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FORM 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-22909
STERIGENICS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 95-3323502
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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4020 CLIPPER COURT, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(510) 770-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) had been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 22, 1998, there were outstanding 7,721,846 shares of the
registrant's Common Stock. The aggregate market value of the common stock held
by non-affiliates of the registrant, based on the closing price of the common
stock as reported on the Nasdaq National Market on June 22, 1998, was
approximately $186,289,535.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be mailed to stockholders
in connection with the registrant's annual meeting of stockholders, scheduled to
be held on August 5, 1998 are incorporated by reference in Part III of this
report. Except as expressly incorporated by reference, the registrant's Proxy
Statement shall not be deemed to be part of this report.
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FORWARD LOOKING STATEMENTS
The discussion in this Report contains forward looking statements that
involve risks and uncertainties. The statements contained in this release that
are not purely historical are forward looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding the Company's "expectations," "beliefs," "hopes," "intentions" or
"strategies," or the like, regarding the future. All forward looking statements
included in this Report are based upon information available to the Company as
of the date hereof, and the Company assumes no obligation to update any such
forward looking statement. Actual results could differ materially from those
indicated by the forward looking statements made herein or presented elsewhere
by the Company's management from time to time. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
elsewhere in this Report including under the caption "Risk Factors."
PART I
ITEM 1. 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 advanced application 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 advanced
applications products.
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.
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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.
ADVANCED APPLICATIONS PRODUCTS STERILIZATION MARKETS
The market for sterilization and radiation processing of advanced
applications 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 advanced applications 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 advanced applications 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.
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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 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.
SERVICES
SteriGenics offers a number of services to its customers including its
standard processing services, time-based services and value-added services such
as validation and testing. In addition, the Company is seeking to lease its
MiniCells to large medical products manufacturers or other customers with high
product volumes for installation in such customers' facilities.
STANDARD 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.
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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 years 1997 and 1998.
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 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. To
date, no MiniCells have been leased.
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 1998, including many of the largest manufacturers
of single-use medical products. Sales to medical products customers accounted
for the majority of the Company's revenues in fiscal 1998. One customer, Baxter
International Inc.
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("Baxter"), accounted for approximately 13% of revenues during fiscal year 1996.
No customer accounted for more than 10% of revenues during fiscal years 1997 or
1998.
ADVANCED APPLICATIONS MARKET
The advanced applications 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. The Company expects that sales to
advanced applications customers as a percentage of overall revenues will
increase in the future. See "Risk Factors -- Uncertainty of Expansion in
Advanced Applications 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 advanced applications 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
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. 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
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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 has
scheduled ISO 9002 and EN46002/EN552 certification audits for the Rockaway and
Salem facilities during 1998. See "Properties"
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."
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 other providers of contract Gamma sterilization services, the
most significant of which is Isomedix, Inc., a subsidiary of Steris Corporation
("Isomedix"), and 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
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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 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.
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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 five 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.
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.
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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 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.
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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.
EMPLOYEES
At March 31, 1998, the Company had 321 employees. The Company considers its
relations with its employees to be good. See "Risk Factors -- Dependence on Key
Personnel."
RISK FACTORS
In addition to the other information in this Report, the following risk
factors should be considered carefully in evaluating the Company and its
business.
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
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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 advanced applications 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 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.
Due to these factors, as well as other unanticipated factors, it is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts or investors. In such event, the price of
the Company's Common Stock would be materially adversely affected.
DEPENDENCE ON MEDICAL PRODUCTS CUSTOMERS
The Company derives a substantial portion of its revenues from the sale of
sterilization services to manufacturers of medical devices, labware and eyecare
products ("medical products"), and the Company expects that the sterilization of
medical products will continue to account for a significant portion of the
Company's revenues for the foreseeable future. The 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
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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.
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 other providers of contract Gamma sterilization services, the
most significant of which is Isomedix, Inc., a subsidiary of Steris Corporation
("Isomedix"), and 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 and radiation processing
services in those markets.
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.
UNCERTAINTY OF EXPANSION IN ADVANCED APPLICATION MARKETS
While the Company has traditionally focused primarily on the medical
products market, it has recently increased its efforts in the advanced
application 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 advanced application products
such as semiconductors and gemstones. These services accounted for approximately
20% of the Company's revenues in fiscal 1997. Many of the advanced application
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.
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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
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.
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.
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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.
SUBSTANTIAL DEBT
As of March 31, 1998, the Company's total consolidated liabilities were
$61.0 million, of which $42.6 million represented long-term debt (including
current portion), its total consolidated assets were $130.7 million and its
total stockholders' equity was $69.7 million. The Company's substantial level of
debt presents the risk that the Company might not generate sufficient cash to
service the Company's indebtedness, including its Industrial Revenue Bonds
("IRBs"), or that its debt level could limit its ability to finance an
acquisition and develop additional projects, to compete effectively or to
operate successfully under adverse economic conditions. As of March 31, 1998,
the Company had $36.5 million of tax-free IRBs outstanding with variable
interest rates as of March 31, 1998 of either 3.7% or 3.9%. 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 Note 3 of Notes to the
Consolidated Financial Statements.
RISKS RELATED TO GOVERNMENT REGULATION AND STANDARDS COMPLIANCE
The Company's business is subject to various federal, state and local laws,
regulations, agency actions and court decisions. Although the Company believes
it has received all licenses and permits necessary to conduct its current
sterilization business, there can be no assurance that the Company will not be
found in violation of applicable requirements or that governmental bodies will
not seek to impose regulatory requirements not now anticipated on the Company
and its business. In addition, the long-term course of regulatory policy cannot
be predicted and, there can be no assurance that laws and regulations will not
be applied in a manner that adversely affects the Company. The imposition of
such regulatory requirements could force the Company to alter or cease
operations of its facilities and could otherwise have a material adverse effect
on the Company's business, financial condition and results of operations.
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The design, construction, use and operation of commercial 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 bodies, such as
the International Standards Organization ("ISO") and the Association for the
Advancement of Medical Instrumentation ("AAMI"). The ISO 9002 Standard is an
international quality standard that requires the Company to implement and
document an effective quality assurance program which is subject to quality
systems surveillance audits every six months.
Changes in, or reinterpretations of, existing requirements and standards or
adoption of new requirements beyond those described below or the failure at any
time to comply with any applicable material regulations and standards could have
a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not incur
significant costs to comply with laws, regulations and other requirements in the
future or that such laws, regulations and other requirements will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Violations of or noncompliance with applicable governmental requirements
may result in an enforcement action including, among other things, a notice of
violation, imposition of civil penalties, suspension, modification or revocation
of any applicable license, criminal prosecution, or withholding or recall of the
nuclear byproduct material held by the Company. Any such action would have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS OF OPERATING FACILITIES USING RADIOACTIVE MATERIAL
The operation of the Company's 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
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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."
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 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
16
<PAGE> 18
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, 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,
17
<PAGE> 19
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.
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.
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
18
<PAGE> 20
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
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.
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.
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. There can be no assurance 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.
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.
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
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<PAGE> 21
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 has received an inquiry from the Software Publishers
Association (the "SPA") regarding an alleged failure to obtain proper licenses
for certain third party software. The Company is in discussions with the SPA
and, while there can be no assurance, the Company does not believe that the
resolution of this matter will have a material adverse effect on its financial
condition or operating results.
