities, in 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.
As a result of their own internal procedures, customers often delay
qualification and use of a new facility until it has been operational for
periods of up to 12 months. As a result, in the past, 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>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------- ----------------
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 52.9 53.2
----- ----- ----- ----- -----
42.8 43.9 45.8 47.1 46.8
Costs and expenses:
General and administrative................... 19.8 17.2 16.8 17.2 14.9
Marketing and selling........................ 5.5 5.8 6.6 6.7 7.5
Research, development and engineering........ 2.4 3.0 3.7 3.7 2.7
----- ----- ----- ----- -----
27.7 26.0 27.1 27.6 25.1
----- ----- ----- ----- -----
Income from operations......................... 15.1 17.9 18.7 19.5 21.7
Other income (expense):
Write-down of investments in joint
ventures.................................. (10.5) -- -- -- --
Interest expense, net........................ (8.4) (6.1) (4.9) (5.2) (4.0)
Other income (expense)....................... 0.5 0.1 0.3 (0.3) 0.1
----- ----- ----- ----- -----
Income (loss) before provision for income
taxes, equity in joint ventures and
discontinued operations...................... (3.3) 11.9 14.1 14.0 17.8
Provision for income taxes..................... 4.1 4.8 5.6 5.5 7.0
----- ----- ----- ----- -----
Income (loss) before equity in joint ventures
and discontinued operations.................. (7.4) 7.1 8.5 8.5 10.8
Equity in net loss of joint ventures........... (4.7) -- -- -- --
----- ----- ----- ----- -----
Income (loss) from continuing operations....... (12.1) 7.1 8.5 8.5 10.8
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% 8.5% 10.8%
===== ===== ===== ===== =====
</TABLE>
22
<PAGE> 24
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
Revenues. Revenues increased 22.3%, from $27.7 million in the nine months
ended December 31, 1996 to $33.9 million in the nine months ended December 31,
1997. This increase is due primarily to higher volume resulting from the
operation of the former facilities of RTI for the entire period and the addition
of the Gurnee, Hayward and Fort Worth II 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 $14.6 million in the
nine months ended December 31, 1996 to $18.0 million in the nine months ended
December 31, 1997. Gross margin decreased from 47.1% in the nine months ended
December 31, 1996 to 46.8% in the nine months ended December 31, 1997. The
slight decrease in gross margin was due primarily to costs associated with the
opening and initial operation of new facilities in Gurnee, Hayward and Fort
Worth, which were substantially offset by greater utilization of the Company's
existing facilities. 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 as 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
6.0%, from $4.8 million in the nine months ended December 31, 1996 to $5.0
million in the nine months ended December 31, 1997. The increase was primarily
attributable to the operation of additional facilities. As a percentage of
revenues, these expenses decreased from 17.2% to 14.9% in the nine months ended
December 31, 1996 and 1997, respectively. The decrease in general and
administrative expenses as a percentage of revenue 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 37.4%,
from $1.8 million in the nine months ended December 31, 1996 to $2.5 million in
the nine months ended December 31, 1997. As a percentage of revenues, these
expenses increased from 6.7% to 7.5% in the nine months ended December 31, 1996
and 1997, respectively. This increase was 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 12.1% from $1.0 million in the nine months ended
December 31, 1996 to $914,000 in the nine months ended December 31, 1997. The
decrease was 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 2.7% in the nine
months ended December 31, 1996 and 1997, 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 decreased 6.0% from $1.5
million in the nine months ended December 31, 1996 to $1.4 million in the nine
months ended December 31, 1997. The decrease in net interest expense resulted
from higher interest income on the higher average cash balances during the nine
months ended December 31, 1997, which was offset in part by higher interest
rates on certain of the Company's Industrial Revenue Bonds ("IRBs"). Other
expense includes an estimated loss on investment for the nine months ended
December 31, 1996.
Provision for income taxes. The provision for income taxes for the nine
months ended December 31, 1996 and 1997 differs from the statutory rate
primarily due to state income taxes. The Company's net deferred tax liabilities
in the nine months ended December 31, 1996 and 1997 relate primarily to
accelerated tax depreciation taken in excess of book depreciation.
23
<PAGE> 25
Year 2000 Compliance. The Company is aware of the issues associated with
the programming code in existing computer systems as the year 2000 approaches.
The "year 2000 problem" is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two digit year
value to 00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. Management is in the process of working with its software
vendors to assure that the Company is prepared for the year 2000. Management
does not anticipate that the Company will incur significant operating expenses
or be required to invest heavily in computer systems improvements to be year
2000 compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with any year 2000 compliance. The Company is
currently implementing an upgrade to its management information system that the
Company believes is year 2000 compliant. Any year 2000 compliance problem of
either the Company or its suppliers or customers could materially adversely
affect the Company's business, results of operations, financial condition and
prospects.
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 was adopted by the Company on
December 31, 1997. Upon adoption, the Company was required to change the method
currently used to compute earnings per share and to restate all prior periods.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130") and No. 131, "Disclosures About Segments of An Enterprise and Related
Information" ("FAS 131"). FAS 130 establishes rules for reporting and displaying
comprehensive income. FAS 131 will require the Company to use the "management
approach" in disclosing segment information. Both statements are effective for
the Company during fiscal 1999. The Company believes that the adoption of either
FAS 130 or FAS 131 will not have a material impact on its results of operations,
cash flows, financial position or prospects.
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 and Corona 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.
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. 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 (approximately $1.3 million
remaining at March 31, 1997 at then current exchange rates).
24
<PAGE> 26
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.
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.
Other income (expense). 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
25
<PAGE> 27
various potential state and local non-income tax liabilities identified and
reserved in fiscal 1995. 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 fluctuated with
changes in currency exchange rates between the U.S. dollar and the Canadian
dollar because payments under certain of the Company's Cobalt 60 capital leases
were payable in Canadian dollars (all such amounts had been paid at March 31,
1997). To date, the effect of currency fluctuations has not been material to the
Company. 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 and
Related Risks."
26
<PAGE> 28
QUARTERLY RESULTS
The following tables set forth consolidated statements of operations data
for the eight quarters in the period ended December 31, 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
------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
---------- ---------- --------- -------- ---------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $8,105 $8,164 $ 9,863 $9,657 $9,984 $ 10,751 $ 11,271 $11,849
Cost of revenues............... 4,385 4,297 4,846 5,498 5,784 5,801 5,895 6,323
------ ------ ------ ------ ------ ------- ------- -------
Gross margin................... 3,720 3,867 5,017 4,159 4,200 4,950 5,376 5,526
As a percentage of
revenues................... 45.9% 47.4% 50.9% 43.1% 42.1% 46.0% 47.7% 46.6%
Costs and expenses:
General and administrative... 1,384 1,417 1,820 1,527 1,581 1,637 1,623 1,788
Marketing and selling........ 528 560 708 576 638 823 859 851
Research, development and
engineering................ 218 273 386 381 341 312 294 308
------ ------ ------ ------ ------ ------- ------- -------
2,130 2,250 2,914 2,484 2,560 2,772 2,776 2,947
------ ------ ------ ------ ------ ------- ------- -------
Income from operations......... 1,590 1,617 2,103 1,675 1,640 2,178 2,600 2,579
As a percentage of
revenues................... 19.6% 19.8% 21.4% 17.3% 16.4% 20.2% 23.1% 21.8%
Other income (expense):
Interest expense, net........ (435) (459) (472) (525) (380) (581) (472) (315)
Other income (expense)....... 7 7 (293) 214 187 15 14 3
------ ------ ------ ------ ------ ------- ------- -------
Income before provision for
income taxes................. 1,162 1,165 1,338 1,364 1,447 1,612 2,142 2,267
Provision for income taxes... 485 461 528 539 571 637 835 884
------ ------ ------ ------ ------ ------- ------- -------
Net income..................... $ 677 $ 704 $ 810 $ 825 $ 876 $ 975 $ 1,307 $ 1,383
====== ====== ====== ====== ====== ======= ======= =======
As a percentage of
revenues................... 8.4% 8.6% 8.2% 8.5% 8.8% 9.1% 11.6% 11.7%
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
Quarterly Fluctuations. Revenues increased from the quarter ended June 30,
1996 to the quarter ended September 30, 1996, 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 quarter
ended December 31, 1996 due to expenses relating to the new Gurnee facility.
Gross margin increased from the quarter ended March 31, 1997 to the quarter
ended June 30, 1997 primarily as a result of greater utilization of the
Company's new and existing facilities. Marketing and selling expenses increased
from the quarter ended March 31, 1997 to the quarter ended June 30, 1997 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 sterilization and
radiation processing services due to varying manufacturing cycles, changes in
demand for customers' products and seasonality related to growth cycles for
spices and herbs and decreased demand during the third fiscal quarter and the
first part of the fourth fiscal quarter due to the 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 services in a timely and cost effective
manner; the ability of the Company to expand successfully in the non-medical
sterilization and radiation processing market; the ability to effectively
integrate and successfully expand its recently acquired E-Beam business; the
timing and size of orders from the Company's customer
27
<PAGE> 29
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 because
payments under certain of the Company's Cobalt 60 capital and operating leases
are payable in Canadian dollars; fluctuations in the costs of electricity for
the Company's E-Beam business; loss of processing time due to maintenance; the
costs associated with customer product being damaged as a consequence of
overdosing and other factors; changes in interest rates; regulatory matters; 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 and radiation processing services; the acceptance of Gamma and
E-Beam radiation as a means of sterilizing and processing products as opposed to
other technologies; 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 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
adverse 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
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 December 31, 1997, the Company had $22.2 million in cash
and cash equivalents and $16.4 million in working capital.
