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FORM 10-K
AMENDMENT NO. 1
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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, 1999
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)
DELAWARE 95-3323502
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 21, 1999, there were outstanding 8,018,820 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 21, 1999, was
approximately $102,179,651.
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 SEPTEMBER 15, 1999 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 Report 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 more than 20 years of experience in the operation, design and
development of Gamma irradiation ("Gamma") systems and facilities. The Company
maintains a worldwide network of facilities comprised of 13 Gamma facilities and
one electron beam radiation ("E-Beam") facility operating in the United States
and three new facilities under construction - two in the United States and one
in Thailand. Serving more than 1,000 customer, SteriGenics has expanded its
presence in the medical products sterilization market through the opening of new
facilities, acquisitions, addition of new customers, and conversion of products
belonging to new and existing customers from ethylene oxide gas ("EtO")
sterilization to Gamma sterilization. In recent years, the Company has expanded
into various advanced applications and materials processing markets and has
expanded its technology base to include E-Beam radiation. 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 and industrial materials.
RECENT DEVELOPMENTS
On June 10, 1999, SteriGenics entered into a Merger Agreement (the "Merger
Agreement") with Ion Beam Applications, s.a. ("IBA"), a Belgian corporation, Ion
Beam Applications GP, and IBA Acquisition Corp. ("Purchaser"). Under the terms
of the Merger Agreement, Purchaser has commenced a tender offer (the "Offer")
for all outstanding shares of the Company's Common Stock (and the associated
Preferred Share Purchase Rights) (the "Shares") for $27.00 per share in cash.
The Offer is currently scheduled to expire at 12:00 Midnight, New York City
time, on Thursday, July 15, 1999. Subject to the terms of the Merger Agreement,
following completion of the Offer, Purchaser will be merged into SteriGenics and
all Shares not purchased in the Offer will be converted into the right to
receive $27.00 per Share in cash, without interest. For additional information
with respect to the Offer, see the Company's Schedule 14D-9
Solicitation/Recommendation Statement filed with the Securities and Exchange
Commission on June 24, 1999.
THE STERILIZATION AND RADIATION PROCESSING MARKETS
SteriGenics provides contract sterilization and radiation processing
services to three distinct markets: the Medical Products Market,
Advanced Applications Market and the Materials Processing Market, each comprised
of a number of product groupings.
MEDICAL PRODUCTS MARKET
The medical products sterilization market consists of independent suppliers
of sterilization 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
current U.S. market for medical product sterilization services (including Gamma,
EtO and E-Beam) is approximately $300 million. Of the U.S. contract
sterilization market, the Company estimates that approximately 40% to 45% is
Gamma, 50% to 55% is EtO and 5% to 10% is E-Beam. There is also a significant
market for the sterilization of medical products outside of the U.S. However,
EtO maintains a significantly larger share of the market than Gamma.
In determining the total cost of various sterilization services, medical
product manufacturers must consider not only the cost of the actual
sterilization services, but also the cost of transportation and cost of
processing time or product turnaround. As a result,
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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.
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 trend is the contracting of
additional services relating to the sterilization of medical products.
Manufacturers have begun to seek outside assistance with the validation and
testing of their products. This emerging trend has the potential to provide
core-business focus, while providing benefits such as reduction in labor costs
and expenses relating to sterilization management.
The medical products 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,
cardiovascular devices, gloves, gowns, bandages, , cotton swabs, cotton gauze,
surgical 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 current the
U.S. market for the sterilization of these types of medical products is
approximately $300 million.
ADVANCED APPLICATIONS MARKET
The market for microbial reduction, purification or irradiation processing
of advanced application products includes a multitude of markets. 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. Concerns over foodborne illnesses have
contributed to an increased awareness of the need for irradiation processing.
While the vast majority of the processing of advanced application products is
currently done with EtO, the percentage being processed using Gamma or E-Beam
radiation has increased in recent years. A number of manufacturers have
converted to Gamma processing 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. In determining the total cost of
various microorganism reduction or purification services, manufacturers must
consider not only the cost of processing, but also the cost of transportation
and cost of processing time or product turnaround. As a result, manufacturers
typically do not send product for processing beyond a 300-mile radius since the
cost of transportation would likely exceed the cost of processing. Because of
these limitations, contract service providers have needed to strategically
locate their facilities in close proximity to their customer base.
The following are the primary advanced application products being processed
using all of the various methods of microbial reduction or purification (Gamma,
EtO, E-Beam):
Spices and Herbs. Spices and herbs for culinary uses constitute the largest
portion of the current advanced applications 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.
Botanicals and Nutraceuticals. The use of herbs and botanicals for the
production of dietary supplements is a growing market in the U.S. According to
industry sources, the total U.S. market for nutraceuticals is in excess of $75
billion, with the vitamin, mineral and herbal category accounting for
approximately $6 billion. The type of products processed using Gamma radiation
to eliminate pathogens and reduce contaminating microorganisms include ginseng,
garlic, aloe vera, ginkgo biloba, bee pollen and St. John's wort.
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.
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Food Packaging Products. As the market for prepackaged foods has grown,
increasing the shelf-life of these products has become a critical economic
issue. By reducing the microbial count in the packaging material, producers are
able to reduce the risk that microorganisms contained in the packaging material
will come into contact with the food product and reduce its shelf-life. Examples
include milk cartons and meat packaging materials.
MATERIALS PROCESSING MARKET
The materials processing market is comprised of a large number of distinct
segments that 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 resin material such as PTFE. In addition, E-Beam radiation is used
to process certain semiconductor devices and to enhance the color of various
gemstones. Unlike that of the medical products and advanced applications
markets, manufacturers of industrial compounds, semiconductors and gemstones are
often willing to ship products to be processed beyond a 300-mile radius since
the cost of transportation and processing account for a smaller percentage of
the unit manufacturing cost.
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 irradiation of food
products. The United States Food and Drug Administration ("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. In February 1999, the USDA announced its approval of
irradiation for the treatment of fresh or frozen red meat and some meat products
and issued a draft guideline for use, which was open to a sixty-day public
comment period. Following the such comment period, it was expected that the USDA
and FDA would issue a final ruling to be published in the Federal Register by
the end of calendar 1999. At the time of this Report, the USDA had extended the
initial comment period for an additional thirty (30) days, and while the USDA
still expects to issue regulatory standards by the end of calendar 1999, there
is no assurance that 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, testing, and sterilization management services.
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
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certification that the product received the specified dosage. The fee charged
for this service is dependent primarily upon the required dose of Gamma
radiation, density of the product, permissible dose range and the volume of
product to be processed.
GAMMASTAT(R) 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 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, 1998, and 1999
GAMMARESERVE(TM) 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(TM) 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.
STERIPRO(TM)
SteriPro is a premium gamma sterilization service offering medical product
manufacturers the ability to contract additional services through SteriGenics as
they relate to the validation and ongoing sterilization of their products. These
services include, but are not limited to, material compatibility testing,
bioburden analysis, establishment of the sterilization dose, and routine
verification of the sterilization dose. The Company introduced its SteriPro
program in August 1998.
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 to three 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.
ELECTROSTAT(TM) SERVICES
ElectroSTAT I and II are premium electron beam sterilization services that
guarantee a turn-around time of 12 or 23 hours, respectively. The Company does
not limit the volume or type of product to be processed. Pricing for both
ElectroSTAT services is at a premium to standard service and is based upon the
time (12 hours or 23 hours) in which the customer requires the product to be
processed and available for shipment. ElectroSTAT was introduced in fiscal 1999.
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MARKETS AND CUSTOMERS
MEDICAL PRODUCTS MARKET
The medical products market is comprised of manufacturers of healthcare and
single-use medical products. The medical sterilization division of the Company
had more than 800 customers in fiscal 1999, 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 1999.
No customer accounted for more than 10% of revenues during fiscal years 1997,
1998 or 1999.
ADVANCED APPLICATIONS MARKET
The advanced applications division of the Company provides services through
both its Gamma and E-Beam facilities to more than 200 customers producing a
variety of products, including spices and herbs, cosmetics, food ingredients, ,
, fruit and vegetable products, food packaging and consumer products, such as
botanicals and nutraceuticals.. 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 the Advanced
Applications Market."
MATERIALS PROCESSING MARKET
The advanced applications division of the Company also provides services through
its Gamma and E-Beam facilities to customers producing a variety of industrial
and consumer products, including semiconductor devices, gemstones, polymer
materials, wire and cable. Although the materials processing market accounted
for less than 5% of the Company's revenues in fiscal 1999, the Company expects
that sales to materials processing customers as a percentage of overall revenues
will increase in the future. See "Risk Factors - Uncertainty of Expansion in
the Materials Processing Market."
CUSTOMER AGREEMENTS
While the Company provides a standard form of agreement for customer
contracts, the Company's agreements with its 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
turnaround times and special services.
SALES AND MARKETING
SteriGenics maintains a corporate marketing department that is responsible
for all marketing, advertising and promotional activities for the Company, while
it has separate sales and marketing groups servicing the medical products,
advanced applications and materials processing markets. In addition, the Company
maintains a separate sales and business development 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 or radiation processing of various
products and product labeling.
In 1996, the Company introduced a 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
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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 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. Research development and engineering expenditures
were $1.4 million, $1.2 million and $1.3 million for fiscal 1997, 1998 and 1999,
respectively. See "Risk Factors -- Increased 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
facility during 1999. 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
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sterilization capabilities. The Company may also, in the future, face
competition from suppliers of Cobalt 60 radioisotope, particularly MDS Nordion,
Inc. ("Nordion"), as well as foreign providers of sterilization services. In
addition, Isomedix has announced its intention to enter the California market
for sterilization services, which would increase competition in that market. To
the extent that the Company expands into international markets it will also be
faced with competition from existing providers of sterilization in those
markets.
In recent years, price competition in the sterilization services industry
has intensified. The Company may, in the future, face increased competition from
companies that employ new or improved technologies or that offer sterilization
services that are more effective or less costly than those developed and
marketed by the Company. 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 -- Increased 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 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 pre-approval 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.
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.
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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 pre-market approval requirements for certain drugs
and medical devices and for all food additives. In addition, the Company is
subject to inspection by the FDA for compliance with the FDA's Good
Manufacturing Practices ("GMP") and other applicable FDA requirements. The FFDCA
also prohibits the introduction into interstate commerce of adulterated or
misbranded drugs, medical devices, foods and cosmetics. Products are deemed
adulterated if, for example, they are manufactured or processed in facilities
that fail to comply with GMP requirements.