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.
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 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.
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<PAGE> 22
ITEM 2. PROPERTIES
The Company has a network of 12 Gamma facilities and one E-Beam facility.
Eight of the Gamma facilities perform sterilization services primarily for the
medical products market. The remaining four Gamma facilities provide services
primarily to advanced applications customers. The Company processes its advanced
applications products primarily in its advanced applications facilities since
certain medical products customers prefer that their products be segregated from
advanced applications 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 advanced applications and medical customers.
The following table sets forth information regarding the Company's
facilities as of March 31, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET
-------- -----------
<S> <C>
MEDICAL PRODUCTS
FACILITIES
Corona, California(2)....................................... 100,000
Hayward, California(2)...................................... 25,000
Fort Worth I, Texas(1)(2)................................... 22,000
Fort Worth II, Texas(1)(2).................................. 58,000
Gurnee, Illinois(1)(2)...................................... 78,000
Westerville, Ohio(1)(2)..................................... 22,000
Charlotte, North Carolina(1)(2)............................. 64,000
Haw River, North Carolina(2)................................ 25,000
ADVANCED APPLICATION
FACILITIES
Tustin, California(2)....................................... 32,000
Schaumburg, Illinois(2)..................................... 32,000
Rockaway, New Jersey........................................ 25,000
Salem, New Jersey........................................... 20,000
E-BEAM FACILITY
San Diego, California(3).................................... 20,000
</TABLE>
- ---------------
(1) Financed through the issuance of Industrial Revenue Bonds. See -- "Risk
Factors -- Substantial Debt" and Note 3 of Notes to the Consolidated
Financial Statements.
(2) ISO-9002 Certified and EN46002/EN552 Certified facilities.
(3) ISO-9002 Certified and EN46002 Certified facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year ended March 31, 1998.
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<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed for trading on the Nasdaq National
Market under the symbol "STER". On March 31, 1998, there were approximately 58
holders of record of the Common Stock.
The table below sets forth the high and low sales prices per share as
reported on the NASDAQ National Market System since the Company's initial public
offering on August 14, 1997. The Company's initial public offering price was
$12.00 per share.
<TABLE>
<CAPTION>
SALES PRICE
------------------
FISCAL YEAR ENDED MARCH 31, 1998 HIGH LOW
-------------------------------- ------- -------
<S> <C> <C>
4th quarter ended March 31, 1998......................... $ 23.00 $16.125
3rd quarter ended December 31, 1997...................... $ 22.00 $ 16.50
2nd quarter ended September 30, 1997(1).................. $17.875 $ 10.80
</TABLE>
- ---------------
(1) Trading of the Company's Common Stock commenced on August 14, 1997.
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<PAGE> 24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues......................................... $46,955 $37,668 $30,241 $28,661 $24,585
Cost of revenues................................. 24,231 20,425 16,978 16,389 11,679
------- ------- ------- ------- -------
22,724 17,243 13,263 12,272 12,906
Costs and expenses:
General and administrative..................... 7,850 6,345 5,213 5,664 3,266
Marketing and selling.......................... 3,497 2,482 1,761 1,583 1,258
Research, development and engineering.......... 1,229 1,381 890 685 518
------- ------- ------- ------- -------
12,576 10,208 7,864 7,932 5,042
------- ------- ------- ------- -------
Income from operations........................... 10,148 7,035 5,399 4,340 7,864
Other income (expense):
Interest income................................ 835 343 114 136 67
Interest expense............................... (2,316) (2,179) (1,960) (2,538) (983)
Write-down of investments in joint ventures.... -- -- -- (3,011) --
Other income................................... 47 115 47 139 256
------- ------- ------- ------- -------
Income (loss) before provision for income taxes,
equity in joint ventures and discontinued
operations..................................... 8,714 5,314 3,600 (934) 7,204
Provision for income taxes....................... 3,408 2,099 1,448 1,185 2,479
------- ------- ------- ------- -------
Income (loss) before equity in joint ventures and
discontinued operations........................ 5,306 3,215 2,152 (2,119) 4,725
Equity in net loss of joint ventures............. -- -- -- (1,360) (720)
------- ------- ------- ------- -------
Income (loss) from continuing operations......... 5,306 3,215 2,152 (3,479) 4,005
Discontinued operations:
Income (loss) from discontinued operations..... -- -- -- (115) 189
Loss on disposition of discontinued
operations.................................. -- -- -- (1,173) --
------- ------- ------- ------- -------
Net income (loss)................................ $ 5,306 $ 3,215 $ 2,152 $(4,767) $ 4,194
======= ======= ======= ======= =======
Pro forma basic net income per share(1).......... $ 0.86 $ 0.66
======= =======
Shares used in computing pro forma basic net
income per share(1)............................ 6,181 4,861
======= =======
Diluted net income per share(1).................. $ 0.79 $ 0.62
======= =======
Shares used in computing diluted net income per
share(1)....................................... 6,711 5,165
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $12,660 $1,957 $9,906 $1,673 $5,945
Working capital (deficit)............................ 29,785 (3,047) 3,329 (3,576) 2,246
Total assets............................... 130,675 91,667 84,729 74,588 66,861
Total liabilities.......................... 60,984 59,187 55,464 47,546 35,161
Redeemable preferred stock........................... -- 1,500 1,500 1,500 1,500
Stockholders' equity................................. 69,691 30,980 27,765 25,542 30,200
</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.
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<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since its inception, SteriGenics International, Inc. (the "Company") 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 advanced application (non-medical) products. The
Company currently operates 12 Gamma facilities nationwide. 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 ("Nicolet") 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
electron beam technology ("E-Beam") facility, located in San Diego, California.
E-Beam involves exposing products to a high-energy electron beam. 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 advanced application
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 advanced application products. The Company has dedicated four
of its Gamma facilities to processing primarily advanced application products.
In addition, a significant portion of the Company's revenues from its E-Beam
facility is generated from the processing of advanced application products.
The Company's revenues have increased significantly from fiscal 1996 to
fiscal 1998 as the Company has opened and acquired additional facilities,
increased its loaded curies of Cobalt 60 and expanded its customer base. In
addition, in recent years the Company has generated incremental revenues by
offering its customers premium services such as ExCell, precision dosing and
validation services, and GammaSTAT, a guaranteed variable time-based service.
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.
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 operation. 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
24
<PAGE> 26
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
twelve 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.