Net cash provided by operating activities was $8.7 million, $11.0 million,
$12.2 million and $11.6 million in fiscal 1995, 1996 and 1997 and the nine
months ended December 31, 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
nine months ended December 31, 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 $13.6 million in fiscal 1995, 1996 and 1997 and the nine
months ended December 31, 1997, respectively, primarily attributable to the
purchase of property, plant and equipment (including Cobalt 60) and, for the
nine months ended December 31, 1997, the assets acquired in the Nicolet
Acquisition.
Net cash provided by (used in) financing activities was $2.6 million, $4.7
million, $(1.0) million and $22.3 million in fiscal 1995, 1996 and 1997 and the
nine months ended December 31, 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 provided by financing activities for the
nine months ended December 31, 1997 was primarily attributable to net proceeds
of $21.4 million from the Company's initial public offering in August 1997, and
an increase in IRB financing, 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 $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.
28
<PAGE> 30
The Company has a $3.5 million revolving line of credit with a bank, with a
variable interest rate (8.5% at December 31, 1997), collateralized by certain
assets of the Company. The line of credit is payable on demand, and at December
31, 1997, no amount was outstanding under this line of credit. The payment of
cash dividends on the Company's Common Stock is limited by the terms of
Company's revolving line of credit.
At December 31, 1997, the Company had $36.5 million in IRB financing which
bears interest at market rates (either 4.4% or 4.5% at December 31, 1997) and
$500,000 in IRB financing which bears interest at a fixed rate of 10.0%. The
Company intends to repay the fixed-rate IRB on March 2, 1998. 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 at December
31, 1997 and by letters of credit with a bank. Assuming repayment of the
fixed-rate IRB the Company will be able to issue only $3.5 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 $7.6 million in fiscal 1995, 1996 and 1997 and the nine months ended
December 31, 1997, respectively. The Company currently expects to make capital
expenditures of approximately $18.0 million through the end of fiscal 1999.
SteriGenics believes that the net proceeds of this 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 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."
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 in or acquire
complementary business, 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 stockholders.
29
<PAGE> 31
BUSINESS
OVERVIEW
SteriGenics International, Inc. ("SteriGenics" or the "Company") is a
provider of high quality contract sterilization and radiation processing
services, with over 19 years of experience in the operation, design and
development of Gamma irradiation ("Gamma") facilities. The Company operates 12
Gamma facilities and one electron beam radiation ("E-Beam") facility nationwide
serving over 1,000 customers, primarily in the medical products market.
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 recently expanded its technology base into E-Beam with the
acquisition in December 1997 of certain assets of the Nicolet Electron Services
Division of ThermoSpectra Corporation (the "Nicolet Acquisition"). The Company's
objective is to be the leading provider of high quality contract sterilization
and radiation processing 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, prepackaged 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 ("captive
processors") or have had their products processed by a provider of contract
sterilization services ("contract processors"). The two most widely used methods
of commercial sterilization are Gamma and EtO sterilization. A third
alternative, E-Beam sterilization, is primarily utilized for lower density
products.
Gamma Sterilization. Gamma sterilization is accomplished by exposing
products or materials 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. 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 Gamma to process newly
developed 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
30
<PAGE> 32
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. 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 which 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. However, E-Beam sterilization has been largely limited to products with
lower densities or which contain materials that are adversely affected by Gamma
radiation. The limitations of E-Beam result from its limited ability to
penetrate various materials and related dosimetry problems. However, E-Beam may
have future applicability in the food products market given the lower dosage of
radiation required to sterilize such products.
COMPARISON OF PRIMARY STERILIZATION TECHNOLOGIES
Although E-Beam is used for certain sterilization applications, the primary
technologies used for sterilization are Gamma and EtO. 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 of sterilizing products using EtO or
Gamma does not differ significantly based on current market conditions. While
the relative magnitude of particular costs differs between EtO and Gamma
processing, the aggregate costs of both technologies are primarily costs related
to facilities and capital equipment, labor, relevant processing materials and
regulatory compliance. However, the acquisition of a
31
<PAGE> 33
sufficient amount of Cobalt 60 to load a facility involves significant capital
expenditures which are amortized over the useful life of the Cobalt 60, as
opposed to EtO, which can be purchased as it is consumed. Therefore, the
acquisition of Cobalt 60 requires a higher level of upfront cash expenditures
and/or lease or other financing than the acquisition of EtO.
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, 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.
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. However, the
rate of this conversion has been impacted by the cost and administrative burden
associated with conversion of certain products from EtO to Gamma, particularly
for products which are subject to FDA pre-market approvals.
The following table sets forth various comparisons of Gamma and EtO
sterilization:
<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>
RADIATION PROCESSING
While E-Beam to date has only accounted for a small percentage of the
sterilization market, it has been the primary technology used in many segments
of the radiation processing market. Radiation processing is accomplished by
exposing materials to either E-Beam or Gamma radiation to alter their physical
properties at the molecular level. E-Beam and Gamma are both used for a variety
of processing applications including
32
<PAGE> 34
altering various industrial compounds, cross-linking polymers and teflon
breakdown. Higher energy E-Beam accelerators are also used for applications such
as altering the switching speeds of certain semiconductors and colorization of
certain gemstones.
THE STERILIZATION AND RADIATION PROCESSING MARKET
The sterilization and radiation processing market consists of independent
suppliers of sterilization and radiation processing services and certain large
manufacturers that have in-house sterilization capabilities. 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 processors. Of the U.S. contract sterilization market, the
Company estimates that in 1996 approximately 40% to 45% was Gamma, 50% to 55%
was EtO and 5% was E-Beam. There is also a significant market for sterilization
and radiation processing 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 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. In contrast, with respect to the radiation processing market,
manufacturers of materials such as certain industrial compounds, semiconductors
and gemstones are often willing to ship products longer distances for processing
since the cost of transportation and processing account for a smaller percentage
of the unit manufacturing cost.
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 STERILIZATION 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.
33
<PAGE> 35
NON-MEDICAL PRODUCTS STERILIZATION MARKETS
The market for sterilization and radiation 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 or E-Beam 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 prepackaged 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.
MATERIALS PROCESSING MARKET
The materials processing market is comprised of a large number of distinct
segments which can be addressed using E-Beam or Gamma technology. Due to the
fragmented nature of the market, and the large number of existing and potential
applications, market size is difficult to estimate. Current markets include the
processing of various industrial compounds, cross-linking of polymers and the
breakdown of teflon. In addition, E-Beam radiation is used to process certain
semiconductor wafers and to colorize various gemstones.
POTENTIAL MARKETS
In recent years there has been increased interest in evaluating food
irradiation in light of the heightened public concern over outbreaks of E. coli,
salmonella and other foodborne pathogens. As a consequence, the Company believes
that there are a number of large potential markets for the sterilization of food
products. The FDA has approved radiation as a safe and effective means of
processing a variety of foods including pork, poultry, fresh fruits and
vegetables. In addition, the FDA has recently approved the radiation of red
meat, meat byproducts and meat food products in order to eliminate E. coli and
other harmful pathogens. However, before irradiated red meat, meat byproducts
and meat food products can be sold commercially, the United States Department of
Agriculture (the "USDA") must amend its regulations to authorize the use of
irradiation and subsequently establish the applicable manufacturing practices
that must be followed when using such irradiation. The USDA is currently
reviewing the issue and is expected to set regulatory standards later in 1998,
although there can be no assurance it will do so. Current FDA regulations also
require any retail foods that have been irradiated to be labeled.
While the Company is closely monitoring developments related to the
potential market for irradiated red meat, the development of this potential
market is subject to consumer acceptance of irradiated foods and the willingness
of consumers to pay the higher prices likely to be charged for such products. In
addition, if these markets do develop, facilities will have to be built or
modified to address the specific requirements of the red meat market. These
modifications would include the addition of refrigeration facilities, changes in
material
34
<PAGE> 36
handling equipment and alterations in processing techniques to accommodate
higher volumes of low dosage products. In addition, new facilities would have to
be constructed in close proximity to customers' facilities to accommodate the
perishable nature of red meat.
THE STERIGENICS APPROACH
SteriGenics is a provider of high quality sterilization and radiation
processing services, with over 19 years of experience in the operation, design
and development of Gamma facilities. The Company operates 12 Gamma facilities
and one E-Beam facility nationwide serving over 1,000 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 nonmedical sterilization and processing markets
and has further expanded into such markets through the Nicolet Acquisition.
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 by
maintaining the only internal engineering and design capability in the Gamma
sterilization and radiation processing 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 believes it will be able to
leverage the engineering and design capability it has developed in Gamma in
order to enhance its E-Beam systems.
SteriGenics has continued its leadership in providing flexible approaches
to sterilization with its introduction of the MiniCell, a smaller single cell
irradiator that can 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 Company has also been able to introduce service innovations including
GammaSTAT, the industry's first guaranteed variable time-based sterilization
program.
STRATEGY
The Company's objective is to be the leading provider of high quality
contract sterilization and radiation 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 emphasis 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 Gamma sterilization
strategy, the Company actively promotes the conversion of products from EtO to
Gamma. Although the Company intends to maintain its emphasis on Gamma
sterilization and processing, it has recently completed its initial expansion
into E-Beam technology which has expanded the array of medical products that it
is able to process. In addition, SteriGenics will continue to evaluate
alternative technologies, as necessary, to address market demand.