Failure by the Company at any time to comply with applicable FDA
requirements could lead the FDA to institute materially adverse enforcement
actions against the Company and/or its customers, including, among other things,
warning letters, recall or seizure of products, fines, injunctions, civil
penalties, total or partial suspension of sterilization operations and criminal
prosecution. Such enforcement actions would also harm the Company's business
reputation and could cause the Company to lose customers to competitors with
better records of regulatory compliance.
Medical Device Regulation. The Company's contract sterilization of medical
devices is subject to pervasive and continuing regulation by the FDA. The FFDCA
defines a medical device, in part, as including an instrument, apparatus,
implement, machine, contrivance, implant or other similar or related article
that is intended for use in the mitigation, treatment, or prevention of disease
in man or other animals. The Company sterilizes finished devices made by other
manufacturers, who commercially distribute them.
The Company's contract sterilization activities render it a device
manufacturer for purposes of the FDA's Quality System Regulation ("QSR"), which
sets forth detailed GMP requirements. As a result, the Company is required to
adhere to the requirements of the QSR that apply to its contract sterilization
activities. The QSR revises the previous GMP regulation (which also applied to
the Company's activities) and imposes certain enhanced requirements that are
likely to increase the cost of compliance. There can be no assurance that the
FDA would find that the Company is in compliance with applicable GMP
requirements or that the Company will be found in compliance at all times in the
future. The Company may also be subject to other FDA requirements such as the
medical device reporting requirements.
Drug Regulation. Contract sterilizers used by manufacturers of aseptic
filled drug products are subject to applicable provisions of the FDA's drug
GMPs. There can be no assurance that the FDA would find that a contract
sterilizer is in compliance with applicable GMP requirements now or at any time
in the future.
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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 pre-market 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 1999.
Cosmetics Regulation. Cosmetics are defined under the FFDCA as including
articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced
into, or otherwise applied to the human body or part thereof for cleansing,
beautifying, promoting attractiveness, or altering the appearance. There
currently are no statutory or regulatory provisions, other than the general
adulteration and misbranding provisions, that limit the use of radiation in the
processing or labeling of cosmetics.
ENVIRONMENTAL AND RELATED MATTERS
The Company's operations are subject to regulation by the EPA as well as
state and local governmental agencies. Although there can be no assurance, the
Company believes it currently maintains all licenses and permits necessary to
conduct its current business and that it is in material compliance with
applicable environmental, health and safety laws and regulations. The loss of
any of the Company's licenses or permits could force the Company to suspend or
terminate operations at one or more of its facilities or could otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations.
Pursuant to an Asset Acquisition Agreement effective August 8, 1996 (the
"Asset Agreement"), the Company purchased certain assets of RTI, including
property located in Haw River, North Carolina and leasehold interests in
property located in Salem, New Jersey and Rockaway, New Jersey (the "Rockaway
Property"). The Rockaway Property was previously owned and operated by Thiokol
Chemical Corporation ("Thiokol"), and is listed on the Superfund National
Priorities List ("NPL"). In 1992, RTI and Thiokol entered into an Administrative
Consent Order ("ACO") with the New Jersey Department of Environmental Protection
(the "NJDEP") requiring, among other things, implementation of a groundwater
remedy estimated to exceed $2.0 million in costs.
Under the Asset Agreement, RTI retained ownership of the Rockaway Property
and all associated environmental liabilities as of the closing date. RTI agreed
to indemnify and hold the Company harmless from and against any and all claims
which may arise directly or indirectly from any use or release of hazardous
substances on or under the leased premises as of the closing date. In addition,
the Company obtained a letter from the NJDEP stating that the NJDEP will not
institute either judicial or administrative civil proceedings against the
Company for any discharge, deposit, release or disposal of hazardous substances
or pollutants existing at the Rockaway Property, emanating therefrom, or
occurring before the closing. However, the Company is required by the NJDEP to
maintain a standby letter of credit in the amount of $500,000, contingent upon
the continued clean up efforts required of RTI. The required amount of the
letter of credit may be subject to certain lease terms 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
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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, 1999, the Company had 322 employees. The Company considers its
relations with its employees to be good. See "Risk Factors -- Dependence on Key
Personnel."
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
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 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.
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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 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.
INCREASED 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.
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UNCERTAINTY OF EXPANSION IN THE ADVANCED APPLICATIONS MARKET
While the Company has traditionally focused primarily on the medical
products market, it continues to increase its efforts in the advanced
applications market. The Company currently irradiates a wide range of food
ingredients and consumer products, including spices, herbs, cosmetics,
nutraceuticals, and fresh foods. Many of the advanced application markets for
irradiation processing are new and emerging, and there can be no assurance that
any of these markets will develop at the anticipated rate, if at all.
Approval for the irradiation of certain 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. In December 1997,
the FDA approved radiation for the processing of red meat, and some meat
products in order to eliminate E. coli and other harmful food-borne pathogens.
However, before irradiated red meat can be sold commercially, the USDA must set
certain minimum standards for processors to follow. On February 12, 1999, the
USDA announced its approval of irradiation for red meat and some meat products
as well as its plans to publish draft standards in the Federal Register
following a sixty-day public comment period. The USDA and FDA intend to issue a
final ruling with regard to the irradiation processing of red meat and certain
meat products. However, the initial comment period has been extended, and it is
unclear as to when the FDA and USDA expect to complete the review process. In
addition, current FDA rules and regulations require the labeling of any retail
food product that is irradiated to be identified as such, and to date, there has
been moderate consumer resistance to irradiated food. The irradiation 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 irradiation 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.
UNCERTAINTY OF EXPANSION IN THE MATERIALS PROCESSING MARKET
Although the sterilization of medical products and irradiation of advanced
application products currently represents the Company's largest markets,
SteriGenics has continued to increase its efforts to expand its share of the
materials processing market. The Company currently processes a variety of
industrial materials and consumer products using both Gamma and E-Beam
technologies, including semiconductors, gemstones and certain polymer materials,
such as PTFE. Many of the materials markets for E-Beam 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.
RISKS RELATED TO GEOGRAPHIC EXPANSION USING THE MINICELL
The Company completed its newest MiniCell facility in Somerset, New Jersey
in March, 1999. A key element of the Company's strategy is to expand
geographically into smaller regional markets and internationally using the
MiniCell. As well, the Company currently plans to install its MiniCell in two
additional locations, West Memphis, Arkansas and Thailand. There can be no
assurance that manufacturers in these markets, or any other 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 turnaround
time or that the Company will receive enough volume of product to operate such
facilities on a profitable basis. In addition, many manufacturers in some of
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.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
In fiscal 1999, SteriGenics announced its international expansion with the
development of an irradiation complex in Thailand featuring both Gamma and
E-Beam technologies. If commencement of the operation is successful, the Company
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. Currency exchange fluctuations in countries in which the
Company conducted operations historically have had, and in the future could
have, a material adverse effect on the Company's business, operating results or
financial condition by resulting in pricing levels that are not competitive or
expense levels that adversely impact profitability. There can be no assurance
that the Company will be able to sustain or increase revenue derived from
international service or that the foregoing factors will not have a material
adverse effect on the
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Company's future international service and other revenue, and consequently, on
the Company's business, operating results or financial condition.
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 addition of existing
technologies to its service offerings, or a significant increase in consumer
resistance to products sterilized by Gamma or the other technologies offered by
the Company, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Competition."
RISKS ASSOCIATED WITH EXPANSION IN E-BEAM TECHNOLOGY
From time to time the Company may expand its E-Beam business through
acquisition or by building new facilities. There can be no assurance that the
Company will be able to effectively expand the operations 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 expansion of the E-Beam business could have a material adverse effect upon
the Company's business, financial condition and results of operations.
UNCERTAINTIES RELATED TO EXPANSION IN X-RAY TECHNOLOGY
In May 1999, the Company announced its purchase of a Rhodotron(R), a
high-powered particle accelerator that the Company intends to use in order to
provide X-ray capabilities. There can be no assurance that the Company will be
able to secure the regulatory approvals necessary to provide X-ray processing,
nor can there be assurance that the Company will be able to effectively expand
the operations of the X-ray 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 expansion of its X-ray business could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "--Subsequent Events" -- Notes to Financial
Statements.
SUBSTANTIAL DEBT
As of March 31, 1999, the Company's total consolidated liabilities were
$55.1 million, of which $36.6 million represent long-term debt (including
current portion), its total consolidated assets were $136.1 million and its
total stockholders' equity was $81.0 million. The Company's substantial level of
debt presents the risk that the Company might not generate sufficient cash to
service the Company's indebtedness, including its 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, 1999, the Company had $36.0 million of
tax-free IRBs outstanding with variable interest rates as of March 31, 1999 of
either 3.2% or 3.0%. 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.
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
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regulatory policy cannot be predicted and, there can be no assurance that laws
and regulations will not be applied in a manner that adversely affects the
Company. The imposition of such regulatory requirements could force the Company
to alter or cease operations of its facilities and could otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations.
The design, construction, use and operation of commercial Gamma facilities
such as those operated by the Company, and byproduct materials used in such
facilities, are extensively regulated by the United States Nuclear Regulatory
Commission (the "NRC"), or in some cases by various state regulatory agencies
and authorities that undertake comparable regulatory functions from the NRC (the
"Agreement States"). While E-Beam is not regulated by the NRC, the Company's
E-Beam facility is subject to regulation by the California Department of Health
Services. The Company is currently operating its E-Beam facility under a
California Department of Health Services license held by ThermoSpectra
Corporation pending the approval of its application for a new radioactive
material license. The Company is also subject to various local zoning and permit
rules in the construction of its facilities. The Company's facilities are
subject to regulation by additional regulatory bodies at the federal, state and
local levels, depending upon the type of product that is being irradiated. The
Company's facilities are subject to the requirements of the FDA when irradiating
medical devices, foods, cosmetics or food or drug packaging materials. In
addition, if the Company were to begin processing meat or poultry products, it
would become subject to the requirements of the Food Safety and Inspection
Service of the USDA, which would require the amendment of its regulations to
authorize this use of irradiation as well as the establishment of the applicable
manufacturing practices that must be followed when using such irradiation. The
Company is also subject to the requirements of other federal agencies, such as
the United States Occupational Safety and Health Administration and the United
States Environmental Protection Agency (the "EPA"). In addition, the Company is
subject to the regulatory requirements of the state and local agencies in the
jurisdictions where the various irradiation facilities are located.
In addition to extensive regulation by various governmental bodies and
agencies, the Company is subject to standards, guidelines and requirements
established by industry organizations and other non-governmental 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 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."
