<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-Q
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 000-22909
---------------
STERIGENICS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3323502
(STATE OF OTHER JURISDICTION OF I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER
4020 CLIPPER COURT, FREMONT, CA 94538-6540
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(510) 770-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
Indicate by check whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate number of shares outstanding of each of the issuer's classes of
common stock, at the latest practicable date:
CLASS OUTSTANDING AS OF JANUARY 29, 1999:
----- -----------------------------------
Common Stock 7,995,111
===============================================================================
<PAGE> 2
STERIGENICS INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1998........................................................ 3
Condensed Consolidated Statements of Operations for the Three Months
and Nine Months Ended December 31, 1997 and 1998......................... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 1997 and 1998.................................. 5
Notes to Condensed Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 23
Item 2. Changes in Securities and Use of Proceeds................................ 23
Item 3. Defaults Upon Senior Securities.......................................... 23
Item 4. Submission of Matters to a Vote of Security Holders...................... 23
Item 5. Other Information........................................................ 23
Item 6. Exhibits and Reports on Form 8-K......................................... 24
Signatures.......................................................................... 25
</TABLE>
2
<PAGE> 3
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998(1) 1998
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents:
Unrestricted ..................................... $ 11,691 $ 32,639
Restricted ....................................... 969 1,002
Short-term investments ............................. 19,257 --
Accounts receivable, net of allowance of $218 and
$205 at March 31, 1998 and December 31, 1998 ..... 6,165 5,945
Prepaid expenses and other current assets .......... 1,158 1,212
Deferred income taxes .............................. 1,676 1,676
--------- ---------
Total current assets ................................. 40,916 42,474
Property, plant and equipment, net ................... 81,705 84,798
Other assets ......................................... 8,054 7,522
--------- ---------
Total assets ................................ $ 130,675 $ 134,794
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 1,035 $ 629
Accrued liabilities ................................ 5,039 4,859
Income taxes payable ............................... 1,684 4,582
Current portion of capital lease obligations ....... 2,873 176
Current portion of long-term debt 500 930
--------- ---------
Total current liabilities ............................ 11,131 11,176
Capital lease obligations, less current portion ...... 3,266 407
Long-term debt, less current portion ................. 36,000 35,570
Deferred income taxes ................................ 10,587 10,587
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value:
Authorized shares -- 1,000,000
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 and 7,925,775 at
December 31, 1998 .............................. 7 8
Additional paid-in capital ......................... 48,090 49,632
Notes receivable from sale of Common Stock to
employees ........................................ (49) --
Retained earnings .................................. 21,643 27,414
--------- ---------
Total stockholders' equity ........................... 69,691 77,054
--------- ---------
Total liabilities and stockholders' equity .. $ 130,675 $ 134,794
========= =========
</TABLE>
- ---------------------
(1) The balance sheet at March 31, 1998, has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial information.
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ................................... $ 11,849 $ 13,432 $ 33,871 $ 40,798
Cost of revenues ........................... 6,323 6,805 18,019 20,660
-------- -------- -------- --------
5,526 6,627 15,852 20,138
Costs and expenses:
General and administrative ............... 1,788 2,103 5,048 6,511
Marketing and selling .................... 851 956 2,533 2,935
Research, development and engineering .... 308 298 914 953
-------- -------- -------- --------
2,947 3,357 8,495 10,399
-------- -------- -------- --------
Income from operations ..................... 2,579 3,270 7,357 9,739
Other income (expense):
Interest income .......................... 336 435 540 1,394
Interest expense ......................... (651) (516) (1,908) (1,693)
Other income ............................. 3 14 32 77
-------- -------- -------- --------
Income before provision for income taxes ... 2,267 3,203 6,021 9,517
Provision for income taxes ................. 884 1,265 2,356 3,746
-------- -------- -------- --------
Net income ................................. $ 1,383 $ 1,938 $ 3,665 $ 5,771
======== ======== ======== ========
Pro forma basic net income per share ....... $ 0.20 -- $ 0.63 --
Basic net income per share ................. -- $ 0.25 -- $ 0.74
======== ========
Shares used in computing pro forma basic net
income .................................... 6,833 -- 5,846 --
======== ========
Shares used in computing basic net income
per share ................................. -- 7,882 -- 7,774
======== ========
Diluted net income per share ............... $ 0.18 $ 0.23 $ 0.58 $ 0.69
======== ======== ======== ========
Shares used in computing diluted net income
per share ................................. 7,513 8,433 6,350 8,360
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
------------------------------
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Cash flows from operating activities:
Net income ......................................... $ 3,665 $ 5,771
Reconciliation to net cash provided by operating
activities:
Depreciation .................................... 7,007 7,477
Amortization .................................... 77 228
Changes in assets and liabilities:
Accounts receivable ........................... (711) 220
Prepaid expenses and other current assets ..... (97) (5)
Accounts payable and accrued liabilities ...... 1,635 2,312
-------- --------
Net cash provided by operating activities ............ 11,576 16,003
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........... (7,589) (10,570)
Acquisition of certain assets of Nicolet ............. (5,001) --
Purchases of short term investments .................. -- (3,075)
Maturities of short term investments ................. -- 22,332
Other assets ......................................... (1,058) 304
-------- --------
Net cash (used in) provided by investing activities .. (13,648) 8,991
FINANCING ACTIVITIES:
Issuance of Common Stock ............................. 21,429 1,543
Redemption of Preferred Stock ........................ (1,500) --
Borrowings under industrial revenue bonds ............ 5,000 --
Borrowings under term loan and line of credit ........ 700 --
Repayments on term loan, line of credit, industrial
revenue bonds and capital leases ................... (3,331) (5,556)
Increase in restricted cash .......................... (15) (33)
-------- --------
Net cash provided by (used in) financing activities .. 22,283 (4,046)
-------- --------
Net increase in unrestricted cash and cash
equivalents ........................................ 20,211 20,948
Unrestricted cash and cash equivalents at beginning of
period ............................................. 1,072 11,691
-------- --------
Unrestricted cash and cash equivalents at end of
period ............................................. $ 21,283 $ 32,639
======== ========
NONCASH FINANCING ACTIVITIES:
Common stock issued in connection with acquisition
of Nicolet .......................................... $ 2,063 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
I. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of SteriGenics International, Inc. ("SteriGenics" or the "Company") and
its wholly owned subsidiaries, SteriGenics East Corporation, SteriGenics
International Holding Corporation and RSI Leasing, Inc. All significant
intercompany accounts and transactions have been
eliminated.
The accompanying interim unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosure normally included in the
financial statements prepared in accordance with generally accepted accounting
principles may have been condensed or omitted pursuant to such rules and
regulations, although management believes that the disclosures are adequate to
make the information presented not misleading. All adjustments (which included
only normal recurring accruals) necessary to present fairly the Company's
financial position and results as of and for the periods indicated have been
recorded. These financial statements should be read in conjunction with the
financial statements and notes included as part of the Company's annual report
on Form 10-K. Results for the quarter ended December 31, 1998 are not
necessarily indicative of the results to be expected for the entire year.