Expand Non-Medical Business. The Company is seeking to expand its presence
in various non-medical sterilization markets, such as the markets for spices and
herbs, cosmetics and food packaging. To effectively address these markets, the
Company has created its non-medical products division, with an independent sales
35
<PAGE> 37
and marketing organization and four Gamma processing facilities dedicated
primarily to processing non-medical products. SteriGenics also continually
monitors developments in other potential non-medical markets such as the
sterilization of fresh foods. In particular, the Company is closely following
developments in the potential market for the irradiation of red meat. The
Company believes that by having expertise in both Gamma and E-Beam technology,
it is better positioned to address developments in these potential food product
markets.
The Company is also seeking to expand its radiation processing business.
This expansion in radiation processing was accelerated by the acquisition of
certain assets of RTI, Inc. ("RTI") which had historically used Gamma
irradiation to alter the physical properties of various materials such as
plastics, teflon and various industrial compounds. The Company has further
expanded its presence in the radiation processing market through the recent
Nicolet Acquisition. By offering both Gamma and E-Beam technologies, the Company
is able to address a greater portion of the radiation processing market.
Pursue Strategic Acquisitions. SteriGenics intends to continue to pursue
strategic acquisitions of sterilization and radiation processing facilities and
businesses both domestically and internationally. The Company began to implement
this strategy with the acquisition of certain assets of 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. In December 1997, the Company
completed the Nicolet Acquisition, which has expanded the Company's technology
base with the addition of E-Beam. The Company does not currently have any
agreements or understandings with respect to any future acquisitions.
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 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
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 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 has also 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 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 believes it
will be able to leverage the engineering expertise it has developed in Gamma to
enhance its E-Beam systems.
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.
36
<PAGE> 38
STANDARD GAMMA SERVICE
SteriGenics' standard Gamma 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 gamma sterilization 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 gamma sterilization 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.
STANDARD E-BEAM SERVICE
SteriGenics' standard E-Beam service for conveyer processing is a one to
two working day turn-around time on the product, which is an industry standard.
Turn-around times for gemstones are typically two weeks. The processing time of
any particular product is dependent upon several factors, including the density
of the product, the dose requirement and the energy level of the E-Beam. 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 E-Beam
radiation. Based upon these factors, the Company determines the processing time
for the specified product. It is the responsibility of the Company's customers
to determine the dose of E-Beam radiation that will achieve the desired results.
The Company uses a calorimeter dosimeter to verify that the customer's dosage
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 dose of E-Beam radiation, density of the product,
packaging compatibility with the Company's size specifications and the volume of
the product to be processed.
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
37
<PAGE> 39
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 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 and one E-Beam facility.
Eight of the Gamma facilities perform sterilization services for the medical
products market. Each of the Company's eight medical product facilities are ISO
9002 certified. The remaining four Gamma facilities provide services primarily
to non-medical customers. 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 12 Gamma facilities have an aggregate design capacity of 101
million curies of Cobalt 60. The Company's E-Beam facility performs
sterilization and radiation processing services for both the non-medical and
medical customers. See "-- Quality Assurance and Safety."
The Company's Gamma sterilization facilities are designed on stand alone
sites of various sizes and capacities. The Company has three basic types of
Gamma 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 eight 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 the Company believes have a
high demand for sterilization services. The Company believes that the number of
additional U.S. markets that can support megafacilities, 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.
38
<PAGE> 40
The following table sets forth information regarding the Company's
facilities as of December 31, 1997:
<TABLE>
<CAPTION>
DESIGN
CAPACITY APPROXIMATE
LOCATION (IN CURIES)(1) SQUARE FEET TYPE OF FACILITY NUMBER/TYPE OF CELLS
- ----------------------------- -------------- ----------- ----------------- ------------------------
<S> <C> <C> <C> <C>
MEDICAL PRODUCTS
FACILITIES
Corona, California(2)........ 19,000,000 100,000 Mega-Facility 3 cells (1 ExCell)
Hayward, California(2)....... 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(2).......... 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
Carolina(2)................ 15,000,000 64,000 Mega-Facility 2 cells (1 ExCell)
Haw River, North
Carolina(2)................ 3,000,000 25,000 Mini-Facility 2 cells (pallet and
underwater 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)
E-BEAM FACILITY
San Diego, California........ N/A (4) 20,000 E-Beam Facility 2 cells
</TABLE>
- ---------------
(1) Shows maximum design capacity. The Company currently does not utilize a
substantial portion of its Cobalt 60 design capacity. See "-- Gamma
Sterilization Systems -- Cobalt 60."
(2) ISO-9002 Certified facilities.
(3) The two Fort Worth facilities together constitute a Mega-Facility and
operate under the same license.
(4) The San Diego facility has two 10 kW electron accelerators.
GAMMA STERILIZATION SYSTEMS
The Gamma 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's facilities utilize 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
39
<PAGE> 41
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 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,
certain of which are payable in Canadian dollars. To date, the effect of
currency fluctuations has not been material to the Company. 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, either of 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."
E-BEAM SYSTEM
The E-Beam system in the Company's facility consists of four major
components: the biological shield, the accelerator, the conveyor system and the
safety system.
40
<PAGE> 42
The Biological Shield. The cell where the product or material is exposed to
the E-Beam is also known as the "biological shield." The Company's facility
utilizes a steel reinforced concrete cell with a ceiling and walls that are over
six feet thick which provides a complete shield from any radiation. Each cell
has a two foot thick lead and concrete door at its entrance and exit to prevent
radiation from escaping from the cell.
The Accelerator. Both of the cells in the Company's E-Beam facility use a
10 kilowatt ("kW") linear accelerator. Two of the primary variables in E-Beam
radiation are the power of the beam (measured in kWs) being produced and the
energy of the electrons (as measured in MeVs). The Company's accelerators can
operate between 10 and 18 MeV with an average beam power of 10 kW. The
penetration capabilities of an E-Beam accelerator is proportional to its MeV
setting. The Company's accelerators create the electron beam horizontally and
then bend the beam 90 degrees to direct it vertically downward to the conveyor.
The electromagnet used to bend the beam also selects the beam energy level
necessary to make it around the turn. This process provides a tightly controlled
energy spectrum with advantages over accelerators that do not bend the beam.
The Conveyor System. Each cell has an independent set of conveyors. Each
set is comprised of an input, exposure and output conveyor. The input and output
conveyors transfer product to and from the exposure conveyor. The exposure
conveyor is more sophisticated as the speed is tightly regulated to ensure
uniform dosage. The system uses feedback circuitry from the electron beam
current monitor to ensure that if the beam current changes during processing,
the exposure conveyor speed correspondingly changes to assure that the delivered
dose is held constant.
The Safety System. Each E-Beam cell has a separate and redundant safety
system that the Company believes meet or exceed all applicable regulations. The
safety system is designed to prevent entry into the cell when the E-Beam is
turned on and will shut down the process in the event of a system failure.
STERIGENICS' GAMMA 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 Gamma 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.
41
<PAGE> 43
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.
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 timebased
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 800 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. No customer accounted
for more than 10% of the Company's revenues during the first nine months of
fiscal 1998.
42
<PAGE> 44
The following is a representative list of the Company's medical products
customers:
REPRESENTATIVE CUSTOMERS
<TABLE>
<S> <C>
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
Aramark Cleanroom Services Inc. International Group, Inc.)
Conco Medical Company Richard-Allan Medical Industries (a
ConvaTec (a division of E.R. division
Squibb & Sons, Inc.) of Imagyn Medical Technologies, Inc.)
DePuy Orthopedics, Inc. Smith & Nephew Orthopedics, Inc.
Endodent, Inc. WEL Industries, Inc.
Lincoln Training Center Zimmer (a subsidiary of Bristol-Myers
Squibb
Company)
</TABLE>
Non-Medical Market
The non-medical division of the Company provides services through both its
Gamma and E-Beam facilities to over 200 customers producing a variety of
products, including spices and herbs, cosmetics, food ingredients,
semiconductors, gemstones, fruit and vegetable products, food packaging,
consumer products and industrial compounds. Sales to non-medical customers
accounted for approximately 20% of the Company's revenues in fiscal 1997. The
Company expects that sales to non-medical customers as a percentage of overall
revenues will increase in the future. See "Risk Factors -- Uncertainty of
Expansion in Non-Medical Markets."
Customer Agreements
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. In addition, the Company maintains a separate
sales and marketing group for its E-Beam business. 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
43
<PAGE> 45
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 its
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 $914,000 for the nine months ended December 31, 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, 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.
Ten 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 Notified
Body, and is subject to quality system surveillance audits every six months by
DNV. Additionally, ten of the Company's facilities have recently received
EN46002/EN552 certification from the DNV. This certification expedites the
ability of certain of the Company's medical device customers to obtain the CE
Mark which is required to sell their products in Europe. The Company plans to
schedule ISO 9002 and EN46002/EN552 certification audits for the Rockaway and
Salem facilities in the fourth quarter of fiscal 1998.
The Company has implemented a number of safety procedures for its workers.
Each Gamma and E-Beam cell has a separate safety system designed to ensure that
no individual is exposed to the 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
in a Gamma facility, 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
Facilities Using Radioactive Material."
44
<PAGE> 46
COMPETITION
The market for sterilization and radiation processing 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 facilities. In particular, the Company currently faces
competition from four other providers of contract Gamma sterilization services,
the most significant of which is Isomedix, Inc., a subsidiary of Steris
Corporation ("Isomedix"), and six other providers of contract E-Beam
sterilization services including The Titan Corporation, E-Beam Services Inc. and
Iotron Industries Canada Inc. In addition, many products that can be sterilized
using Gamma or E-Beam can also be sterilized using EtO. As a result, the Company
also competes with companies that process products using EtO technology
including 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 a broader range of sterilization technologies, which may
enable them to address more 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. To the extent such increased competition were to occur
the Company may explore alternative sterilization technologies as necessary to
enhance its competitive position. 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.