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>
YEAR ENDED MARCH 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues............................................ 100.0% 100.0% 100.0%
Cost of revenues.................................... 51.6 54.2 56.1
----- ----- -----
48.4 45.8 43.9
Costs and expenses:
General and administrative........................ 16.7 16.8 17.2
Marketing and selling............................. 7.5 6.6 5.8
Research, development and engineering............. 2.6 3.7 3.0
----- ----- -----
26.8 27.1 26.0
----- ----- -----
Income from operations.............................. 21.6 18.7 17.9
Other income (expense):
Interest income................................... 1.8 0.9 0.4
Interest expense.................................. (4.9) (5.8) (6.5)
Other income...................................... 0.1 0.3 0.1
----- ----- -----
Income before provision for income taxes............ 18.6 14.1 11.9
Provision for income taxes.......................... 7.3 5.6 4.8
----- ----- -----
Net income.......................................... 11.3% 8.5% 7.1%
===== ===== =====
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
REVENUES
Revenues increased in fiscal 1998 to $47.0 million, or 24.7%, compared to
$37.7 million in fiscal 1997, and 24.6% from $30.2 million in fiscal 1996. The
increase in revenues in fiscal 1998 is primarily due to a full year of
operations for the Company's facilities in Gurnee, Illinois; Hayward,
California; Salem, New Jersey; Haw River, North Carolina; and Rockaway, New
Jersey, and the addition of a second Fort Worth, Texas facility during the
fiscal year, as well as the addition of the Company's first E-Beam facility in
San Diego, California. Salem, Haw River and Rockaway are the former RTI, Inc.
facilities acquired by the Company in August 1996. Revenues in fiscal 1997
increased primarily as a result of the addition of the Salem, Haw River and
Rockaway facilities, and the Gurnee facility. The increase in revenue year over
year to fiscal 1998 from fiscal 1996 is also attributable to the increased
installed base of Cobalt 60 in its existing facilities, which enabled the
Company to process higher volumes of product, and the continued expansion of the
Company's advanced applications business, as well as continued growth in revenue
from premium services. Growth in revenues attributable to premium services
contributes to the Company's ability to maintain its revenue per installed
Cobalt 60 curie despite opening new facilities, which generally incur higher
costs related to Cobalt 60, as well as higher personnel costs in the months
preceding initial operation.
COST OF REVENUES
Cost of revenues increased to $24.2 million in fiscal 1998 from $20.4
million in fiscal 1997 and $17.0 million in fiscal 1996. Gross margin increased
to 48.4% in fiscal 1998 from 45.8% in fiscal 1997 and
25
<PAGE> 27
43.9% in fiscal 1996. The increase in gross margin in fiscal 1998 was primarily
attributable to greater utilization of the Company's existing facilities which
enabled the Company to leverage the fixed costs associated with such facilities,
a higher percentage of revenue attributable to premium services, and the
acquisition of the San Diego E-Beam facility, offset in part by the impact of
the opening of the Hayward and Fort Worth II facilities. The increase in gross
margin in fiscal 1997 was primarily attributable to greater utilization of the
Company's existing facilities and a higher percentage of revenue attributable to
premium services, offset in part by the impact of the opening of the Gurnee
facility and transition of the former RTI, Inc. 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 $1.6
million remaining at March 31, 1998 at then current exchange rates).
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 23.7% to $7.8 million in
fiscal 1998 from $6.3 million in fiscal 1997, and 21.7% from $5.2 million in
fiscal 1996. The increase in absolute dollars in fiscal 1998 was attributable to
increases in corporate overhead, including the additional costs of becoming a
public company, as well as increased headcount at the facility level
attributable to the addition of three new facilities (including the former
Nicolet E-Beam facility) during the fiscal year. The increase in absolute
dollars in fiscal 1997 was primarily attributable to an increased headcount at
the facility level as four new facilities (including the three former RTI, Inc.
facilities) were added during the fiscal year and, to a lesser extent, related
increases in corporate overhead. As a percentage of revenues, these expenses
decreased to 16.7% from 16.8% and 17.2% in fiscal 1998, 1997 and 1996,
respectively. The decrease in general and administrative expenses as a
percentage of revenue in fiscal 1998 from fiscal 1997 and fiscal 1996 was
primarily due to economies of scale achieved as the Company's revenues
increased. The Company expects general and administrative expenses will continue
to increase in absolute dollars as the Company adds facilities and corresponding
plant administration, and incurs additional costs related to being a public
company.
MARKETING AND SELLING
Marketing and selling expenses increased 40.9% to $3.5 million in fiscal
1998, from $2.5 million in fiscal 1997, and 40.9% from $1.8 million in fiscal
1996. As a percentage of revenues, these expenses increased to 7.5% from 6.6%
and 5.8% in fiscal 1998, 1997 and 1996, respectively. The increase in fiscal
1998 was primarily attributable to the addition of sales and marketing personnel
at the corporate level in 1998 in the newly organized Advanced Applications
division and, to a lesser extent, increased sales and marketing personnel at the
facility level, and 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 advanced
application markets. The Company expects marketing and selling expenses will
continue to increase in absolute dollars and as a percentage of revenue as the
Company continues to move into new advanced application markets.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses decreased 11.0% to $1.2
million in fiscal 1998, from $1.4 million in fiscal 1997, and increased 55.2%
from $890,000 in fiscal 1996. As a percentage of revenues, these expenses
decreased to 2.6% from 3.7% and 3.0% in fiscal 1998, 1997 and 1996,
respectively. The decrease in fiscal 1998 was primarily attributable to
decreased travel, rent and research expenses associated with fewer new system
installations in the year. 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 as it intends to design and develop new facilities
and systems during fiscal 1999.
26
<PAGE> 28
INTEREST INCOME
Interest income increased 143.4% to $835,000 in fiscal 1998, from $343,000
in fiscal 1997, and 200.9% from $114,000 in fiscal 1996. The increase in fiscal
1998 is attributable to the earnings on invested proceeds from the Company's
initial public offering in August 1997 and to a lesser extent, earnings on
invested proceeds from the issuance of a tax-free Industrial Revenue Bond
("IRB") in July 1997. The increase in fiscal 1997 is primarily attributable to
earnings on invested proceeds from the issuance of a tax-free IRB in April 1996,
as well as earnings on cash reserves. As a percentage of revenues, interest
income increased to 1.8% from 0.9% and 0.4% in fiscal 1998, 1997 and 1996,
respectively.
INTEREST EXPENSE
Interest expense increased 6.3% to $2.3 million in fiscal 1998, from $2.2
million in fiscal 1997, and 11.2%, from $2.0 million in fiscal 1996. Interest
expense increased in fiscal 1998 primarily due to higher levels of borrowings of
tax-free IRB financing offset by a reduction in bank financing, which was repaid
during the year with a portion of the proceeds from the Company's initial public
offering, and the reduction in the Company's outstanding capital lease debt.
Interest expense increased in fiscal 1997 as higher levels of borrowings were
partially offset by lower interest rates on tax-free IRB financing which
replaced higher rate bank financing and other debt. As a percentage of revenue,
interest expense decreased to 4.9% from 5.8% and 6.5% in fiscal 1998, 1997 and
1996, 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. The Company expects interest expense to remain relatively
unchanged in absolute dollars and to decrease as a percentage of revenue.
PROVISION FOR INCOME TAXES
In fiscal 1998, 1997 and fiscal 1996, the total provision for income taxes
differs from the statutory rate primarily due to state income taxes. The
Company's net deferred tax liabilities in fiscal years 1998, 1997 and 1996
relate primarily to tax depreciation taken in excess of book depreciation.
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. Additionally, the
Company completed a follow-on offering of Common Stock in February 1998, raising
approximately $8.8 million, net of expenses. Prior to the initial and follow-on
public offerings, the Company had financed its operations with cash from
operations, capital leases, IRB and bank financing, and the private placement of
equity securities. At March 1998, the Company had $12.7 million in cash and cash
equivalents and $29.8 million in working capital.
