<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1998
REGISTRATION NO. 333-60153
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7389 36-3552153
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
2001 SPRING ROAD, SUITE 500
OAK BROOK, ILLINOIS 60523-1887
TELEPHONE (630) 571-1280
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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KEVIN M. SWAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
2001 SPRING ROAD, SUITE 500
OAK BROOK, ILLINOIS 60523-1887
TELEPHONE: (630) 571-1280
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
Copies to:
<TABLE>
<S> <C>
JOHN C. BLEW, ESQ. LOUIS E. ROSEN, ESQ.
BELL, BOYD & LLOYD LORD, BISSELL & BROOK
THREE FIRST NATIONAL PLAZA 115 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60602 CHICAGO, ILLINOIS 60603
TELEPHONE: (312) 372-1121 TELEPHONE: (312) 443-0700
</TABLE>
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Amending the Prospectus
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1998
PROSPECTUS
2,500,000 SHARES
[GRIFFITH MICRO SCIENCE LOGO]
CLASS A COMMON STOCK
All of the shares of Class A Common Stock offered hereby (the "Offering")
are being issued and sold by Griffith Micro Science International, Inc. (with
its subsidiaries and predecessors, the "Company" or "Griffith Micro Science"
unless the context otherwise requires).
The Company has two classes of Common Stock, Class A Common Stock and Class
B Common Stock (collectively, the "Common Stock"). Except with respect to voting
and conversion, the rights of the holders of Class A Common Stock and Class B
Common Stock are substantially identical. Each share of Class A Common Stock is
entitled to one vote and each share of Class B Common Stock is entitled to ten
votes. See "Description of Capital Stock -- Recapitalization" and "-- Class A
Common Stock and Class B Common Stock."
All of the outstanding capital stock of the Company is currently owned by
Griffith Laboratories International, Inc., a subsidiary of Griffith
Laboratories, Inc. (collectively, the "Parent Company" unless the context
otherwise requires). Upon completion of the Offering, the Parent Company will
continue to own all of the outstanding shares of Class B Common Stock and will
hold 67.6% of the total number and have 95.4% of the combined voting power of
the outstanding shares of both classes of Common Stock. A total of approximately
$12.2 million of the net proceeds of the Offering will be used by the Company to
discharge indebtedness owing to the Parent Company. See "Use of Proceeds."
Prior to the Offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering price
per share will be between $13.00 and $15.00. For factors which are expected to
be considered in determining the initial public offering price, see
"Underwriting." Application has been made for the listing of the Class A Common
Stock on the Nasdaq National Market under the symbol "GMSI."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF CLASS A COMMON
STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share $ $ $
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Total(3) $ $ $
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</TABLE>
(1) The Company and Griffith Laboratories International, Inc. have agreed to
indemnify the Underwriters against certain liabilities, including
liabilities arising under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated expenses of $900,000 which are payable by the
Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 375,000 shares of Class A Common Stock, at the Price to
Public, less the underwriting discount, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discount, and Proceeds to Company will be $ , $ ,
and $ , respectively. See "Underwriting."
---------------------
The shares of Class A Common Stock offered hereby are offered severally by
the Underwriters, as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that delivery of the shares of Class A Common Stock will be made
against payment therefor in Chicago, Illinois on or about , 1998.
ABN AMRO INCORPORATED ROBERT W. BAIRD & CO.
INCORPORATED
, 1998
<PAGE> 3
GRIFFITH MICRO SCIENCE NETWORK
[MAP OF NORTH AMERICA AND EUROPE]
- - Sterilization Facility * Headquarters O Sterilization and Laboratory
Facility
---------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information contained in this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised and, except in the Consolidated
Financial Statements and notes thereto, gives effect to the recapitalization of
the Company described under "Description of Capital Stock -- Recapitalization."
As used in this Prospectus in conjunction with any given year, the term "Fiscal"
refers to the fiscal year of the Company which ended on September 30. For
example, Fiscal 1997 ended on September 30, 1997.
THE COMPANY
Griffith Micro Science is a major multinational provider of sterilization
management services with extensive operations in both North America and Europe.
The Company offers comprehensive sterilization processing and related laboratory
testing, consulting and logistics management services to manufacturers of single
use medical devices and, to a much lesser extent, pharmaceuticals, cosmetics and
food products. The Company pioneered the development and use of ethylene oxide
as a sterilant beginning in the 1930s. It currently operates a network of eleven
ethylene oxide sterilization facilities in North America (eight in the United
States, two in Canada and one in Mexico) and a network of seven ethylene oxide
sterilization facilities in Europe. The Company began offering gamma
sterilization services in 1997 through the acquisition of a gamma sterilization
facility in Belgium. The Company has also formed a joint venture to design,
construct and operate a gamma sterilization facility in Mexico. Over the past
five years, the Company has opened three new sterilization facilities, acquired
five others, replaced one and closed one.
Of the Company's Fiscal 1997 net revenues of $60.2 million, approximately
61% was derived from its operations in North America and 39% from its operations
in Europe. In Fiscal 1997, the Company provided sterilization management
services to approximately 530 customers in North America and approximately 980
customers in Europe. The Company's customers range in size from large
multinational corporations to small local enterprises. The Company's largest
customers include many of the world's major medical products manufacturers, such
as: Abbott Laboratories; Allegiance Healthcare Corporation; Baxter
International, Inc.; Becton, Dickinson and Co.; The Kendall Company (a
subsidiary of Tyco International, Ltd.); Mallinckrodt Inc.; Medtronic, Inc.;
Merck & Co., Inc.; Pfizer, Inc.; and Schering-Plough Corporation. The Company's
five largest customers accounted for approximately 38% of its net revenues in
Fiscal 1997, including one customer, Allegiance Healthcare Corporation, which
accounted for approximately 20% of net revenues.
A substantial portion of single use prepackaged medical devices and kits
are required by government regulation in the United States and many other
countries to be "sterile" or to have minimal levels of microbial contamination
when sold. In addition, other products, such as pharmaceuticals, cosmetics,
spices and herbs, frozen and dried foods, and animal feed, undergo sterilization
processing to improve their safety, reduce microbial contamination and extend
shelf-life. Manufacturers sterilize their products after assembly and packaging
using either or both of their own in-house sterilization facilities ("captive
processors") or the services of commercial sterilization processing companies
such as Griffith Micro Science ("contract processors"). The two most widely used
methods of commercial sterilization utilize either ethylene oxide in gaseous
form ("ethylene oxide sterilization") or gamma radiation from a radioactive
Cobalt 60 isotope ("gamma sterilization"). Other methods include E-beam
sterilization ("E-beam"), accomplished using a high-energy electron beam, and
steam sterilization, which to date have only been employed to a limited extent
for contract sterilization. Eighteen of the Company's 19 sterilization
facilities currently utilize ethylene oxide sterilization; the other utilizes
gamma sterilization.
Although the Company is not aware of any published industry statistics and
precise numbers are difficult to determine, the Company estimates that in 1997
the market for sterilization services in North America and those European
countries in which the Company has sterilization facilities was approximately
$500 million, consisting of approximately $300 million in aggregate net revenues
generated by contract processors (approximately $200 million in North America
and $100 million in Europe) and $200 million in equivalent net revenue value for
products sterilized by captive processors (approximately $140 million in North
America
3
<PAGE> 5
and $60 million in Europe). Of this total market, the Company estimates that
slightly more than 50% was attributable to ethylene oxide sterilization,
approximately 40% to 45% to gamma sterilization and the balance to E-beam and
other forms of sterilization. The principal sources for the foregoing market
estimates were publicly available information of certain other contract and
captive processors, information received from customers and the knowledge of and
experience within the industry of the Company's management in North America and
Europe.
Beginning in Fiscal 1995 under new senior management, the Company initiated
a comprehensive program to: (i) increase its sterilization processing capacity;
(ii) strengthen the quality and training of its personnel; (iii) improve the
process capability as well as the efficiency of its operations on a system-wide
basis; (iv) expand its customer base; (v) provide greater focus to and expand
the laboratory services it offers; and (vi) broaden its service offering to
include gamma sterilization, sterilization consulting and logistics management.
These efforts, together with a continuing trend by manufacturers of single use
medical devices to use contract processors for their sterilization requirements,
have resulted in compound annual growth rates for the Company of 14.1% and 65.6%
in net revenues and pro forma operating profit, respectively, during the
three-year period ended September 30, 1997.
The Company's primary strategic objective is to expand and strengthen its
position as the largest multi-national provider of a full range of sterilization
management services. The Company believes the extensive experience, know-how,
expertise and data it has gathered over the more than 60 years since it
pioneered the use of ethylene oxide as a sterilant has created a significant and
unique core competency, which it refers to as its "scientific platform." The
Company's business strategy is to continue to take advantage of its scientific
platform, enhancing its position as a full service provider of comprehensive
sterilization management services and allowing it to further pursue "Value
Managed Relationships" with its customers. The key components of this strategy
include: (i) expanding its core medical device sterilization business; (ii)
optimizing the sterilization process through continuous improvement programs
with customers; (iii) broadening its laboratory and related service offerings;
and (iv) expanding its processing of non-medical products.
All of the outstanding capital stock of the Company is currently owned by
Griffith Laboratories International, Inc. which in turn is wholly owned by
Griffith Laboratories, Inc. Upon completion of the Offering, the Parent Company
will continue to own all of the outstanding shares of Class B Common Stock and
will hold 67.6% of the total number and have 95.4% of the combined voting power
of all outstanding shares of Common Stock. As a result, the Parent Company will
be able to control the election of directors and the vote on other matters
submitted to the Company's stockholders, including the approval of extraordinary
corporate transactions. In addition, two of the Company's directors, including
Dean L. Griffith, its Chairman of the Board, are directors and senior officers
of the Parent Company, which was organized in 1919. Mr. Griffith, members of his
family and trusts established for their benefit collectively beneficially own a
substantial majority of the voting stock of the Parent Company. There is no
public market for the stock of the Parent Company.
The Company was organized in 1987 under the laws of Delaware. Its corporate
headquarters is located at 2001 Spring Road, Suite 500, Oak Brook, Illinois
60523-1887 and its telephone number is (630) 571-1280.
RISK FACTORS
An investment in the shares of Class A Common Stock being offered hereby
involves a high degree of risk. Accordingly, prospective purchasers should
carefully consider each of the risk factors set forth beginning on page 7, as
well as the other information set forth in this Prospectus.
4
<PAGE> 6
THE OFFERING
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<S> <C>
Class A Common Stock offered by the Company................. 2,500,000 shares
Common Stock to be outstanding after the Offering(1):
Class A Common Stock...................................... 2,500,000 shares(2)
Class B Common Stock...................................... 5,225,000 shares(3)
----------------------------------
Total............................................. 7,725,000 shares
==================================
Use of Proceeds............................................. To repay approximately $12.2
million of short-term debt payable
to the Parent Company (incurred in
payment of a dividend), to repay
short-term bank debt and for
general corporate purposes,
including capital expenditures.
See "Use of Proceeds."
Proposed Nasdaq National Market Symbol for
Class A Common Stock...................................... GMSI
</TABLE>
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(1) Two classes of Common Stock will be outstanding after the Offering: Class A
Common Stock, entitled to one vote per share, which will be owned by the
public stockholders; and Class B Common Stock, entitled to ten votes per
share, which will be owned by the Parent Company. The two classes of Common
Stock generally will vote as a single class with respect to all matters
submitted to a vote of stockholders. Class B Common Stock will be
convertible into Class A Common Stock on a share-for-share basis at the
option of the holder at any time or upon transfer to a person or entity
which is not a Permitted Transferee (as defined). See "Description of
Capital Stock."
(2) Excludes 179,000 shares of Class A Common Stock issuable upon exercise of
options to be granted under the Company's 1998 Employee Stock Option Plan
and its 1998 Director Stock Option Plan effective on the date of the
Offering at an exercise price per share equal to the initial public offering
price. See "Management -- 1998 Director Stock Option Plan" and "-- Employee
Stock Option Plans -- 1998 Plan."