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 Gamma 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"). While E-Beam is not regulated by the NRC, the
Company's E-Beam facility is subject to regulation by the California Department
of Health Services (the "CDHS"). The Company is currently operating its E-Beam
facility under a CDHS license held by ThermoSpectra Corporation pending the
approval of its application for a new radioactive material license. The Company
is also 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 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 would
require preapproval of the irradiation process for meat and poultry. The Company
is
45
<PAGE> 47
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
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
Gamma 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
considered 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 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.
46
<PAGE> 48
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.
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
47
<PAGE> 49
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.
The Food Safety and Inspection Service (the "FSIS") of the USDA is
responsible for establishing additional requirements for the irradiation of meat
and poultry products. In addition to issuing a regulation that specifically
authorizes the use of irradiation, FSIS has established manufacturing practices
that must be followed when irradiating products. Although FDA recently approved
the use of irradiation for purposes of controlling foodborne pathogens and
extending shelf life of red meat, meat byproducts and meat food products, FSIS
has not yet amended its regulations to authorize this use of irradiation or
established the applicable manufacturing practices that must be followed when
using such irradiation. FSIS is in the process of issuing proposed rules and
final rules are anticipated before the end of 1998.
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 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 and results of
operations.
In the spring of 1985, the Company leased over 400 stainless steel capsules
of radioactive Cesium from the United States Department of Energy (the "DOE")
for use at the Company's Decatur, Georgia and
48
<PAGE> 50
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 from June 6, 1988 until July 1996, when the Company leased
the facility to a third party for a different purpose. 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 or persons owning or occupying nearby properties,
would not, in the future, assert claims against the Company in connection with
the contamination of the Decatur facility. In January 1993, 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. Incidents
involving radioactive contamination from use of Cobalt 60 would likely differ
from incidents involving Cesium contamination in a number of respects. Cesium is
a salt and water soluble, in contrast to Cobalt 60, which is a metal and not
water soluble. As a result, when Cesium contamination occurs, the evaporation of
contaminated water can result in Cesium being spread to a greater extent than
would be the case with substances that are not water soluble, such as Cobalt 60.
However, since Cobalt 60 is a metal and therefore any released amount would
remain in a more concentrated form, direct exposure could potentially be more
dangerous. See "Risk Factors -- 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 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
49
<PAGE> 51
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 December 31, 1997
was 4.5%.
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 is adjustable weekly based
upon market conditions. The interest rate as of December 31, 1997 was 4.4%.
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
December 31, 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 December 31, 1997 was 4.5%.
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 December 31, 1997 was 4.4%.
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 and Related 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
50
<PAGE> 52
construct and equip the leased premises. The Company intends to repay this IRB
on March 2, 1998.
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. The interest rate as of December 31, 1997 was 4.5%. The
facility is currently being leased to a third party. See "Risk
Factors -- Environmental and Related Risks."
EMPLOYEES
At January 31, 1998, the Company had 314 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 and
E-Beam industries 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.
51
<PAGE> 53
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
James E. Williams........... 54 Chief Financial Officer and Senior Vice
President, Finance and Administration
D. Patterson Adams.......... 44 Vice President and General Manager,
Non-Medical Division
Eric W. Beers............... 37 Senior Vice President of Engineering
Donald A. Currie............ 40 Vice President of Operations, Eastern Region
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
Charles W. King, Jr......... 62 Chairman of the Board
Walter G. Kortschak(1)...... 38 Director
Thomas F. Stephenson(1)..... 55 Director
James R. Yarter............. 60 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 in Accounting from Rochester Institute of Technology.
James E. Williams joined SteriGenics in October 1997 as Chief Financial
Officer and Senior Vice President of Finance and Administration. Prior to
joining SteriGenics, Mr. Williams served as Executive Vice President and Chief
Financial Officer of Systems Integrators, Inc., a publishing systems and
software company, from July 1995 to October 1997. From February 1993 to July
1995 Mr. Williams served as Vice President and Chief Financial Officer of VISX,
Inc., a manufacturer of laser vision correction products. Mr. Williams earned
his Bachelor of Arts degree in Accounting from San Francisco State University
and his Masters in Business Administration in Finance from Golden Gate
University.
D. Patterson Adams joined SteriGenics in January 1998 as Vice President and
General Manager of the Non-Medical Division. Prior to joining SteriGenics, Mr.
Adams served as a consultant to health care providers and medical manufacturers
as President of VestCorp, an investment holding company, from July 1995 to
January 1998. Mr. Adams served as Chief Operating Officer of Progressive Capital
Investment Corporation from July 1993 to June 1995. From June 1988 to June 1993,
Mr. Adams was Vice President of EtO Operations for Isomedix, Inc. Mr. Adams
earned his Bachelor of Science Degree in Biology from the University of Memphis.
Eric W. Beers joined SteriGenics in February 1994 as Senior Vice President
of Engineering. Prior to joining SteriGenics and since 1980, Mr. Beers held
several engineering and managerial positions with Nordion, a supplier of Cobalt
60 and irradiation equipment, the most recent of which was as Manager of the
Industrial Irradiation Engineering Department. Mr. Beers has a degree in
Mechanical/Aeronautical Engi-
52
<PAGE> 54
neering 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. In January 1998, Mr.
Currie became Vice President of Operations, Eastern Region. 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.
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.
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 Diamond Multimedia Systems, Inc., HMT Technology
Corporation, 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.
James R. Yarter became a director of the Company in January 1998. Mr.
Yarter has been a consultant to medical device manufacturers since April 1996.
From October 1995 to April 1996, Mr. Yarter served as President and Chief
Executive Officer of U.S. Medical. From February 1994 to October 1995, Mr.
Yarter was President and Chief Executive Officer of BLOCK Medical. Mr. Yarter
provided private consulting services to medical device manufacturers from 1990
to February 1994. Previously, Mr. Yarter served in various capacities at C.R.
Bard, a medical equipment and supplies manufacturer.
53
<PAGE> 55
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 $100,000 during such year (the "Named
Officers").
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1997(1)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
AWARDS
ANNUAL COMPENSATION ----------------------
-------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
----------------------------------------------- --------- -------- ----------------------
<S> <C> <C> <C>
James F. Clouser............................... 179,667 89,834 --
President, Chief Executive Officer and
Director
Eric W. Beers.................................. 95,918 43,163 5,000
Senior Vice President of Engineering
Eugene C. Davis................................ 99,105 39,642 5,000
Vice President of Operations, Western Region
David E. Meyer................................. 96,088 48,044 5,000
President of Medical Products Division
Edward M. Miller, Jr.(2)....................... 96,586 19,317 5,000
Vice President of Finance
</TABLE>
- ---------------
(1) On July 24, 1997, the Company granted the following options to the Named
Officers under the Company's 1997 Equity Incentive Plan: Mr.
Clouser -- options for 125,000 shares; Mr. Beers -- options for 17,500
shares; Mr. Davis -- options for 7,500 shares; Mr. Meyer -- options for
15,000 shares.
(2) Mr. Miller ceased to be an employee of the Company as of January 22, 1998.
STOCK OPTIONS GRANTED IN FISCAL 1997
The following table provides information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended March 31,
1997 to the Named Officers:
OPTION GRANTS IN FISCAL YEAR 1997(1)(2)
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
INDIVIDUAL GRANTS RATES OF STOCK
---------------------------------------------------- PRICE
NUMBER OF APPRECIATION
SECURITIES % OF TOTAL FOR OPTION
UNDERLYING OPTIONS TERM(4)
OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION ---------------
GRANTED(#) EMPLOYEES PER SHARE($)(3) 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)................ 5,000 5.15 4.90 5/31/06 15,408 39,047
</TABLE>
- ---------------
(1) The Company granted options for 97,000 shares during the fiscal year ended
March 31, 1997.
(2) Since March 31, 1997, the Company granted options to the Named Officers for
the following number of shares: Mr. Clouser -- options for 125,000 shares;
Mr. Beers -- options for 17,500 shares; Mr. Davis -- options for 7,500
shares; Mr. Meyer -- options for 15,000 shares.
(3) 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
54
<PAGE> 56
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.
(4) 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.
(5) Mr. Miller ceased to be an employee of the Company as of January 22, 1998.
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(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT MARCH 31, 1997(#) AT MARCH 31, 1997($)(2)
-------------------- -----------------------
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.(3)..... 10,200 17,300 36,720 62,280
</TABLE>
- ---------------
(1) Since March 31, 1997, the Company granted options to the Named Officers for
the following number of shares: Mr. Clouser -- options for 125,000 shares;
Mr. Beers -- options for 17,500 shares; Mr. Davis -- options for 7,500
shares; Mr. Meyer -- options for 15,000 shares.
(2) 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.
(3) Mr. Miller ceased to be an employee of the Company as of January 22, 1998.
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. 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 issuance under the Company's 1997 Stock Plan. As of December 31,
1997, options for an aggregate of 213,000 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
55
<PAGE> 57
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 initial public offering will receive a onetime 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 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 initial
public 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. The number of shares of Common Stock reserved for issuance
under the Stock Plan was equal to 175,000 shares. To the extent that any shares
of Common Stock remained available for grant after July 24, 1997, such shares
were 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 164,750 shares are currently outstanding. However,
the Board does not intend to grant any additional options under the Stock Plan.
56
<PAGE> 58
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. 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 February 1
and August 1 (except that the first offering period commenced on the effective
date of the initial public offering and will end on July 31, 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 began on the effective date of the initial public offering
and ended on January 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) was an employee on the effective date of the initial public
offering or has been employed by the Company, or an entity acquired 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 initial public
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.