Net cash provided by operating activities was $13.3 million, $12.2 million
and $11.0 million in fiscal 1998, 1997 and 1996 respectively. Net cash provided
by operating activities in fiscal 1998, fiscal 1997 and fiscal 1996 was
primarily attributable to net income, depreciation, and deferred tax liability.
Net cash used in investing activities was $33.5 million, $19.1 million and
$7.6 million in fiscal 1998, 1997 and 1996, respectively, primarily attributable
to the purchase of property, plant and equipment (including Cobalt 60) and, for
fiscal 1998, the assets acquired in the Nicolet acquisition, as well as the
purchase of short term investments.
Net cash provided by (used in) financing activities was $30.8 million,
$(1.0) million and $4.7 million in fiscal 1998, 1997 and 1996 respectively. Net
cash provided by financing activities in fiscal 1998 was primarily attributable
to net proceeds of $21.4 million from the Company's initial public offering in
August 1997, the net
27
<PAGE> 29
proceeds of $8.8 million from the Company's follow-on public offering in
February 1998, and an increase in IRB financing, offset in part by the repayment
of bank, IRB and Cobalt 60 financing, and to a lesser extent, the redemption of
Preferred Stock. 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 in fiscal 1996 was generated primarily from an increase in
IRB financing offset in part by the repayment of bank and Cobalt 60 financing.
Noncash financing activities included the issuance of Common Stock,
totaling $2.1 million, in connection with the acquisition of Nicolet in fiscal
year 1998 and the acquisition of Cobalt 60 through capital leases totaling $2.5
million and $2.4 million in fiscal years 1997 and 1996, respectively. These
leases have terms of 15 years.
The Company has a $3.5 million revolving line of credit with a bank that
carries a variable interest rate (8.5% at March 31, 1998), collateralized by
certain assets of the Company. The line of credit is payable on demand, and at
March 31, 1998, 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 the
Company's revolving line of credit.
At March 31, 1998, the Company had $36.5 million in IRB financing which
bears interest at market rates (either 3.9% or 3.7% at March 31, 1998). The IRBs
are collateralized by certain assets of the Company at March 31, 1998 and by
letters of credit with a bank. The Company is 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.
The Company had capital expenditures of $7.3 million, $18.6 million and
$7.2 million in fiscal 1998, 1997 and 1996, respectively. The Company currently
expects to make capital expenditures of approximately $18.0 million during
fiscal 1999. These expenditures will include, but are not limited to, the
purchase of additional Cobalt 60, new facilities and renovations to existing
facilities.
SteriGenics believes that existing cash balances, including the net
proceeds of its two public offerings of Common Stock, cash expected to be
generated from operations and available credit facilities will be sufficient to
fund the Company's anticipated capital expenditures, operations and repayment of
debt, 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.
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 businesses, products or technologies. The Company may attempt to
utilize 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.
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.
28
<PAGE> 30
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 changed the method used to compute earnings per share and restated 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.
29
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL SECTION
<TABLE>
<S> <C>
Consolidated Balance Sheets................................. 31
Consolidated Statements of Operations....................... 32
Consolidated Statements of Stockholders' Equity............. 33
Consolidated Statements of Cash Flows....................... 34
Notes to Consolidated Financial Statements.................. 35
Report of Ernst & Young LLP, Independent Auditors........... 47
</TABLE>
30
<PAGE> 32
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents:
Unrestricted............................................ $ 11,691,383 $ 1,072,342
Restricted.............................................. 968,725 885,058
Short-term investments.................................... 19,257,339 --
Accounts receivable, net of allowance of $218,000 and
$253,000 at March 31, 1998 and 1997..................... 6,165,027 4,591,611
Prepaid expenses and other current assets................. 1,158,278 933,686
Deferred income taxes..................................... 1,675,244 1,108,717
------------ -----------
Total current assets........................................ 40,915,996 8,591,414
Property, plant and equipment, net.......................... 81,704,679 80,330,124
Other assets................................................ 8,054,174 2,744,999
------------ -----------
Total assets....................................... $130,674,849 $91,666,537
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,035,282 $ 1,461,758
Accrued liabilities....................................... 5,038,597 6,096,785
Income taxes payable...................................... 1,684,174 677,192
Current portion of capital lease obligations.............. 2,872,810 3,152,394
Current portion of long-term debt......................... 500,000 250,000
------------ -----------
Total current liabilities................................... 11,130,863 11,638,129
Capital lease obligations, less current portion............. 3,266,246 6,139,685
Long-term debt, less current portion........................ 36,000,000 32,000,000
Deferred income taxes....................................... 10,586,847 9,408,691
Series A Redeemable Preferred Stock, $0.001 par value:
Authorized shares -- none at March 31, 1998 and
100,000 at March 31, 1997
Issued and outstanding shares -- none at March 31, 1998
and
15,000 at March 31, 1997................................ -- 1,500,000
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value:
Authorized shares -- 1,000,000 at March 31, 1998 and
10,000,000 at March 31, 1997
Issued and outstanding shares -- none................... -- --
Convertible Preferred Stock, Series B and C, $0.001 par
value:
Authorized shares -- none at March 31, 1998 and
1,772,728 at March 31, 1997
Issued and outstanding shares -- none at March 31, 1998
and 1,772,727 at March 31, 1997....................... -- 1,773
Common Stock, $0.001 par value:
Authorized shares -- 15,000,000
Issued and outstanding shares -- 7,681,323 at March 31,
1998 and 3,056,042 at March 31, 1997.................. 7,681 3,056
Additional paid-in capital................................ 48,089,859 14,726,994
Notes receivable from sale of Common Stock to employees... (49,499) (88,170)
Retained earnings......................................... 21,642,852 16,336,379
------------ -----------
Total stockholders' equity.................................. 69,690,893 30,980,032
------------ -----------
Total liabilities and stockholders' equity......... $130,674,849 $91,666,537
============ ===========
</TABLE>
See accompanying notes.
31
<PAGE> 33
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................ $46,954,902 $37,668,198 $30,240,840
Cost of revenues.................................... 24,231,361 20,425,350 16,977,930
----------- ----------- -----------
22,723,541 17,242,848 13,262,910
Costs and expenses:
General and administrative........................ 7,849,969 6,345,112 5,212,719
Marketing and selling............................. 3,496,943 2,482,124 1,761,026
Research, development and engineering............. 1,228,824 1,380,821 889,815
----------- ----------- -----------
12,575,736 10,208,057 7,863,560
----------- ----------- -----------
Income from operations.............................. 10,147,805 7,034,791 5,399,350
Other income (expense):
Interest income................................... 835,288 342,657 113,851
Interest expense.................................. (2,315,784) (2,178,967) (1,959,992)
Other income...................................... 46,846 115,347 46,741
----------- ----------- -----------
Income before provision for income taxes............ 8,714,156 5,313,828 3,599,950
Provision for income taxes.......................... 3,407,683 2,099,065 1,447,888
----------- ----------- -----------
Net income.......................................... $ 5,306,473 $ 3,214,763 $ 2,152,062
=========== =========== ===========
Pro forma basic net income per share................ $ 0.86 $ 0.66
=========== ===========
Shares used in computing pro forma basic net income
per share......................................... 6,180,980 4,860,685
=========== ===========
Diluted net income per share........................ $ 0.79 $ 0.62
=========== ===========
Shares used in computing diluted net income per
share............................................. 6,711,438 5,164,679
=========== ===========
</TABLE>
See accompanying notes.