II. 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.
III. Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"),
which was adopted on December 31, 1997. In accordance with the provisions of FAS
128, all prior period net income per share amounts have been restated to reflect
basic and diluted per share amounts.
Except as noted below, basic net income per share is computed using the
weighted average number of shares of Common Stock outstanding. Pro forma basic
net income per share is calculated as for basic net income per share, but
assumes conversion of all convertible Preferred Stock which converted
automatically upon the Company's initial public offering, even if antidilutive.
Diluted net income per share includes potential common shares, when dilutive,
from stock options (using the treasury stock method) and from convertible
Preferred Stock (using the if-converted method).
The following table sets forth the computation of basic, pro forma basic and
diluted net income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
EARNINGS PER SHARE) EARNINGS PER SHARE)
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator for basic and diluted:
Net income .......................................... $1,383 $1,938 $3,665 $5,771
====== ====== ====== ======
Denominator:
Weighted average common shares outstanding .......... 6,833 7,882 4,944 7,774
Shares related to SEC Staff Accounting Bulletins .... -- -- 16 --
------ ------
Denominator for basic net income per share ............ -- 7,882 -- 7,774
Conversion of Preferred Stock (pro forma) ............. -- -- 886 --
------ ------
Denominator for pro forma basic net income per share .. 6,833 -- 5,846 --
Stock options ......................................... 680 551 504 586
------ ------ ------ ------
Denominator for diluted net income per share .......... 7,513 8,433 6,350 8,360
====== ====== ====== ======
Basic net income per share ............................ $ 0.25 $ 0.74
====== ======
Pro forma basic net income per share .................. $ 0.20 $ 0.63
====== ======
Diluted net income per share .......................... $ 0.18 $ 0.23 $ 0.58 $ 0.69
====== ====== ====== ======
</TABLE>
6
<PAGE> 7
V. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income" ("FAS 130") and Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("FAS 131"). FAS 130 establishes rules for reporting and displaying
comprehensive income. FAS 131 will require the Company to use the "management
approach" in disclosing segment information. Both statements are effective for
the Company during fiscal 1999. The Company believes that the adoption of either
FAS 130 or FAS 131 will not have a material impact on the Company's results of
operations, cash flows or financial position. Comprehensive income for the three
and nine months ended December 31, 1997 and 1998 approximates actual net income
in those periods.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. The statement will be effective for the Company in fiscal 2001. The
Company has not yet determined the effect, if any, of adopting the new standard.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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." This Report
is intended to be read in conjunction with the Company's Annual Report as filed
with the SEC on Form 10-K on June 22, 1998.
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 twelve Gamma facilities nationwide and one electron beam
("E-Beam") facility in San Diego, California.
The Company has recently announced plans to add four new facilities by the
end of calendar 1999. 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 designed to service the region's medical
device community. The Company expects the facility to be operational by the end
of the first calendar quarter of 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 plans to
renovate the existing structure and install the Company's MiniCell(TM)
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. On December 7, 1998, the Company entered into an agreement to purchase
land and a building in Laem Chaebang, Thailand. The Company intends to build 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, in the past, the Company failed to
realize a portion of anticipated revenues for the facility pending such
qualification. Qualification generally requires the completion of various audit
procedures by a customer's quality assurance personnel. Customers' decisions on
timing of qualification of new facilities are based on various issues including
internal policies and procedures, work load of internal quality assurance audit
personnel and the need for amendments of certain FDA approvals. Certain
customers will qualify a new facility shortly after opening, while others may
delay for three, six, nine or 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. While the Company's primary market continues to be the
sterilization of medical products, the Company continues to increase its focus
on the sterilization and processing of advanced applications product. The
Company has dedicated four of its Gamma facilities to processing primarily
advanced applications product. In addition, a significant portion of the
Company's revenues from its E-Beam facility are generated from the processing of
advanced applications product.
8
<PAGE> 9
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, precision dosing and validation
services, and GammaSTAT, a guaranteed variable time-based service. Recently the
Company introduced two additional premium services, ElectroSTAT, a guaranteed
variable time-based service using E-Beam and SteriPro, a consultative and
technical assistance program created to assist medical device manufacturers with
the development, validation and ongoing 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.
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>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- ------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues .................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ............................ 53.4 50.7 53.2 50.6
----- ----- ----- -----
46.6 49.3 46.8 49.4
Costs and expenses:
General and administrative ................ 15.1 15.7 14.9 16.0
Marketing and selling ..................... 7.2 7.1 7.5 7.2
Research, development and engineering...... 2.6 2.2 2.7 2.3
----- ----- ----- -----
24.9 25.0 25.1 25.5
----- ----- ----- -----
Income from operations ...................... 21.7 24.3 21.7 23.9
Other income (expense):
Interest income ........................... 2.8 3.2 1.6 3.4
Interest expense, net ..................... (5.5) (3.8) (5.6) (4.1)
Other income .............................. 0.1 0.1 0.1 0.1
----- ----- ----- -----
Income before provision for income taxes 19.1 23.8 17.8 23.3
Provision for income taxes .................. 7.4 9.4 7.0 9.2
----- ----- ----- -----
Net income .................................. 11.7% 14.4% 10.8% 14.1%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
Revenues: Revenues increased 13.4% from $11.8 million for the three months
ended December 31, 1997 to $13.4 million for the three months ended December 31,
1998. The increase is primarily attributable to facilities that were either new
or not in place during the three months ended December 31, 1997. The Hayward,
California, facility was newly operational, and the San Diego, California E-Beam
facility was not in place for the three months ended December 31, 1997, and
therefore had significantly less and no revenue, respectively, in the three
months ended December 31, 1997 as compared with the same period ended December
31, 1998. The increase is secondarily 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.
Cost of Revenues: Cost of revenues increased 7.6% from $6.3 million for the
three months ended December 31, 1997 to $6.8 million for the three months ended
December 31, 1998. Gross margin increased from 46.6% for the three months ended
December 31, 1997 to 49.3% for the same period ended December 31, 1998. The
increase in gross margin is primarily attributable to greater utilization of the
Company's existing facilities which enabled the Company to leverage the fixed
costs associated with such facilities, offset in part by the increase in
installed Cobalt 60. In addition, the Company realized a higher percentage of
revenue attributable to premium services in the three months ended December 31,
1998.
9
<PAGE> 10
General and Administrative: General and administrative expenses increased
17.6% from $1.8 million for the three months ended December 31, 1997 to $2.1
million for the three months ended December 31, 1998. As a percentage of
revenue, these expenses increased from 15.1% to 15.7% for the three months ended
December 31, 1997 and 1998, respectively. The increase in both absolute dollars
and as a percentage of revenue is 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 level,
primarily as a result of new facilities, and corporate level.
Marketing and Selling: Marketing and selling expenses increased 12.3% from
$851,000 for the three months ended December 31, 1997 to $956,000 for the three
months ended December 31, 1998. As a percentage of revenue, these expenses
decreased slightly from 7.2% for the three months ended December 31, 1997 to
7.1% for the three months ended December 31, 1998. The increase in absolute
dollars is attributable to the addition of marketing and sales personnel at the
facility and corporate level as well as increased travel, professional and
marketing costs.