15
<PAGE> 16
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
re-encapsulation 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 Company believes, based on
present information available to it, including the indemnification from RTI, the
ACO among RTI, Thiokol and the NJDEP, and the NJDEP's letter stating that it
will not seek recovery or remediation costs from the Company for contamination
that predates the purchase of RTI's assets, that it does not face any
significant environmental liability with respect to the Rockaway Property.
However, there can be no assurance that the Company will not be subject to
environmental liability relating to the remediation of the Rockaway Property or
liability for losses suffered by adjacent property owners or other third
parties, and such liability could have a material adverse effect on its
business, financial condition or results of operations.
In the spring of 1985, the Company leased over 400 stainless steel capsules
of radioactive Cesium from the United States Department of Energy (the "DOE")
for use at the Company's Decatur, Georgia and Westerville, Ohio irradiation
facilities. On June 6, 1988, the Company discovered one or more of DOE's Cesium
capsules had leaked radioactive Cesium, which is water soluble, contaminating
the Company's Decatur, Georgia facility. As a result of the contamination, the
Company's Decatur irradiation facility was completely shut down from June 6,
1988 until July 1996, when the Company leased the facility to a third party for
a different purpose. The decontamination activities were conducted by the DOE
and its contractors, and the Company filed an administrative claim with the DOE
for damages the Company incurred as a result of the Cesium contamination. The
DOE did not pay or deny the Company's claim within the required six month
period. As a result, the Company filed suit against the U.S. government in June
1991. Although the DOE had orally offered to fund the costs of the cleanup, the
government subsequently asserted a substantial
16
<PAGE> 17
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 MDS
Nordion ("Nordion"), a Canadian company and the world's principal source of
Cobalt 60, and REVISS Services (UK) Limited ("REVISS"), a United Kingdom company
and formerly a division of Amersham International plc. In addition, the Company
has purchased smaller amounts of its Cobalt 60 requirements from Neutron
Products Inc., a Maryland corporation. While the Company has not experienced any
shortages in Cobalt 60 supply since the mid-1980s and has various supply
contracts in place, there can be no assurance that it will be able to obtain
sufficient supplies of Cobalt 60 from Nordion, REVISS or other suppliers on
acceptable terms or that it will be able to identify and qualify alternative
sources. In addition, there is no assurance that Nordion will not in the future
become a competitor of the Company in the delivery of sterilization services,
which could result in a decrease in the availability of Cobalt 60 from Nordion.
In July 1997, Nordion announced a joint venture with Griffith Micro Science,
Inc. to provide sterilization services in Mexico. If interruptions in the supply
or increases in the price of Cobalt 60 were to occur for any reason, including a
decision by any of the Company's suppliers to decrease or discontinue supplies
of Cobalt 60 to the Company, trade restrictions with Canada or the United
Kingdom, political unrest, labor disputes or other factors, the Company's
business, financial condition and results of operations would be materially
adversely affected. Since the Company pays for Cobalt 60 primarily in Canadian
dollars, and the Canadian dollar is currently trading at levels significantly
lower than it has in recent years, the Company's results of operations may be
adversely affected by fluctuations in currency exchange rates. In addition, the
availability and price of Cobalt 60 to the Company and its suppliers is
dependent in part on the political situation in countries with large deposits of
Cobalt 59 (the material that is processed into Cobalt 60), such as the
Democratic Republic of Congo and the republics of the former Soviet Union. Such
countries have recently experienced political unrest. In addition, since mined
Cobalt 59 must be converted into Cobalt 60 in nuclear reactors, the supply of
Cobalt 60 to the Company's suppliers is dependent upon the availability of
nuclear reactors to convert Cobalt 59 to Cobalt 60. An interruption in the
Company's supply of Cobalt 60 or significant increase in the price the Company
is required to pay for Cobalt 60 would have a material adverse effect on the
Company's business, financial condition and results of operations.
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
17
<PAGE> 18
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 continues to experience periods of revenue growth and an
expansion in the number of its employees, the scope of its operating and
financial systems and the geographic area of its operations. This growth 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
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.
While it is an element of the Company's strategy to pursue strategic
acquisitions, the Company believes that the number of potential acquisition
candidates in the domestic market is limited. Therefore, there can be no
assurance that the Company will successfully complete any such transaction.
DEPENDENCE ON KEY PERSONNEL
The Company's progress to date has been highly dependent upon the skills of
its key technical and management personnel, many of whom would be difficult to
replace. To reach its future business objectives, the Company will need to hire
additional qualified personnel in the areas of sales, engineering and
management. There can be no assurance that the Company will be able to hire such
personnel, as the Company must compete with other companies, academic
institutions, government entities and other agencies. The number of persons with
experience in Gamma sterilization, 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 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, CEO & President, 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.
18
<PAGE> 19
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 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.
At the end of fiscal year 1998, the Company 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 has
concluded its discussions with the SPA and has settled the inquiry to the
satisfaction of both parties.
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.
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<PAGE> 20
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.
ITEM 2. PROPERTIES
The Company has a network of 13 Gamma facilities and one E-Beam facility
currently in operation in the United States, with three new facilities under
development - two in the United States and one in Thailand. Of the plants
currently operating, nine 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
application facilities since certain medical product customers prefer that their
products be segregated from advanced application products such as herbs and
spices. The 13 Gamma facilities have an aggregate design capacity of 104 million
curies of Cobalt 60. The Company's E-Beam facility performs sterilization and
radiation processing services for the medical products market, as well as the
advanced applications and materials processing markets.
The following table sets forth information regarding the Company's
facilities as of March 31, 1999:
<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
Somerset, New Jersey .................... 60,000
ADVANCED APPLICATION
FACILITIES
Tustin, California(2).................... 32,000
Schaumburg, Illinois(2) ................. 32,000
Rockaway, New Jersey .................... 25,000
Salem, New Jersey (1)(2) ................ 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.
20
<PAGE> 21
(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, 1999.
21
<PAGE> 22
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, 1999, there were approximately 64
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, 1999 HIGH LOW
-------------------------------- --------- ---------
<S> <C> <C>
4th quarter ended March 31, 1999 ...... $ 26.00 $ 9.00
3rd quarter ended December 31, 1998 ... $ 27.50 $ 18.50
2nd quarter ended September 30, 1998 .. $ 28.00 $ 16.50
1st quarter ended June 30, 1998 ....... $ 26.25 $ 19.63
FISCAL YEAR ENDED MARCH 31, 1998
--------------------------------
4th quarter ended March 31, 1998 ...... $ 22.25 $ 16.00
3rd quarter ended December 31, 1997 ... $ 23.75 $ 16.13
2nd quarter ended September 30, 1997(1) $ 18.50 $ 12.00
</TABLE>
- ----------
(1) Trading of the Company's Common Stock commenced on August 14, 1997.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ............................................... $ 28,661 $ 30,241 $ 37,668 $ 46,955 $ 54,529
Cost of revenues ....................................... 16,389 16,978 20,425 24,231 27,529
-------- -------- -------- -------- --------
12,272 13,263 17,243 22,724 27,000
Costs and expenses:
General and administrative ........................... 5,664 5,213 6,345 7,850 8,719
Marketing and selling ................................ 1,583 1,761 2,482 3,497 4,117
Research, development and engineering ................ 685 890 1,381 1,229 1,282
-------- -------- -------- -------- --------
7,932 7,864 10,208 12,576 14,118
-------- -------- -------- -------- --------
Income from operations ................................. 4,340 5,399 7,035 10,148 12,882
Other income (expense):
Interest income ...................................... 136 114 343 835 1,859
Interest expense ..................................... (2,538) (1,960) (2,179) (2,316) (2,015)
Write-down of investments in joint ventures .......... (3,011) -- -- -- --
Other income ......................................... 139 47 115 47 91
-------- -------- -------- -------- --------
Income (loss) before provision for income taxes,
equity in joint ventures and discontinued operations . (934) 3,600 5,314 8,714 12,817
Provision for income taxes ............................. 1,185 1,448 2,099 3,408 5,050
-------- -------- -------- -------- --------
Income (loss) before equity in joint ventures and
discontinued operations .............................. (2,119) 2,152 3,215 5,306 7,767
Equity in net loss of joint ventures ................... (1,360) -- -- -- --
-------- -------- -------- -------- --------
Income (loss) from continuing operations ............... (3,479) 2,152 3,215 5,306 7,767
Discontinued operations:
Income (loss) from discontinued operations ........... (115) -- -- -- --
Loss on disposition of discontinued operations ....... (1,173) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ...................................... $ (4,767) $ 2,152 $ 3,215 $ 5,306 $ 7,767
======== ======== ======== ======== ========
Pro forma basic net income per share(1) ................ $ 0.66 $ 0.86
======== ========
Basic net income per share ............................. $ 0.99
========
Shares used in computing pro forma basic net
income per share(1) .................................. 4,861 6,181
======== ========
Shares used in computing basic net
income per share(1) .................................. 7,824
========
Diluted net income per share(1) ........................ $ 0.62 $ 0.79 $ 0.93
======== ======== ========
Shares used in computing diluted net income per share(1) 5,165 6,711 8,353
======== ======== ========
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ...... $ 1,673 $ 9,906 $ 1,957 $ 12,660 $ 22,765
Working capital (deficit) ...... (3,576) 3,329 (3,047) 29,785 28,266
Total assets ................... 74,588 84,729 91,667 130,675 136,083
Total liabilities .............. 47,546 55,464 59,187 60,984 55,055
Redeemable preferred stock ..... 1,500 1,500 1,500 -- --
Stockholders' equity ........... 25,542 27,765 30,980 69,691 81,028
</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.
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 applications product. The Company
currently operates thirteen Gamma facilities nationwide and one electron beam
facilities.
On September 21, 1998, the Company announced a new MiniCell(TM) facility
located in Somerset, New Jersey. While the new location represents the Company's
third irradiation processing facility located in the northeast, it is the
Company's first facility designed to service the region's medical device
community. The facility began operations in March 1999. On October 13, 1998, the
Company announced plans to construct a gamma irradiation facility in Gilroy,
California. The Gilroy facility will be dedicated to servicing the Company's
advanced applications market and will feature a customized material handling
system and it's new (OMEGA)megaCell(TM) irradiation processing system. The
(OMEGA)megaCell(TM), a continuous pallet-type irradiator, is the Company's
newest irradiation design. The Company expects operations to commence by the end
of the third calendar quarter of 1999. On October 30, 1998 the Company purchased
land and a building in West Memphis, Arkansas. The former irradiation facility
was purchased from Stericycle, Inc. (Nasdaq: SRCL). The Company is renovating
the existing structure and will install the Company's MiniCell irradiation
system. This facility will service the medical applications market and is
expected to begin operations by the end of the fourth calendar quarter of 1999.