32
<PAGE> 34
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FROM
CONVERTIBLE SALE OF
PREFERRED STOCK COMMON STOCK ADDITIONAL 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, 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 Stock............... (1,772,727) (1,773) 1,772,727 1,773 -- -- -- --
Issuance of Common Stock, net
of issuance costs of
$3,570,501................. -- -- 2,575,000 2,575 30,201,924 -- -- 30,204,499
Issuance of Common Stock
pursuant to Nicolet
acquisition................ -- -- 109,307 109 2,063,061 -- -- 2,063,170
Issuance of Common Stock
pursuant to employee stock
purchase plan January 30,
1998....................... -- -- 32,111 32 336,860 -- -- 336,892
Exercise of options.......... -- -- 136,136 136 667,936 -- -- 668,072
Income tax benefit from stock
option
transactions............... -- -- -- -- 93,084 -- -- 93,084
Repayment of notes
receivable................. -- -- -- -- -- 38,671 -- 38,671
Net income................... -- -- -- -- -- -- 5,306,473 5,306,473
---------- ------- --------- ------ ----------- -------- ----------- -----------
Balance at March 31, 1998.... -- $ -- 7,681,323 $7,681 $48,089,859 $(49,499) $21,642,852 $69,690,893
========== ======= ========= ====== =========== ======== =========== ===========
</TABLE>
See accompanying notes.
33
<PAGE> 35
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Cash flows from operating activities:
Income from continuing operations................... $ 5,306,473 $ 3,214,763 $ 2,152,062
Reconciliation to net cash provided by operating
activities:
Depreciation..................................... 9,596,762 8,200,411 7,546,759
Amortization..................................... 155,743 70,605 29,076
Deferred income tax liability.................... 1,178,155 833,812 519,879
Deferred income tax asset........................ (566,527) (149,395) 665,678
Changes in assets and liabilities:
Accounts receivable............................ (1,573,416) (1,114,874) 28,640
Prepaid expenses and other current assets...... (175,360) (241,161) (104,348)
Accounts payable and accrued liabilities....... (616,629) 1,369,584 172,741
------------ ------------ -----------
Net cash provided by operating activities............. 13,305,201 12,183,745 11,010,487
INVESTING ACTIVITIES:
Purchases of property, plant and equipment............ (7,333,503) (18,613,378) (7,207,495)
Purchases of short term investments................... (19,257,339)
Acquisition of certain assets of Nicolet.............. (5,001,052) -- --
Proceeds from sale of investment in joint venture..... -- 1,249,000 --
Other assets.......................................... (1,910,123) (1,779,364) (369,076)
------------ ------------ -----------
Net cash used in investing activities................. (33,502,017) (19,143,742) (7,576,571)
FINANCING ACTIVITIES:
Issuance of Common Stock.............................. 30,541,391 -- --
Redemption of Preferred Stock......................... (1,500,000) -- --
Exercise of stock options............................. 761,156 -- 71,163
Borrowings under industrial revenue bonds............. 5,000,000 8,750,000 9,000,000
Borrowings under term loan and line of credit......... 700,000 2,881,619 --
Repayments on term loan, line of credit, industrial
revenue bonds and capital leases.................... (4,603,023) (12,620,719) (4,271,103)
Increase in restricted cash........................... (83,667) (40,889) (51,713)
------------ ------------ -----------
Net cash provided by (used in) financing activities... 30,815,857 (1,029,989) 4,748,347
------------ ------------ -----------
Net increase (decrease) in unrestricted cash and cash
equivalents......................................... 10,619,041 (7,989,986) 8,182,263
Unrestricted cash and cash equivalents at beginning of
period.............................................. 1,072,342 9,062,328 880,065
------------ ------------ -----------
Unrestricted cash and cash equivalents at end of
period.............................................. $ 11,691,383 $ 1,072,342 $ 9,062,328
============ ============ ===========
NONCASH FINANCING ACTIVITIES:
Assets acquired under capital leases.................. $ -- $ 2,508,127 $ 2,372,252
Common Stock issued in connection with the acquisition
of Nicolet.......................................... $ 2,063,170 $ -- $ --
Income tax benefit from stock options................. $ 93,084 $ -- $ --
Notes receivable issued on exercise of stock
options............................................. $ -- $ -- $ 18,570
</TABLE>
See accompanying notes.
34
<PAGE> 36
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
SteriGenics International, Inc. (the "Company") was incorporated in the
state of California in 1978. In July 1997, the Company was reincorporated in the
state of Delaware. The Company performs contract sterilization and radiation
processing services using gamma radiation ("Gamma") and electron beam radiation
("E-Beam"). The Company operates 12 Gamma facilities in several states and one
E-Beam facility in San Diego, California.
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 and RSI Leasing, Inc. SteriGenics
East Corporation includes three facilities located along the eastern seaboard of
the United States (see Note 11). SteriGenics International Holding Corporation
holds investments in the Company's joint venture in Taiwan (see Note 10). 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 11).
All significant intercompany accounts and transactions have been eliminated.
Certain prior year balance sheet amounts have been reclassified to conform
with the current year's presentation.
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. No customer accounted for more than 10% of revenues during fiscal
1998 or 1997. One customer accounted for approximately 13% of revenues during
fiscal 1996.
Advertising Costs
Advertising costs are recorded as an expense when incurred. Advertising
costs were approximately $348,000, $289,000 and $191,000 for the years ended
March 31, 1998, 1997 and 1996, respectively. The Company does not incur any
direct response advertising costs.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are carried at cost, which approximates fair value. The Company is
exposed to credit risk in the event of default by the financial institutions or
issuers of the investments to the extent of the amounts recorded on the balance
sheet.
35
<PAGE> 37
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Short-Term Investments
The Company invests its excess cash in high-quality commercial paper with
maturity less than one year. At March 31, 1998, all short-term investments are
designated as available for sale. Interest and dividends on the investments are
included in interest income. There were no realized gains or losses on the
Company's investments during fiscal 1998 as all investments were held to
maturity during the year. At March 31, 1998, the fair value of short-term
investments approximates cost.
Financial Instruments
The estimated fair values of financial instruments approximate the carrying
values at March 31, 1998 and 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 United States. 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.
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.
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
36
<PAGE> 38
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fair value basis method prescribed by FAS 123 had been applied in measuring
employee compensation expense (see Note 5.)
Net Income 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 per share amounts have been restated to reflect
basic and diluted per share amounts.
Except as noted below, basic net income per share is computed using the
weighted average number of shares of Common Stock outstanding. Pro forma basic
net income per share is calculated as for basic net income per share, but
assumes conversion of all convertible Preferred Stock which converted
automatically in the initial public offering, even if antidilutive. Diluted net
income 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).