Research, Development and Engineering: Research, development and engineering
expenses decreased 3.2% from $308,000 for the three months ended December 31,
1997 to $298,000 for the three months ended December 31, 1998. As a percentage
of revenue, these expenses decreased from 2.6% for the three months ended
December 31, 1997 to 2.2% for the three months ended December 31, 1998. The
slight decrease in absolute dollars, and as a percentage of revenue, is
attributable to lower travel, professional fees, and depreciation of fixed
assets used in research and development
Interest Income: Interest income increased 29.5% from $336,000 for the three
months ended December 31, 1997 to $435,000 for the three months ended December
31, 1998. As a percentage of revenues, interest income increased from 2.8% for
the three months ended December 31, 1997 to 3.2% for the three months ended
December 31, 1998. The increase is attributable to earnings on the investment of
proceeds from the Company's follow-on public offering of stock, and the issuance
of a tax free Industrial Revenue Bond ("IRB"), both in February 1998.
Interest Expense: Interest expense decreased 20.7% from $651,000 for the
three months ended December 31, 1997 to $516,000 for the three months ended
December 31, 1998. As a percentage of revenues, this expense decreased from 5.5%
for the three months ended December 31, 1997 to 3.8% for the three months ended
December 31, 1998. The decrease is attributable to reduced interest expense on
declining balances of outstanding capital lease debt, which was reduced further
by the early retirement of the majority of the Company's Cobalt 60 capital lease
debt in November 1998.
Provision for Income Taxes: For the three months ended December 31, 1997 and
1998, the Company recorded an estimated annual effective tax rate of
approximately 39% and 39.5%, respectively. 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.
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1998
Revenues: Revenues increased 20.5% from $33.9 million for the nine months
ended December 31, 1997 to $40.8 million for the nine months ended December 31,
1998. The increase is primarily attributable to facilities that where either
newly operational or not in place during the nine months ended December 31,
1997. The Hayward, California and Fort Worth II, Texas facilities, and the
Gurnee, Illinois MiniCell (located in the existing Gurnee Mega facility) were
newly operational, and the San Diego, California E-Beam facility was not in
place for the nine months ended December 31, 1997, and therefore had
significantly less or no revenue in the nine months ended December 31, 1997 as
compared with the same period ended December 31, 1998. To a lesser extent, the
increase is 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.
Cost of Revenues: Cost of revenues increased 14.7% from $18.0 million for the
nine months ended December 31, 1997 to $20.7 million for the nine months ended
December 31, 1998. Gross margin increased from 46.8% for the nine months ended
December 31, 1997 to 49.4% for the same period ended December 31, 1998. The
increase in gross margin is primarily attributable to greater
10
<PAGE> 11
utilization of the Company's existing facilities which enabled the Company to
leverage the fixed costs associated with such facilities, offset in part by the
increase in installed Cobalt 60. The increase in gross margin for the nine
months ended December 31, 1998 is secondarily attributable to a higher
percentage of revenue attributable to premium services. The Company expects
gross margins to fluctuate in future periods, and that it may be negatively
impacted to the extent the Company adds facilities and continues to expand its
installed capacity of Cobalt 60. The Company's cost of revenues is subject to
fluctuations based upon changes in currency exchange rates between the U.S.
dollar and the Canadian dollar because payments under certain of the Company's
Cobalt 60 operating leases are payable in Canadian dollars (approximately
$865,000 remaining at December 31, 1998, at then current exchange rates).
General and Administrative: General and administrative expenses increased
29.0% from $5.0 million for the nine months ended December 31, 1997 to $6.5
million for the nine months ended December 31, 1998. As a percentage of revenue,
these expenses increased from 14.9% to 16.0% for the nine months ended December
31, 1997 and 1998, respectively. The increase in both absolute dollars and as a
percentage of revenue is 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 level, primarily as
a result of new facilities, and corporate level. The Company expects general and
administrative expenses to increase in absolute dollars as it adds facilities
and corresponding plant administration, and continues to incur the additional
costs of being a public company.
Marketing and Selling: Marketing and selling expenses increased 15.9% from
$2.5 million for the nine months ended December 31, 1997 to $2.9 million for the
nine months ended December 31, 1998. As a percentage of revenue, these expenses
decreased slightly from 7.5% for the nine months ended December 31, 1997 to 7.2%
for the nine months ended December 31, 1998. The increase in absolute dollars is
attributable to the addition of marketing and sales personnel at the facility
and corporate level as well as increased travel, professional and marketing
costs. The Company expects marketing and selling expenses to increase in
absolute dollars over the remainder of fiscal 1999 as it focuses on revenue
growth, expanding premium service offerings, and increasing market share.
Research, Development and Engineering: Research, development and engineering
expenses increased 4.3% from $914,000 for the nine months ended December 31,
1997 to $953,000 for the nine months ended December 31, 1998. As a percentage of
revenue, these expenses decreased slightly from 2.7% for the nine months ended
December 31, 1997 to 2.3% for the nine months ended December 31, 1998. The
increase in absolute dollars is attributable to increased travel, professional
fees, and depreciation of fixed assets used in the research and development. The
Company expects research, development and engineering expense to increase in
absolute dollars over the remainder of fiscal 1999.
Interest Income: Interest income increased 158.1% from $540,000 for the nine
months ended December 31, 1997 to $1.4 million for the nine months ended
December 31, 1998. As a percentage of revenues, interest income increased from
1.6% for the nine months ended December 31, 1997 to 3.4% for the nine months
ended December 31, 1998. The increase is attributable to earnings on the
investment of proceeds from the Company's initial and follow-on public offerings
of stock, in August 1997 and February 1998, respectively. The Company expects
interest income to decrease as funds are used for capital expenditures and other
general corporate purposes. See -"Liquidity and Capital Resources".
Interest Expense: Interest expense decreased 11.3% from $1.9 million for the
nine months ended December 31, 1997 to $1.7 million for the nine months ended
December 31, 1998. As a percentage of revenues, this expense decreased from 5.6%
for the nine months ended December 31, 1997 to 4.1% for the nine months ended
December 31, 1998. The decrease is attributable to reduced interest expense on
declining balances of outstanding capital lease debt, which was reduced further
by the early retirement of the majority of the Company's Cobalt 60 capital lease
debt in November 1998. There was no change in tax free IRB interest expense for
the nine months ended December 1997, compared with the same period ended
December 31, 1998, as interest reduced by the February 1998 retirement of
$500,000 in tax free IRB debt, which carried a fixed interest rate of 10%, was
offset by additional interest expense on a variable rate, tax free IRB that was
issued on July 30, 1997. The remaining balance of tax free IRB debt carries
variable interest rates, 3.5% and 4.2% at December 31, 1998. The Company expects
interest expense to remain relatively unchanged in absolute dollars and to
decrease as a percentage of revenue for the remainder of the fiscal year. See
"Risk Factors - Substantial Debt."
Provision for Income Taxes: For the nine months ended December 31, 1997 and
1998, the Company recorded an estimated annual effective tax rate of
approximately 39.1% and 39.4%, respectively. 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
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book depreciation. As a result of the recently announced 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 Operations."
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 December 31, 1998, the Company had $33.6 million in cash
and cash equivalents and $31.3 million in working capital.