In December 1998, the Company purchased land and a building near Laem Chabang,
Thailand. The Company is building an irradiation complex that will offer both
gamma and electron beam technologies. The Company expects operations to commence
by the end of the second calendar quarter of 1999. While the Company expects
each of these facilities to be operational as noted, there can be no assurance
that there will be no unforeseen delays.
As the Company builds or expands existing 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, historically, the Company failed to
realize a portion of anticipated revenues for the facility pending such
qualification. Qualification generally requires the completion of various audit
procedures by a customer's quality assurance personnel. Customers' decisions on
timing of qualification of new facilities are based on various issues including
internal policies and procedures, work load of internal quality assurance audit
personnel and the need for amendments of certain FDA approvals. Certain
customers will qualify a new facility shortly after opening, while others may
delay for three, six, nine or 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.
The Company has divided its operations into two divisions: medical and
advanced applications, which includes materials processing. While the Company's
primary market continues to be the sterilization of medical products, the
Company continues to increase its focus on the irradiation and processing of
advanced applications product and industrial materials. The Company has
23
<PAGE> 24
dedicated four of its Gamma facilities to processing primarily advanced
applications product and industrial materials. In addition, a significant
portion of the Company's revenues from its E-Beam facility are generated from
the processing of advanced applications product and industrial materials.
In addition to standard contract sterilization and radiation processing
services, the Company continues to generate incremental revenues by offering its
customers premium services such as ExCell(TM), precision dosing and validation
services, and GammaSTAT(R), a guaranteed variable time-based service. Recently,
the Company introduced two additional premium services, ElectroSTAT(TM), a
guaranteed variable time-based service using E-Beam and SteriPro(TM), a
consultative and technical assistance program created to assist medical device
manufacturers with the development, validation and routine sterilization
management of a sterile health care product. Revenues are recognized upon
completion of the sterilization, processing or consultative 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, GammaSTAT, ElectroSTAT and SteriPro.
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,
-----------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenues ............................. 100.0% 100.0% 100.0%
Cost of revenues ..................... 54.2 51.6 50.5
----- ----- -----
45.8 48.4 49.5
Costs and expenses:
General and administrative ......... 16.8 16.7 16.0
Marketing and selling .............. 6.6 7.5 7.6
Research, development and
engineering .......................... 3.7 2.6 2.3
27.1 26.8 25.9
----- ----- -----
Income from operations ............... 18.7 21.6 23.6
Other income (expense):
Interest income .................... 0.9 1.8 3.4
Interest expense ................... (5.8) (4.9) (3.7)
Other income ....................... 0.3 0.1 0.2
----- ----- -----
Income before provision for income
taxes ................................ 14.1 18.6 23.5
Provision for income taxes ........... 5.6 7.3 9.3
----- ----- -----
Net income ........................... 8.5% 11.3% 14.2%
===== ===== =====
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1997, 1998 AND 1999
REVENUES
Revenues increased 24.7% from $37.7 million in fiscal 1997 to $47.0 million in
fiscal 1998, and 16.1% to $54.5 million in fiscal 1999. 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. The increase from fiscal 1998 to fiscal 1999 is primarily
attributable to increased sales from existing facilities, resulting from a
combination of increased quantity of product processed, price increases, and an
increase in the sale of premium services including the Company's latest premium
service offering SteriPro. In addition, the increase in fiscal 1999 is
attributable to the acquisition of the San Diego E-Beam facility which
contributed revenue for only the last quarter of fiscal 1998 and a full year in
fiscal 1999. See -- "Business - SteriPro" and "Note to Consolidated Financial
Statements - Acquisitions".
24
<PAGE> 25
COST OF REVENUES
Cost of revenues increased from $20.4 million in fiscal 1997 to $24.2
million in fiscal 1998 and $27.5 million in fiscal 1999. Gross margin increased
from 45.8% in fiscal 1997 to 48.4% in fiscal 1998 and 49.5% in fiscal 1999. 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 1999 was
primarily attributable to greater utilization of the Company's existing
facilities offset, in part, by the increase in installed Cobalt 60. The Company
expects gross margin to fluctuate in future periods, and that it may be
negatively impacted to the extent the Company adds facilities and continues to
expand its installed capacity of Cobalt 60.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 23.7% from $6.3 million in
fiscal 1997 to $7.8 million in fiscal 1998, and 11.1% to $8.7 million in fiscal
1999. 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 acquisition
of the San Diego E-Beam facility) during the fiscal year. The increase in
absolute dollars in fiscal 1999 was primarily attributable to the increase in
corporate overhead, including the cost of automation and maintenance of
information systems, and the addition of personnel at both the facility and
corporate level. As a percentage of revenues, these expenses decreased from
16.8% to 16.7% and 16.0% in fiscal 1997, 1998 and 1999, respectively. The
decrease in general and administrative expenses as a percentage of revenue from
fiscal 1997 to fiscal 1998 and fiscal 1999 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 and corporate administration.
MARKETING AND SELLING
Marketing and selling expenses increased 40.9% from $2.5 million in fiscal
1997 to $3.5 million in fiscal 1998, and 17.7% to $4.1 million in fiscal 1999.
As a percentage of revenues, these expenses increased from 6.6% to 7.5% and 7.6%
in fiscal 1997, 1998 and 1999, respectively. The increase in fiscal 1998 was
primarily attributable to the addition of sales and marketing personnel at the
corporate level 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 1999 was
primarily attributable to increased sales and marketing personnel at the
facility and corporate level as well as increased travel, professional and
advertising expenses. 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 focus on revenue growth, expanding premium service
offerings, and increasing market share.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses decreased 11.0% from $1.4
million in fiscal 1997 to $1.2 million in fiscal 1998, and slightly increased
4.3% to $1.3 million in fiscal 1999. The slight fluctuations in absolute dollars
in fiscal years 1998 and 1999 are primarily attributable to short-term
fluctuations in headcount and travel related expenditures. As a percentage of
revenues, these expenses decreased from 3.7% in fiscal 1997 to 2.6% in fiscal
1998 and decreased to 2.3% in fiscal 1999. The decreases year over year are
attributable to economies of scale gained as the Company's revenue increased.
The Company expects research, development and engineering expenses to increase
in absolute dollars as it intends to design and develop new facilities and
systems, as well as increasing personnel resources in fiscal year 2000.
INTEREST INCOME
Interest income increased 143.8% from $343,000 in fiscal 1997 to $835,000 in
fiscal 1998 and 122.6% to $1.9 million in fiscal 1999. 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 1999 is attributable to earnings on
the invested proceeds from the Company's initial and follow-on public offerings
of stock, in August 1997 and February 1998. As a percentage of revenues,
interest income increased from 0.9% to 1.8% and 3.4% in fiscal 1997, 1998 and
1999, respectively. The Company expects interest income to decline in both
absolute dollars and as a percentage of revenue, as the funds are used for
capital expenditures. See "Liquidity and Capital Resources."
25
<PAGE> 26
INTEREST EXPENSE
Interest expense increased 6.3% from $2.2 million in fiscal 1997 to $2.3
million in fiscal 1998, and decreased 13.0% to $2.0 million in fiscal 1999. In
fiscal 1998 interest expense increases were 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. The decrease in fiscal 1999 is attributable to
lower tax-free IRB financing expenses, primarily as a result of lower average
interest expense and to a lesser extent to lower administration fees. As a
percentage of revenue, interest expense decreased from 5.8% in fiscal 1997 to
4.9% and 3.7% in fiscal 1998 and 1999, respectively. Taxfree IRB debt carries
variable interest rates, 3.0% and 3.2% at fiscal year end March 31, 1999. See
"Risk Factors - Substantial Debt."
PROVISION FOR INCOME TAXES
The annual effective tax rates for 1997, 1998 and 1999 were 39.5%, 39.1% and
39.4%, respectively. The decrease in the tax rate from 1997 to 1998 is
attributable to the fact that the nondeductible expenses, which remained the
same year to year, had a lower impact on increased 1998 pretax income. The
increase in the tax rate from 1998 to 1999 relates primarily to an increase in
the federal statutory rate from 34% to 35%.
The recorded tax rates differ from the federal statutory rate primarily due to
state income taxes. The Company's net deferred tax liabilities relate primarily
to tax depreciation taken in excess of book depreciation. As a result of the
facility in Thailand, the Company's effective tax rate could increase in future
years if the Thailand operation experienced significant losses. See "Risk
Factors - Risks Associated with International Expansion."
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 1999, the Company had $22.8 million in cash and cash
equivalents and $28.3 million in working capital.
Net cash provided by operating activities was $12.2 million, $13.3 million
and $18.2 million in fiscal 1997, 1998 and 1999, respectively. Net cash provided
by operating activities in fiscal 1997, fiscal 1998 and fiscal 1999 was
primarily attributable to net income and depreciation.
Net cash used in investing activities was $19.1 million, $33.5 million and
$5.5 million in fiscal 1997, 1998 and 1999, respectively. For fiscal years 1997
and 1998 this was primarily attributable to the purchase of property, plant and
equipment (including Cobalt 60) and, for fiscal 1998, the assets acquired in the
acquisition of the San Diego E-Beam facility, as well as the purchase of short
term investments. For fiscal 1999, net cash used in investing activities was
attributed to the purchase of property plant and equipment and to a lesser
extent, the purchase of short term investments, offset to a large extent by the
maturities of short term investments.
Net cash (used in) provided by financing activities was $(1.0) million,
$30.8 million and $(2.6) million in fiscal 1997, 1998 and 1999, respectively.
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 1998 was primarily attributable to net proceeds of $21.4 million from the
Company's initial public offering in August 1997, the net 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 provided by financing activities in fiscal 1999 was primarily
attributable to the early retirement of capital lease debt associated with
Cobalt 60 financing, partially offset by the issuance of Common Stock under the
Company's equity incentive and employee stock purchase plans.
Noncash financing activities included the acquisition of Cobalt 60 through
capital leases totaling $2.5 million in fiscal year 1997 and the issuance of
Common Stock, totaling $2.1 million, in connection with the acquisition of the
San Diego facility in fiscal year 1998. Additionally, in 1998, noncash financing
included $93,000 from income tax benefits on stock options, which also accounted
for $1.4 million of noncash financing in fiscal 1999.