The following table sets forth the computation of basic, pro forma basic
and diluted net income per share:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Numerator for basic and diluted:
Net income................................................ $5,306 $3,215 $2,152
====== ====== ======
Denominator:
Weighted average common shares outstanding................ 5,504 3,056 3,028
Shares related to SEC Staff Accounting Bulletins.......... 12 32 32
------ ------ ------
Denominator for basic net income per share.................. 5,516 3,088 3,060
Conversion of Preferred Stock (pro forma)................... 665 1,773
------ ------
Denominator for pro forma basic net income per share........ 6,181 4,861
Conversion of Preferred Stock............................... -- -- 1,773
Stock options............................................... 530 304 171
------ ------ ------
Denominator for diluted net income per share................ 6,711 5,165 5,004
====== ====== ======
Basic net income per share.................................. $ 0.70
======
Pro forma basic net income per share........................ $ 0.86 $ 0.66
====== ======
Diluted net income per share................................ $ 0.79 $ 0.62 $ 0.43
====== ====== ======
</TABLE>
Options to purchase 88,250 shares of Common Stock were outstanding in the
year ended March 31, 1998 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.
37
<PAGE> 39
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET COMPONENTS
Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land............................................ $ 2,105,244 $ 1,605,245
Buildings....................................... 19,858,531 12,091,744
Cobalt 60 isotope............................... 73,076,015 71,776,948
Furniture and fixtures.......................... 4,994,345 3,932,708
Machinery and equipment......................... 30,918,948 24,846,155
Construction-in-progress........................ 641,610 9,016,290
------------ ------------
131,594,693 123,269,090
Accumulated depreciation and amortization....... 49,890,014 42,938,966
------------ ------------
$ 81,704,679 $ 80,330,124
============ ============
</TABLE>
Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Industrial revenue bond costs (net of accumulated
amortization of $435,000 in 1998, and $363,000
in 1997)........................................ $ 969,233 $ 791,477
Goodwill (see Notes 1 and 11)..................... 4,229,133 558,769
Other............................................. 2,917,068 1,445,453
---------- ----------
8,115,434 2,795,699
Less current portion of bond costs................ 61,260 50,700
---------- ----------
$8,054,174 $2,744,999
========== ==========
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Compensation...................................... $1,972,534 $1,717,429
Property tax...................................... 614,169 582,960
Legal and accounting.............................. 403,571 418,463
Sales and other non-income taxes.................. 294,196 1,657,034
Other............................................. 1,754,127 1,720,899
---------- ----------
$5,038,597 $6,096,785
========== ==========
</TABLE>
38
<PAGE> 40
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BORROWING ARRANGEMENTS
Long-term debt consists of:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Industrial revenue bond, due in March 2005, with interest at
the contract formula rate of 3.7% and 3.6% at March 31,
1998 and
March 31, 1997, respectively.............................. $ 5,250,000 $ 5,250,000
Industrial revenue bond, due in December 2004, with interest
at the contract formula rate of 3.7% and 3.6% at March 31,
1998 and
March 31, 1997, respectively.............................. 4,900,000 4,900,000
Industrial revenue bond, due in November 2005, with interest
at the contract formula rate of 3.7% and 3.6% at March 31,
1998 and March 31, 1997, respectively..................... 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 3.9% and 3.7% at
March 31, 1998 and March 31, 1997, respectively........... 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 3.9% and 3.7% at
March 31, 1998 and March 31, 1997, respectively........... 7,750,000 7,750,000
Industrial revenue bond, due in July 2017, with interest at
the contract formula rate of 3.9% at March 31, 1998....... 5,000,000 --
Industrial revenue bond, due in annual installments of
$250,000 with interest at a fixed rate of 10.0%........... -- 750,000
----------- -----------
36,500,000 32,250,000
Less current portion........................................ 500,000 250,000
----------- -----------
$36,000,000 $32,000,000
=========== ===========
</TABLE>
Industrial revenue bonds are collateralized by certain assets of the
Company and by letter of credit agreements with a bank. 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, 1998
and 1997, there were approximately $969,000 and $885,000 recorded, respectively,
as restricted cash associated with the outstanding industrial revenue bonds.
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, 1998 and 1997,
collateralized by certain assets of the Company. At March 31, 1998 and 1997, no
amount was outstanding under this line of credit.
Payments of principal due on long-term debt for the five-year period from
March 31, 1998 and thereafter are:
<TABLE>
<S> <C>
1999............................................ $ 500,000
2000............................................ 930,000
2001............................................ 930,000
2002............................................ 930,000
2003............................................ 930,000
Thereafter...................................... 32,280,000
-----------
Total................................. $36,500,000
===========
</TABLE>
Cash payments for interest in fiscal 1998, 1997 and 1996 were approximately
$1,664,000, $1,875,000 and $996,000, respectively.
39
<PAGE> 41
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On July 30, 1997, the Company issued an industrial revenue bond in the
amount of $5.0 million which bears a variable interest rate. The interest rate
was 3.9% at issuance, and on March 31, 1998.
4. REDEEMABLE PREFERRED STOCK
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. The shares of Series A Redeemable Preferred Stock
were redeemed for $1,500,000 from the proceeds of the initial public offering.
Series A Redeemable Preferred Stock was not convertible and had no voting
rights. In the event of liquidation, Series A stockholders were entitled to
receive $100.00 per share plus all declared but unpaid dividends prior to any
distribution to the common stockholders.
5. STOCKHOLDERS' EQUITY
Convertible Preferred
Each share of the Company's outstanding convertible Preferred Stock was
automatically converted to a share of Common Stock during the initial public
offering in August 1997.
Each share of Series B Preferred Stock was convertible into one share of
the Company's Common Stock, had voting rights, had a liquidation preference of
$5.00 per share, was subordinate to the Series A Preferred Stock, and permitted
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 was convertible into one share of
the Company's Common Stock, had voting rights, had a liquidation preference of
$11.00 per share, was subordinate to the Series A and B Preferred Stock, and
permitted noncumulative dividends to be declared at the discretion of the Board
of Directors. In any fiscal year, dividends of $1.10 per share for Series C
Preferred Stock must be paid before any dividends on Common Stock.
No dividends have been declared to date by the Board of Directors on any of
the outstanding Preferred Stock.
Stock Option Plans
Under the 1985 Incentive Stock Option Plan and the Second Amended and
Restated 1986 Stock Option Plans, the Board of Directors were able to 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.
In July, 1997, the stockholders approved the adoption of the 1997 Equity
Incentive Plan, as amended, and the 1997 Stock Plan, under which a total of
1,025,000 shares and 175,000 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.