Net cash provided by operating activities was $11.6 million and $16.0 million
for the nine months ended December 31, 1997 and 1998, respectively, primarily
attributable to net income and depreciation.
Net cash (used in) provided by investing activities was $(13.6) million and
$9.0 million in the nine months ended December 31, 1997 and 1998, respectively.
Net cash used in investing activities was primarily attributable to the purchase
of property, plant and equipment (including Cobalt 60) and the acquisition of
certain assets of Nicolet for the nine months ended December 31, 1997. Net cash
provided by investing activities was primarily attributable to the maturity of
short term investments, partially offset by the purchase of property, plant and
equipment and short term investments for the nine months ended December 31,
1998.
Net cash provided by (used in) financing activities was $22.3 million and
$(4.0) million for nine months ended December 31, 1997 and 1998, respectively.
Net cash provided by financing activities for the nine months ended December 31,
1997 was attributable to the issuance of common stock from the Company's initial
public offering in August 1997, and to a lesser extent the issuance of an IRB.
These two financing activities were offset, in part, by the redemption of
preferred stock, and the repayment of IRB and capital lease debt. Net cash used
in financing activities for the nine months ended December 31, 1998 was
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 issuance of common stock in
connection with the acquisition of Nicolet for the nine months ended December
31, 1997. There were no noncash financing activities for the nine months ended
December 31, 1998.
The Company has a $3.5 million revolving line of credit with a bank that
carries a variable interest rate (8.5% at December 31, 1998), collateralized by
certain assets of the Company. The line of credit is payable on demand, and at
December 31,1998, no amount was outstanding under this line of credit. The
Company has never declared or paid dividends on its Common Stock and does not
expect to pay dividends in the foreseeable future. The payment of cash dividends
on the Company's Common Stock is limited by the terms of the Company's revolving
line of credit.
At December 31, 1998, the Company had $36.5 million in IRB financing which
bears interest at market rates (either 3.5% or 4.2% at December 31, 1998). The
IRBs are collateralized by certain assets of the Company and by letters of
credit with a bank. The Company is able to issue $3.5 million of additional
tax-free IRBs until it reaches the maximum aggregate tax-free IRB limit of $40.0
million. Thereafter, the Company will be required to obtain any additional
financing through higher cost funding sources. See "Risk Factors - Substantial
Debt."
The Company had capital expenditures of $7.6 million and $10.6 million for
the nine months ended December 31, 1997 and 1998, respectively. Capital
expenditures made during the nine months ended December 31, 1998 include the
purchase of land in Gilroy, California, which will be the site of a new gamma
irradiation facility, and the purchase of an irradiation processing facility in
West Memphis, Arkansas, which the Company plans to renovate and install a
MiniCell irradiation system. Additionally, the Company purchased Cobalt 60 to
increase capacity at several of its existing facilities. The Company expects to
make additional capital expenditures during the remainder of fiscal 1999. These
expenditures will include, but are not limited to, the purchase of additional
Cobalt 60, construction of new facilities, including the recently announced
facility in Laem Chaebang, Thailand, and renovations to existing facilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SteriGenics believes that existing cash balances, cash expected to be
generated from operations and available credit facilities will be sufficient to
fund the Company's anticipated capital expenditures, operations and repayment of
debt, at least through the end of fiscal 2000. There can be no assurance that
adequate sources of capital will be available in the future or, if available,
will be on terms acceptable to the Company. See "Risk Factors - Need for
Additional Capital."
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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 to quantify, evaluate, recommend, and
implement procedures to assess and assure the Company's year 2000 readiness.
Members of the committee are in the process of working with the Company's
employees, as well as software and hardware vendors to assure that the Company
is able to achieve year 2000 readiness. Also, included in the committee's scope
is the compliance of customers and level one suppliers. Level one suppliers are
defined as those critical to the Company's sterilization and irradiation
processes. In the third fiscal quarter, the committee increased its scope to
include other significant third parties, such as telephone and security
suppliers. The Committee will also initiate 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.
The Company has completed its review of its financial reporting systems. It
has already installed or will install upgraded software before the end of the
current fiscal year, March 31, 1999. The total estimated cost to bring the
financial reporting systems up to year 2000 compliance is $27,000 of which
$11,000 has been expended as of December 31, 1998. In respect to the Company's
other internal systems, and all Company hardware, a review is progressing.
During the fourth quarter of fiscal 1999, the Company will implement a test plan
and specification for its year 2000 readiness program ("Y2K Program"). The Y2K
Program will allow 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. As the Y2K Program is on
going, it is not presently possible to precisely quantify the overall cost to
make these systems year 2000 ready. However, management does not anticipate that
the Company will incur additional, significant operating expenses or be required
to invest heavily in computer systems improvements to achieve year 2000
readiness. Significant uncertainty exists concerning the potential costs and
effects associated 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.
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;
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loss of processing time due to maintenance; the costs associated with customer
product being damaged as a consequence of overdosing and other factors; changes
in interest rates; regulatory matters; and litigation, acquisitions and other
extraordinary events.
The Company's results of operations are also influenced by competitive
factors, including the pricing and availability of the Company's and competing
sterilization and radiation processing services; the acceptance of Gamma and
E-Beam radiation as a means of sterilizing and processing products as opposed to
other technologies; the ability of the Company's competitors to obtain orders
from the Company's customers; the establishment of in-house sterilization
capabilities by the Company's customers; the acquisition of the Company's
customers by entities that do not use the Company's services; the timing of new
service or technology announcements and releases by the Company and its
competitors; and the entry of new competitors into the market for sterilization
and radiation processing services. A large portion of the Company's expenses are
fixed and difficult to reduce in a short period of time. If revenues do not meet
the Company's expectations, the Company's fixed expenses would exacerbate the
adverse effect of such a shortfall on net income.
Additional factors that have a significant impact on the Company's results of
operations are the timing of construction and commencement of operations of new
facilities. Building new facilities requires significant capital investments in
construction and equipment and, for Gamma facilities, in Cobalt 60. In addition
to incurring costs associated with building and equipping such facilities, the
Company also incurs costs related to Cobalt 60 and higher personnel costs in the
months preceding initial operation. As a result of their own internal
procedures, customers often delay qualification and use of new facilities until
they have been operational for a specified period of time of up to 12 months. As
a result, in the past, the Company has failed to realize a portion of
anticipated revenues for the facility pending such qualification, while
incurring significant start-up costs, both of which adversely affected the
Company's results of operations.
Due to these factors, as well as other unanticipated factors, it is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts or investors. In such event, the price of
the Company's Common Stock would be materially adversely affected.