(3) Excludes 504,306 shares of Class B Common Stock subject to options
outstanding at June 30, 1998 at a weighted average exercise price per share
of $7.45 which were granted by the Company under its 1996 Key Employee Stock
Option Plan. See "Management -- Employee Stock Option Plans -- 1996 Plan."
5
<PAGE> 7
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net revenues..................... $ 37,184 $ 40,587 $ 50,117 $ 54,771 $ 60,247 $ 44,111 $ 54,953
Gross profit..................... 13,270 12,344 15,275 16,452 19,602 14,198 17,628
Royalty expense to Parent
Company(1)..................... 1,653 1,911 2,275 2,481 2,747 2,027 2,432
Operating profit(1).............. 4,589 152(2) 2,912 3,800 4,852 3,667 4,950
Interest expense, net............ 335 822 1,705 1,355 875 711 783
Earnings (loss) before income
taxes.......................... 4,231 (1,277) 1,056 2,761 3,699 2,806 3,797
Net earnings (loss).............. $ 2,633 $ (816) $ 1,017 $ 1,784 $ 2,726 $ 1,742 $ 2,294
Diluted net earnings (loss) per
common share(3)................ $ 0.50 $ (0.16) $ 0.19 $ 0.34 $ 0.52 $ 0.33 $ 0.43
Adjusted diluted net earnings per
common share(3)(4)............. $ 0.45 $ 0.37
Weighted average number of common
shares and dilutive potential
common shares outstanding(3)... 5,225,000 5,225,000 5,225,000 5,225,000 5,242,782 5,242,782 5,291,286
PRO FORMA DATA (UNAUDITED):
Operating profit(5).............. $ 7,099 $ 7,007
Net earnings(5).................. $ 4,431 $ 3,575
Diluted net earnings per common
share(3)(5).................... $ 0.85 $ 0.68
CASH FLOW DATA:
Depreciation and amortization.... $ 3,664 $ 4,380 $ 5,380 $ 5,884 $ 6,108 $ 4,564 $ 5,629
Capital expenditures............. 6,864 23,189(6) 8,533 3,943 8,885(6) 3,560 19,671(6)
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
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ACTUAL ADJUSTED(7)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................... $(25,590)(8) $ 6,060
Total assets................................................ 81,476 86,247
Long-term debt, less current portion........................ 17,015 17,015
Stockholders' equity........................................ 17,851 49,501
</TABLE>
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(1) For all periods presented the Company has paid to the Parent Company a
royalty (classified as an operating expense) equal to 5% of net revenues
from ethylene oxide sterilization management services for the license of
certain intellectual property owned by the Parent Company. Effective upon
completion of the Offering, the Parent Company will assign this intellectual
property to the Company and the royalty payment to the Parent Company will
cease.
(2) Operating profit for Fiscal 1994 is net of costs associated with the closing
of a sterilization facility in Bound Brook, New Jersey. These costs include
approximately $1,264 for equipment value write downs and dismantling charges
and $147 for severance payments.
(3) The earnings per share and weighted average number of common shares
outstanding give effect to the 5.5 for one stock reclassification to occur
as part of the recapitalization of the Company described under "Description
of Capital Stock -- Recapitalization."
(4) The adjusted diluted net earnings per common share for Fiscal 1997 and the
nine months ended June 30, 1998 assume that the proceeds from the sale of
874,286 of the shares of Class A Common Stock offered hereby, at an assumed
initial public offering price of $14.00 per share, will be used to discharge
the $12,000 note payable (plus accrued interest) that was issued to the
Parent Company on June 1, 1998 in payment of a dividend. Accordingly, an
additional 874,286 shares of Class A Common Stock have been added to the
weighted average number of common shares and dilutive potential common
shares outstanding shown in the table for each of those two periods for the
purpose of calculating their adjusted diluted net earnings per common share.
See "Use of Proceeds."
(5) Pro forma operating profit for Fiscal 1997 and the nine months ended June
30, 1998 include the following adjustments: (i) the elimination of the 5%
royalty payable to the Parent Company; and (ii) the inclusion of an
incremental amount payable to the Parent Company under the Administrative
Services Agreement estimated to be $500 per year (see "Relationship with
Parent Company -- Administrative Services Agreement"). Pro forma net
earnings and diluted net earnings per common share for those periods also
include adjustments for (x) assumed interest savings of $67 and $63,
respectively, from the net cash flows resulting from the adjustments in (i)
and (ii) above; and (y) an increase in estimated income tax expense of $609
and $839, respectively, resulting from the foregoing adjustments.
6
<PAGE> 8
(6) Capital expenditures for Fiscal 1994, Fiscal 1997 and the nine months ended
June 30, 1998 include $8,138, $2,585 and $9,727, respectively, for
acquisitions.
(7) The adjusted balance sheet data as of June 30, 1998 gives effect to the sale
by the Company of the shares of Class A Common Stock offered hereby at an
assumed initial public offering price of $14.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
(8) The working capital (deficit) at June 30, 1998 results primarily from a
$12,000 note payable to the Parent Company which was issued June 1, 1998 in
payment of a dividend, $9,600 of short-term debt incurred for the
acquisition of Sorex Medical, Inc. and $5,218 of other short-term borrowings
primarily incurred for capital expenditures.
7
<PAGE> 9
RISK FACTORS
AN INVESTMENT IN THE CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
ACCORDINGLY, PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY EACH OF THE RISK
FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS
PROSPECTUS, PRIOR TO INVESTING IN THE SHARES OF CLASS A COMMON STOCK OFFERED
HEREBY.
SUBSTANTIAL DEPENDENCE ON THE STERILIZATION OF SINGLE USE MEDICAL DEVICES
In Fiscal 1997, the Company derived approximately 86% of its net revenues
from the provision of sterilization management services to manufacturers of
single use medical devices. The Company anticipates that its sterilization
management services for such products will continue to provide a substantial
majority of the Company's net revenues for the foreseeable future. Accordingly,
the future growth of the Company is dependent in large part upon continued
growth in the market for single use medical devices in North America, Europe and
any other regions or countries in which the Company subsequently establishes
sterilization facilities.
There are several developments which could adversely affect the market for
single use medical devices. In North America and Europe environmental and health
and safety concerns have been raised concerning the proper disposal of such
devices following their use. If any significant disposal restrictions or
requirements are imposed which materially increase the cost or administrative
burden of the disposal process, hospitals and other end users of such devices
might increase their use of reusable medical products. Also, in various
countries in which the Company operates, including the United States, there are
government and private insurance company efforts to change or reform the way in
which healthcare is delivered and paid for. The Company believes that these
efforts to contain or reduce healthcare costs are likely to continue. This could
result in fewer and shorter hospital stays and a reduction in the number and
nature of medical procedures which are performed. Were either or both of these
developments to lead to a material increase in reusable medical products or a
decrease in the use of hospitals or reduction in medical procedures, demand for
the Company's services could be adversely affected. See "Business -- The
Sterilization Processing Industry" and "-- Customers."
CUSTOMER CONCENTRATION
The Company's five largest customers accounted for approximately 38% of its
net revenues in Fiscal 1997, including one customer, Allegiance Healthcare
Corporation, which accounted for approximately 20% of net revenues. The loss by
the Company of any of these major customers, or any substantial reduction in the
volume of their business with the Company, could have a material adverse effect
on the Company's business, financial condition and results of operations. In
October 1998, Allegiance and Cardinal Health, Inc. announced an agreement to
merge the two companies pursuant to which Allegiance would operate as a wholly
owned subsidiary of Cardinal Health, Inc. Cardinal Health, Inc., headquartered
in Dublin, Ohio, is a wholesale distributor of pharmaceuticals, surgical and
hospital supplies, and health and beauty aids to retail drug stores, hospitals
and other health care providers. The Company does not believe that the proposed
merger, if consummated, will have any adverse effect on the Company's commercial
relationship or the volume of business it does with Allegiance.
In addition, at three of the Company's sterilization facilities in the
United States, the business from Allegiance Healthcare Corporation accounts for
a substantial majority of the total net revenues generated by that facility. Any
substantial reduction in the volume of business at any individual sterilization
facility of the Company could also have a material adverse effect on the
Company's business, financial condition and results of operations due to the
significant level of fixed operating costs at each of the Company's
sterilization facilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Customers."
LIKELY FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
There can be no assurance that the Company's net revenues will grow or be
sustained in future periods or that the Company will maintain its current
profitability in the future. In addition, the Company has
8
<PAGE> 10
experienced, and expects to continue to experience, significant fluctuations in
net 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. An important cause of such quarterly
fluctuations has been material increases or decreases in demand by the Company's
customers for its ethylene oxide sterilization services, resulting from such
factors as changes in customers' product mix or sterilization technology
preferences or in the demand for their products. Another important factor has
been the timing of the opening of new operating facilities or of significant
capacity expansions at existing facilities. In addition to the substantial
capital requirements which capacity expansion entails, the start-up of a new
facility typically involves substantial added costs and any new facility
typically requires several years before achieving profitability.
As a result of these and other factors, it is likely that in one or more
future quarters or other interim reporting periods the Company's operating
results will be less favorable than the estimates made by or the expectations of
market analysts or investors and may be materially lower than the prior period
in the same fiscal year or the comparable period of the prior fiscal year. In
either event, the prevailing market price of the Class A Common Stock could be
materially adversely affected. See "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Quarterly Results."
CHANGES IN EXCHANGE RATES
Exchange rates between the United States dollar, in which the Company's
results are reported, and the local currency in each of the seven foreign
countries in which the Company currently operates, may fluctuate from quarter to
quarter. Since the Company reports its interim and annual results in United
States dollars, it is subject to the risk of translation losses for reporting
purposes. Whenever the United States dollar gains against the local currency in
any reporting period, the actual earnings generated by the Company's operations
in that country are diminished in translation. Additionally, to the extent the
Company's foreign operations' revenue and expense transactions are not
denominated in the local currency and/or to the extent the Company's foreign
earnings are not reinvested overseas, the Company is also subject to the risk of
transaction losses (actual financial losses occurring when the currency of one
country is exchanged for the currency of another country). In Fiscal 1997,
approximately 47% of the Company's net revenues were derived from operations
outside the United States. Consequently, translation and transaction losses
could be significant in any given reporting period. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations".
On January 1, 1999 eleven members of the European Union will adopt the euro
as their common legal currency. From January 1, 1999 through January 1, 2002 the
local currencies will remain legal tender as sub-denominations of the euro in
the eleven countries and parties may use either the euro or the local currencies
to pay for goods and services. Beginning on January 1, 2002 the participating
countries will withdraw their local currencies and introduce the new euro
denominated currency. After July 1, 2002 the euro will be the only legal tender
for the participating countries. In Fiscal 1997, approximately 39% of the
Company's net revenues were derived from its operations within the European
Union. As such, the Company will be faced with the risks and challenges related
to the introduction of the euro which may include: (i) greater competition and
price sensitivity due to cross-border price transparency; (ii) increased demands
on or the need for modification or replacement of existing management
information systems to accommodate dual currencies during the transition period
and euro currency translation and decimal requirements; (iii) increased currency
exchange rate risk and derivatives exposure; and (iv) the impact on the
continuity of significant contracts. The inability of the Company to address
these risks satisfactorily and on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- European Monetary Union."
RISKS RELATED TO DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments, principally cap,
collar and swap agreements, to manage the impact of movements in interest rates
on certain of its floating rate debt. Additionally, the
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Company has in the past entered into forward currency contracts to hedge
selected transaction cash flows. It is the Company's intention to continue to
utilize derivative financial instruments, as it deems appropriate, to manage its
interest rate and currency risks in the future. While the Company does not hold
or issue derivative financial instruments for trading purposes nor is it party
to any leveraged derivatives, it remains subject to various risks which are
inherent in such transactions.