40
<PAGE> 42
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity under the option plans was as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------
WEIGHTED
NUMBER AVERAGE
OF PRICE
SHARES PER SHARE
-------- ---------
<S> <C> <C>
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.............................................. 447,000 $12.60
Exercised............................................ (136,136) $ 4.98
Canceled............................................. (23,140) $ 6.38
--------
Balance at March 31, 1998.............................. 990,649 $ 8.44
========
</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, 1998, 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....................... 518,649 4.48 $ 4.96 423,750 $4.97
$ 7.00 - $10.80....................... 383,750 9.28 10.48 7,540 7.00
$19.50 - $20.375...................... 88,250 9.75 20.07 -- --
------- ---- ------ ------- -----
990,649 6.81 $ 8.44 431,290 $5.00
======= ==== ====== ======= =====
</TABLE>
At March 31, 1997, options to purchase 487,014 shares of Common Stock were
exercisable at an average exercise price of $5.01 per share. 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, 1998, 764,686 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
41
<PAGE> 43
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAS 123. For options granted prior to the initial public offering, the fair
value for these options was estimated at the date of grant using the minimum
value option pricing method. For options granted subsequent to the initial
public offering, the fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model. The following weighted
average assumptions were used for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Risk-free interest rate (%)................................. 5.79 6.37
Dividend yield.............................................. -- --
Volatility factor........................................... 0.68 --
Expected option life (years)................................ 5.20 3.57
</TABLE>
The Minimum Value option valuation method may be used by non-public
companies to value an award. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected 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 a method prescribed in 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>
1998 1997
---------- ----------
<S> <C> <C>
Pro forma net income................................ $4,288,371 $3,139,858
Pro forma basic net income per share................ 0.69 0.65
Pro forma diluted net income per share.............. 0.64 0.61
</TABLE>
The weighted average fair value of options granted in fiscal 1998 and 1997
was $5.97 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.
Employee Stock Purchase Plan
In June 1997, the Company adopted the 1997 Employee Stock Purchase Plan
("the Purchase Plan"). The Company has reserved 400,000 shares of Common Stock
for issuance thereunder. Under the Purchase Plan, qualified employees are
entitled to purchase shares through payroll deductions at 85% of the fair market
value at the beginning or end of the offering period, whichever is lower. As of
December 31, 1997, shares issued under the Purchase Plan totaled 32,111.
Notes Receivable from Sale of Common Stock to Employees
At March 31, 1998, the Company had notes receivable in the amount of
$49,000 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. In April 1998, repayments of $38,000
were received by the Company.
42
<PAGE> 44
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TAXES ON INCOME
The provision for income taxes for the years ended March 31 consists of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current.............................. $2,395,188 $1,276,373 $ (419,606)
Deferred............................. 573,637 614,517 1,717,191
---------- ---------- ----------
2,968,825 1,890,890 1,297,585
State:
Current.............................. 400,867 138,274 334,236
Deferred............................. 37,991 69,901 (183,933)
---------- ---------- ----------
438,858 208,175 150,303
---------- ---------- ----------
$3,407,683 $2,099,065 $1,447,888
========== ========== ==========
</TABLE>
The tax benefits associated with disqualifying dispositions of stock
options or employee stock purchase plan shares reduced taxes currently payable
as shown by $93,084 for 1998. Such benefits are credited to paid-in-capital when
realized. 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>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected provision at 34%.............. $2,962,813 $1,806,702 $1,223,983
State taxes, net of federal benefit.... 289,646 137,395 99,200
Other.................................. 155,224 154,968 124,705
---------- ---------- ----------
$3,407,683 $2,099,065 $1,447,888
========== ========== ==========
</TABLE>
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 amounts used for income tax purposes. Significant components of
the deferred tax assets and liabilities at March 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards........................ $ 2,013,422 $ 2,530,896
Reserves and accruals........................... 2,001,993 1,626,070
Other........................................... 302,625 198,077
----------- -----------
Total deferred tax assets............... 4,318,040 4,355,043
Deferred tax liabilities:
Depreciation.................................... 13,014,098 12,564,094
Other........................................... 215,545 90,923
----------- -----------
Total deferred tax liabilities.......... 13,229,643 12,655,017
----------- -----------
Net deferred tax liabilities...................... $ 8,911,603 $ 8,299,974
=========== ===========
</TABLE>
At March 31, 1998, the Company had federal and state alternative minimum
tax credit carryforwards of approximately $1,860,000 and $162,000, respectively,
which do not expire, and other carryforwards of approximately $70,000 expiring
in fiscal 2005. 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, net of refunds received, were
$1,696,000, $805,000 and $11,000 during fiscal 1998, 1997 and 1996,
respectively.
43
<PAGE> 45
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLAN
Effective February 1, 1990, the Company established a defined contribution
retirement plan, the SteriGenics 401(k) plan, which 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
$10,000 for calendar year 1998. 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 $176,000, $122,000 and $44,000 for fiscal 1998, 1997 and
1996, respectively. Administrative expenses related to the plan are not
significant.
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,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cobalt 60 isotope, at cost........................ $16,389,051 $16,389,051
Less accumulated amortization..................... 5,523,196 3,995,319
----------- -----------
$10,865,855 $12,393,732
=========== ===========
</TABLE>
The Company leases certain facilities and a portion of its Cobalt 60
isotope under noncancelable operating leases. At March 31, 1998, future minimum
lease payments under operating leases and capital leases are as follows
(including approximately $1.6 million under operating leases, at then current
exchange rates, payable in Canadian dollars):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
1999............................................... $3,065,796 $ 3,719,367
2000............................................... 1,437,627 2,785,237
2001............................................... 673,011 1,476,508
2002............................................... 316,343 1,234,027
2003............................................... 171,161 780,658
Thereafter......................................... 1,027,473 346,528
---------- -----------
Total payments........................... 6,691,411 $10,342,325
===========
Less amount representing interest.................. 551,963
----------
Present value of minimum lease payments............ 6,139,448
Less current portion............................... 2,872,810
----------
$3,266,638
==========
</TABLE>
In conjunction with the RTI, Inc. ("RTI") Asset Acquisition Agreement (see
Note 11) 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
44
<PAGE> 46
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
Total rent expense for fiscal 1998, 1997 and 1996 was $1,167,000,
$1,318,000 and $1,246,000, respectively.
9. 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 $419,000.
Rent expense attributable to these related party leases was approximately
$407,000 in the fiscal year ended March 31, 1998, and $472,000 in fiscal 1997
and 1996. 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 is neither a director nor an officer.
Included in costs and expenses are approximately $1,168,000, $2,116,000 and
$1,189,000 for fiscal 1998, 1997 and 1996, respectively, relating to payments to
a minority stockholder for administrative, maintenance and engineering services.
10. INVESTMENTS IN JOINT VENTURES
In January 1997, the Company sold the majority of its holdings in a joint
venture in a sterilization facility in Taiwan for $1,249,000. This investment
was accounted for under the equity method. No gain or loss was recorded related
to this transaction. The carrying value of the remaining investment was $1,000
at March 31, 1998 and 1997.
11. ACQUISITIONS
On February 26, 1996, the Company, through its subsidiary SteriGenics East
Corporation, entered into an agreement to acquire certain assets and liabilities
of RTI, Inc., a New York corporation, and its subsidiaries that operated three
irradiation facilities along the eastern seaboard of the United States. 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, related to this acquisition, was
approximately $58,000 at March 31, 1998.
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 $3.8
million of goodwill in connection with the acquisition, which is being amortized
over a twenty-year period. Accumulated amortization of goodwill, related to this
acquisition, was approximately $47,000 at March 31, 1998. Under the asset
acquisition agreement, ThermoSpectra Corporation may under certain circumstances
be entitled to receive up to an additional 21,861 shares of Common Stock of the
Company.