DEPENDENCE ON MEDICAL PRODUCTS CUSTOMERS
The Company derives a substantial portion of its revenues from the sale of
sterilization services to manufacturers of medical devices, labware and eyecare
products ("medical products"), and the Company expects that the sterilization of
medical products will continue to account for a significant portion of the
Company's revenues for the foreseeable future. The Company thus depends to a
considerable extent upon the continued growth of the market for medical
products. In particular, a significant aspect of the Company's medical products
business is the sterilization of single-use medical devices. As a result, the
Company is dependent in part on continued growth in the market for single-use
medical devices. There has recently been an increasing focus on reusable medical
devices and, therefore, there can be no assurance that use of reusable medical
devices will not increase. Any significant increase in the use of reusable
medical devices would decrease the use of single use devices of the type
sterilized by the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes that continued growth in the use of medical products depends on a
number of factors, including the impact of health reform proposals. The Company
believes that government and private insurance company efforts to contain or
reduce health care costs are likely to continue. These trends may lead to fewer
medical procedures being performed or the increased use of reusable medical
devices, either of which could negatively impact the demand for the Company's
services. In addition, the Company is dependent on the ongoing conversion of
products from EtO to Gamma or E-Beam sterilization and there can be no assurance
that such conversion will continue at the rate currently anticipated by the
Company. Loss of significant business from medical products manufacturers,
including reductions caused by large customers establishing captive facilities,
changes in such customers' competitive position or a decision to purchase
contract sterilization services from other suppliers, a downturn in the medical
products market, or a failure of the conversion of products from EtO to Gamma at
the anticipated rate could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The market for sterilization and radiation processing services is intensely
competitive and is characterized by significant price competition. The Company's
market is fragmented as a result of geographical limitations on the
transportation of products for sterilization, multiple technologies and the mix
of captive and contract facilities. In particular, the Company currently faces
competition from other providers of contract Gamma sterilization services, the
most significant of which is Isomedix, Inc., a subsidiary of Steris Corporation
("Isomedix"), and other providers of contract E-Beam sterilization services
including The Titan Corporation, E-Beam Services Inc. and Iotron Industries
Canada Inc. In addition, many products that can be sterilized using Gamma or
E-Beam can also be sterilized using EtO. As a result, the Company also competes
with companies that process products using EtO
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technology, including Cosmed Group, Inc., Griffith Micro Science, Inc. and
Isomedix. Certain of the Company's competitors and potential competitors have
substantially greater financial, marketing, distribution, technical and other
resources than the Company or offer a broader range of sterilization
technologies, which may enable them to address more of the sterilization
requirements of individual customers. In addition, the Company competes with
manufacturers that have or are considering establishing in-house sterilization
capabilities. The Company may also in the future face competition from suppliers
of Cobalt 60 radioisotope, particularly Nordion, as well as foreign providers of
sterilization services. In addition, Isomedix has announced its intention to
enter the California market for sterilization services, which would increase
competition in that market. To the extent that the Company expands into
international markets it will also be faced with competition from existing
providers of sterilization and radiation processing services in those markets.
In recent years, price competition in the sterilization and radiation
processing services industry has intensified. The Company may in the future face
increased competition from companies that employ new or improved technologies or
that offer sterilization services that are more effective or less costly than
those developed and marketed by the Company. To the extent such increase in
competition were to occur, the Company may explore alternative sterilization
technologies as necessary to enhance its competitive position. Such competition
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to continue to compete effectively or that the competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, financial condition and results of operations.
UNCERTAINTY OF EXPANSION IN ADVANCED APPLICATIONS MARKETS
While the Company has traditionally focused primarily on the medical products
market, it continues to increase its efforts in the advanced application
contract sterilization and radiation processing market. The Company currently
sterilizes a wide range of food ingredients and consumer products, including
cosmetics, semiconductors, gemstones, spices and herbs. The Company also
processes various industrial compounds and other materials using both Gamma and
E-Beam technologies. Many of the advanced application markets for Gamma
sterilization and processing are new and emerging, and there can be no assurance
that any of these markets will develop at the anticipated rate, if at all.
Approval for the irradiation of food products is regulated by the FDA and the
USDA. While the FDA has approved radiation for the processing of a variety of
foods, including pork, poultry and fresh fruits and vegetables, only limited
commercial sales of irradiated food have taken place. In December 1997, the FDA
approved radiation for the processing of red meat, meat byproducts and food
products in order to eliminate E. coli and other harmful foodborne pathogens.
However, before irradiated red meat can be sold commercially, the USDA must set
certain minimum standards for processors to follow. On February 12, 1999, the
USDA announced plans to publish draft standards in the Federal Register within
10 days, after which there would be a sixty-day public comment period. There
can be no assurance that they will do so. In addition, current FDA rules and
regulations require the labeling of any retail food product that is irradiated,
and to date, there has been significant consumer resistance to irradiated food.
The 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 sterilization of fresh food products will gain
public acceptance or will ultimately prove commercially feasible in the United
States or that the Company would undertake to expand its irradiation activities
to include red meat. To the extent that the Company seeks to take advantage of
future opportunities in this market, such activities would require significant
changes in the Company's processing techniques, including the redesign of
facilities and the addition of refrigeration capabilities. Furthermore, to
accommodate the perishable nature of red meat and the high processing volume
that may result from the commercial irradiation of red meat, the Company could
be required to expend significant capital to build specially equipped processing
facilities near customer facilities.
RISKS RELATED TO GEOGRAPHIC EXPANSION USING THE MINICELL
A key element of the Company's strategy is to expand geographically into
smaller regional markets and internationally using the MiniCell. The Company
currently plans to install its MiniCell in three locations, West Memphis,
Arkansas, Somerset, New Jersey, and Laem Chaebang, 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 turn-around
time or that the Company will receive enough volume of product to operate such
facilities on a profitable basis. In addition, many manufacturers in 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.
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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
If the Company is successful in expanding into international markets either
through the use of the MiniCell or otherwise, it will be subject to a number of
risks related to foreign operations, including fluctuations in currency exchange
rates, political and economic conditions in various jurisdictions, unexpected
changes in regulatory requirements, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer accounts
receivable payment cycles and potentially adverse tax consequences. 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 Company's
future international service and other revenue, and consequently, on the
Company's business, operating results or financial condition.
UNCERTAINTIES RELATED TO MINICELL LEASING
The Company's ability to successfully lease its MiniCell will depend upon the
acceptance of the Company's technology and the concept of "in-house outsourcing"
(utilizing third party contractors to provide services within a manufacturer's
own facility) by manufacturers with high volume sterilization needs, as well as
upon the Company's ability to enter into favorable leasing terms with potential
customers. The Company has not yet leased a MiniCell, and there can be no
assurance that manufacturers will elect to lease a MiniCell in lieu of relying
on traditional in-house sterilization operations and contract sterilization
providers or that any such leases will be on terms favorable to the Company. In
addition, the leasing of the MiniCell will involve a significant commitment of
management attention and resources by prospective customers and may require
input from and approval at multiple levels of a customer's organization.
Accordingly, the Company anticipates that the MiniCell leasing process will be
subject to long sales cycles typically associated with significant capital
expenditures. Delay in or the failure to lease the MiniCell could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON GAMMA TECHNOLOGY
Historically, the Company has performed all of its sterilization and
radiation processing services using Gamma radiation. Because of its reliance on
Gamma technology, a decline in the demand for, or the pricing of, Gamma services
would have a material adverse effect on the Company's business, financial
condition and results of operations. To remain competitive, the Company may also
need to respond quickly to technological changes and innovations in the
sterilization and radiation processing market, including changes in the
technologies used to perform sterilization or radiation processing services that
could render Gamma obsolete or noncompetitive. The Company is also dependent
upon continued consumer acceptance of the Gamma sterilization of medical
products and the ongoing conversion of products from EtO to Gamma sterilization.