26
<PAGE> 27
The Company has a $3.5 million revolving line of credit with a bank that
carries a fixed interest rate (8.5% at March 31, 1999), collateralized by
certain assets of the Company. The line of credit is payable on demand, and at
March 31, 1998 and March 31, 1999, 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, 1999, the Company had $36.0 million in IRB financing, which
bears interest at market rates (either 3.2% or 3.0% at March 31, 1999). The IRBs
are collateralized by certain assets of the Company at March 31, 1999 and by
letters of credit with a bank. The Company is able to issue only $4.0 million of
additional tax-free IRBs until it reaches the maximum aggregate tax-free IRB
limit of $40.0 million. Thereafter, the Company will be required to obtain any
additional financing through higher cost funding sources. See "Risk Factors -
Substantial Debt."
The Company had capital expenditures of $18.6 million, $7.3 million and
$22.6 million in fiscal 1997, 1998 and 1999, respectively. The Company currently
expects to make capital expenditures of approximately $48.6 million during
fiscal 2000. 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 the second quarter of fiscal 2000. Thereafter, the
Company will utilize existing and future credit facilities. 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, and other electronic systems such as telephone and
security 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 has formed a committee, led by an outside Information Systems
Consultant, to quantify, evaluate, recommend, and implement procedures to assess
the Company's year 2000 readiness. Members of the committee are continuing the
process of working with the Company's employees, as well as software and
hardware vendors in order for the Company to achieve year 2000 readiness. Also,
included in the committee's scope is the compliance of customers and level one
suppliers. This includes written certification that these customers and
suppliers and/or their products are year 2000 compliant. Level one suppliers are
defined as those critical to the Company's sterilization and irradiation
processes. In the third quarter of fiscal 1999, the committee increased its
scope to include other significant third parties, such as telephone and security
suppliers. The Committee has also initiated contingency plans for implementation
in the event that the Company, its level one suppliers or significant third
parties, fails to adequately address the year 2000 issue.
During the fourth quarter of fiscal 1999, the Company implemented a test
plan and specification for its year 2000 readiness program ("Y2K Program"). The
Y2K Program allowed the Committee to review an inventory of all of the Company's
hardware and software, its level of business impact on the operations of the
Company, and to implement its repair or replacement. Included in the Y2K
program, the Company has completed its review of its financial reporting
systems. As of March 31, 1999, it has installed or upgraded all software
necessary to be year 2000 compliant. The cost to bring the financial reporting
systems up to year 2000 compliance was expensed as incurred and was not
material. With respect to the Company's other internal systems, and all Company
hardware, a review is progressing. In addition, certain systems have been either
year 2000 certified or upgraded to attain year 2000 readiness. Costs for these
upgrades have been expensed as incurred and have not been material to date.
Management does not anticipate that the Company will incur additional,
significant operating expenses or be required to invest heavily in computer
systems improvements to complete year 2000 readiness. Significant uncertainty
exists concerning the potential costs and effects associated
27
<PAGE> 28
with any year 2000 compliance. 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 and financial condition.
ADOPTION OF NEW ACCOUNTING STANDARDS
In fiscal 1999, the Company adopted 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 requires the Company to use the "management approach" in
disclosing segment information. The adoption of FAS 130 or FAS 131 did not have
an impact on the Company's results of operations or financial position.
In April 1999, AcSEC issued Statement of Position ("SOP") 98-5, "Reporting
on the Costs of Start-Up Activities." This SOP provides guidance on the
financial reporting of start-up costs and organization costs. It requires the
costs of start-up activities and organization costs to be expensed as incurred.
The SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company does not expect that the adoption of SOP No. 98-5
will have a material impact on its financial statements.
In June 1998, the Financial Accounting Standards Board issued statement No.
133 "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Management does
not anticipate that the adoption of the new Statement will have a significant
effect on results of operations or the financial position of the Company.
RECENT DEVELOPMENTS
On June 10, 1999, SteriGenics entered into a Merger Agreement (the "Merger
Agreement") with Ion Beam Applications, s.a. ("IBA"), a Belgian corporation, Ion
Beam Applications GP, and IBA Acquisition Corp. ("Purchaser"). Under the terms
of the Merger Agreement, Purchaser has commenced a tender offer (the "Offer")
for all outstanding shares of the Company's Common Stock (and associated
Preferred Share Purchase Rights) (the "Shares") for $27.00 per share in cash.
The Offer is currently scheduled to expire at 12:00 Midnight, New York City
time, on Thursday, July 15, 1999. Subject to the term of the Merger Agreement,
following completion of the Offer, Purchaser will be merged into SteriGenics and
all Shares not purchased in the Offer will be converted to the right to receive
$27.00 per Share in cash, without interest. For additional information with
respect to the Offer, see the Company's Schedule 14D-9
Solicitation/Recommendation Statement filed with the Securities and Exchange
Commission on June 24, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes to interest rates
and foreign currency exchange rates. A discussion of the Company's accounting
policies for financial instruments and further disclosures relating to financial
instruments is included in the Organization and Summary of Significant
Accounting Policies in the Notes to Consolidated Financial Statements.
The Company monitors the risks associated with interest rates and foreign
currency exchange rate risks and has established policies and business practices
to protect against these and other exposures. The Company places its investments
in instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines; the policy also limits the amount of
credit exposure to any one issue, issuer, or type of instrument and does not
permit derivative financial instruments in its investment portfolio. As the
result, the Company does not expect any material loss with respect to its
investment portfolio.
At March 31, 1999, the Company held $22.8 million in cash and cash
equivalents, $2.6 million in short-term investments, and $36.0 million in
tax-free IRB debt, all of which are subject to interest rate fluctuations. Based
on the amount and terms of these financial instruments, the Company believes
fluctuations in interest rates would not result in a material adverse effect.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL SECTION
<TABLE>
<S> <C>
Consolidated Balance Sheets ............................................. 30
Consolidated Statements of Operations ................................... 31
Consolidated Statement of Stockholders' Equity .......................... 32
Consolidated Statements of Cash Flows ................................... 33
Notes to Consolidated Financial Statements .............................. 34
Report of Ernst & Young LLP, Independent Auditors ....................... 44
</TABLE>
29
<PAGE> 30
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents:
Unrestricted .................................................. $ 11,691,383 $ 21,753,171
Restricted .................................................... 968,725 1,011,419
Short-term investments .......................................... 19,257,339 2,622,287
Accounts receivable, net of allowance of $ 218,000 and
$220,000 at ................................................. 6,165,027 6,946,823
March 31, 1998 and 1999
Prepaid expenses and other current assets ....................... 1,158,278 1,045,733
Deferred income taxes ........................................... 1,675,244 1,052,185
------------- -------------
Total current assets .............................................. 40,915,996 34,431,618
Property, plant and equipment, net ................................ 81,704,679 94,330,956
Other assets ...................................................... 8,054,174 7,320,344
------------- -------------
Total assets ............................................. $ 130,674,849 $ 136,082,918
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 1,035,282 $ 838,851
Accrued liabilities ............................................. 5,038,597 4,116,379
Income taxes payable ............................................ 1,684,174 102,992
Current portion of capital lease obligations .................... 2,872,810 176,953
Current portion of long-term debt ............................... 500,000 930,000
------------- -------------
Total current liabilities ......................................... 11,130,863 6,165,175
Capital lease obligations, less current portion ................... 3,266,246 405,207
Long-term debt, less current portion .............................. 36,000,000 35,070,000
Deferred income taxes ............................................. 10,586,847 13,414,590
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value:
Authorized shares -- 1,000,000 at March 31, 1998 and
March 31, 1999
Issued and outstanding shares-- none .......................... -- --
Common Stock, $0.001 par value:
Authorized shares -- 15,000,000
Issued and outstanding shares -- 7,681,323 at March 31, 1998 7,681 7,996
and 7,995,546 at March 31, 1999
Additional paid-in capital ...................................... 48,089,859 51,609,860
Notes receivable from sale of Common Stock to employees ......... (49,499) --
Retained earnings ............................................... 21,642,852 29,410,090
------------- -------------
Total stockholders' equity ........................................ 69,690,893 81,027,946
------------- -------------
Total liabilities and stockholders' equity ............... $ 130,674,849 $ 136,082,918
============= =============
</TABLE>
See accompanying notes.
30
<PAGE> 31
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues ............................................ $ 37,668,198 $ 46,954,902 $ 54,529,020
Cost of revenues .................................... 20,425,350 24,231,361 27,528,527
------------ ------------ ------------
17,242,848 22,723,541 27,000,493
Costs and expenses:
General and administrative ........................ 6,345,112 7,849,969 8,719,814
Marketing and selling ............................. 2,482,124 3,496,943 4,116,723
Research, development and engineering ............. 1,380,821 1,228,824 1,282,218
------------ ------------ ------------
10,208,057 12,575,736 14,118,755
------------ ------------ ------------
Income from operations .............................. 7,034,791 10,147,805 12,881,738
Other income (expense):
Interest income ................................... 342,657 835,288 1,859,351
Interest expense .................................. (2,178,967) (2,315,784) (2,015,368)
Other income ...................................... 115,347 46,846 91,149
------------ ------------ ------------
Income before provision for income taxes ............ 5,313,828 8,714,156 12,816,870
Provision for income taxes .......................... 2,099,065 3,407,683 5,049,632
------------ ------------ ------------
Net income .......................................... $ 3,214,763 $ 5,306,473 $ 7,767,238
============ ============ ============
Pro forma basic net income per share ................ $ 0.66 $ 0.86
============ ============
Basic net income per share .......................... $ 0.99
============
Shares used in computing pro forma basic
net income per share ............................... 4,860,685 6,180,980
============ ============
Shares used in computing basic net income per share . 7,823,634
============
Diluted net income per share ........................ $ 0.62 $ 0.79 $ 0.93
============ ============ ============
Shares used in computing diluted net income per share 5,164,679 6,711,438 8,353,336
============ ============ ============
</TABLE>
See accompanying notes.