Derivative contracts are subject to the changes in the market price of the
underlying instruments. As such, hedging activities involving highly volatile
instruments can yield significant unintended adverse results. Additional risk
may result if the Company hedges its exposures using an index or basis other
than that of the underlying exposure, such as purchasing a LIBOR interest rate
contract to hedge a group of individual European interest rate exposures. The
use of derivative financial instruments which are not exchange traded also
carries with it a liquidity risk in which the derivative cannot be purchased or
sold quickly enough or in sufficient quantities at a fair price to achieve the
result intended by the Company. In entering into derivative transactions the
Company assumes the credit risk which might arise due to the inability of the
counterparty to meet the terms of the contract and the potential for systemic
risk whereby a default outside of the Company's transaction impairs the ability
of the counterparty to its transaction to perform. Derivative instruments also
may carry certain legal risks, which vary from country to country. The most
common legal risk relates to documentation and enforceability. If the Company
does not comply with the applicable legal and documentation requirements in the
countries where derivatives are used, losses could result due to unenforceable
contracts. Finally, the actual cost to the Company of entering into hedge
transactions, in terms of cash requirements and opportunity cost, could exceed
the expected benefits. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
AVAILABILITY OF ALTERNATIVE TECHNOLOGIES
All but one of the Company's 19 sterilization facilities currently employ
ethylene oxide technology exclusively. Certain of the Company's competitors
utilize alternative sterilization technologies, principally gamma radiation, in
some or all of their processing facilities. Gamma radiation has certain
advantages over ethylene oxide as a sterilant. As a result of these advantages,
while the business of both ethylene oxide and gamma contract processors has
grown rapidly during the past ten years, the use of gamma sterilization
increased at a significantly faster rate as many medical device manufacturers
which could easily do so converted certain of their products from ethylene oxide
to gamma sterilization and designed certain new products and packaging to be
gamma compatible. Any significant further shift by manufacturers of single use
medical devices in their sterilization technology requirements from ethylene
oxide to gamma or other technologies would likely have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, any effort by the Company to effect a material and rapid conversion of
its facilities to gamma or some other sterilization technology or to rapidly
establish a number of new facilities employing such an alternative technology,
whether as a result of regulatory changes, customer preferences or some other
reason, would not be financially or operationally feasible. See "Business -- The
Sterilization Processing Industry," "-- Competition" and "-- Regulatory,
Environmental and Health and Safety Matters."
The Company believes that operating margins for most gamma facilities are
higher than the margins for comparable ethylene oxide facilities, primarily due
to the higher capital costs typically required to build and equip an ethylene
oxide facility and the higher operating costs typically required to run the
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
HEALTH AND SAFETY RISKS OF ETHYLENE OXIDE AND GAMMA
Ethylene oxide is a toxic and hazardous chemical which is flammable and
explosive. It has also been identified as a cancer and reproductive hazard. The
Cobalt 60 isotope used in gamma sterilization is highly radioactive and
corrosive. As a result, the operation of the Company's ethylene oxide and gamma
facilities involves special safety risks and potential liabilities resulting
from exposure to ethylene oxide or radioactive material or from an explosion or
fire involving the use of ethylene oxide and the possible business interruption
associated with any such explosion or fire. The Company is also subject to a
variety of specific regulatory, health and safety and environmental requirements
stemming from the use of these hazardous materials.
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Health risks. The cancer and reproductive hazards associated with exposure
to ethylene oxide subject the Company to the risk of liability claims being made
against it by workers and others who are exposed to ethylene oxide. The highly
radioactive Cobalt 60 isotope used in gamma sterilization subjects the Company
to the risk of liability claims for damages caused by radioactive contamination
being made against it by workers who load the isotope into the facility, those
who remove the spent isotope from the facility and those who handle the isotope
in the facility. There can be no assurance that such claims will not be made
against the Company in the future and, if made, that the Company will not be
held liable for damages that are alleged to have resulted from such exposure.
Both the Company and the Parent Company's Food Group are covered by the same
liability insurance coverage. There can be no assurance that such liability
insurance coverage will be adequate or remain available to the Company at
acceptable costs. A successful claim brought against the Company in excess of
the insurance coverage then available to it could have a material adverse effect
on the Company's business, financial condition and results of operations.
Additionally, any such adverse liability actions could result in adverse
publicity to the Company and have a negative impact on market acceptance of the
Company's services and the Company's ability to obtain and maintain regulatory
approval for the products it processes.
These hazards have resulted in government regulations in the countries in
which the Company operates which strictly limit the exposure of workers to
ethylene oxide and gamma radiation. The United States Occupational Safety and
Health Administration ("OSHA") limits worker exposure to ethylene oxide gas to
one part per million as an 8-hour time weighted average and five parts per
million in any 15-minute short-term exposure. The regulations in most other
countries where the Company has facilities are similar. These regulations also
have the indirect effect of limiting the permissible amount of residual ethylene
oxide left on a product following completion of the sterilization process, since
such residuals are one source of exposure to ethylene oxide. OSHA regulations
also require that equipment used in connection with ethylene oxide at the
Company's facilities be designed and operated in a manner which is safe and that
the Company use proper safety precautions and practices when handling,
monitoring and storing ethylene oxide. Compliance by the Company with these
regulations significantly increases the cost of operating its ethylene oxide
facilities and, in the case of certain products, increases their turn-around
time through the Company's facilities.
In addition to extensive regulation by various governmental bodies and
agencies, these hazards have resulted in standards, guidelines and requirements
established by industry organizations and other non-governmental bodies, such as
the International Organization for Standardization ("ISO"), which impact the
Company's operations. The ISO 10993-7 standard, adopted in 1995, limits the
permissible levels of residual ethylene oxide on sterilized medical devices in
order to protect patients who come into contact with such devices. These residue
limits are readily achievable by the existing process technology and procedures
employed by the Company for most of the medical devices manufactured by its
customers. The ISO is currently engaged in a process to review and revise its
existing ethylene oxide residue standard. The Company is unable to predict the
final outcome of this review process, although it believes that it will likely
result in some reduction in the permissible ethylene oxide residue limits set
forth in the ISO standard. Depending upon the extent of any such reduction,
aeration times (the processing step which follows exposure of the products to
ethylene oxide during which residual amounts of gas are removed from the
sterilized products) might need to be increased for some products or, in an
extreme case, certain products might require redesign or significant changes in
ethylene oxide sterilization technology and equipment might be required to
assure compliance. In any such event, manufacturers might shift their
sterilization requirements to gamma or other existing or new sterilization
techniques.
The Company anticipates that ethylene oxide will be subjected to further
risk assessment by international standards organizations and by various
governmental entities and institutions in one or more of the countries in which
the Company operates. Furthermore, it is likely that more restrictive ethylene
oxide regulations or industry standards will be adopted as a result of such
studies. The expenditures required by the Company or its customers to comply
with any additional restrictions could be material. The further operating
restraints or burdens which any additional restrictions might entail, as well as
any increased concern over the health and safety risks of ethylene oxide, could
also result in customer shifts away from ethylene oxide sterilization. In
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either event, any additional regulations could have a material adverse effect on
the Company's business, financial condition and results of operations.
Safety risks. The exposure of ethylene oxide in gaseous form to air
combined with an ignition source in a sterilization facility can result in an
explosion or fire. The ethylene oxide sterilization process equipment and
procedures employed by the Company at its facilities are designed to avoid
creating flammable conditions. However, the use of certain types of
environmental control equipment at some facilities requires the use of heat and
particular care must be exercised in order to avoid inadvertently causing
circumstances under which an explosion or fire could result, thereby
interrupting normal operations at or the temporary shut-down of the facility
while repairs are made. During the last five years, there have been three such
incidents at the Company's facilities in North America and two at its facilities
in Europe. See "Business -- Regulatory, Environmental and Health and Safety
Matters."
In addition to being highly radioactive, Cobalt 60 is a corrosive material.
While the Company's existing gamma facility in Belgium, the gamma facility now
being established by its Mexican joint venture and any additional gamma
facilities which the Company may build or acquire in the future are or will be
designed to protect against such corrosion, there can be no assurance that the
steel capsules which contain the Cobalt 60 will not corrode. Depending upon the
seriousness of any such corrosion, the Company might be required to replace such
Cobalt 60 and, if it was responsible, to bear the cost of removing and
reencapsulating the Cobalt 60. It is also possible that such corrosion could
result over time in radioactive material being released in the facility, which
could result in the contamination of portions or all of the facility. Any
contamination resulting from such a release, as well as the related
decontamination process, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Any incident occurring at any of the Company's ethylene oxide or gamma
facilities which causes harm to workers or others or the interruption of normal
operations at the facility could result in substantial liability to the Company.
Such an incident might also result in adverse community or regulatory reaction,
which could affect the Company's ability to continue to operate the facility
involved in the incident. To the extent any such liability is not covered by
insurance or able to be recovered from others, the Company's business, financial
condition and results of operations could be materially adversely affected. A
similar result could occur if any incident and the related interruption of
normal operations of the facility caused any significant customer served by that
facility to switch to an alternative sterilization service provider. In
addition, the Company may encounter resistance, protests or other actions from
those communities in which its existing facilities are located or where it seeks
to establish or expand facilities based on the perceived risk of exposure to
ethylene oxide or radiation on the part of the residents of these communities.
See "Business -- Regulatory, Environmental and Health and Safety Matters."
RISKS RELATED TO COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
Government regulations intended to protect the environment are applicable
in varying degrees to the Company's facilities in each of the countries in which
it operates. Ethylene oxide is evacuated in a high concentration when the sealed
sterilization chamber is purged at the end of each cycle. Thereafter, residual
ethylene oxide is evacuated in a low concentration after the chamber is opened
and during aeration following removal of the sterilized products from the
chamber. See "Business -- The Sterilization Processing Industry -- The principal
sterilization in processes."
The release of high concentration emissions into the atmosphere is
prohibited or strictly limited in most of the countries in which the Company has
facilities. Each of the Company's sterilization facilities throughout North
America utilize either a wet scrubber system or catalytic oxidizer to treat its
high concentration emissions. In its European ethylene oxide facilities, the
Company uses several different technologies (including wet scrubbers,
incinerators and catalytic converters) to control their high concentration
emissions.
Low concentration ethylene oxide emissions are currently regulated by state
and local governmental entities in certain of the U.S. states in which the
Company's facilities are located. In addition, regulations to control low
concentration ethylene oxide emissions were adopted by the United States
Environmental Protection Agency ("EPA") in 1994 and were originally scheduled to
become effective in December 1997.
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However, certain types of low concentration emissions control equipment used by
ethylene oxide sterilizers, including the Company, have a risk of explosion. As
a result, the original effective date was postponed to December 1998, and the
EPA has announced its intention to again postpone the effective date of the
regulations to December 1999 to assure that most sterilizers can comply without
compromising the safety of their operations. If the regulations take effect in
their present form, the Company will be required to incur substantial cost
(currently estimated to be approximately $3.7 million subsequent to June 30,
1998) to acquire the control equipment necessary to bring certain of its
facilities in the United States into compliance.
Regulations restricting low concentration emissions in the European
countries in which the Company has facilities vary from country to country. The
Company believes that all of its European facilities are in material compliance
with applicable low concentration emissions regulations. However, due to the
greater volume of absorbent products now being sterilized at its facility at
Herentals, Belgium, the Company believes that a new control system will be
required in order for that facility to remain in compliance with those
regulations. Accordingly, the Company has proposed to local governmental
authorities the installation of a new state-of-the-art system which would
control both the high concentration and low concentration emissions at the
Herentals facility. The Company believes that the installation of the new
equipment (currently planned for Fiscal 1999 and Fiscal 2000) will be approved
by such authorities and that any necessary waivers pending its installation will
be obtained.