COMPENSATION OF DIRECTORS
James R. Yarter, a director since January 1998, receives $2,000 per Board
meeting with no additional compensation for designated committee meetings,
assuming such meetings will occur at the time of regularly scheduled Board
meetings. The remaining 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. In
addition, each outside director who first becomes a director after the date of
the Company's initial public offering will receive a one-time option grant for
15,000 shares. The option for 15,000 shares will become exercisable with respect
to 24% of the option shares on the first anniversary of the date of grant and
with respect to an additional 2% of the option shares upon the completion of
each month of service thereafter. At each regular annual stockholder meeting,
each outside director who continues to serve as a member of the Board will
receive an option for 3,000 shares which will become fully exercisable on the
first anniversary of the date of grant.
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.
57
<PAGE> 59
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.
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 3.0% 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 3.0% 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 December 31, 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 December 31, 1997 of 4.5%, adjustable based upon market conditions. Mr.
King received no consideration for the guarantee of this IRB.
The Company used $1.5 million of the net proceeds of the Company's initial
public offering to redeem 15,000 shares of Series A Preferred Stock. The Charles
W. King, Jr. Revocable Trust, of which Mr. King is the trustee and beneficiary,
was the sole holder of the Series A Preferred Stock.
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.
58
<PAGE> 60
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 31, 1998, 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, (iii) by all
selling stockholders, and (iv) by all officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
---------------------- SHARES ----------------------
NAME AND ADDRESS(1) NUMBER PERCENT(2) BEING OFFERED NUMBER PERCENT(2)
- ----------------------------------------- --------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Summit Partners, L.P.(3)................. 736,630 10.6% 400,000 336,630 4.5%
499 Hamilton Avenue, Suite 200
Palo Alto, CA 94301
Sequoia Capital(4)....................... 368,315 5.3% 200,000 168,315 2.2%
3000 Sand Hill Road
Suite 280, Building 4
Palo Alto, CA 94025
Charles W. King, III Trust............... 907,054 13.1% 225,454 681,600 9.1%
c/o King Asset Management Corporation
1999 South Bascom Avenue, Suite 925
Campbell, CA 95008
Michael J. King Trust.................... 907,054 13.1% 225,454 681,600 9.1%
c/o King Asset Management Corporation
1999 South Bascom Avenue, Suite 925
Campbell, CA 95008
Patricia Morley King Trust............... 907,054 13.1% 225,454 681,600 9.1%
c/o King Asset Management Corporation
1999 South Bascom Avenue, Suite 925
Campbell, CA 95008
Charles W. King, Jr. Revocable 505,100 7.3% 73,638 431,462 5.7%
Trust(5)...............................
c/o King Asset Management Corporation
1999 South Bascom Avenue, Suite 925
Campbell, CA 95008
ThermoSpectra Corporation................ 109,307 1.6% 50,000 59,307 *
245 Winter Street
Waltham, MA 02154
James F. Clouser(6)...................... 293,911 4.1% 75,000 218,911 2.8%
James E. Williams(7)..................... -- -- -- -- --
Eric W. Beers(8)......................... 13,933 * -- 13,933 *
Eugene C. Davis(9)....................... 12,033 * -- 12,033 *
David E. Meyer(10)....................... 26,183 * -- 26,183 *
Edward M. Miller, Jr.(11)................ 15,883 * -- 15,883 *
Charles W. King, Jr.(12)................. 505,100 7.3% 73,638 431,462 5.7%
Walter G. Kortschak(13).................. 736,630 10.6% 400,000 336,630 4.5%
Thomas F. Stephenson(14)................. 368,315 5.3% 200,000 168,315 2.2%
James R. Yarter(15)...................... -- -- -- -- --
All Officers and Directors as a group
(12 persons)(16)......................... 1,997,515 27.3% 748,638 1,248,877 16.0%
</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
59
<PAGE> 61
currently exercisable or exercisable within 60 days of January 31, 1998 are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing percentage ownership of each other person. 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 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 6,939,846 shares of Common Stock
outstanding on December 31, 1997 and 7,514,846 shares of Common Stock
outstanding after completion of the offering. 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. Entities
affiliated with Summit Partners have granted to the Underwriters an
over-allotment option to purchase up to 200,000 additional shares of Common
Stock. See "Underwriting." If the over-allotment option is exercised in
full, the number of shares beneficially owned by entities affiliated with
Summit Partners will be reduced to 136,630 shares, or 1.8% of shares
outstanding.
(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. Entities affiliated with Sequoia Capital have 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 entities
affiliated with Sequoia Capital will be reduced to 68,315 shares, or 1.0%
of shares outstanding.
(5) Includes 495,100 and 10,000 shares of Common Stock held of record by the
Charles W. King, Jr. Revocable Trust and the Charles W. King, Jr.
Irrevocable Trust, respectively.
(6) Includes 293,911 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of January 31, 1998.
(7) Mr. Williams has no options currently exercisable or exercisable within 60
days of January 31, 1998.
(8) Includes 13,933 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of January 31, 1998.
(9) Includes 12,033 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of January 31, 1998.
(10) Includes 26,183 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of January 31, 1998.
(11) Includes 15,883 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of January 31, 1998. Mr. Miller
ceased to be an employee of the Company as of January 22, 1998.
(12) Includes 495,000 and 10,000 shares of Common Stock held of record by the
Charles W. King, Jr. Revocable Trust and the Charles W. King, Jr.
Irrevocable Trust, respectively. 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) Mr. Yarter has no options currently exercisable or exercisable within 60
days of January 31, 1998.
(16) Includes 387,470 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of January 31, 1998.
60
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists 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 December 31, 1997, there were 6,939,846 shares of Common Stock
outstanding that were held of record by approximately 52 stockholders. There
will be 7,514,846 shares of Common stock outstanding (assuming no exercise after
December 31, 1997 of outstanding options or purchases under the Employee Stock
Purchase Plan) after giving effect to the sale of the shares of Common Stock to
the public offered hereby.
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
"Price Range of Common Stock and 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.
Under the terms of the Asset Acquisition Agreement entered into as of
December 27, 1997 by and among SteriGenics, RSI Leasing, Inc. and ThermoSpectra
Corporation ("ThermoSpectra"), under which the Company acquired certain assets
of the Nicolet Electron Services Division, ThermoSpectra may under certain
circumstances be entitled to receive up to an additional 21,861 shares of Common
Stock of the Company.
PREFERRED STOCK
The Board of Directors has 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 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 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
61
<PAGE> 63
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 -- Anti-Takeover 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 504,945 shares (204,945 shares if the
underwriters' over-allotment option is exercised in full) of Common Stock (the
"1993 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 1993 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 1993 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 1993
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.
After this offering, under that certain Registration Rights Agreement dated
December 31, 1997, ThermoSpectra, which holds 109,307 shares of Common Stock
(the "1997 Registrable Securities") will be entitled to certain rights with
respect to such shares under the Securities Act. Under the terms of the
agreement between the Company and the holders of such 1997 Registrable
Securities, if the Company proposes to register any
62
<PAGE> 64
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 1997 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 1997 Registrable Securities, and the Company is required
to use its best efforts to effect such registration. 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 four months following an offering of the Company's
securities, including the offering made hereby.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have outstanding
7,514,846 shares of Common Stock, of which 4,543,639 shares will be freely
tradable without restriction and 2,971,207 shares will be saleable subject to
certain volume and other restrictions of Rule 144 under the Securities Act. The
Company's executive officers and directors have agreed that without the prior
written consent of PaineWebber Incorporated they will not 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 Common Stock or warrants or
other rights to acquire shares of Common Stock until the earlier of May 15, 1998
or a period 75 days from the date of this Prospectus. Thereafter, all shares can
be sold in the public market subject to certain volume and other restrictions of
Rule 144 under the Securities Act. In addition, upon completion of this
offering, there will be outstanding options to purchase a total of approximately
1,126,890 shares of the Company's Common Stock under the Company's stock option
plans. Sales of substantial amounts of such shares in the public market or the
prospect of such sales could adversely affect the market price of the Company's
Common Stock. The Company has agreed, subject to certain exception, in the
Underwriting Agreement that, without the prior written consent of PaineWebber
Incorporated, it will not issue, offer, sell, grant options to purchase or
otherwise dispose of any of the Company's equity securities or any other
securities convertible into or exchangeable for the Company's Common Stock or
other equity securities for a period of 75 days after the date of this
Prospectus. The lock-up agreements may be released at any time as to all or any
portion of the shares subject to such agreements at the sole discretion of
PaineWebber Incorporated. See "Underwriting."
63
<PAGE> 65
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom PaineWebber
Incorporated and Piper Jaffray 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 Selling Stockholders, and the Company and the Selling Stockholders have
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. .............................................
-----------
Total................................................. 2,050,000
==========
</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 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.
Certain of the Selling Stockholders have granted the Underwriters an
option, exercisable during the 30 day period after the date of this Prospectus,
to purchase up to an additional 300,000 shares of Common Stock at the 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 Company and the Selling Stockholders 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 an aggregate of approximately 4,321,000 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 Common
Stock or warrants or other rights to acquire shares of Common Stock owned by any
of them prior to, in the case of the Company, the expiration of 75 days from the
date of this Prospectus and in the case of the directors, executive officers and
stockholders, until the earlier of May 15, 1998 or 75 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.
64
<PAGE> 66
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, pursuant to
Regulation M under the Securities Act, 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.
The Underwriters have advised the Company that the Underwriters and dealers
may engage in passive market making transactions in the Common Stock in
accordance with rules promulgated by the SEC. In general, a passive market maker
may not bid for or purchase the Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
Common Stock during a specified two-month prior period or 200 shares, whichever
is greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may have the effect of stabilizing or maintaining the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market. Underwriters and dealers are not required to engage in passive market
making and may discontinue such activities at any time.