31
<PAGE> 32
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1996 ....... 1,772,727 1,773 3,056,042 3,056
Net and comprehensive income .... -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 1997 ....... 1,772,727 1,773 3,056,042 3,056
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
Issuance of Common Stock
pursuant to Nicolet acquisition -- -- 109,307 109
Issuance of Common Stock
pursuant to employee stock
purchase plan January 30, 1998 -- -- 32,111 32
Exercise of options ............. -- -- 136,136 136
Income tax benefit from stock
option transactions ........... -- -- -- --
Repayment of notes receivable ... -- -- -- --
Net and comprehensive income .... -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 1998 ....... -- -- 7,681,323 7,681
Issuance of Common Stock
pursuant to employee stock
purchase plan ................. -- -- 88,542 89
Exercise of options ............. -- -- 225,681 226
Income tax benefit from stock
option transactions ........... -- -- -- --
Repayment of notes receivable ... -- -- -- --
Net and comprehensive income .... -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 1999 ....... -- $ -- 7,995,546 $ 7,996
============ ============ ============ ============
<CAPTION>
NOTES
RECEIVABLE
FROM
SALE OF
ADDITIONAL COMMON TOTAL
PAID-IN STOCK TO RETAINED STOCKHOLDERS'
CAPITAL EMPLOYEES EARNINGS EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1996 ....... 14,726,994 (88,170) 13,121,616 27,765,269
Net and comprehensive income .... -- -- 3,214,763 3,214,763
------------ ------------ ------------ ------------
Balance at March 31, 1997 ....... 14,726,994 (88,170) 16,336,379 30,980,032
Conversion of Preferred Stock
to Common Stock ................. -- -- -- --
Issuance of Common Stock, net
of issuance costs of $3,570,501 30,201,924 -- -- 30,204,499
Issuance of Common Stock
pursuant to Nicolet acquisition 2,063,061 -- -- 2,063,170
Issuance of Common Stock
pursuant to employee stock
purchase plan January 30, 1998 336,860 -- -- 336,892
Exercise of options ............. 667,936 -- -- 668,072
Income tax benefit from stock
option transactions ........... 93,084 -- -- 93,084
Repayment of notes receivable ... -- 38,671 -- 38,671
Net and comprehensive income .... -- -- 5,306,473 5,306,473
------------ ------------ ------------ ------------
Balance at March 31, 1998 ....... 48,089,859 (49,499) 21,642,852 69,690,893
Issuance of Common Stock
pursuant to employee stock
purchase plan ................. 921,568 -- -- 921,657
Exercise of options ............. 1,233,098 -- -- 1,233,324
Income tax benefit from stock
option transactions ........... 1,365,335 -- -- 1,365,335
Repayment of notes receivable ... -- 49,499 -- 49,499
Net and comprehensive income .... -- -- 7,767,238 7,767,238
------------ ------------ ------------ ------------
Balance at March 31, 1999 ....... $ 51,609,860 $ -- $ 29,410,090 $ 81,027,946
============ ============ ============ ============
</TABLE>
See accompanying notes.
32
<PAGE> 33
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Cash flows from operating activities:
Income from continuing operations .......................... $ 3,214,763 $ 5,306,473 $ 7,767,238
Reconciliation to net cash provided by operating activities:
Depreciation ............................................ 8,200,411 9,596,762 9,984,771
Amortization ............................................ 70,605 155,743 303,795
Deferred income tax liability ........................... 833,812 1,178,155 2,827,743
Deferred income tax asset ............................... (149,395) (566,527) 623,059
Changes in assets and liabilities:
Accounts receivable ................................... (1,114,874) (1,573,416) (781,796)
Prepaid expenses and other current assets ............. (241,161) (175,360) 162,043
Accounts payable and accrued liabilities .............. 1,369,584 (616,629) (2,699,830)
------------ ------------ ------------
Net cash provided by operating activities .................... 12,183,745 13,305,201 18,187,023
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................... (18,613,378) (7,333,503) (22,611,048)
Purchases of short term investments .......................... -- (19,257,339) (7,586,224)
Maturities of short term investments ......................... -- -- 24,221,276
Acquisition of certain assets of Nicolet ..................... -- (5,001,052) --
Proceeds from sale of investment in joint venture ............ 1,249,000 -- --
Other assets ................................................. (1,779,364) (1,910,123) 430,035
------------ ------------ ------------
Net cash used in investing activities ........................ (19,143,742) (33,502,017) (5,545,961)
FINANCING ACTIVITIES:
Issuance of Common Stock ..................................... -- 30,541,391 921,657
Redemption of Preferred Stock ................................ -- (1,500,000) --
Exercise of stock options .................................... -- 761,156 2,598,659
Borrowings under industrial revenue bonds .................... 8,750,000 5,000,000 --
Borrowings under term loan and line of credit ................ 2,881,619 700,000 --
Repayments on term loan, line of credit, industrial
revenue bonds and capital leases ........................... (12,620,719) (4,603,023) (6,056,896)
Increase in restricted cash .................................. (40,889) (83,667) (42,694)
------------ ------------ ------------
Net cash (used in) provided by financing activities .......... (1,029,989) 30,815,857 (2,579,274)
------------ ------------ ------------
Net increase (decrease) in unrestricted cash and
cash equivalents ............................................. (7,989,986) 10,619,041 10,061,788
Unrestricted cash and cash equivalents at
beginning of period .......................................... 9,062,328 1,072,342 11,691,383
------------ ------------ ------------
Unrestricted cash and cash equivalents at end of period ...... $ 1,072,342 $ 11,691,383 $ 21,753,171
============ ============ ============
NONCASH FINANCING ACTIVITIES:
Assets acquired under capital leases ......................... $ 2,508,127 $ -- $ --
Common Stock issued in connection with the acquisition
of Nicolet ................................................. $ -- $ 2,063,170 $ --
Income tax benefit from stock options ........................ $ -- $ 93,084 $ 1,365,335
</TABLE>
See accompanying notes.
<PAGE> 34
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 13 Gamma facilities in several states and one
E-Beam facility in San Diego, California. During fiscal 1999, the Company
announced plans for two additional gamma facilities in the United States and one
irradiation complex in Thailand featuring Gamma and E-Beam. All three facilities
are expected to commence operation by the end of calendar 1999.
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. SteriGenics International Holding Corporation holds
investments in the Company's joint venture in Taiwan (see Note 9). In addition,
SteriGenics International Holding Corporation owns SteriGenics Cayman, which
owns SteriGenics Thailand Ltd. (see Note 10). RSI Leasing, Inc. leases Cobalt 60
to the Company and includes a facility located in San Diego, California. All
significant intercompany accounts and transactions have been eliminated.
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 manufacturers is recognized upon the completion of
sterilization, irradiation processing or consultative services. No customer
accounted for more than 10% of revenues during fiscal years 1997, 1998 or 1999.
Advertising Costs
Advertising costs are recorded as an expense when incurred. Advertising
costs were approximately $289,000, $348,000 and $227,000 for the years ended
March 31, 1997, 1998 and 1999, 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 from the date of purchase 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.
Short-Term Investments
The Company invests its excess cash in high-quality commercial paper with
maturity less than one year. At March 31, 1999, 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 1997, 1998 and 1999 as all investments were
held to maturity during the year. At March 31, 1999, the fair value of
short-term investments approximates cost.
33
<PAGE> 35
Financial Instruments
The estimated fair values of financial instruments approximate the carrying
values at March 31, 1999 and 1998 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.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of investments in cash equivalents and
short-term investments. The Company uses local banks and various investment
firms to invest its excess cash. The Company is exposed to credit risk in the
event of default by these institutions or issuers of the investments to the
extent of the amount recorded on the balance sheet.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
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 of Cobalt 60 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
As permitted under Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), the Company accounts for
its employee stock option plans in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB Opinion No. 25") and will provide pro forma disclosures of net income and
earnings per share as if the fair value basis method prescribed by FAS 123 had
been applied in measuring employee compensation expense (see Note 4.)
Net Income Per Share
In accordance with the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("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
35
<PAGE> 36
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 pro forma basic, basic and
diluted net income per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Numerator for basic and diluted:
Net income ................................. $3,215 $5,306 $7,767
====== ====== ======
Denominator:
Weighted average common shares outstanding . 3,056 5,504 7,824
Shares related to SEC Staff Accounting ..... 32 12 --
------ ------ ------
Bulletins
Denominator for basic net income per share ... 3,088 5,516 7,824
Conversion of Preferred Stock (pro forma) .... 1,773 665 --
------ ------ ------
Denominator for pro forma basic net income per 4,861 6,181
share Stock options .......................... 304 530 529
------ ------ ------
Denominator for diluted net income per share . 5,165 6,711 8,353
====== ====== ======
Pro forma basic net income per share ......... $ 0.66 $ 0.86
====== ======
Basic net income per share ................... $ 0.99
======
Diluted net income per share ................. $ 0.62 $ 0.79 $ 0.93
====== ====== ======
</TABLE>
Options to purchase 88,250 and 305,995 shares of Common Stock were
outstanding in the years ended March 31, 1998 and 1999 respectively, 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.
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. The
Company has elected to disclose its comprehensive earnings in its statement of
stockholders' equity.
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," in fiscal
1999. Statement No. 131 supersedes Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise," and establishes standards for reporting
information about operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
group, in deciding how to allocate resources and in assessing performance. The
Company has determined that under Statement No. 131, it operates in one segment
of contract sterilization. The Company's customers and operations are primarily
in the United States.
New Accounting Pronouncements
In April 1999, AcSEC issued Statement of Position ("SOP") 98-5, "Reporting
on the Costs of Start-Up Activities." This SOP provides guidance on the
financial reporting of start-up costs and organization costs. It requires the
costs of start-up activities and organization costs to be expensed as incurred.
The SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company does not expect that the adoption of SOP No.98-5
will have a material impact on its financial statements.
In June 1998, the Financial Accounting Standards Board issued statement No.
133 "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Management does
not anticipate that the adoption of the new Statement will have a significant
effect on results of operations or the financial position of the Company.
36
<PAGE> 37
2. BALANCE SHEET COMPONENTS
Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Land .................................... $ 2,105,244 $ 2,790,002
Buildings ............................... 19,858,531 19,942,349
Cobalt 60 isotope ....................... 73,076,015 82,450,964
Furniture and fixtures .................. 4,994,345 6,560,994
Machinery and equipment ................. 30,918,948 31,729,740
Construction-in-progress ................ 641,610 8,484,748
------------ ------------
131,594,693 151,958,797
Accumulated depreciation and amortization 49,890,014 57,627,841
------------ ------------
$ 81,704,679 $ 94,330,956
============ ============
</TABLE>
Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1998 1999
---------- ----------
<S> <C> <C>
Industrial revenue bond costs (net of
accumulated amortization of $435,000 in 1998, and
$516,000 in 1999) ............................... $ 969,233 $ 888,290
Goodwill (see Notes 1 and 10) ................... 4,229,133 4,006,278
Other ........................................... 2,917,068 2,487,036
---------- ----------
8,115,434 7,381,604
Less current portion of bond costs .............. 61,260 61,260
---------- ----------
$8,054,174 $7,320,344
========== ==========
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1998 1999
---------- ----------
<S> <C> <C>
Compensation ............................. $1,972,534 $1,948,518
Property tax ............................. 614,169 584,461
Legal and accounting ..................... 403,571 308,556
Sales and other non-income taxes ......... 294,196 191,157
Other .................................... 1,754,127 1,083,687
---------- ----------
$5,038,597 $4,116,379
========== ==========
</TABLE>
3. BORROWING ARRANGEMENTS
Long-term debt consists of:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Industrial revenue bond, due in March 2005, with
interest at the contract formula rate of 3.7% and
3.0% at March 31, 1998 and
March 31, 1999, 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 3.0% at March 31, 1998 and
March 31, 1999, 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 3.0% at March 31, 1998 and
March 31, 1999, 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 3.2% at
March 31, 1998 and March 31,
1999, respectively ............................................. 9,000,000 8,500,000
Industrial revenue bond, due in annual principal installments of
$430,000 beginning in May 1999, with interest at
the contract formula rate of 3.9% and 3.2% at
March 31, 1998 and March 31,
1999, respectively ............................................. 7,750,000 7,750,000
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C>
Industrial revenue bond, due in July 2017, with interest at the
contract formula rate of 3.9% and 3.2% at March 31, 1998 and
March 31, 1999, respectively ................................... 5,000,000 5,000,000
36,500,000 36,000,000
Less current portion ............................................ 500,000 930,000
----------- -----------
$36,000,000 $35,070,000
=========== ===========
</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
1999, there were approximately $969,000 and $1.0 million recorded, respectively,
as restricted cash associated with the outstanding industrial revenue bonds.