There can be no assurance that such conversion will occur at the rate
anticipated by the Company. Failure by the Company to quickly and effectively
respond to changes in the sterilization and radiation processing market,
including the development of new technologies, or a significant increase in
consumer resistance to products sterilized by Gamma, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Competition."
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.
SUBSTANTIAL DEBT
As of December 31, 1998, the Company's total consolidated liabilities were
$57.7 million, of which $37.1 million represent long-term debt (including
current portion), its total consolidated assets were $134.8 million and its
total stockholders' equity was $77.1 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 December 31, 1998, the Company had $36.5 million of
tax-free IRBs outstanding with variable interest rates as of December 31, 1998
of either 3.5% or 4.2%. Under federal regulations, the maximum aggregate amount
of tax-free IRBs that the Company may issue is $40.0 million. Once
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the Company has issued the maximum amount of tax-free IRBs, it will be
required to obtain any additional financing through higher cost funding sources.
Each of the Company's IRBs is collateralized by certain assets of the Company.
The Company is also required, under certain IRB agreements, to maintain cash
reserves in the amount of the bond interest payments due within one year. As a
result, such cash is not available to the Company for working capital or other
purposes.
RISKS RELATED TO GOVERNMENT REGULATION AND STANDARDS COMPLIANCE
The Company's business is subject to various federal, state and local laws,
regulations, agency actions and court decisions. Although the Company believes
it has received all licenses and permits necessary to conduct its current
sterilization business, there can be no assurance that the Company will not be
found in violation of applicable requirements or that governmental bodies will
not seek to impose regulatory requirements not now anticipated on the Company
and its business. In addition, the long-term course of regulatory policy cannot
be predicted and, there can be no assurance that laws and regulations will not
be applied in a manner that adversely affects the Company. The imposition of
such regulatory requirements could force the Company to 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
17
<PAGE> 18
involved in such an incident, as well as similar facilities. In the event any
losses or liabilities related to such an incident are underinsured or exceed
accumulated funds, or adequate recovery is not possible, the Company's business,
financial condition and results of operations would be materially adversely
affected.
In addition, the Company may encounter resistance from those in the
communities where it seeks to build additional facilities or be subject to
protests or other actions in areas where it has facilities based on perceived
risk of exposure to radiation on the part of those living in the communities
surrounding the Company's facilities. Any actual or perceived exposure to
radiation as a result of the Company's activities or a failure related to the
Company's safety procedures could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Environmental and Related Risks."
The Cobalt 60 stored in water shielding pools at each of the Company's
facilities is double encapsulated in stainless steel. There can be no assurance
that these stainless steel capsules will not corrode. In 1995, the Company
encountered minor corrosion in the outer encapsulation of certain of its Cobalt
60 rods, requiring their replacement. Since the quantity of Cobalt 60 in a
facility is the key determinant of the amount of product that can be processed,
any significant delay in the replacement of such Cobalt 60 could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if the Company is determined to be responsible for the
corrosion, it could be required to bear the costs of transportation and
reencapsulation of the Cobalt 60. Furthermore, such corrosion, if undetected,
could result in radioactive material being released into the water shielding
pool, which could cause contamination of the pool and potentially the related
facility. Any contamination resulting from such release and the related
decontamination process would have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Risks Related
to Government Regulation and Standards Compliance."
Due to the high energy levels emitted from the electron accelerator in the
Company's E-Beam facility, some residual radiation remains in the cell after the
accelerator is turned off and items that are in the direct path of the beam,
such as equipment and portions of the concrete, may become radioactive for some
period of time. Therefore, although the Company complies with federal and state
regulations with regard to worker safety, workers who enter the E-Beam cell are
exposed to low levels of radiation. Furthermore, the Company may be required to
incur costs in connection with disposal of radioactive material in connection
with the replacement of equipment or upgrading or decommissioning of its E-Beam
facility.
ENVIRONMENTAL AND RELATED RISKS
The Company's operations are subject to regulation by the EPA as well as
state and local governmental agencies. Although there can be no assurance, the
Company believes it currently maintains all licenses and permits necessary to
conduct its current business and that it is in material compliance with
applicable environmental, health and safety laws and regulations. The loss of
any of the Company's licenses or permits could force the Company to suspend or
terminate operations at one or more of its facilities or could otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations.
Pursuant to an Asset Acquisition Agreement effective August 8, 1996 (the
"Asset Agreement"), the Company purchased certain assets of RTI, Inc. ("RTI"),
including property located in Haw River, North Carolina and leasehold interests
in property located in Salem, New Jersey and Rockaway, New Jersey (the "Rockaway
Property"). The Rockaway Property was previously owned and operated by Thiokol
Chemical Corporation ("Thiokol"), and is listed on the Superfund National
Priorities List ("NPL"). In 1992, RTI and Thiokol entered into an Administrative
Consent Order ("ACO") with the New Jersey Department of Environmental Protection
(the "NJDEP") requiring, among other things, implementation of a groundwater
remedy estimated to exceed $2.0 million in costs.
Under the Asset Agreement, RTI retained ownership of the Rockaway Property
and all associated environmental liabilities as of the closing date. RTI agreed
to indemnify and hold the Company harmless from and against any and all claims
which may arise directly or indirectly from any use or release of hazardous
substances on or under the leased premises as of the closing date. In addition,
the Company obtained a letter from the NJDEP stating that the NJDEP will not
institute either judicial or administrative civil proceedings against the
Company for any discharge, deposit, release or disposal of hazardous substances
or pollutants existing at the Rockaway Property, emanating therefrom, or
occurring before the closing. However, the Company is required by the NJDEP to
maintain a standby letter of credit in the amount of $500,000, contingent upon
the continued clean up efforts required of RTI. The required amount of the
letter of credit decreases over the life of the leasehold interest, and/or as
the NJDEP requires. As of August 8, 1998 the required letter of credit amount
was reduced to $460,000 as allowed for in the agreement. 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.