45
<PAGE> 47
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998 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>
YEAR ENDED MARCH 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net revenues............... $49,839,101 $43,197,048 $34,592,867
Pro forma net income................. 6,123,795 3,901,349 1,627,419
Pro forma diluted net income per
share.............................. 0.90 0.74 0.33
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
The following events occurred subsequent to March 31, 1998.
During April 1998, the Company received $38,000 in repayments of notes
receivable from the sale of stock to employees.
On June 4, 1998, the Company entered into an operating lease on a building
with a total lease commitment of approximately $4.3 million and a term of 10
years.
46
<PAGE> 48
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, 1998 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, 1998. 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, 1998 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, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
May 1, 1998
47
<PAGE> 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of March 31, 1998
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James F. Clouser........... 47 President, Chief Executive Officer and
Director
D. Patterson Adams......... 45 Vice President and General Manager, Non-
Medical Division
Eric W. Beers.............. 38 Senior Vice President of Engineering
Donald A. Currie........... 41 Vice President of Operations, Eastern
Region
Eugene C. Davis............ 50 Vice President of Operations, Western
Region
Lisa C. Foster............. 37 Vice President of Quality Assurance
David E. Meyer............. 47 President of Medical Products Division
Charles W. King, Jr........ 62 Chairman of the Board
Walter G. Kortschak(1)..... 39 Director
Thomas F. Stephenson(1).... 55 Director
James R. Yarter............ 61 Director
Frederick J. Ruegsegger.... 42 Director Nominee
</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.
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 Engineering from Carleton University in Canada and is a
Member of the Association of Professional Engineers of Ontario, Canada.
Donald A. Currie joined SteriGenics in March 1991 as General Manager of the
Westerville facility. In August 1994, Mr. Currie became Director of Operations
overseeing the Westerville and Schaumburg facilities and was promoted to Vice
President of Operations, Non-Medical in November 1996. In January 1998,
48
<PAGE> 50
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.
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, a medical device company. From February 1994
to October 1995, Mr. Yarter was President and Chief Executive Officer of BLOCK
Medical, a medical device company. Mr. Yarter provided private consulting
services to medical device manufacturers from 1990 to February 1994. Previously,
Mr. Yarter served as a corporate officer at C.R. Bard, a medical equipment and
supplies manufacturer.
49
<PAGE> 51
Director Nominee
Frederick J. Ruegsegger has been the Senior Vice President, Finance and
Corporate Development and Chief Financial Officer of AXYS Pharmaceuticals, Inc.
since January 1998. Prior to that he served as Vice President, Finance and
Administration and Chief Financial Officer of Arris Pharmaceutical Corporation
from December 1996 until January 1998. From 1993 to 1996, he was President and
Chief Executive Officer of EyeSys Technologies, Inc., a medical instrument and
software company. Mr. Ruegsegger received a B.S. degree in Economics from the
University of Illinois and a Master of Management from Northwestern University's
Kellogg Graduate School of Management.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") is incorporated herein by
reference from the section entitled "Compliance with Section 16(a) of the
Exchange Act" of the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act in connection with the registrant's Annual
Meeting of Stockholders to be held on August 5, 1998 (the "Proxy Statement").
The Proxy Statement is anticipated to be filed within 120 days after the end of
the registrant's fiscal year ended March 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation and Related
Information" of the Proxy Statement.
50
<PAGE> 52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled "Stock
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(a)(1) Financial Statements
See Item 8 above.
(a)(2) Financial Statement Schedules
See Item 14(d) below.
(a)(3) Exhibits
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.
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>
51
<PAGE> 53
<TABLE>
<S> <C> <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.
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.
</TABLE>
52
<PAGE> 54
<TABLE>
<S> <C> <C>
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.
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
).
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.
53
<PAGE> 55
* 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.
(b) Reports on Form 8-K
On January 14, 1998 the Company filed a Report on Form 8-K with the
Securities and Exchange Commission relating to the acquisition of certain assets
and liabilities of the Nicolet Electron Services Division of ThermoSpectra
Corporation. The Company did not file any financial statements in connection
with such filing.
(c) Exhibits
See (a)(3) above.
(d) Valuation and Qualifying Accounts Years Ended March 31, 1996, 1997 and
1998
54
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STERIGENICS INTERNATIONAL, INC.
By: /s/ JAMES F. CLOUSER
--------------------------------------
James F. Clouser
President, Chief Executive Officer and
Director
(Principal Executive and Financial
Officer)
Date: June 25, 1998
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.
<TABLE>
<S> <C>
Date: June 25, 1998 By: /s/ JAMES F. CLOUSER
----------------------------------------------------
James F. Clouser
President, Chief Executive Officer and Director
(Principal Executive and Financial Officer)
Date: June 25, 1998 By: /s/ CAROLE-LYNN S. GLASS
----------------------------------------------------
Carole-Lynn S. Glass
Corporate Controller
(Principal Accounting Officer)
Date: June 25, 1998 By: /s/ CHARLES W. KING, JR.
----------------------------------------------------
Charles W. King, Jr.
Chairman of the Board
Date: June 25, 1998 By: /s/ WALTER G. KORTSCHAK
----------------------------------------------------
Walter G. Kortschak
Director
Date: June 25, 1998 By: /s/ THOMAS F. STEPHENSON
----------------------------------------------------
Thomas F. Stephenson
Director
Date: June 25, 1998 By: /s/ JAMES R. YARTER
----------------------------------------------------
James R. Yarter
Director
</TABLE>
55
<PAGE> 57
STERIGENICS INTERNATIONAL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGED
BALANCE AT TO CHARGE TO BALANCE AT
BEGINNING ASSETS AND OTHER END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) OF PERIOD
DESCRIPTION ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998
deducted from asset account
Allowance for doubtful accounts........... $ 253 $ -- $ 84 $(119) $ 218
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
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
56
<PAGE> 58
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
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.
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> 59
<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> 60
<TABLE>
<CAPTION>
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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> 61
<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
).
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.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-34205) pertaining to the 1997 Equity Incentive Plan and the
Employee Stock Purchase Plan of SteriGenics International, Inc. of our report
dated May 1, 1998, with respect to the consolidated financial statements of
SteriGenics International, Inc. included in this Annual Report (Form 10-K) for
the year ended March 31, 1998.
Our audits also included the financial statement schedule of SteriGenics
International, Inc. listed in Item 14(a). 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 the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
June 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 12,660
<SECURITIES> 19,257
<RECEIVABLES> 6,383
<ALLOWANCES> 218
<INVENTORY> 0
<CURRENT-ASSETS> 40,916
<PP&E> 131,595
<DEPRECIATION> 49,890
<TOTAL-ASSETS> 130,675
<CURRENT-LIABILITIES> 11,131
<BONDS> 36,000
0
0
<COMMON> 8
<OTHER-SE> 69,683
<TOTAL-LIABILITY-AND-EQUITY> 130,675
<SALES> 46,955
<TOTAL-REVENUES> 46,955
<CGS> 24,231
<TOTAL-COSTS> 24,231
<OTHER-EXPENSES> 1,229
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,316
<INCOME-PRETAX> 8,714
<INCOME-TAX> 3,408
<INCOME-CONTINUING> 5,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,306
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.79
</TABLE>