The Company has a $3.5 million revolving line of credit with a bank, payable
on demand, with a fixed interest rate of 8.5% at March 31, 1998 and 1999,
collateralized by certain assets of the Company. At March 31, 1998 and 1999, 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, 1999 and thereafter are:
<TABLE>
<S> <C>
2000 .......... $ 930,000
2001 .......... 930,000
2002 .......... 930,000
2003 .......... 930,000
2004 .......... 930,000
Thereafter .... 31,350,000
-----------
Total $36,000,000
===========
</TABLE>
Cash payments for interest in fiscal 1997, 1998 and 1999 were approximately
$1,875,000, $1,664,000 and $1,444,000, respectively.
4. STOCKHOLDERS' EQUITY
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.
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, 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
Granted ............... 254,900 $ 19.45
Exercised ............. (225,681) $ 5.46
Canceled .............. (41,836) $ 17.47
--------
Balance at March 31, 1999 978,032 $ 11.62
========
</TABLE>
38
<PAGE> 39
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, 1999, 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> <C>
$ 4.90 -- $ 5.00 317,528 4.40 $ 4.94 281,874 $ 4.94
$ 7.00 -- $10.80 351,509 8.28 10.58 133,451 10.62
$16.63 -- $19.75 230,795 9.12 19.37 25,069 19.36
$20.00 -- $23.50 78,200 8.97 20.56 16,468 20.32
------- -------
978,032 456,862
======= =======
</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, 1998,
options to purchase 431,290 shares of Common Stock were exercisable at an
average exercise price of $5.00 per share. At March 31, 1999, 543,054 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 FAS
123, requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of FAS 123. 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>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate (%) 6.37 5.79 4.55
Dividend yield ............. -- -- --
Volatility factor .......... -- 0.68 0.78
Expected option life (years) 3.57 5.20 5.55
</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>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Pro forma net income ................. $ 3,139,858 $ 4,288,371 $ 5,990,261
Pro forma basic net income per share . 0.65 0.69 0.77
Pro forma diluted net income per share 0.61 0.64 0.72
</TABLE>
The weighted average fair value of options granted in fiscal 1997, 1998 and
1999 was $1.10, $5.97 and $10.84 per share, respectively.
39
<PAGE> 40
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. The effects of applying FAS 123 pro forma disclosures are not
likely to be representative of the effects on net income for future years.
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
March 31, 1999, shares issued under the Purchase Plan totaled 120,653.
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. During the first quarter of fiscal 1999,
repayments of $49,000 were received by the Company. At March 31, 1999, no
amounts were outstanding.
5. TAXES ON INCOME
The provision for income taxes for the years ended March 31 consists of the
following:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
Federal:
<S> <C> <C> <C>
Current .......... $1,276,373 $2,395,188 $1,480,451
Deferred ......... 614,517 573,637 2,923,042
---------- ---------- ----------
1,890,890 2,968,825 4,403,493
State:
Current .......... 138,274 400,867 118,379
Deferred ......... 69,901 37,991 527,760
---------- ---------- ----------
208,175 438,858 646,139
---------- ---------- ----------
$2,099,065 $3,407,683 $5,049,632
========== ========== ==========
</TABLE>
The tax benefits associated with stock options reduce taxes currently
payable as shown by $93,000 and 1.4 million for 1998 and 1999, respectively.
Such benefits were credited to additional paid in capital.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate (34% for 1997 and 1998, and 35% for 1999)
to income before taxes as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Statutory tax ..................... $1,806,702 $2,962,813 $4,485,903
State taxes, net of federal benefit 137,395 289,646 419,990
Other ............................. 154,968 155,224 143,739
---------- ---------- ----------
$2,099,065 $3,407,683 $5,049,632
========== ========== ==========
</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 1999 are as
follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards ............. $ 2,013,422 $ 1,060,330
Reserves and accruals ................ 2,001,993 1,376,362
Other ................................ 302,625 310,625
----------- -----------
Total deferred tax assets .... 4,318,040 2,747,317
Deferred tax liabilities:
Depreciation ......................... 13,014,098 14,827,317
Other ................................ 215,545 282,407
----------- -----------
Total deferred tax liabilities 13,229,643 15,109,724
----------- -----------
Net deferred tax liabilities ........... $ 8,911,603 $12,362,407
=========== ===========
</TABLE>
40
<PAGE> 41
At March 31, 1999, the Company had federal alternative minimum tax credit
carryforwards of approximately $1.1 million, which do not expire. Utilization of
the carryforwards may be subject to an annual limitation due to the ownership
change limitations provided the by the Internal Revenue Code of 1986 and similar
state provisions.
Cash payments made for income taxes, net of refunds received, were $805,000,
$1.7 million and $1.8 million during fiscal 1997, 1998 and 1999, respectively.
6. 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 1999. 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 $122,000, $176,000 and $204,000 for fiscal 1997, 1998 and
1999, respectively. Administrative expenses related to the plan are not
significant.
7. COMMITMENTS AND CONTINGENCIES
The Company leases a portion of its Cobalt 60 isotope under capital leases
having terms of 15 years. The Company paid off substantially all of its capital
lease debt in the third fiscal quarter of fiscal 1999. Assets acquired by the
Company under such lease arrangements are included on the consolidated balance
sheet as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cobalt 60 isotope, at cost ............ $16,389,051 $15,837,200
Less accumulated amortization ......... 5,523,196 6,837,698
----------- -----------
$10,865,855 $ 8,999,502
=========== ===========
</TABLE>
The Company leases certain facilities and a portion of its Cobalt 60 isotope
under noncancelable operating leases. At March 31, 1999, future minimum lease
payments under operating leases and capital leases are as follows (including
approximately $487,000 under operating leases, at then current exchange rates,
payable in Canadian dollars):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
2000 .................................. 193,577 3,209,145
2001 .................................. 193,577 1,809,653
2002 .................................. 154,861 1,518,737
2003 .................................. 9,679 1,065,368
2004 .................................. 9,679 640,202
Thereafter ............................ 67,752 1,523,200
---------- ----------
Total payments .............. 629,125 $9,766,305
========== ==========
Less amount representing interest ..... 46,961
----------
Present value of minimum lease payments 582,164
Less current portion .................. 176,953
----------
$ 405,211
==========
</TABLE>
In conjunction with the RTI, Inc. ("RTI") Asset Acquisition Agreement (See
Note 10) the Company leases a facility in Rockaway, New Jersey and is required
by the New Jersey Department of Environmental Protection ("NJDEP") to maintain a
standby letter of credit in the amount of $500,000, contingent upon the
continued environmental clean up efforts required of the property owners, RTI.
The required amount of the letter of credit decreases over the life of the
building lease, and/or as the NJDEP deems required.
Additionally, RTI has the option to require the Company to purchase the
Rockaway land and buildings on the sixth anniversary of the lease commencement
date for a purchase price equal to $138,376. RTI may only exercise the option
upon receipt of proof that environmental remediation of the property was
complete to the extent that the Company would not have any material liability
for further environmental remediation and the property has been removed from the
national priorities list.
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 1997, 1998 and 1999 was $1.3 million, $1.2
million and $1.2 million, respectively.
41
<PAGE> 42
8. TRANSACTIONS WITH RELATED PARTIES AND MINORITY STOCKHOLDERS
In June 1997, the Company entered into operating leases with one of its
Directors 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
$472,000 in the fiscal year ended March 31, 1997, and $407,000 in fiscal 1998
and $653,000 in fiscal 1999. The Company also leases one facility and its
corporate offices from a publicly traded real estate investment trust of which
one of its Directors is a minority shareholder, but is neither a director nor an
officer.
Included in costs and expenses are approximately $2.1 million, $1.2 million
and $1.3 million for fiscal 1997, 1998 and 1999, respectively, relating to
payments to a minority stockholder for administrative, maintenance and
engineering services.
9. 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 $1.3 million. 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 1999.
10. 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 and $186,000 at March 31, 1998 and March
31, 1999, respectively. 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.
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,
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
Pro forma net revenues ......................... $43,197,048 $49,839,101
Pro forma net income ........................... 3,901,349 6,123,795
Pro forma diluted net income per share ......... 0.74 0.90
</TABLE>
42
<PAGE> 43
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's quarterly results of
operations for the years ended March 31, 1998 and 1999 (in thousands, except per
share amounts).
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Fiscal 1998
Revenues $10,751 $11,271 $11,849 $13,084
Gross Profit 4,950 5,376 5,526 6,872
Percentage of Revenues 46% 48% 47% 53%
Net Income 975 1,307 1,383 1,641
======= ======= ======= =======
Pro Forma Basic Net Income per share $ 0.20 $ 0.22 $ 0.20 $ 0.24
Diluted Net Income per share $ 0.19 $ 0.21 $ 0.18 $ 0.21
Fiscal 1999
Revenues $13,317 $14,048 $13,432 $13,732
Gross Profit 6,412 7,099 6,627 6,862
Percentage of Revenues 48% 51% 49% 50%
Net Income 1,794 2,039 1,938 1,996
======= ======= ======= =======
Pro Forma Basic Net Income per share $ 0.23 $ 0.26 $ 0.25 $ 0.25
Diluted Net Income per share $ 0.22 $ 0.24 $ 0.23 $ 0.24
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
The following events occurred subsequent to March 31, 1999.