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<PAGE> 19
In the spring of 1985, the Company leased over 400 stainless steel capsules
of radioactive Cesium from the United States Department of Energy (the "DOE")
for use at the Company's Decatur, Georgia and Westerville, Ohio irradiation
facilities. On June 6, 1988, the Company discovered one or more of DOE's Cesium
capsules had leaked radioactive Cesium, which is water soluble, contaminating
the Company's Decatur, Georgia facility. As a result of the contamination, the
Company's Decatur irradiation facility was completely shut down from June 6,
1988 until July 1996, when the Company leased the facility to a third party for
a different purpose. The decontamination activities were conducted by the DOE
and its contractors, and the Company filed an administrative claim with the DOE
for damages the Company incurred as a result of the Cesium contamination. The
DOE did not pay or deny the Company's claim within the required six month
period. As a result, the Company filed suit against the U.S. government in June
1991. Although the DOE had orally offered to fund the costs of the cleanup, the
government subsequently asserted a substantial counterclaim against the Company
alleging that the Company had been negligent in its handling and use of the
Cesium capsules. A settlement was reached between the parties to this litigation
on April 9, 1997, following a trial and notice of appeals filed by both
SteriGenics, the U.S. government and two of its contractors. The presiding court
entered a stipulation of dismissal effective May 9, 1997. While the litigation
resulted in significant expenses and was a significant diversion of management
attention, the Company is not aware of any ongoing environmental or other legal
liabilities associated with the Cesium incident. However, there can be no
assurance that unspecified third parties, including former employees or persons
owning or occupying nearby properties, would not, in the future, assert claims
against the Company in connection with the contamination of the Decatur
facility. In January 1993, after the decontamination activities were completed,
final survey reports were prepared by both a contractor for DOE and by a third
party consultant on behalf of the Georgia Department of Human Resources, which
regulates such matters in Georgia, to allow for the unrestricted use of the
Decatur facility consistent with the requirements of the Georgia Department of
Human Resources. The documentation and data prepared by such third party
indicated that any residual radioactivity at the Decatur facility was beneath
that of regulatory concern to the applicable regulatory authority. While the
Company no longer uses Cesium in any of its facilities, there can be no
assurance that it will not experience any incidents of radioactive contamination
resulting from its use of Cobalt 60. Incidents involving radioactive
contamination from use of Cobalt 60 would likely differ from incidents involving
Cesium contamination in a number of respects. Cesium is a salt and water
soluble, in contrast to Cobalt 60, which is a metal and not water soluble. As a
result, when Cesium contamination occurs, the evaporation of contaminated water
can result in Cesium being spread to a greater extent than would be the case
with substances that are not water soluble, such as Cobalt 60. However, since
Cobalt 60 is a metal and therefore any released amount would remain in a more
concentrated form, direct exposure could potentially be more dangerous. See "--
Risks of Operating Facilities Using Radioactive Material."
RISKS RELATED TO COBALT 60 SUPPLY
To date, the Company has obtained its supply of the Cobalt 60 radioactive
isotope from three sources. The Company's primary sources of Cobalt 60 are 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.
19
<PAGE> 20
RISKS OF BUSINESS INTERRUPTION
Any prolonged disruption in the operations at any of the Company's
facilities, whether due to technical or labor difficulties, equipment
malfunction, regulatory action, destruction of or damage to any facility or
other reasons, would have a material adverse effect on the Company's business,
financial condition and results of operations. This risk is increased since
customers generally seek to have their products sterilized within a 300 mile
radius of their production or distribution facilities and, therefore, it is
often not feasible to transfer products to other facilities in the event of a
prolonged disruption in any facility. The Company is also susceptible to natural
disasters, including earthquakes, hurricanes and tornadoes, as well as other
catastrophic events such as fire. Furthermore, if additional capacity is
required as a result of unplanned increases in demand for the Company's
services, the Company may suffer delays and increased costs in establishing
other facilities or increasing production at existing facilities that could
adversely affect customer relationships, cause a loss of market opportunities
and have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the failure to effectively
implement any design or process changes could disrupt the sterilization process,
which could also adversely affect customer relationships, cause a loss of market
opportunities and have a material adverse effect on the Company's business,
financial condition and results of operations.
MANAGING GROWTH; RECENT AND POTENTIAL ACQUISITIONS
The Company 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
20
<PAGE> 21
no assurance that the Company will not be held liable for damages that are
alleged to result from improper dosing or incorrect dosage instructions received
from a customer. The Company currently maintains product liability insurance
with a claims limit of $5.0 million per claim and $5.0 million in the aggregate.
However, there can be no assurance that the Company will avoid significant
product liability claims and attendant adverse publicity. Furthermore, there can
be no assurance that the Company's product liability insurance is adequate or
that such insurance coverage will remain available at acceptable costs. A
successful claim brought against the Company in excess of its insurance coverage
could have a material adverse effect on the Company's business, financial
condition and results of operations. Additionally, adverse product liability
actions could negatively affect market acceptance of the Company's services and
the Company's ability to obtain and maintain regulatory approval for its
products.
NEED FOR ADDITIONAL CAPITAL
The Company requires substantial working capital to fund its business,
particularly for capital expenditures, including the construction of its
facilities and acquisition of Cobalt 60. There can be no assurance that as a
result of acquisitions, lower than anticipated cash flows or other unforeseen
events the Company will not require additional debt or equity financing.
Further, there can be no assurance that additional financing, if required, will
be available to the Company on acceptable terms, if at all. If adequate funds
are not available, the Company may be required to delay, scale back or eliminate
its planned expansion, acquisitions or research, development and engineering
programs. Accordingly, the inability to obtain or difficulty in obtaining such
financing could have a material adverse effect on the Company's business,
financial condition and results of operations.
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company relies on a combination of copyright and trade secret protection
and nondisclosure agreements to protect its proprietary rights. In addition, the
Company has a U.S. patent application pending on its MiniCell. There can be no
assurance, however, that patent and copyright law and trade secret protection
will be adequate to deter misappropriation of its technology, that any patents
issued to the Company will not be challenged, invalidated or circumvented, that
the rights granted thereunder will provide competitive advantages to the
Company, or that the claims under any patent application will be allowed.
Furthermore, there can be no assurance that others will not independently
develop similar processes or designs, duplicate the Company's processes or
design around any patents issued to the Company. The Company may be subject to
or 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
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<PAGE> 22
a substantial effect on the market prices of securities of many companies for
reasons frequently unrelated or disproportionate to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the Company's Certificate of Incorporation may have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire control of the Company.
The Company's Certificate of Incorporation allows the Board of Directors to
issue and determine the rights, powers and preferences of Preferred Stock
without any vote or further action by the stockholders, and certain provisions
of the Company's Certificate of Incorporation and Bylaws eliminate the right of
stockholders to act by written consent without a meeting, and specify procedures
for director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings. Certain provisions of Delaware law could
also delay or make more difficult a merger, tender offer or proxy contest
involving the Company, including Section 203 of the Delaware General Corporation
Law, which prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years unless
certain conditions are met. The possible issuance of Preferred Stock, the
procedures required for director nominations and stockholder proposals and
Delaware law could have the effect of delaying, deferring or preventing a change
in control of the Company, including without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of the
Company's Common Stock. These provisions could also limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - NOT
APPLICABLE
22
<PAGE> 23
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - NOT APPLICABLE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the registration statement for the Company's initial
public offering, filed on Form S-1 under the Securities Act of 1933 (File No.
333-30047), was August 13, 1997 (the "IPO Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on August 13,
1997 and all securities offered were sold in the offering. The managing
underwriters for the offering were PaineWebber Incorporated, Piper Jaffray Inc.
and Wheat First Butcher Singer.
Pursuant to the IPO Registration Statement, the Company sold 2,000,000
shares of its Common Stock for an aggregate offering price of $24.0 million.
The Company incurred expenses of approximately $2.6 million of which
approximately $1.7 million represented underwriting discounts and commission and
approximately $0.9 million represented other expenses related to the offering.
The net offering proceeds to the Company after total expenses were $21.4
million.