Compliance by the Company with applicable environmental regulations
significantly increases the cost of constructing and operating its ethylene
oxide facilities. Although the Company believes it has received all material
environmental permits necessary to conduct its current business, there can be no
assurance that the Company will not be found in violation of applicable
requirements or that more stringent emission control requirements will not be
adopted by governmental entities which will apply to some or all of the
Company's ethylene oxide facilities. Any such violations or more stringent
regulations could result in fines, adverse publicity and increased capital and
operating costs. They might also, in an extreme case, force the Company to alter
or cease the operation of one of more of its facilities. See "Business --
Regulatory, Environmental and Health and Safety Matters -- Emission control
regulations."
RISKS RELATED TO OTHER GOVERNMENT REGULATIONS AND STANDARDS COMPLIANCE
The design, construction and operation of the Company's sterilization
facilities are subject to a variety of federal, state and local regulations in
each of the countries where they are located. Although the Company believes it
has received all material licenses and permits necessary to conduct its current
business, there can be no assurance that the Company will not be found in
violation of applicable requirements or that governmental entities will not seek
to impose more stringent regulatory requirements 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 the operation
of one or more of its facilities and could otherwise have a material adverse
effect on the Company's business, financial condition and results of operations.
Sterilization of medical devices is subject to regulation by the United
States Food and Drug Administration (the "FDA") pursuant to the Federal Food,
Drug and Cosmetic Act. The FDA has promulgated a Quality System Regulation
("QSR") which sets forth detailed Good Manufacturing Practices ("GMP") that
manufacturers of medical devices, including providers of contract sterilization
of medical devices, are required to follow. Consequently, the Company is
required to comply with the GMP requirements set forth in the QSR with respect
to its operating facilities in the United States and those outside the United
States which sterilize devices for export to the United States. These facilities
are subject to periodic inspections by the FDA to determine whether they are in
compliance with such requirements. A similar regulatory framework, also
administered by the FDA, applies to the processing in the United States of food,
cosmetics and pharmaceutical products. Regulatory agencies in each of the other
countries in which the Company has ethylene oxide facilities conduct periodic
inspections and otherwise enforce local regulations applicable to their
operations. The Company's gamma facility in Belgium is subject to regulations of
the Belgian government (and the governments of other European countries in which
food products processed at the Company's facility are sold)
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which limit those food products which can be processed for sale in those
countries and which impose labelling requirements on the Company with respect to
those food products.
The parametric release system now being implemented by the Company to
increase sterilization processing efficiency (see "Business -- Sterilization
Management Services -- Continuous improvement initiatives") is subject to
compliance with FDA GMPs. This system permits release of processed products
based upon achieving electronically measured levels of temperature, humidity,
ethylene oxide concentration and time of exposure, thus avoiding the need for
laboratory testing of biological indicators. The Company has only recently begun
to commercially process certain products for one of its customers using the
parametric release system. The Company's parametric release system adheres to
the standards for parametric release included in the ISO 11135 standard for
ethylene oxide sterilization. However, the Company has not been inspected by the
FDA since implementing the system and no assurance can be given that the FDA
will accept the Company's use of its parametric release system. Further, there
can be no assurance that the Company's customers will accept the use of
parametric release for contract sterilization.
Failure by the Company at any time to comply with applicable FDA
requirements could lead the FDA to institute enforcement actions against the
Company or its customers, including, among other things, warning letters, recall
or seizure of products, fines, injunctions, civil penalties, total or partial
suspension of sterilization operations and criminal prosecution. Such
enforcement actions would also harm the Company's business reputation and could
cause the Company to lose customers to competitors. During the last five years,
the Company has not received any warning letters from or been subjected to any
more stringent compliance action by the FDA. See "Business -- Regulatory,
Environmental and Health and Safety Matters -- Health regulations."
The Company and its medical device manufacturing customers are also subject
to standards, guidelines and requirements established by industry organizations
and other non-governmental entities, such as the ISO and the Committee for
European Normalization ("EN"). The ISO 9001 and 9002 standards are international
quality standards that require the Company to implement and document an
effective quality assurance program which is subject to periodic quality systems
surveillance audits. The ISO 10993-7 standard, adopted in 1995, limits the
permissible levels of residual ethylene oxide on sterilized medical devices in
order to protect patients who come into contact with such devices. See "Risk
Factors -- Health and Safety Risks of Ethylene Oxide and Gamma."
Demonstrated compliance by a contract processor with the ISO and EN
certifications is becoming a requirement for doing business in or exporting
sterilized products to Canada and Europe and is expected by most medical device
manufacturers in the United States. Medical devices to be sold in countries
which are members of the European Community must carry the "CE" symbol on their
labels. In order to affix the CE symbol to any sterile medical device it must,
among other requirements, have been sterilized in a facility which is certified
as ISO 9000 series and EN 46000 series compliant and it must satisfy the ISO
10993-7 ethylene oxide residue standard. See "Business -- Quality Assurance."
POTENTIAL FOR SHORT-TERM CAPACITY CONSTRAINTS
Demand for the Company's sterilization services has been growing rapidly,
in some cases temporarily exceeding the capacity of certain of its processing
facilities. Certain of the Company's existing facilities are now at or are
expected over the next two years to reach their maximum capacity, which will
necessitate increases in capacity at some or all of these facilities or the
opening of new facilities. During the first nine months of Fiscal 1998, the
Company added capacity at seven facilities and is currently adding capacity at
four facilities. Any substantial and prolonged inability on the part of the
Company to maintain sufficient sterilization capacity to fully serve the needs
of its customers could have a material adverse effect on its relationships with
affected customers and put at risk key elements of its business strategy.
Conversely, should anticipated increases in demand for the Company's
sterilization services at any of its facilities fail to materialize, or should
such demand subsequently decline by a significant amount and for a significant
period of time, the effect on the Company's business, financial condition and
results of operations could be material
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and adverse. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview" and "-- Liquidity and Capital Resources"
and "Business -- Facilities."
SUPPLY RISKS
While ethylene oxide is a relatively common chemical with many different
uses, its use as a sterilant in the United States is subject to stringent
regulation under the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA"). The Company is aware of only two sources in the United States which
possess the FIFRA registration necessary to produce ethylene oxide for use as a
sterilant, only one of which, the ARC Chemical Division of Balchem Corporation,
actually engages in such production. In September 1997, the Company entered into
a seven-year agreement with Balchem Corporation to supply ethylene oxide to all
of its sterilization facilities in the United States and Canada. Balchem
Corporation is a publicly held company which files periodic reports, including
financial statements and other information, with the Securities and Exchange
Commission, all of which is publicly available. Any interruption in the supply
of ethylene oxide to the Company's sterilization facilities, or substantial
increase in the cost of such supply, would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is aware of only two principal sources in the world for Cobalt
60, the radioactive isotope which emits gamma radiation. One of these sources is
MDS Nordion Inc., a Canadian company, and the other is the Puridec Irradiation
Technologies Division of Amersham International plc, a United Kingdom company.
The Company's gamma facility in Belgium purchases its Cobalt 60 requirements
under contract from Puridec. MDS Nordion is the Company's partner in a joint
venture to design, build and operate a gamma facility in Mexico. The joint
venture is contractually committed to acquire its Cobalt 60 requirements from
MDS Nordion. While the Company has not experienced any shortages of Cobalt 60
since the acquisition of its Belgian gamma facility in August 1997, there can be
no assurance that it will be able to obtain sufficient supplies of Cobalt 60 in
the future. 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. 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 might be materially
adversely affected. See "Business -- Sterilization Management
Services -- Availability of raw materials."
COMPETITION
The Company is subject to intense competition in the provision of
sterilization services in each of the countries where it has operations. The
market for such services is fragmented as a result of traditional geographical
limitations on the area which can be served by each sterilization facility,
multiple sterilization technologies and the mix of captive and contract
facilities. Certain of the Company's competitors in North America have
substantially greater financial, marketing, technical and other resources or
offer a broader range of sterilization technologies than the Company, which may
give them a competitive advantage over the Company. Two of its major competitors
in the United States, Isomedix, Inc. (a subsidiary of Steris Corporation) and
SteriGenics International, Inc., have extensive gamma sterilization networks. In
Europe, many of the Company's local competitors benefit from long-term
relationships with individual customers. Also, to the extent that the Company
expands into additional foreign countries it could be faced with competition
from existing providers of contract sterilization services in those countries.
See "Business -- Competition."
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ACQUISITIONS
The Company has recently completed several acquisitions and expects to
continue to pursue acquisitions in the future. Some of the Company's major
competitors have similar acquisition strategies. As a result, competition for
suitable acquisition candidates is increasing, and the number of potential
acquisition candidates, particularly in the United States, is limited. There can
be no assurance that the Company will be able to acquire companies on favorable
terms, if at all. If the Company continues to complete acquisitions, it will
encounter various associated risks, including possible difficulty in integrating
an acquired business into the Company's sterilization or laboratory networks,
diversion of management's attention and unanticipated problems or liabilities,
some or all of which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
currently have any understandings, commitments or agreements with respect to any
potential acquisition. See "Business -- Business Strategy" and "-- Strategic
Acquisitions and Alliances."
ADDITIONAL INTERNATIONAL EXPANSION
Part of the Company's business strategy is to enter additional foreign
countries. Further expansion into additional countries will require substantial
capital and be subject to a number of risks, including any or all of the
following: (i) differing and evolving regulatory requirements for ethylene oxide
or gamma sterilization; (ii) political, economic, cultural and language
differences; (iii) economic recession and financial instability; (iv)
fluctuating currency exchange rates; (v) difficulties in staffing and managing
such operations and of integrating them into the Company's business; (vi) the
inability to establish a stable and profitable customer base for such
operations; (vii) higher operating and administrative costs; and (viii)
potentially adverse tax consequences. Such factors, either individually or in
combination, could result in operating losses for any such facility or
facilities for several years or more and have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Business Strategy" and "-- Sterilization Management Services."
CAPITAL REQUIREMENTS
In order to expand its sterilization capacity sufficiently to meet
anticipated increases in the demand for its services, as well as to carry out
other components of its business strategy, the Company expects to require
substantially greater capital than it has previously required. Prior to the
Offering, a material portion of the Company's capital requirements was funded by
or through the Parent Company. Following completion of the Offering, no further
financing can be expected to be available from or through the Parent Company. No
assurance can be given that the Company's existing financial resources,
including cash flow from operations and amounts available under a new
$50-million Revolving Credit Agreement which the Company expects to enter into
with a syndicate of major banks prior to completion of the Offering, will be
sufficient to fund its future growth. The Company may be required to seek other
external funding sources in order to finance its business strategy, which
sources may not be available on terms favorable to the Company or at all. These
sources could include, subject to market conditions, additional offerings by the
Company of its equity or debt securities. Any such offerings of additional
equity securities would have the effect of diluting the percentage ownership
interests of purchasers of the Shares in the Offering made hereby. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Shares Eligible For Future
Sale."