On May 5, 1999, the Company announced the expansion of its electron beam
processing network through the addition of the Gaithersburg, Maryland facility
of Irradiation Industries, Inc., a privately held company. In conjunction with
this transaction, SteriGenics has purchased a Rhodotron(R) - the high powered
electron beam accelerator designed and developed by Ion Beam Applications s.a.
("IBA")- and plans to futher expand its electron beam operation to include the
construction of a new facility.
On June 10, 1999, SteriGenics entered into a Merger Agreement (the "Merger
Agreement") with IBA, a Belgian corporation, Ion Beam Applications GP, and IBA
Acquisition Corp. ("Purchaser"). Under the terms of the Merger Agreement,
Purchaser has commenced a tender offer (the "Offer") for all outstanding shares
of the Company's Common Stock (and the associated Preferred Share Purchase
Rights) (the "Shares") for $27.00 per share in cash. The Offer is currently
scheduled to expire at 12:00 Midnight, New York City time, on Thursday, July 15,
1999. Subject to the terms of the Merger Agreement, following completion of the
Offer, Purchaser will be merged into SteriGenics and all Shares not purchased in
the Offer will be converted into the right to receive $27.00 per Share in cash,
without interest. For additional information with respect to the Offer, see the
Company's Schedule 14D-9 Solicitation/Recommendation Statement filed with the
Securities and Exchange Commission on June 24, 1999.
43
<PAGE> 44
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1999. Our audits also included the
financial statement schedule listed in index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements take as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
April 30, 1999
44
<PAGE> 45
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 June 30, 1999 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James F. Clouser ................ 48 President, Chief Executive Officer and
Chairman of the Board
David E. Meyer .................. 48 President, Medical Sterilization Division
D. Patterson Adams .............. 46 President, Advanced Applications Division
Eric W. Beers ................... 39 Senior Vice President of Engineering
Carole-Lynn S. Glass ............ 39 Vice President Finance and Administration,
Chief Financial Officer
Donald A. Currie ................ 42 Vice President of Operations, Eastern Region
Eugene C. Davis ................. 51 Vice President of Operations, Western Region
Lisa C. Foster .................. 38 Vice President of Quality Assurance
Charles W. King, Jr. ............ 63 Director
Barrik L. Prince ................ 52 Director
James R. Yarter ................. 62 Director
Frederick J. Ruegsegger ......... 43 Director
</TABLE>
- ----------
(1) Member of Audit Committee and Compensation Committee.
All directors hold office until the next annual meeting of the stockholders
and until their successors have been duly elected and qualified. Officers are
elected by and serve at the direction of the Board of Directors. There are no
family relationships among the directors or officers of the Company.
James F. Clouser joined SteriGenics in June 1988 as President and Chief
Executive Officer. In June 1999, Mr. Clouser was appointed Chairman of the Board
by the Company's Board of Directors. 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.
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
Sterilization 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.
D. Patterson Adams joined SteriGenics in January 1998 as Vice President and
General Manager of the Advanced Applications Division, and in July 1998 was
promoted to division President. 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
45
<PAGE> 46
Mechanical/Aeronautical Engineering from Carleton University in Canada and is
a Member of the Association of Professional Engineers of Ontario, Canada.
Carole-Lynn S. Glass joined SteriGenics in February 1996 as Company
Controller. In July 1997, Ms. Glass was promoted to Director of Finance and in
July 1998, and was appointed Assistant Secretary by the Board of Directors. In
June 1999, Ms. Glass was promoted to Vice President of Finance and
Administration and Chief Financial Officer. From 1994 to 1996, Ms. Glass was the
Corporate Controller of 3Soft Corporation, an intellectual properties company
servicing the semiconductor industry. Ms. Glass also held various positions from
1985 to 1994, at Esprit/ADI Systems, Inc., a computer peripheral manufacturer,
the most recent being Corporate Controller. Ms. Glass has a Bachelor of Science
degree in Accounting from State University of New York at Fredonia.
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, Advanced Applications in November 1996. In January
1998, Mr. Currie became Vice President of Operations, Eastern Region for the
Company's Medical Sterilization Division. 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, Western Region for the Company's Medical Sterilization Division.
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.
Charles W. King, Jr., a founder of the Company and Chairman of the Board of
SteriGenics from its inception to June 1999, at which time he became a director
of the Company. Mr. King is a private investor and real estate developer and has
been a Managing Partner in Charles King & Associates since 1965.
Barrick L. Prince became a director of the Company in October 1998. Mr.
Prince has owned and operated a multi-million dollar trucking company in
Northern California since 1989. From 1979 to 1989 Mr. Prince held several Vice
Presidential titles at the Matson Navigation Company, a major steamship company.
Mr. Prince is a co-founder of The Leadership Network, an organization for
business leaders, and currently serves as a member of the Board of Directors for
Goodwill Industries of the Greater East Bay.
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.
Frederick J. Ruegsegger became a director of the Company in July 1998. Mr.
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
46
<PAGE> 47
Meeting of Stockholders to be held on September 15, 1999 (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, 1999.
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.
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
47
<PAGE> 48
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
2.1**** Merger Agreement dated as of June 10, 1999, by and among Ion Beam
Applications s.a., Ion Beam Applications GP, IBA Acquisition Corp.
and the Registrant
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.
4.5***** Stockholders' Agreement dated as of June 10, 1999 among Ion Beam
Applications s.a., Ion Beam Applications GP, IBA Acquisition Corp.
and certain stockholders of the Registrant listed on Schedule I
thereto.
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.
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.
48
<PAGE> 49
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.
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.
49
<PAGE> 50
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.
10.65*** Facility lease dated June 4,1998 between Maurice M. Weill, Trustee
Under Trust Indenture Dated December 1, 1972 and the Registrant
for a building.
21.1++ Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors
27.1 Financial Data Schedule.
- ----------
++ 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.
*** Incorporated by reference from the exhibit of the same number in the
Registrant's SEC filing on Form 10-Q as filed with the SEC on August 7,
1998.
**** Incorporated by reference from Exhibit (c)(1) of the Registrant's SEC
filing on Schedule 14D-9 as filed with the SEC on June 24, 1999.
***** Incorporated by reference from Exhibit (c)(2) of the Registrant's SEC
filing on Schedule 14D-9 as filed with the SEC on June 24, 1999.
(b) Reports on Form 8-K
On April 7, 1999 the Company filed a Report on Form 8-K with the Securities
and Exchange Commission relating to the March 31, 1999 declaration of a dividend
of Preferred Share Purchase Rights. The Company did not file any financial
statements in connection with such filing.
On June 16, 1999 the Company filed a Report on Form 8-K with the Securities
and Exchange Commission relating to the June 10, 1999, difinitive Merger
Agreement with Ion Beam Applications s.a., Ion Beam Applications GP, IBA
Acquisition Corp. (collectively referred to as "IBA"). The Company has filed a
Schedule 14D-9 in connection with such filing.
(c) Exhibits
See (a)(3) above.
(d) Valuation and Qualifying Accounts Years Ended March 31, 1997, 1998 and
1999. Schedule II.
50
<PAGE> 51
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
Chairman of the Board
(Principal Executive Officer)
Date: July 6, 1999
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.
Date: July 6, 1999 By: /s/ JAMES F. CLOUSER
----------------------------------------
James F. Clouser
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: July 6, 1999 By: /s/ CAROLE-LYNN S. GLASS
------------------------------------------
Carole-Lynn S. Glass
Vice President Finance and Administration and
Chief Financial Officer
(Principal Financial Officer)
Date: July 6, 1999 By:
----------------------------------------
Charles W. King, Jr.
Director
Date: July 6, 1999 By: /s/ BARRICK L. PRINCE
-----------------------------------------
Barrick L. Prince
Director
Date: July 6, 1999 By: /s/ JAMES R. YARTER
----------------------------------------
James R. Yarter
Director
Date: July 6, 1999 By: /s/ FREDERICK J. RUEGSEGGER
--------------------------------------------
Frederick J. Ruegsegger
Director
51
<PAGE> 52
STERIGENICS INTERNATIONAL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGE TO BALANCE AT
BEGINNING ASSETS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) OF PERIOD
----------- --------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999
deducted from asset account
Allowance for doubtful accounts ........ $ 218 $ -- $ -- $ 2 $ 220
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.
52
<PAGE> 53
INDEX TO EXHIBITS
Number Description
- ------ -----------
2.1**** Merger Agreement dated as of June 10, 1999, by and among Ion Beam
Applications s.a., Ion Beam Applications GP, IBA Acquisition Corp.
and the Registrant
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.
4.5***** Stockholders' Agreement dated as of June 10, 1999 among Ion Beam
Applications s.a., Ion Beam Applications GP, IBA Acquisition Corp.
and certain stockholders of the Registrant listed on Schedule I
thereto.
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.
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.
<PAGE> 54
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.
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.
<PAGE> 55
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.
10.65*** Facility lease dated June 4,1998 between Maurice M. Weill, Trustee
Under Trust Indenture Dated December 1, 1972 and the Registrant
for a building.
21.1++ Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors
27.1 Financial Data Schedule.
- ----------
++ 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.
*** Incorporated by reference from the exhibit of the same number in the
Registrant's SEC filing on Form 10-Q as filed with the SEC on August 7,
1998.
**** Incorporated by reference from Exhibit (c)(1) of the Registrant's SEC
filing on Schedule 14D-9 as filed with the SEC on June 24, 1999.
***** Incorporated by reference from Exhibit (c)(2) of the Registrant's SEC
filing on Schedule 14D-9 as filed with the SEC on June 24, 1999.
<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 April
30, 1999, 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, 1999.
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 herein.
/s/ ERNST & YOUNG LLP
San Jose, California
June 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 22,765
<SECURITIES> 2,622
<RECEIVABLES> 7,167
<ALLOWANCES> 220
<INVENTORY> 0
<CURRENT-ASSETS> 34,432
<PP&E> 151,959
<DEPRECIATION> 57,628
<TOTAL-ASSETS> 136,083
<CURRENT-LIABILITIES> 6,165
<BONDS> 35,070
0
0
<COMMON> 8
<OTHER-SE> 81,020
<TOTAL-LIABILITY-AND-EQUITY> 136,083
<SALES> 54,529
<TOTAL-REVENUES> 54,529
<CGS> 27,529
<TOTAL-COSTS> 27,529
<OTHER-EXPENSES> 14,119
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,015
<INCOME-PRETAX> 12,817
<INCOME-TAX> 5,050
<INCOME-CONTINUING> 7,767
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,767
<EPS-BASIC> .99
<EPS-DILUTED> .93
</TABLE>