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.
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.
65
<PAGE> 67
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> 68
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.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Palo Alto, California
May 9, 1997,
except for the last paragraph of Note 3 as to which the date is
July 30, 1997
F-2
<PAGE> 69
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
------------------------- DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents:
Unrestricted............................................... $ 9,062,328 $ 1,072,342 $ 21,282,983
Restricted................................................. 844,169 885,058 899,761
Accounts receivable, net of allowance of $242,000, $253,000
and $154,000 at March 31, 1996 and 1997 and December 31,
1997....................................................... 3,476,737 4,591,611 5,302,324
Prepaid expenses and other current assets..................... 560,243 801,404 941,986
Deferred income taxes......................................... 959,322 1,108,717 1,108,717
----------- ----------- -----------
Total current assets............................................ 14,902,799 8,459,132 29,535,771
Property, plant and equipment, net.............................. 67,430,439 80,330,124 84,555,135
Other assets.................................................... 1,146,113 2,876,281 7,394,298
Investment in joint venture..................................... 1,250,000 1,000 1,000
----------- ----------- -----------
Total assets.......................................... $84,729,351 $91,666,537 $121,486,204
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 382,031 $ 1,461,758 $ 413,385
Income taxes payable.......................................... 86,179 677,192 2,683,916
Accrued liabilities........................................... 6,305,238 6,096,785 6,912,412
Current portion of capital lease obligations.................. 2,543,965 3,152,394 2,912,541
Current portion of long-term debt............................. 2,289,059 250,000 250,000
----------- ----------- -----------
Total current liabilities....................................... 11,606,472 11,638,129 13,172,254
Capital lease obligations, less current portion................. 7,406,387 6,139,685 3,998,166
Long-term debt, less current portion............................ 27,783,641 32,000,000 36,750,000
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 at March 31, 1996 and
1997 and none at December 31, 1997......................... 1,500,000 1,500,000 --
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares -- 10,000,000 at March 31, 1996 and 1997
and 1,000,000 at December 31, 1997
Issued and outstanding shares -- none...................... -- -- --
Convertible preferred stock, Series B and C, $0.001 par value:
Authorized shares -- 1,772,728 at March 31, 1996 and 1997
and none at December 31, 1997
Issued and outstanding shares -- 1,772,727 at March 31,
1996 and 1997 and none at December 31, 1997.............. 1,773 1,773 --
Common stock, $0.001 par value:
Authorized shares -- 15,000,000
Issued and outstanding shares -- 3,056,042 at March 31,
1996 and 1997 and 6,939,846 at December 31, 1997........... 3,056 3,056 6,940
Additional paid-in capital.................................... 14,726,994 14,726,994 38,216,875
Notes receivable from sale of common stock to employees....... (88,170) (88,170) (68,217)
Retained earnings............................................. 13,121,616 16,336,379 20,001,495
----------- ----------- -----------
Total stockholders' equity...................................... 27,765,269 30,980,032 58,157,093
----------- ----------- -----------
Total liabilities and stockholders' equity............ $84,729,351 $91,666,537 $121,486,204
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 70
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $28,661,287 $30,240,840 $37,668,198 $27,684,475 $33,870,801
Cost of revenues................ 16,389,018 16,977,930 20,425,350 14,641,499 18,018,613
----------- ----------- ----------- ----------- -----------
12,272,269 13,262,910 17,242,848 13,042,976 15,852,188
Costs and expenses:
General and administrative.... 5,664,413 5,212,719 6,345,112 4,764,117 5,048,038
Marketing and selling......... 1,582,875 1,761,026 2,482,124 1,843,790 2,532,522
Research, development and
engineering................ 685,154 889,815 1,380,821 1,039,715 914,083
----------- ----------- ----------- ----------- -----------
7,932,442 7,863,560 10,208,057 7,647,622 8,494,643
----------- ----------- ----------- ----------- -----------
Income from operations.......... 4,339,827 5,399,350 7,034,791 5,395,354 7,357,545
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) (1,456,376) (1,368,414)
Other income (expense)........ 139,578 46,741 115,347 (71,644) 32,463
----------- ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes, equity in
joint ventures and
discontinued operations....... (933,953) 3,599,950 5,313,828 3,867,334 6,021,594
Provision for income taxes...... 1,185,000 1,447,888 2,099,065 1,527,855 2,356,478
----------- ----------- ----------- ----------- -----------
Income (loss) before equity in
joint ventures and
discontinued operations....... (2,118,953) 2,152,062 3,214,763 2,339,479 3,665,116
Equity in net loss of joint
ventures................... (1,359,983) -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations.................... (3,478,936) 2,152,062 3,214,763 2,339,479 3,665,116
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 $ 2,339,479 $ 3,665,116
=========== =========== =========== =========== ===========
Pro forma basic net income per
share......................... $ 0.66 $ 0.48 $ 0.63
=========== =========== ===========
Shares used in computing pro
forma basic net income per
share......................... 4,860,685 4,860,685 5,846,286
=========== =========== ===========
Diluted net income per share.... $ 0.62 $ 0.45 $ 0.58
=========== =========== ===========
Shares used in computing diluted
net income per share.......... 5,164,679 5,164,679 6,350,343
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 71
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
Conversion of
preferred
stock to
common
(unaudited)... (1,772,727) (1,773) 1,772,727 1,773 -- -- -- --
Issuance of
common stock,
net of
issuance costs
of $2,580,001
(unaudited)... -- -- 2,000,000 2,000 21,417,999 -- -- 21,419,999
Issuance of
common stock
pursuant to
Nicolet
acquisition... -- -- 109,307 109 2,063,061 -- -- 2,063,170
Exercise of
options
(unaudited)... -- -- 1,770 2 8,821 -- -- 8,823
Repayment of
notes
receivable
(unaudited)... -- -- -- -- -- 19,953 -- 19,953
Net income
(unaudited)... -- -- -- -- -- -- 3,665,116 3,665,116
---------- ------ --------- ------ ----------- -------- ----------- -----------
Balance at
December 31,
1997
(unaudited)..... -- $ -- 6,939,846 $6,940 $38,216,875 $ (68,217) $20,001,495 $58,157,093
========== ====== ========= ====== =========== ======== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 72
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------------------- ---------------------------
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 $ 2,339,479 $ 3,665,116
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 6,017,667 7,083,553
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) (21,099) --
Changes in assets and liabilities:
Accounts receivable........................ 506,696 28,640 (1,114,874) (601,282) (710,713)
Prepaid expenses and other current
assets.................................. 252,022 (104,348) (241,161) (669,702) (96,948)
Accounts payable and accrued liabilities... 119,515 172,741 1,369,584 1,047,343 1,635,032
Net assets of discontinued operations...... 723,276 -- -- 18,149 --
------------ ----------- ------------ ----------- -----------
Net cash provided by operating activities........ 8,686,036 11,010,487 12,183,745 8,130,955 11,576,040
INVESTING ACTIVITIES
Purchases of property, plant and
equipment -- continued operations.............. (16,546,736) (7,207,495) (18,613,378) (18,342,246) (7,588,613)
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 -- -- -- --
Acquisition of certain assets of Nicolet......... -- -- -- -- (5,001,052)
Investments in joint ventures.................... (590,792) -- -- -- --
Proceeds from sale of investment in joint
venture........................................ -- -- 1,249,000 -- --
Loss from investment in joint venture............ -- -- -- 100,000 --
Other assets..................................... (28,548) (369,076) (1,779,364) (1,004,725) (1,058,480)
------------ ----------- ------------ ----------- -----------
Net cash used in investing activities............ (15,550,529) (7,576,571) (19,143,742) (19,246,971) (13,648,145)
FINANCING ACTIVITIES
Issuance of Common Stock......................... -- -- -- -- 21,428,822
Issuance costs related to Series C Preferred
Stock.......................................... (23,440) -- -- -- --
Redemption of Preferred Stock.................... -- -- -- -- (1,500,000)
Exercise of stock options........................ -- 71,163 -- -- --
Borrowings under industrial revenue bonds........ -- 9,000,000 8,750,000 8,750,000 5,000,000
Borrowings under term loan and line of credit.... 7,322,726 -- 2,881,619 2,081,619 700,000
Borrowings under cobalt financing agreements..... -- -- -- 2,508,127 --
Repayments on term loan, line of credit,
industrial revenue bonds and capital leases.... (4,706,987) (4,271,103) (12,620,719) (10,830,639) (3,331,373)
Increase in restricted cash...................... (12,300) (51,713) (40,889) (28,005) (14,703)
------------ ----------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities..................................... 2,579,999 4,748,347 (1,029,989) 2,481,102 22,282,746
------------ ----------- ------------ ----------- -----------
Net increase (decrease) in unrestricted cash and
cash equivalents............................... (4,284,494) 8,182,263 (7,989,986) (8,634,914) 20,210,641
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 $ 427,414 $ 21,282,983
============ =========== ============ =========== ===========
NONCASH FINANCING ACTIVITIES
Assets acquired under capital leases............. $ 7,818,369 $ 2,372,252 $ 2,508,127 $ 1,548,882 $ --
Common stock issued in connection with
acquisition of Nicolet......................... $ -- $ -- $ -- $ -- $ 2,063,170
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> 73
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 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. The Company performs contract sterilization and
radiation processing services using Gamma radiation ("Gamma") and electron beam
radiation ("E-Beam"). The Company operates 12 Gamma and one E-Beam sterilization
facility 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 and includes a
facility located in San Diego acquired pursuant to the acquisition of the
Nicolet Electron Services Division of ThermoSpectra Corporation (the "Nicolet
Acquisition") (see Note 14). All significant intercompany accounts and
transactions have been eliminated.