FINANCIAL EXPOSURE TO PRODUCT AND OTHER LIABILITY CLAIMS
The Company faces the risk of financial exposure to product and other
liability claims alleging that the Company's failure to adequately perform its
services resulted in adverse effects. While the Company's customers are
generally responsible for determining the cycle parameters (the levels of
temperature, humidity and ethylene oxide concentration to which products are
exposed during the sterilization process, and the duration of such exposure) or
dosage specifications (the amount of gamma radiation to which products are
exposed) for their products, the Company is required to certify that such cycle
or dosage parameters were achieved. In the event of the failure of the Company
to process the customer's product in accordance with the
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cycle parameters or dosage specifications prescribed by the customer, the
Company's standard contract requires it to inform its customer of the
nonconformance, to reprocess the product if that is a feasible alternative and
to reimburse the customer (subject to a maximum) for the cost of any such
product which is damaged as a result of the nonconformance. In Belgium and
France, contract processors, including the Company, are required by law to
certify that products they have processed are "sterile." There can be no
assurance that the Company will not be held liable for damages that are alleged
to result from improper or incorrect processing, cycle parameters or dosage
specifications, product damage or the failure to achieve "sterility." In such
event, the Company also could receive adverse publicity. Both the Company and
the Parent Company's Food Group are covered by the same liability insurance
coverage. There can be no assurance that such liability insurance coverage will
be adequate or remain available to the Company at acceptable costs. A successful
claim brought against the Company in excess of the insurance coverage then
available to it could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, adverse product or
other liability actions could have a negative impact on market acceptance of the
Company's services and the Company's ability to obtain and maintain regulatory
approval for the products it processes. See "Risk Factors --Health and Safety
Risks of Ethylene Oxide and Gamma" and "Business -- Sterilization Management
Services -- Achieving 'sterility,' " "-- Quality Assurance" and "-- Regulatory,
Environmental and Health and Safety Matters."
CONTROL BY THE PARENT COMPANY
The Parent Company is currently the sole stockholder of the Company. Upon
completion of the Offering, the Parent Company will continue to own all of the
outstanding shares of Class B Common Stock (each of which entitles the holder to
ten votes) and will hold 67.6% of the total number and have 95.4% of the
combined voting power of the Common Stock. As a result, the Parent Company will
be able to control the election of directors and the vote on other matters
submitted to the Company's stockholders, including the approval of extraordinary
corporate transactions (such as a sale of assets, merger or other transaction
involving a change of control). In addition, two of the Company's directors,
including its Chairman of the Board, are also directors and senior officers of
the Parent Company.
The Company's Restated Certificate of Incorporation permits the Parent
Company to transfer shares of Class B Common Stock which it holds to any person
who is a Permitted Transferee. "Permitted Transferees" for such purpose include:
(i) the shareholders of the Parent Company, but only pursuant to a single
transaction in which all outstanding shares of Class B Common Stock held by the
Parent Company are distributed to the shareholders of the Parent Company as part
of a tax free spin off; and (ii) an unaffiliated corporation or business entity,
but only pursuant to a single transaction approved by the board of directors of
the Parent Company in which all outstanding shares of Class B Common Stock held
by the Parent Company are sold to, exchanged with or otherwise transferred to
such other corporation or business entity. Accordingly, it will be possible for
the Parent Company, as part of a spin off or sale, to convey to its shareholders
or to an unrelated purchaser all of the Class B Common Stock then held by it and
the voting power (which would be likely to include at least a majority of the
combined voting power of all shares of Common Stock then outstanding)
represented by such shares. See "Relationship with Parent Company" and
"Description of Capital Stock."
POSSIBLE CONFLICTS OF INTEREST WITH THE PARENT COMPANY
There is almost no operational overlap between the business of the Parent
Company and the business of the Company. The Parent Company does, however,
render a variety of administrative and financial support services to the
Company, and it is expected to continue to do so after completion of the
Offering. In order to document and establish the terms of these arrangements and
other aspects of their continuing relationship, the Company and the Parent
Company will, prior to the completion of the Offering, enter into a series of
agreements (the "Intercompany Agreements"). The Intercompany Agreements will
include a Shareholder Agreement, an Administrative Services Agreement and a Tax
Matters Agreement. The initial terms of both the Administrative Services
Agreement and the Tax Matters Agreement will be five years.
17
<PAGE> 19
The Intercompany Agreements will not be the result of arm's length
negotiations between independent parties, and there can be no assurance that
their terms and conditions will be the same as if so negotiated. The Company
estimates that in Fiscal 1999 its incremental payments under the Administrative
Services Agreement to the Parent Company for services rendered to the Company,
including internal tax administration services called for by the Tax Matters
Agreement, will not exceed $500,000.
Conflicts of interest may arise in the future between the Company and the
Parent Company. The Company has not adopted any formal plan or arrangement to
address such potential conflicts of interest. It is anticipated that the
directors of the Company would take such steps as they deem reasonable under all
of the circumstances to resolve any specific conflict of interest that may
occur. There can be no assurance, however, that any such conflicts will be
resolved in a manner favorable to the Company. See "Relationship With Parent
Company."
Approximately $12.2 million of the net proceeds to the Company from the
Offering being made hereby will be paid to the Parent Company to discharge in
full the principal of and accrued interest on a promissory note issued by the
Company on June 1, 1998 in payment of a dividend declared by the Company on May
21, 1998. The promissory note is payable on demand and bears interest at the
annual rate of 6%, payable at maturity. See "Use of Proceeds."
Under the Shareholder Agreement to be entered into between the Company and
the Parent Company, the Parent Company will have the right, at any time when it
holds less than 50% of the combined voting power of all outstanding shares of
capital stock of the Company, to require the Company to cease using the name
"Griffith" in its corporate name and its trademarks and trade names and to cease
using the "flask and world" logo and trademark (a version of which appears on
the cover page of this Prospectus). Any exercise by the Parent Company of this
right could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Relationship With Parent
Company -- Shareholder Agreement."
POSSIBLE ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CAPITAL STRUCTURE
The Company's Restated Certificate of Incorporation will provide for two
classes of Common Stock with differing voting rights. The Class A Common Stock
(the class to be sold to the public in the Offering) will have one vote per
share, while the Class B Common Stock (all of the outstanding shares of which
will be held by the Parent Company at the conclusion of the Offering) will have
ten votes per share. Immediately after the Offering, the Parent Company will
hold 67.6% of the Common Stock, but as a result of the voting rights of the
Class B Common Stock, will have 95.4% of the combined voting power of the Common
Stock. Due to its ownership of Class B Common Stock, the Parent Company will be
able to maintain voting control of the Company even if its ownership is reduced
substantially below 50% of the total number of outstanding shares of Common
Stock. Such voting control may have the effect of discouraging or preventing
proposed merger, acquisition or other change in control transactions which might
be favored by the holders of Class A Common Stock, since any such transaction
would require the approval of the Parent Company.
In addition, the Board of Directors has the authority, without further
action by the stockholders, to issue up to 10,000,000 shares of Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, and to issue authorized but unissued shares of Class A
Common Stock up to a maximum of 50,000,000 shares. The issuance of Preferred
Stock or additional shares of Class A Common Stock could have the effect of
discouraging or preventing takeover proposals that might otherwise be favored by
stockholders. Provisions in the Company's bylaws requiring that stockholders
follow advance notification procedures for nominations for candidates for the
board of directors and to present other business to be considered at any meeting
of stockholders may have similar anti-takeover effects.
POTENTIAL SALES OF CLASS A COMMON STOCK BY THE PARENT COMPANY OR THE COMPANY
Sales by the Parent Company or by the Company of substantial amounts of
Class A Common Stock could adversely affect prevailing market prices of the
Class A Common Stock. Upon the consummation of the Offering, the Parent Company
will own all of the outstanding shares of Class B Common Stock (which will
represent 67.6% of the total number of shares of Common Stock outstanding or
64.5% if the Underwriters'
18
<PAGE> 20
over-allotment option is exercised in full). Pursuant to the Company's Restated
Certificate of Incorporation, the Parent Company will be able at any time or
from time to time to convert any or all of its Class B Common Stock to Class A
Common Stock on a share-for-share basis. Pursuant to the Shareholder Agreement,
the Parent Company will also be able to cause the Company to register under the
Securities Act of 1933 (the "Securities Act"), in connection with their public
sale, any or all of the shares of Class A Common Stock resulting from such
conversion. In addition, the Parent Company will be permitted to sell in the
public market specified amounts of such Class A Common Stock without
registration pursuant to Rule 144 under the Securities Act. The Company may also
issue and sell shares of Class A Common Stock in the future to fund
acquisitions, raise additional capital or for other purposes.
The Parent Company has informed the Company that it has no current
intention to sell any of its shares of Common Stock. In addition, each of the
Parent Company, the Company and each of the directors and officers of the
Company has agreed with the Underwriters that it or he will not sell or
otherwise dispose of any Common Stock or securities convertible into Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of ABN AMRO Incorporated. The Company's agreement in this
regard excludes from such restriction Common Stock issued in connection with
acquisitions (provided that any recipient of Common Stock in an acquisition
during such 180-day period agrees to be bound by such prohibition during the
remainder of the 180-day period) and pursuant to the exercise of stock options
by directors and employees of the Company. See "Shares Eligible for Future
Sale."
ABSENCE OF PRIOR PUBLIC MARKET FOR THE CLASS A COMMON STOCK
Prior to the Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop for
the Class A Common Stock after the Offering or, if one does develop, that it
will be maintained. The initial public offering price of the Class A Common
Stock offered hereby will be determined through negotiations among the Company
and the representatives of the Underwriters, and may not be indicative of future
market prices. See "Underwriting" for the factors which are expected to be
considered in determining the initial public offering price of the Class A
Common Stock offered hereby.
POTENTIAL VOLATILITY OF THE MARKET PRICE OF THE CLASS A COMMON STOCK
There can be no assurance that the market price of the Class A Common Stock
will not be highly volatile or that it will not decline below the initial public
offering price. Factors such as variations in the Company's quarterly or annual
financial results, comments by securities analysts and others, changes in
earnings estimates by securities analysts, fluctuations in the stock prices of
the Company's competitors, any loss by the Company of a key member of senior
management, adverse regulatory actions or decisions, adverse evidence regarding
the health or safety effects of ethylene oxide, 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 or retention of in-house sterilization capabilities by
manufacturers of single use medical devices, changing government regulations or
industry standards, and changes in the market for single use medical devices or
in general economic, political and market conditions in the United States or
elsewhere, may have a significant effect on the market price of the Class A
Common Stock.
In addition, stock markets have experienced extreme price and volume
trading volatility in recent years. This volatility has had a substantial effect
on the market prices of securities of many companies for reasons frequently
unrelated or disproportionate to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of the Class A Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
DEPENDENCE ON KEY PERSONNEL
The Company's progress to date has been dependent to a significant extent
upon the skills of its senior management and other key personnel, many of whom
would be difficult to replace. There can be no assurance that the Company can
retain such personnel or that it can attract and retain other highly qualified
personnel in
19
<PAGE> 21
the future. The loss of any of the Company's senior management, particularly
Kevin M. Swan, Peter D. Gortz and Dirk Barrie, or other key marketing, technical
or administrative personnel, especially if lost to competitors, or the failure
of any such key personnel to perform well in his or her current positions, could
have a material adverse effect on the Company's business, financial condition
and results of operations. Such an effect could occur, for example, if any key
employee who left the Company were to take with him or her any of the Company's
proprietary technology or know-how or to cause the loss by the Company of one or
more of its customers. The Company follows several procedures designed to
safeguard its technology and know-how and to prevent any such loss of its
customers. These include entering into, and vigorously enforcing its rights
under, confidentiality agreements with virtually all of its employees,
non-competition agreements with its senior managers and non-solicitation
agreements with its sales employees. Any breach by a current or former employee
of the Company of any such agreement exposes him or her to legal action by the
Company seeking to enjoin the conduct and recover damages suffered by the
Company as a result of the conduct. See "Management."
YEAR 2000 ISSUES
Many currently installed computer systems and software products throughout
the world, including certain of those used by the Company, are coded to accept
only two digit entries in the date code field. Any computer programs that have
date-sensitive software will require, prior to January 1, 2000, date code fields
which accept four digit entries or other revisions to enable them to distinguish
21st century dates from 20th century dates. As a result, prior to the end of
1999, certain of the computer systems and/or software used by the Company will
need to be upgraded or replaced to become "Year 2000 compliant."
The Company's principal computer applications cover three broad areas of
its operation: (i) those associated with the process controls at its
sterilization facilities (which include both information technology and embedded
technology); (ii) those which relate to its general operations (including
invoicing, purchasing, receiving and payroll); and (iii) those which pertain to
its financial and accounting systems (including its general ledger, receivables,
payables and fixed assets). The Company currently utilizes the Parent Company as
a service provider with respect to its financial and accounting systems
throughout North America and also with respect to its general operations systems
in Mexico.