As of December 31, 1998, the Company has used approximately $3.3 million on
land and building purchases, $5.0 million on the purchase of Cobalt 60, $5.0
million on the acquisition of certain assets of the Nicolet Electron Services
Division of ThermoSpectra Corporation, and $ 4.7 million on the early retirement
of capital lease debt. The remaining net proceeds have been invested in cash and
cash equivalents. The use of the proceeds from the offering does not represent a
material change in the use of the proceeds described in the prospectus.
The effective date of the registration statement for the Company's
follow-on public offering, filed on Form S-1 under the Securities Act of 1933
(File No. 333-45563), was February 26, 1998 (the "Follow-On Registration
Statement"). The class of securities registered was Common Stock. The offering
commenced on February 26, 1998 and all securities were sold in the offering. The
managing underwriters for the offering were PaineWebber Incorporated and Piper
Jaffray Inc.
Pursuant to the Follow-On Registration Statement, the Company sold 575,000
shares of its Common Stock for an aggregate offering price of $9.8 million. Also
pursuant to the Follow-On Registration Statement, certain selling stockholders
sold 1,425,000 shares of Common Stock of the Company for an aggregate offering
price of $24.2 million.
The Company incurred expenses of approximately $2.4 million of which
approximately $1.9 million represented underwriting discounts and commission and
approximately $0.5 million represented other expenses related to the offering.
The net offering proceeds to the Company and the selling shareholders after
total expenses were $9.2 million and $22.9 million, respectively.
All net proceeds have been invested in cash, cash equivalents and
short-term investments. The use of proceeds from the offering does not represent
a material change in the use of the proceeds described in the prospectus.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- NOT APPLICABLE
ITEM 5. OTHER INFORMATION -- NOT APPLICABLE
23
<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
The exhibits listed in the accompanying Exhibit Index are filed or
incorporated by reference as part of this Report.
(b) REPORTS ON FORM 8-K.
There were no reports filed during the quarterly period ending December
31, 1998.
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<PAGE> 25
SIGNATURES
Pursuant to the requirements 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.
February 16, 1999 /s/ Thomas J. Balutis
- -------------------------------- ---------------------------------------------
Date Thomas J. Balutis,
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)
February 16, 1999 /s/ Carole-Lynn S. Glass
- -------------------------------- ---------------------------------------------
Date Carole-Lynn S. Glass,
Corporate Controller and Director of Finance
(Principal Accounting Officer)
25
<PAGE> 26
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
3.1++ Certificate of Incorporation of the Registrant, as amended to date.
3.3++ Bylaws of the Registrant.
4.1++ Reference is made to Exhibits 3.1 and 3.3.
4.2++ Specimen Common Stock certificate.
4.3++ Investors' Rights Agreement, dated September 20, 1993 among the Registrant and the
investors and the founders named therein.
4.4* Registration Rights Agreement, dated December 31, 1997 among the Registrant and
ThermoSpectra Corporation.
10.1++ Form of Indemnification Agreement.
10.2++ Second Amended and Restated 1986 Stock Option Plan.
10.3++ 1997 Equity Incentive Plan.
10.4++ 1997 Employee Stock Purchase Plan.
10.5++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985A
($2,150,000) -- Loan Agreement.
10.6++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985B
($2,450,000) -- Loan Agreement.
10.7++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985A
($2,150,000) -- Trust Indenture Agreement.
10.8++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985B
($2,450,000) -- Trust Indenture Agreement.
10.9++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond -- Bond Purchase Agreement.
10.10++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985A
($2,150,000) -- Reimbursement Agreement.
10.11++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985B
($2,450,000) -- Reimbursement Agreement.
10.12++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985A
($2,150,000) -- Letter of Credit.
10.13++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985B
($2,450,000) -- Letter of Credit.
10.14++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985A
($2,150,000) -- Intercreditor Agreement.
10.15++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985B
($2,450,000) -- Intercreditor Agreement.
10.16++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985A
($2,150,000) -- Pledge and Security Agreement.
10.17++ Trinity River Industrial Development Authority Variable Rate
Demand Industrial Development Revenue Bond Series 1985B
($2,450,000) -- Pledge and Security Agreement.
10.18++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond -- General Continuing Guarantee.
10.19++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond -- Company Security Agreement.
10.20++ Trinity River Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bond -- Guaranty Security Agreement.
10.21++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds
($4,900,000) -- Loan Agreement.
10.22++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds
($4,900,000) -- Trust Agreement.
10.23++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds
($4,900,000) -- Letter of Credit Agreement.
10.24++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds
($4,900,000) -- General Continuing Guaranty.
10.25++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds
($4,900,000) -- Pledge and Security Agreement.
10.26++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds
($4,900,000) -- Bond Purchase Agreement.
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
<S> <C>
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.
10.57++ Facility lease dated June 25, 1997 between Charles King & Associates and the Registrant
for the Tustin facility.
10.58++ Facility lease dated June 25, 1997 between Charles King & Associates and the Registrant
for the Schaumburg facility.
10.59++ Facility lease dated December 2, 1991 between Galloway Industrial
Properties and the Registrant for the Westerville warehouse
facility.
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C>
10.60++ Facility lease dated February 8, 1993 between Aetna Investment Group and the Registrant
for the Corona facility.
10.61++ Facility lease dated August 16, 1996 between SCI Ltd. Partnership and the Registrant
for the Hayward facility.
10.62++ Facility lease dated August 8, 1996 between RTI Inc. and the Registrant for the
Rockaway facility.
10.63++ Asset Acquisition Agreement between RTI Inc. and the Registrant effective as of August
8, 1996.
10.64** Asset Acquisition Agreement between RSI Leasing, Inc.,
ThermoSpectra Corporation and the Registrant dated December 27,
1997.
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.
27.1**** Financial Data Schedule.
</TABLE>
- ----------
++ Incorporated by reference from the exhibit of the same number in
the Registrant's Registration Statement on Form S-1
(Registration No. 333-30047) as filed with the SEC on June 24, 1997.
* Incorporated by reference from Exhibit 4.1 of the Registrant's SEC
Filing on Form 8-K as filed with the SEC on January 14, 1998.
** Incorporated by reference from Exhibit 2.1 of the Registrant's SEC
filing on Form 8-K as filed with the SEC on January 14, 1998.
*** 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.
**** Included with this filing.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1998.
28
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,641
<SECURITIES> 0
<RECEIVABLES> 6,150
<ALLOWANCES> 205
<INVENTORY> 0
<CURRENT-ASSETS> 42,474
<PP&E> 142,165
<DEPRECIATION> 57,367
<TOTAL-ASSETS> 134,794
<CURRENT-LIABILITIES> 11,176
<BONDS> 35,570
0
0
<COMMON> 8
<OTHER-SE> 77,046
<TOTAL-LIABILITY-AND-EQUITY> 134,794
<SALES> 40,798
<TOTAL-REVENUES> 40,798
<CGS> 20,660
<TOTAL-COSTS> 20,660
<OTHER-EXPENSES> 10,399
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,693
<INCOME-PRETAX> 9,517
<INCOME-TAX> 3,746
<INCOME-CONTINUING> 5,771
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,771
<EPS-PRIMARY> .74
<EPS-DILUTED> .69
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