Interim Financial Statements
In the opinion of management, the unaudited interim financial statements at
December 31, 1997 and for the nine months ended December 31, 1996 and 1997
include all adjustments, consisting only of normal recurring accruals, necessary
to present fairly the Company's financial position at December 31, 1997, and
results of operations and cash flows for the nine months ended December 31, 1996
and 1997. Results for the nine months ended December 31, 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 revenues during
fiscal 1995 and 1996. No customer accounted for more than 10% of revenues during
fiscal 1997, or during the nine months ended December 31, 1997.
Advertising Costs
Advertising costs are recorded as an expense when incurred. Advertising
costs were approximately $134,000, $191,000, $243,000 and $289,000 for the years
ended March 31, 1995, 1996 and 1997, and for the nine months ended December 31,
1997, respectively. The Company does not incur any direct response advertising
costs.
F-7
<PAGE> 74
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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.
Financial Instruments
The estimated fair values of financial instruments approximate the carrying
values at March 31, 1996 and 1997 and December 31, 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 U.S. 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 in fiscal 1997 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 builds or expands 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.
F-8
<PAGE> 75
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
Goodwill
Goodwill represents the excess of the purchase price paid over the
estimated fair values of tangible and intangible net assets acquired. Goodwill
is amortized on a straight-line basis over the estimated useful life of the
assets acquired.
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 plans 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).
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128), which
was adopted on December 31, 1997. In accordance with the provisions of FAS 128,
all prior period net income (loss) per share amounts have been restated to
reflect basic and diluted per share amounts.
Except as noted below, basic net income (loss) per share is computed using
the weighted average number of shares of common stock outstanding. Pro forma
basic net income (loss) per share is calculated as for basic net income (loss)
per share, but assumes conversion of all convertible preferred stock which
converted automatically in the initial public offering, even if antidilutive.
Diluted net income (loss) per share includes potential common shares, when
dilutive, from stock options (using the treasury stock method) and from
convertible preferred stock (using the if-converted method). Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, potential common
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) for both
basic and diluted.
F-9
<PAGE> 76
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
The following table sets forth the computation of basic, pro forma basic,
and diluted net income (loss) per share:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
MARCH 31, DECEMBER 31,
------------------------- ---------------
1995 1996 1997 1996 1997
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Numerator for basic and diluted:
Net income (loss).................................. $(4,767) $2,152 $3,215 $2,339 $3,665
======= ====== ====== ====== ======
Denominator:
Weighted average common shares outstanding......... 3,000 3,028 3,056 3,056 4,944
Shares related to SEC Staff Accounting Bulletins... 32 32 32 32 16
------- ------ ------ ------ ------
Denominator for basic net income (loss) per share.... 3,032 3,060 3,088 3,088 4,960
Conversion of preferred stock (pro forma).......... 1,773 1,773 886
------ ------ ------
Denominator for pro forma basic net income per
share.............................................. 4,861 4,861 5,846
Conversion of preferred stock........................ -- 1,773 -- -- --
Stock options........................................ -- 171 304 304 504
------- ------ ------ ------ ------
Denominator for diluted net income (loss) per
share.............................................. 3,032 5,004 5,165 5,165 6,350
======= ====== ====== ====== ======
Basic net income (loss) per share.................... $ (1.57) $ 0.70
======= ======
Pro forma basic net income per share................. $ 0.66 $ 0.48 $ 0.63
====== ====== ======
Diluted net income (loss) per share.................. $ (1.57) $ 0.43 $ 0.62 $ 0.45 $ 0.58
======= ====== ====== ====== ======
</TABLE>
In the year ended March 31, 1995 the loss from continuing operations was
$3,479,000 or $1.15 per share (basic and diluted), and the loss from
discontinued operations was $1,288,000 or $0.42 per share (basic and diluted).
Options to purchase 25,500 shares of common stock were outstanding in the
nine months ended December 31, 1997 but were not included in the computation of
diluted earnings per share because the exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income (FAS 130) and Statement No. 131, Disclosures
About Segments of an Enterprise and Related Information (FAS 131). FAS 130
establishes rules for reporting and displaying comprehensive income. FAS 131
will require the Company to use the "management approach" in disclosing segment
information. Both statements are effective for the Company during fiscal 1999.
The Company believes that the adoption of either FAS 130 or FAS 131 will not
have a material impact on the Company's results of operations, cash flows or
financial position.
F-10
<PAGE> 77
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 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,
--------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Land................................. $ 1,568,397 $ 1,605,245 $ 2,105,245
Buildings............................ 7,340,648 12,091,744 19,856,582
Cobalt 60 isotope.................... 69,442,173 71,776,948 74,060,451
Furniture and fixtures............... 2,704,230 3,932,708 4,743,962
Machinery and equipment.............. 18,341,205 24,846,155 30,831,988
Construction-in-progress............. 6,563,966 9,016,290 857,217
------------ ------------ ------------
105,960,619 123,269,090 132,455,445
Accumulated depreciation and
amortization....................... 38,530,180 42,938,966 47,900,310
------------ ------------ ------------
$ 67,430,439 $ 80,330,124 $ 84,555,135
============ ============ ============
</TABLE>
Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------- DECEMBER 31,
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 $505,000 at
December 31, 1997)...................... $ 459,441 $ 791,477 $ 959,185
Goodwill (see Notes 1, 13 and 14)......... -- 558,769 4,253,328
Investment in RTI, Inc. (see Note 13)..... 236,000 -- --
Other..................................... 479,742 1,576,735 2,243,045
--------- --------- ---------
1,175,183 2,926,981 7,455,558
Less current portion of bond costs........ 29,070 50,700 61,260
--------- --------- ---------
$1,146,113 $2,876,281 $7,394,298
========= ========= =========
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------ DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Compensation.............................. $1,070,563 $1,717,429 $1,566,719
Property tax.............................. 778,314 582,960 619,344
Legal and accounting...................... 198,469 418,463 419,403
Sales and other non-income taxes.......... 2,088,948 1,628,539 1,628,955
Other..................................... 2,168,944 1,749,394 2,677,991
--------- --------- ---------
$6,305,238 $6,096,785 $6,912,412
========= ========= =========
</TABLE>
F-11
<PAGE> 78
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
3. BORROWING ARRANGEMENTS
Long-term debt consists of:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Industrial revenue bond, due in March 2005, with
interest at the contract formula rate of 3.6% and 4.5%
at March 31, 1997 and December 31, 1997,
respectively.......................................... $ 5,250,000 $ 5,250,000 $ 5,250,000
Industrial revenue bond, due in December 2004, with
interest at the contract formula rate of 3.6% and 4.5%
at March 31, 1997 and December 31, 1997,
respectively.......................................... 4,900,000 4,900,000 4,900,000
Industrial revenue bond, due in November 2005, with
interest at the contract formula rate of 3.6% and 4.5%
at March 31, 1997 and December 31, 1997,
respectively.......................................... 4,600,000 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% and 4.4%
at March 31, 1997 and December 31, 1997,
respectively.......................................... 9,000,000 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% and 4.4%
at March 31, 1997 and December 31, 1997,
respectively.......................................... -- 7,750,000 7,750,000
Industrial revenue bond, due in annual installments of
$250,000 with interest at a fixed rate of 10.0%....... -- 750,000 500,000
Industrial revenue bond, due in July 2017, with interest
at the contract formula rate of 4.4% at December 31,
1997.................................................. -- -- 5,000,000
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 37,000,000
Less current portion.................................... 2,289,059 250,000 250,000
----------- ----------- -----------
$ 27,783,641 $ 32,000,000 $ 36,750,000
=========== =========== ===========
</TABLE>
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 December 31, 1997, there
were approximately $844,000, $885,000 and $900,000 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 March 31, 1997 and at
December 31, 1997, collateralized by certain assets of the Company. At March 31
and December 31, 1997 no amount was outstanding under this line of credit.
F-12
<PAGE> 79
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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.
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 nine
months ended December 31, 1997 were approximately $1,395,000, $996,000,
$1,875,000 and $1,306,000, respectively.
On July 30, 1997 the Company issued an industrial revenue bond in the
amount of $5 million which bears a variable interest rate. The interest rate was
3.9% at issuance, and 4.4% at December 31, 1997.
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 (see Note 14).
5. STOCKHOLDERS' EQUITY
Convertible Preferred
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 (see Note 14).
No dividends have been declared to date by the Board of Directors on any of
the outstanding preferred stock.
F-13
<PAGE> 80
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 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 (see Note 14).
Activity under the option plans was as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------
WEIGHTED
NUMBER OF AVERAGE PRICE
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)....................... 384,250 $ 11.34
Exercised (unaudited)..................... (1,770) $ 4.98
Canceled (unaudited)...................... (8,765) $ 6.78
---------
Balance at December 31, 1997 (unaudited).... 1,076,640 $ 7.29
=========
</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.
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>
F-14
<PAGE> 81
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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.
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.
F-15
<PAGE> 82
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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 30,000 99,200 137,395
benefit..........................
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 nine months ended December 31, 1996
and 1997 is based upon the Company's estimated annual effective tax rate for
fiscal 1997 and 1998, respectively.
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.
F-16
<PAGE> 83
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
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 and
the nine months ended December 31, 1997 were $942,000, $11,000, $805,000 and
$786,000 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
for calendar year 1997. 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 $134,000 for fiscal 1995, 1996
and 1997 and for the nine months ended December 31, 1997, respectively.