Commencing late in 1997, the Company began an evaluation and conversion
project covering all of its systems to identify and address all necessary code
changes, testing and implementation related to Year 2000 compliance issues. At
the same time, the Company also began an evaluation of Year 2000 compliance
issues for its critical customers and suppliers. Internal resources are being
used to make these evaluations and test Year 2000 compliance. The Company
expects to conclude its evaluation and testing of all systems under its direct
control by the end of February 1999 and to complete necessary systems
modifications or conversions and testing by mid-1999. The Parent Company has
informed the Company that (i) it has undertaken a similar evaluation and
conversion project with respect to its computer systems including those which
are used by the Company and (ii) it expects to bring such systems into Year 2000
compliance by mid-1999. Based upon its evaluation to date, the Company estimates
its aggregate cost will not be material to bring into Year 2000 compliance all
of the computer systems utilized by the Company, including those of the Parent
Company. Through August 31, 1998, the Company had incurred costs approximating
$25,000 to perform the evaluation and testing of its systems.
There can be no assurance that the foregoing compliance schedule will be
met by the Company or the Parent Company or that any software or systems of the
Company's customers and suppliers, on which the Company's business is dependent,
will be corrected in a timely manner. The Company has not prepared contingency
plans pending completion of its evaluation of the extent and nature of its
compliance issues. The Company expects to complete its contingency plans by the
end of February 1999. In a worst case scenario, any failure by the Company, the
Parent Company or such third parties to become Year 2000 compliant on a timely
basis could result in disruption of the Company's normal operations and in the
inability or unwillingness of its customers to utilize the Company's services.
Any such failure or disruption could have a material adverse effect on the
Company's business, financial condition and results of operations and could
result in litigation against the Company based upon any such disruption or
failure. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Issues."
20
<PAGE> 22
ABSENCE OF DIVIDENDS
The Company intends to retain its earnings to finance its growth and for
general corporate purposes and therefore does not anticipate paying any cash
dividends in the foreseeable future on the Common Stock. In addition, the
Company expects to enter into a Revolving Credit Agreement prior to completion
of the Offering which it anticipates will contain a covenant restricting the
amount of dividends which the Company will be permitted to pay. See "Dividend
Policy."
DILUTION
Investors purchasing shares of Class A Common Stock in the Offering will
experience immediate and substantial dilution of $8.47 per share in the net
tangible book value of their shares. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $31.7 million ($36.5 million if the Underwriters' over-allotment
option is exercised in full) assuming an initial public offering price of $14.00
per share and after deduction of the estimated underwriting discount and
offering expenses.
Approximately $12.2 million of the proceeds will be paid to the Parent
Company to discharge in full the principal of and accrued interest on a
promissory note issued by the Company on June 1, 1998 in payment of a dividend
declared by the Company on May 21, 1998. The promissory note is payable on
demand and bears interest at the annual rate of 6%, payable at maturity.
The Company expects to use approximately $14.5 million of the remaining
approximately $19.4 million of the net proceeds ($24.3 million if the
Underwriters' over-allotment option is exercised in full) to repay some
short-term bank debt. At June 30, 1998, the Company's aggregate short-term bank
debt was approximately $14.8 million, bore interest at a weighted average rate
of 6.15% per annum and had an average maturity of seven days. Approximately $9.6
million of the Company's short-term bank debt outstanding at June 30, 1998 was
used to finance the purchase of Sorex Medical, Inc. and the balance was used
primarily to fund other parts of the Company's capital expenditure program. The
remaining approximately $4.9 million of net proceeds not used to retire
short-term debt will be available for general corporate purposes, including to
fund capital expenditures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Business -- Business Strategy" and "-- Strategic Acquisitions and
Alliances."
DIVIDEND POLICY
The Company has not declared or paid any dividends on its capital stock
since the beginning of Fiscal 1996 except for a dividend of $12.0 million paid
on June 1, 1998 to the Parent Company. It is the Company's current intention to
retain its earnings to finance its growth and for general corporate purposes.
Therefore the Company does not anticipate paying any cash dividends in the
foreseeable future. The declaration and payment of any future dividends will be
subject to the discretion of the Board of Directors of the Company. In addition,
the Revolving Credit Agreement which the Company expects to enter into prior to
the completion of the Offering will contain a covenant restricting the amount of
dividends which the Company will be permitted to pay. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
21
<PAGE> 23
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1998 on an actual basis and as adjusted to give effect to the sale by the
Company of the shares of Class A Common Stock offered hereby at an assumed
initial public offering price of $14.00 per share and the application of the
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with the Selected Financial Data, the Consolidated Financial
Statements, and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 3,069 $ 7,840
======= =======
Short-term debt:
Bank overdrafts........................................... $ 183 $ --
Short-term credit facilities.............................. 14,635 --
Note due to Parent Company................................ 12,060 --
------- -------
Total short-term debt............................. 26,878 --
------- -------
Long-term debt, including current portion:
Borrowings under notes payable and Industrial Revenue
Bonds.................................................. 19,386 19,386
------- -------
Stockholders' equity:
Preferred Stock, par value, $.01 per share, 10,000,000
shares authorized and none issued or outstanding....... -- --
Class A Common Stock, par value $.01 per share, 50,000,000
shares authorized, 2,500,000 issued and outstanding, as
adjusted(1)............................................ -- 25
Class B Common Stock, par value $.01 per share, 40,000,000
shares authorized, 5,225,000 issued and
outstanding(2)......................................... 53 53
Additional paid-in capital................................ 12,004 43,629
Retained earnings......................................... 7,751 7,751
Equity adjustment from foreign currency translation....... (1,957) (1,957)
------- -------
Total stockholders' equity........................ 17,851 49,501
------- -------
Total capitalization.............................. $64,115 $68,887
======= =======
</TABLE>
- ---------------
(1) Excludes 179,000 shares of Class A Common Stock issuable upon exercise of
options to be granted under the Company's 1998 Employee Stock Option Plan
and its 1998 Director Stock Option Plan effective on the date of the
Offering at an exercise price per share equal to the initial public offering
price. See "Management -- 1998 Director Stock Option Plan" and "-- Employee
Stock Option Plans -- 1998 Plan."
(2) Excludes 504,306 shares of Class B Common Stock issuable upon exercise of
outstanding options granted under the Company's 1996 Key Employee Stock
Option Plan. See "Management -- Employee Stock Option Plans -- 1996 Plan."
No further options will be granted under the 1996 Plan.
22
<PAGE> 24
DILUTION
The net tangible book value of the Company at June 30, 1998 was
approximately $11.1 million, or $2.13 per share. "Net tangible book value" per
share represents the amount of total tangible assets of the Company less its
total liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of the 2,500,000 shares of Class
A Common Stock in the Offering at an assumed initial public offering price of
$14.00 per share and the deduction of the estimated underwriting discount and
expenses of the Offering the adjusted net tangible book value of the Company at
June 30, 1998 would have been approximately $42.8 million, or $5.53 per share.
This represents an immediate increase in such net tangible book value of $3.40
per share to the Parent Company and an immediate dilution of $8.47 per share to
new investors purchasing shares of Class A Common Stock at the initial public
offering price. Net tangible book value dilution per share represents the
difference between the amount paid by purchasers of the shares of Class A Common
Stock in the Offering and the adjusted net tangible book value per share of
Common Stock immediately after completion of the Offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Net tangible book value per share at June 30, 1998........ $2.13
Increase in net tangible book value per share attributable
to new investors....................................... 3.40
-----
Adjusted net tangible book value per share after the
Offering.................................................. 5.53
------
Dilution in net tangible book value per share to new
investors................................................. $ 8.47
======
</TABLE>
- ---------------
The foregoing table does not give effect to the exercise of any options to
purchase shares of Class B Common Stock which were outstanding at June 30, 1998.
The following table sets forth information with respect to such options in
relation to the assumed initial public offering price of $14.00 per share:
<TABLE>
<CAPTION>
DATE OF AGGREGATE NUMBER OF EXERCISE PRICE
OPTION GRANT SHARES SUBJECT TO OPTIONS PER SHARE
- -------------------------------------------------- ------------------------- --------------
<S> <C> <C>
June 14, 1996..................................... 137,066 $ 3.93
June 23, 1997..................................... 87,010 4.51
April 9, 1998..................................... 280,230 10.09
------- ------
Aggregate number and weighted average
exercise price per share..................... 504,306 $ 7.45
======= ======
</TABLE>
To the extent any such outstanding options are exercised, there will be further
dilution to purchasers of the Shares in the Offering. See "Management -- Stock
Option Plans -- 1996 Plan" and Note 17 of the Notes to Consolidated Financial
Statements.
23
<PAGE> 25
SELECTED FINANCIAL DATA
The following table presents selected consolidated or combined financial
information for the Company. The financial information as of September 30, 1997,
1996 and 1995 and for each of the years then ended was derived from the
Company's audited consolidated financial statements. This information should be
read in conjunction with the audited consolidated financial statements,
including the notes thereto, for each of the years in the three year period
ended September 30, 1997 included elsewhere in this Prospectus. Prior to Fiscal
1995, some of the Company's operations were held by other affiliates of the
Parent Company. See "Relationship with Parent Company -- Background." As such,
the financial information as of September 30, 1994 and 1993 and for the two
years then ended was derived from the audited financial statements of the Parent
Company and in the opinion of management of the Company has been prepared on a
basis consistent with the audited financial statements of the Company and
includes all normal and recurring adjustments and eliminations for a fair
presentation of such information. The selected financial information as of June
30, 1998 and 1997 and the nine month periods then ended was obtained from the
Company's unaudited financial statements. In the opinion of the Company's
management all normal and recurring adjustments and eliminations necessary for a
fair presentation of the interim results have been included. The results of
operations for the nine months ended June 30, 1998 are not necessarily
indicative of the results for any future periods. This selected financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
24
<PAGE> 26
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net revenues............... $ 37,184 $ 40,587 $ 50,117 $ 54,771 $ 60,247 $ 44,111 $ 54,953
Cost of revenues......... 23,914 28,243 34,842 38,319 40,645 29,913 37,325
--------- --------- --------- --------- --------- ---------- ----------
Gross profit............... 13,270 12,344 15,275 16,452 19,602 14,198 17,628
Selling and
administrative
expenses............... 7,028 9,017 10,088 10,171 12,003 8,504 10,246
Royalty expense to Parent
Company(1)............. 1,653 1,911 2,275 2,481 2,747 2,027 2,432
--------- --------- --------- --------- --------- ---------- ----------
Operating profit(1)........ 4,589 152(2) 2,912 3,800 4,852 3,667 4,950
Interest expense, net...... 335 822 1,705 1,355 875 711 783
Earnings (loss) before
income taxes............. 4,231 (1,277) 1,056 2,761 3,699 2,806 3,797
Net earnings (loss)........ $ 2,633 $ (816) $ 1,017 $ 1,784 $ 2,726 $ 1,742 $ 2,294
Basic net earnings (loss)
per common share(3)...... $ 0.50 $ (0.16) $ 0.19 $ 0.34 $ 0.52 $ 0.33 $ 0.44
Diluted net earnings (loss)
per common share(3)...... $ 0.50 $ (0.16) $ 0.19 $ 0.34 $ 0.52 $ 0.33 $ 0.43
Adjusted basic net earnings
per common share(3)(4)... $ 0.45 $ 0.38
Adjusted diluted net
earnings per common
share(3)(4).............. $ 0.45 $ 0.37
Weighted average number of
common shares
outstanding(3)........... 5,225,000 5,225,000 5,225,000 5,225,000 5,225,000 5,225,000 5,225,000
Weighted average number of
common shares and
dilutive potential common
shares outstanding(3).... 5,225,000 5,225,000 5,225,000 5,225,000 5,242,782 5,242,782 5,291,286
Cash dividends paid........ -- -- -- -- -- -- $ 12,000(8)
PRO FORMA DATA (UNAUDITED):
Operating profit(5)........ $ 7,099 $ 7,007
Net earnings(5)............ $ 4,431 $ 3,575
Diluted net earnings per
common share(3)(5)....... $ 0.85 $ 0.68
CASH FLOW DATA:
Depreciation and
amortization............. $ 3,664 $ 4,380 $ 5,380 $ 5,884 $ 6,108 $ 4,564 $ 5,629
Capital expenditures....... 6,864 23,189(6) 8,533 3,943 8,885(6) 3,560 19,671(6)
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
---------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit)................ $ (1,244) $ (15,656) $ (10,478) $ (3,500) $ (583) $ 1,818 $ (25,590)(7)
Total assets............... 35,210 56,074 62,631 58,294 66,719 58,637 81,476
Long-term debt, less
current portion.......... 1,510 6,987 11,777 15,391 19,208 16,938 17,015
Stockholder's equity....... 22,784 21,952 25,262 26,385 28,006 27,146 17,851(8)
</TABLE>
- ---------------
(1) For all periods presented the Company has paid to the Parent Company a
royalty (classified as an operating expense) equal to 5% of net revenues
from ethylene oxide sterilization management services for the license of
certain intellectual property owned by the Parent Company. Effective upon
completion of the Offering, the Parent Company will assign this intellectual
property to the Company and the royalty payment to the Parent Company will
cease.
(2) Operating profit for Fiscal 1994 is net of costs associated with the closing
of the Company's sterilization facility in Bound Brook, New Jersey. These
costs include approximately $1,264 for equipment value write downs and
dismantling charges and $147 for severance payments.
(3) The earnings per share and weighted average number of common shares
outstanding give effect to the 5.5 for one stock reclassification to occur
as part of the recapitalization of the Company described under "Description
of Capital Stock -- Recapitalization."
(4) The adjusted basic and diluted net earnings per common share for Fiscal 1997
and the nine months ended June 30, 1998 assume that the proceeds from the
sale of 874,286 of the shares of Class A Common Stock offered hereby, at an
assumed initial public offering price of $14.00 per share, will be used to
discharge the $12,000 note payable (plus accrued interest) that was issued
to the Parent Company on June 1, 1998 in payment of a dividend. Accordingly,
an additional 874,286 shares of Class A Common Stock have been added to the
weighted average number of common shares and dilutive potential common
shares outstanding shown in the table for each of those two periods for the
purpose of calculating their adjusted basic and diluted net earnings per
common share. See "Use of Proceeds."
(5) Pro forma operating profit for Fiscal 1997 and the nine months ended June
30, 1998 include the following adjustments: (i) the elimination of the 5%
royalty payable to the Parent Company; and (ii) the inclusion of an
incremental amount payable to the Parent Company under the Administrative
Services Agreement estimated to be $500 per year (see "Relationship with
Parent Company -- Administrative Services Agreement"). Pro forma net
earnings and diluted net earnings per common share for those periods also
include adjustments for (x) assumed interest savings of $67 and $63,
respectively, from the net cash flows resulting from the adjustments in (i)
and (ii) above; and (y) an increase in estimated income tax expense of $609
and $839, respectively, resulting from the foregoing adjustments.
(6) Capital expenditures for Fiscal 1994, Fiscal 1997 and the nine months ended
June 30, 1998 include $8,138, $2,585 and $9,727, respectively, for
acquisitions.
(7) The working capital (deficit) at June 30, 1998 results primarily from a
$12,000 note payable to the Parent Company issued in payment of a dividend
(see note (8) below), $9,600 of short-term debt incurred for the acquisition
of Sorex Medical, Inc. and $5,218 of other short-term borrowings primarily
incurred for capital expenditures.
(8) On June 1, 1998, the Company paid a $12,000 dividend to the Parent Company
in the form of a promissory note. The promissory note is due on demand and
bears interest at the rate of 6% per annum which is payable at maturity.
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
the Consolidated Financial Statements and notes thereto of the Company included
elsewhere in this Prospectus. Figures may vary due to rounding.
OVERVIEW
Griffith Micro Science's principal line of business, representing
approximately 92% of net revenues in Fiscal 1997, is providing sterilization
management services to manufacturers of single use medical devices and, to a
much lesser extent, pharmaceuticals, cosmetics and food products. Its
sterilization management services include comprehensive sterilization processing
and related laboratory testing, consulting and logistics management services.
Substantially all of the remainder of the Company's net revenues are derived
from the distribution of a variety of sterilization packaging materials,
disinfection products and related items in Europe. Revenue from the Company's
contract sterilization services is recognized upon the completion of an error
free sterilization cycle as defined by the individual parameters or dosage level
specified for the customer's product. Revenue for laboratory testing, consulting
and logistics management is recognized when the related service is performed.
In the early 1990's, senior management of the Parent Company decided to
significantly strengthen the operations at Griffith Micro Science and
implemented several initiatives which included: (i) strengthening senior
management at the Company; (ii) increasing sterilization processing capacity;
(iii) completing acquisitions to increase capacity and expand geographically;
and (iv) improving overall profitability. During this period, the Company opened
three new ethylene oxide facilities, acquired five operations and added capacity
to existing facilities. The three new facilities are: Ontario, California
(August 1994); Glens Falls, New York (October 1994); and Charlotte, North
Carolina (October 1995). The five acquisitions include: ethylene oxide
facilities in eastern Belgium (July 1998), Salt Lake City, Utah (April 1998),
and France (two plants -- July 1994), and one gamma facility in Belgium (August
1997 -- 82.8% ownership). The implementation of these initiatives, as well as
the continuing trend of medical device manufacturers to outsource sterilization
processing, have resulted in compound annual growth rates of 14.1% and 65.6% in
net revenues and pro forma operating profit, respectively, during the three-year
period ended September 30, 1997.
For all periods presented the Company has paid to the Parent Company a
royalty equal to 5% of net revenues from ethylene oxide sterilization management
services for the license of certain intellectual property owned by the Parent
Company. The licensed intellectual property consists entirely of intangibles
(trade secrets, know-how and trademarks and tradenames) which were developed
internally by the Parent Company, and it has never been appraised. All costs to
develop and maintain this intellectual property have been expensed as incurred,
and accordingly no value has been assigned to such property on the books of the
Parent Company. Effective upon the completion of the Offering, the Parent
Company will transfer this intellectual property to the Company and the royalty
payment to the Parent Company will cease. The transfer of this intellectual
property will be made by means of a contribution to the capital of the Company,
and accordingly no shares of capital stock of the Company will be issued to the
Parent Company in consideration of the transfer. No value will be assigned to
this property on the books of the Company upon its receipt from the Parent
Company. The royalty currently is an operating expense of the Company which it
pays in cash. Accordingly, its elimination will have a positive impact on the
operating results and cash flows of the Company for all periods subsequent to
the Offering. The amount of royalty expense incurred during Fiscal 1995, 1996
and 1997 and for the nine months ended June 30, 1998 was $2.3 million, $2.5
million, $2.7 million and $2.4 million, respectively.
Also effective upon completion of the Offering, the Company will make
payments to the Parent Company for certain support services to be rendered
pursuant to the proposed Administrative Services Agreement. The Company
estimates that in Fiscal 1999 its aggregate incremental payments to the Parent
Company under the Administrative Services Agreement are not likely to exceed
$500,000. Excluding these royalty expense amounts and including estimated
incremental payments of $500,000 per year under the Administrative
27
<PAGE> 29
Services Agreement, pro forma operating profit was approximately $4.7 million,
$5.8 million, $7.1 million and $7.0 million for Fiscal 1995, 1996, 1997 and the
nine months ended June 30, 1998, respectively. This represents a compound annual
growth rate of approximately 65.6% in pro forma operating profit during the
three-year period ended September 30, 1997. Moreover, pro forma operating
margins improved from 3.9% in Fiscal 1994 to 11.8% in Fiscal 1997. See "Selected
Financial Data."
Although the Company acquired a gamma facility in August 1997, most of the
Company's sterilization business continues to utilize the ethylene oxide
process. Both ethylene oxide and gamma sterilization operations are capital
intensive, resulting in significant depreciation expense. Efficiency and
capacity utilization are therefore key determinants of the margins for both
ethylene oxide and gamma operations. The Company believes that operating margins
for most gamma facilities are higher than the margins for comparable ethylene
oxide facilities because while there appears to be little difference in the
prices charged to customers for ethylene oxide and gamma sterilization, the
costs for an ethylene oxide facility are higher than for a comparable gamma
facility. The Company estimates that the capital cost to build and equip an
ethylene oxide facility is higher than the cost (excluding the cost of Cobalt
60) to build a comparable gamma facility primarily due to the need for emission
control equipment in the ethylene oxide facility. Further, in a gamma facility
the cost of the source for sterilization, Cobalt 60, is capitalized and then
amortized over time at a rate corresponding to its natural decay rate of 12.3%
per year. Ethylene oxide is purchased as it is used, and recorded as an
operating cost. The Company believes that the costs to operate an ethylene oxide
sterilization facility tend to be substantially higher than the operating costs
for a comparable gamma facility, principally because of the more complex nature
of the ethylene oxide sterilization process. This greater complexity tends to
result in higher costs in such areas as utilities, labor, repairs and
maintenance. The lower margins associated with the ethylene oxide sterilization
process could result in the Company's results of operations and liquidity
related to a given volume of business being lower than for a comparable gamma
processing company.
Compliance by the Company with applicable environmental regulations
significantly increases the cost of an ethylene oxide facility. Regulations to
control low concentration ethylene oxide emissions were adopted by the United
States EPA in 1994 and were originally scheduled to become effective in December
1997. However, the original effective date was postponed to December 1998, and
the EPA has announced its intention to again postpone the effective date of the
regulations, to December 1999 (see "Risk Factors -- Risks Related to Compliance
With Environmental Regulations"). The Company believes that it will be able to
comply with the EPA's 1994 low concentration ethylene oxide emission regulations
by December 1999. The Company estimates that its capital expenditures for
environmental control equipment, including equipment necessary to comply with
the EPA's low concentration ethylene oxide emissions regulations (assuming they
take effect in their present form), for the last quarter of Fiscal 1998 and for
Fiscal 1999 and Fiscal 2000 will be approximately $175,000, $4.1 million and
$2.45 million, respectively.
The Company's average amount of annual capital expenditures (including
amounts for acquisitions) during the last five fiscal years was approximately
$10.3 million. The Company estimates that its total capital expenditures
(including approximately $9.8 million for the acquisition of Sorex Medical,
Inc.) for Fiscal 1998 will be approximately $26.0 million. In order to meet
anticipated increases in demand for its services, as well as to implement key
components of its growth strategy, the Company expects that its annual capital
expenditures in the next three fiscal years will be substantial and are likely
to exceed historical levels, more closely resembling the estimated Fiscal 1998
level. While the Company believes that net revenues and profits will ultimately
be generated from capital expenditures for additional capacity, there could be
significant lead times before this occurs.
28
<PAGE> 30
The following tables set forth for the periods indicated a breakdown of the
Company's net revenues and operating profit between North America and Europe:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net revenues:
North America............................ $28.4 $31.0 $36.9 $26.6 $35.4
Europe................................... 21.7 23.7 23.3 17.5 19.6
----- ----- ----- ----- -----
Total............................ $50.1 $54.7 $60.2 $44.1 $55.0
===== ===== ===== ===== =====
Operating profit:
North America............................ $ 0.9 $ 1.6 $ 2.9 $ 1.9 $ 3.2
Europe................................... 2.8 3.0 3.1 2.6 2.7
Corporate overhead....................... (0.8) (0.8) (1.1) (0.8) (0.9)
----- ----- ----- ----- -----
Total............................ $ 2.9 $ 3.8 $ 4.9 $ 3.7 $ 5.0
===== ===== ===== ===== =====
</TABLE>
In Fiscal 1997 and for the nine months ended June 30, 1998, the Company's
net revenues generated outside North America were 38.7% and 35.7%, respectively.