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,
--------------------------- DECEMBER 31,
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 5,332,579
----------- ----------- -----------
$11,502,314 $12,393,732 $ 11,056,472
=========== =========== ===========
</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
(including approximately $1.3 million under operating leases, at then current
exchange rates, payable in Canadian dollars):
<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>
F-17
<PAGE> 84
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
In conjunction with the RTI, Inc. ("RTI") 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.
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 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 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 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 $18,907,000 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 reaffirming the dismissal of both suits. While the
litigation resulted in significant expenses and diversion of management
attention, the settlement had no impact on the financial position or results of
operations of the Company. 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
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.
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 $309,000 for the nine months ended December 31, 1997
compared to total rent expense of $883,000 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.
F-18
<PAGE> 85
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
Included in costs and expenses are approximately $1,414,000, $1,189,000,
$2,116,000 and $826,000 for fiscal 1995, 1996 and 1997 and for the nine months
ended December 31, 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 $799,000, $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 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
On February 26, 1996, the Company, through its subsidiary SteriGenics East
Corporation, entered into an agreement to acquire certain assets and liabilities
of RTI, a New York corporation and its subsidiaries that operated three
irradiation facilities along the eastern seaboard of the U.S. At March 31, 1996,
the Company had an initial investment of $236,000 in RTI. 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 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.
F-19
<PAGE> 86
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
14. SUBSEQUENT EVENTS (UNAUDITED)
In July, 1997, the stockholders approved the adoption of the 1997 Equity
Incentive Plan, as amended, the 1997 Stock Plan and the 1997 Employee Stock
Purchase Plan, under which a total of 1,025,000 shares, 175,000 shares and
400,000 shares, respectively, of the Company's authorized but unissued common
stock have been reserved for issuance thereunder. Subsequently, the remaining
available shares under the 1986 Stock Plan and the 1997 Stock Plan became
available for issuance under the 1997 Equity Incentive Plan. Activity under
these plans is included in Note 5. Since December 31, 1997, options to purchase
50,250 shares of common stock have been granted under the 1997 Equity Incentive
Plan and 32,111 shares have been issued under the 1997 Employee Stock Purchase
Plan.
In August 1997, the Company completed its initial public offering of
2,000,000 shares of its common stock at a price of $12.00 per share, raising net
proceeds of $21.4 million. Each share of the Company's outstanding convertible
preferred stock was automatically converted to a share of common stock during
the initial public offering. The shares of Series A Redeemable Preferred Stock
were redeemed for $1,500,000 from the proceeds of the initial public offering.
In July 1997, the Company was reincorporated in the State of Delaware, and
became authorized to issue 1,000,000 shares of $0.001 par value preferred stock.
On December 31, 1997, the Company acquired certain assets of the Nicolet
Electron Services Division of ThermoSpectra Corporation ("Nicolet") for a net
purchase price of approximately $7 million, $5 million in cash and 109,307
shares of the Company's common stock valued at approximately $2 million. The
consolidated statements of operations include the results of operations of
Nicolet from the date of acquisition. The Company recorded approximately $3.4
million of goodwill in connection with the acquisition, which is being amortized
over a twenty-year period.
The following unaudited pro forma summary represents the Company's
consolidated results of operations for the periods presented on the following
basis: (i) as if the acquisition of RTI had occurred on April 1, 1995 and is
therefore included in all periods presented and (ii) as if the acquisition of
Nicolet had occurred on April 1, 1996 and is therefore included in the year
ended March 31, 1997 and the nine months ended December 31, 1996 and 1997. Such
pro forma results do 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>
NINE MONTHS ENDED DECEMBER
YEARS ENDED MARCH 31, 31,
------------------------- ---------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Pro forma net revenues.................... $34,592,867 $43,197,048 $32,354,700 $36,755,006
Pro forma net income...................... 1,627,419 3,901,349 2,804,886 4,482,436
Pro forma diluted net income per share.... 0.33 0.74 0.53 0.69
</TABLE>
F-20
<PAGE> 87
============================================================
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, THE SELLING STOCKHOLDERS 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>
Additional Information.................... 2
Available Information..................... 2
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 18
Price Range of Common Stock and Dividend
Policy.................................. 18
Capitalization............................ 19
Selected Consolidated Financial Data...... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 21
Business.................................. 30
Management................................ 52
Certain Transactions...................... 58
Principal and Selling Stockholders........ 59
Description of Capital Stock.............. 61
Shares Eligible for Future Sale........... 63
Underwriting.............................. 64
Legal Matters............................. 65
Experts................................... 65
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
============================================================
============================================================
2,050,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
PIPER JAFFRAY INC.
------------------------
, 1998
============================================================
<PAGE> 88
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...................................... $ 12,306
NASD filing fee........................................... 4,827
Nasdaq National Market listing fee........................ 11,500
Printing and engraving expenses........................... 150,000
Legal fees and expenses................................... 115,000
Accounting fees and expenses.............................. 85,000
Blue sky fees and expenses................................ 5,000
Transfer agent fees....................................... 5,000
Miscellaneous fees and expenses........................... 61,367
-------
Total........................................... $450,000
=======
</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
incorporated by reference 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 7 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 1,770 shares 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> 89
2. On August 22, 1997 the Registrant registered all options
outstanding under the Registrant's Second Amended and Restated 1986 Stock
Option Plan, 1997 Stock Plan and 1997 Equity Incentive Plan and all shares
available for option grant or available for issuance under such plans on a
Form S-8 Registration Statement. Prior to the registration of the Form S-8,
the Registrant 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, and 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.
3.3++ Bylaws of the Registrant.
4.1++ Reference is made to Exhibits 3.1 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.
4.4* Registration Rights Agreement, dated December 31, 1997 among the Registrant and
ThermoSpectra Corporation.
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.
</TABLE>
II-2
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------------------------------------------------------------------------------
<S> <C>
10.14++.. Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond Series 1985A ($2,150,000) -- Intercreditor Agreement.
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> 91
<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> 92
<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.
10.64** Asset Acquisition Agreement between RSI Leasing, Inc., ThermoSpectra Corporation
and the Registrant dated December 27, 1997.
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>
- ---------------
++ Incorporated by reference from the exhibit of the same number in the
Registrant's Registration Statement on Form S-1 (Registration No.
333-30047) as filed with the SEC on June 24, 1997.
* Incorporated by reference from Exhibit 4.1 of the Registrant's SEC Filing on
Form 8-K as filed with the SEC on January 14, 1998.
** Incorporated by reference from Exhibit 2.1 of the Registrant's SEC filing on
Form 8-K as filed with the SEC on January 14, 1998.
+ 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> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to the Registration Statement
No. 333-45563 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fremont, State of California, on this 25th day of
February, 1998.
STERIGENICS INTERNATIONAL, INC.
By: /s/ JAMES E. WILLIAMS
------------------------------------
James E. Williams
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<S> <C> <C>
/s/ JAMES F. CLOUSER* President, Chief Executive February 25, 1998
- --------------------------------------------- Officer (Principal Executive
James F. Clouser Officer) and Director
/s/ JAMES E. WILLIAMS Chief Financial Officer February 25, 1998
- --------------------------------------------- (Principal Financial and
James E. Williams Accounting Officer)
/s/ CHARLES W. KING, JR.* Chairman of the Board February 25, 1998
- ---------------------------------------------
Charles W. King, Jr.
/s/ WALTER G. KORTSCHAK* Director February 25, 1998
- ---------------------------------------------
Walter G. Kortschak
/s/ THOMAS F. STEPHENSON Director February 25, 1998
- ---------------------------------------------
Thomas F. Stephenson
/s/ JAMES YARTER* Director February 25, 1998
- ---------------------------------------------
James Yarter
*By: /s/ JAMES E. WILLIAMS
- ---------------------------------------------
James E. Williams
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 94
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 reports dated
May 9, 1997 (except for the last paragraph of Note 3 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
2,350,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Palo Alto, California
February 20, 1998
II-7
<PAGE> 95
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 for the last paragraph of Note 3 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.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Palo Alto, California
May 9th, 1997
II-8
<PAGE> 96
STERIGENICS INTERNATIONAL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
MARCH 31, 1997
(IN THOUSANDS)
<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.
<PAGE> 97
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ------------
<S> <C> <C>
1.1+ Form of Underwriting Agreement (preliminary form).
3.1++ Certificate of Incorporation of the Registrant, as amended to date.
3.3++ Bylaws of the Registrant.
4.1++ Reference is made to Exhibits 3.1 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.
4.4* Registration Rights Agreement, dated December 31, 1997 among the
Registrant and ThermoSpectra Corporation.
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.
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.
</TABLE>
<PAGE> 98
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ------------
<S> <C> <C>
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>
<PAGE> 99
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ------------
<S> <C> <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.
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ------------
<S> <C> <C>
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.
10.64** Asset Acquisition Agreement between RSI Leasing, Inc., ThermoSpectra
Corporation and the Registrant dated December 27, 1997.
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>
- ---------------
++ Incorporated by reference from the exhibit of the same number in the
Registrant's Registration Statement on Form S-1 (Registration No.
333-30047) as filed with the SEC on June 24, 1997.
* Incorporated by reference from Exhibit 4.1 of the Registrant's SEC Filing on
Form 8-K as filed with the SEC on January 14, 1998.
** Incorporated by reference from Exhibit 2.1 of the Registrant's SEC filing on
Form 8-K as filed with the SEC on January 14, 1998.
+ Previously filed.
<PAGE> 1
EXHIBIT 5.1
February 25, 1998
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.
333-45563) originally filed by SteriGenics International, Inc. (the "Company")
with the Securities and Exchange Commission (the "Commission") on February 4,
1998, as thereafter amended or supplemented (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of up to 2,350,000 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 being sold by the Company 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 being sold
by the Company, 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