The Company's European operating margins are typically higher than those of
North America due to: (i) higher use of plant capacity; (ii) lower depreciation
and rent expense associated with older facilities; and (iii) shorter term
contracts, which generally do not provide for any pricing incentives. See Note 3
of the Notes to Consolidated Financial Statements for further operating segment
data.
Since the vast majority of the Company's foreign operations' revenue and
expense transactions are denominated in local currency and it has typically been
the Company's policy to reinvest its foreign earnings overseas, the Company's
foreign exchange rate exposure has primarily been one of financial statement
translation exposure rather than transaction exposure. The Company utilizes
interest rate cap, collar and swap agreements to reduce the impact of increases
in interest rates on certain of its floating rate debt. The primary instruments
used for this purpose are "zero cost collars" acquired from the Company's
relationship banks. These collar transactions limit the Company's interest rate
risk by effectively constraining the floating rates within a limited range.
Historically, gains and losses on these contracts have not been material. In
entering into these contracts, the Company has assumed the risk which might
arise from the possible inability of the counterparties to meet the terms of
their contracts. Counterparties to the interest rate contracts are major
financial institutions. Accordingly, the Company does not anticipate any losses
as a result of counterparty defaults. The Company does not hold or issue
derivative financial instruments for trading purposes nor is it a party to any
leveraged derivatives.
Over the past five years, the Company has closed one older ethylene oxide
facility in conjunction with the opening of the Glens Falls, New York facility
and replaced one of the acquired facilities in France. The Company plans to
close an additional small facility in Montreal, Canada and consolidate its
activities with the Company's Toronto, Canada facility during the third quarter
of Fiscal 1999. In June 1998, the Company recorded an operating expense reserve
of approximately $320,000 for estimated costs associated with the closing of the
Montreal facility.
The United States operating results of the Company and the Parent Company
are included in the consolidated federal income tax returns of Griffith
Laboratories, Inc. Income taxes have been allocated to the Company based upon
the estimated taxes which the Company would have paid on a separate company
basis. Subsequent to the Offering, the Company's operating results will no
longer be consolidated with those of the Parent Company for United States
federal income tax purposes.
29
<PAGE> 31
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated the percentage of
net revenues and the percentage change from the prior period of certain items
reflected in the Company's consolidated statements of income:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
---------------------------------------
FISCAL YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
--------------------- ---------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................... 69.5 70.0 67.5 67.8 67.9
----- ----- ----- ----- -----
Gross profit................................... 30.5 30.0 32.5 32.2 32.1
Selling and administrative expenses............ 20.1 18.6 19.9 19.3 18.7
Royalty expense to Parent Company.............. 4.6 4.5 4.6 4.6 4.4
----- ----- ----- ----- -----
Operating profit............................... 5.8 6.9 8.0 8.3 9.0
----- ----- ----- ----- -----
Other (income) expense:
Interest expense, net........................ 3.4 2.5 1.5 1.6 1.4
Other (income) expense....................... 0.3 (0.6) 0.4 .3 .7
----- ----- ----- ----- -----
Earnings before income taxes................... 2.1 5.0 6.1 6.4 6.9
Income tax expense............................. 0.1 1.7 1.6 2.4 2.7
----- ----- ----- ----- -----
Net earnings................................... 2.0% 3.3% 4.5% 4.0% 4.2%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGES
---------------------------------------
NINE
MONTHS
FISCAL YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
------------------------- -----------
1996 1997 1998
COMPARED TO COMPARED TO COMPARED TO
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues..................................... 9.3% 10.0% 24.6%
Cost of revenues................................. 10.0 6.1 24.8
Gross profit..................................... 7.7 19.2 24.2
Selling and administrative expenses.............. 0.8 18.0 20.5
Operating profit................................. 30.5 27.7 35.0
Earnings before income taxes..................... 161.5 34.0 35.3
</TABLE>
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
Net revenues. Net revenues increased $10.8 million, or 24.6%, to $55.0
million in the nine months of Fiscal 1998 from $44.1 million in the nine months
of Fiscal 1997. This increase was primarily due to additional volume in North
America, reflecting (a) the continued strength of the single use medical device
industry and industry trends towards consolidation and outsourcing, and (b) the
Company's acquisition of Sorex Medical, Inc., in April 1998. Also, European net
revenues increased due to new revenues generated by Griffith Mediris, the
Belgian gamma company acquired in August 1997.
Cost of revenues. Cost of revenues increased $7.2 million, or 24.8%, to
$37.3 million in the nine months of Fiscal 1998 from $30.1 million in the nine
months of Fiscal 1997. Cost of revenues for the nine months of Fiscal 1998
include expenses of Sorex Medical, Inc. (acquired in April 1998) and Griffith
Mediris (acquired in August 1997), as well as an approximate $320,000 expense
reserve provision for estimated costs associated with the closing of the
Company's Montreal facility. Gross margin decreased to 32.1% for the nine months
of Fiscal 1998 from 32.2% for the nine months of Fiscal 1997.
Selling and administrative expenses. Selling and administrative expenses
increased $1.7 million, or 20.5%, to $10.2 million for the nine months of Fiscal
1998 from $8.5 million for the nine months of Fiscal 1997. This increase is
primarily a result of additional costs related to increasing sales and marketing
initiatives in North America, incremental fees for outside consultants and the
addition of the Griffith Mediris operation.
30
<PAGE> 32
However, such expenses as a percent of net revenues declined to 18.7% in the
nine months of Fiscal 1998 from 19.3% in the nine months of Fiscal 1997, due to
economies of scale.
Operating profit. As a result of the preceding factors, operating profit
increased $1.3 million, or 35.0%, to $4.9 million for the nine months of Fiscal
1998 from $3.7 million for the nine months of Fiscal 1997. Fluctuations in
foreign exchange rates between fiscal years had an unfavorable translation
impact of approximately $200,000 on the reported amount of operating profit for
the nine months of Fiscal 1998 as compared to the nine months of Fiscal 1997.
Other (income) expense. Net other expenses increased to approximately $1.2
million for the nine months of Fiscal 1998 from $861,000 for the nine months of
Fiscal 1997 primarily due to the write-off of idle fixed assets and interest
expense on a $12.0 million promissory note dated June 1, 1998 payable to the
Parent Company for a dividend (see "Liquidity and Capital Resources").
Income tax expense. The Company's income tax expense represented a 39.6%
effective tax rate for the nine months of Fiscal 1998 as compared to a 37.9%
effective tax rate for the nine months of Fiscal 1997. The net increase in the
effective tax rate is primarily due to the relative weight of earnings before
income taxes generated during the Fiscal 1998 period in those European countries
in which the Company operates, which generally have higher statutory tax rates
than those in effect in North American countries.
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Net revenues. Net revenues increased $5.4 million, or 10.0%, to $60.2
million in Fiscal 1997 from $54.8 million in Fiscal 1996. This increase was due
to volume increases in North America with a number of existing customers. The
addition of capacity in the Glens Falls, New York facility during Fiscal 1997
also contributed to the net revenue increase. Net revenues from European
operations increased approximately 5.0% in local currency primarily due to
increased volume; however, unfavorable exchange rate variances resulted in a
slight decrease when translated into United States dollars.
Cost of revenues. Cost of revenues increased $2.3 million, or 6.1%, to
$40.6 million in Fiscal 1997 from $38.3 million in Fiscal 1996. Gross margin
increased to 32.5% in Fiscal 1997 from 30.0% in Fiscal 1996 due to the favorable
impact of higher volume against the Company's fixed cost structure.
Selling and administrative expenses. Selling and administrative expenses
increased $1.8 million, or 18.0%, to $12.0 million in Fiscal 1997 from $10.2
million in Fiscal 1996. This increase primarily resulted from additional North
American sales and marketing initiatives and increased professional fees.
Selling and administrative expenses as a percent of net revenues increased to
19.9% in Fiscal 1997 from 18.6% in Fiscal 1996 as a result.
Operating profit. As a result of the preceding factors, operating profit
increased $1.1 million, or 27.7%, to $4.9 million for Fiscal 1997 from $3.8
million for Fiscal 1996. Fluctuations in foreign exchange rates between fiscal
years had an unfavorable translation impact of approximately $300,000 on
operating income in Fiscal 1997 as compared to Fiscal 1996.
Other (income) expense. Net other expenses increased to $1.2 million in
Fiscal 1997 from $1.0 million in Fiscal 1996. Interest expense decreased
approximately $500,000 in Fiscal 1997. However, in Fiscal 1996 other income
included $653,000 of insurance recoveries related to equipment damage claims at
the Company's Charlotte, North Carolina and Herentals, Belgium facilities.
Income tax expense. While the United States federal income tax rate was
34.0% in both fiscal years, the Company's effective tax rate in Fiscal 1997 and
Fiscal 1996 was 26.3% and 35.4%, respectively. The difference between the
Company's effective tax rate and the statutory rate, as well as the difference
between the Company's effective tax rates between years, was primarily due to
variations in foreign tax rate differentials and amounts of state income taxes
net of federal tax benefits.
31
<PAGE> 33
FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Net revenues. Net revenues increased $4.7 million, or 9.3%, to $54.8
million in Fiscal 1996 from $50.1 million in Fiscal 1995. Net revenues in North
America increased $2.6 million largely due to volume increases made possible by
the opening of the Charlotte, North Carolina facility in early Fiscal 1996, and
by additional capacity added to the Glens Falls, New York facility. Net revenues
in Europe increased $2.1 million as a result of strong revenue growth in the
United Kingdom, growth in the Belgian and Dutch core sterilization operations
and in the European distribution business.
Cost of revenues. Cost of revenues increased $3.5 million, or 10.0%, to
$38.3 million in Fiscal 1996 from $34.8 million in Fiscal 1995. Gross margin
decreased to 30.0% in Fiscal 1996 from 30.5% in Fiscal 1995.
Selling and administrative expenses. Selling and administrative expenses
remained essentially level between Fiscal 1996 at $10.2 million and Fiscal 1995
at $10.1 million. Selling and administrative expenses as a percent of net
revenues decreased to 18.6% in Fiscal 1996 from 20.1% in Fiscal 1995, due to
economies of scale.
Operating profit. As a result of the preceding factors, operating profit
increased $888,000, or 30.5%, to $3.8 million for Fiscal 1996 from $2.9 million
for Fiscal 1995. Fluctuations in foreign exchange rates between years had an
unfavorable impact of approximately $400,000 in Fiscal 1996 as compared to
Fiscal 1995.
Other (income) expense. Net other expenses decreased to $1.0 million for
Fiscal 1996 from $1.9 million for Fiscal 1995. As previously indicated, in
Fiscal 1996 other income included $653,000 of insurance recoveries related to
equipment damage claims at the Company's Charlotte, North Carolina and
Herentals, Belgium facilities.
Income tax expense. While the United States federal income tax rate was
34.0% in both fiscal years, the Company's effective tax rate in Fiscal 1996 and
Fiscal 1995 was 35.4% and 3.7%, respectively. The difference between the
Company's effective tax rate and the statutory rate, as well as the difference
between the Company's effective tax rates between years, was primarily due to
variations in foreign tax rate differentials and amounts of state income taxes
net of federal tax benefits.
QUARTERLY RESULTS
The following table sets forth consolidated statement of operations data
for the eleven quarters in the period ended June 30, 1998. This information has
been derived from unaudited consolidated financial statements that, in the
Company's opinion, reflect all normal recurring adjustments and eliminations
that the Company considers necessary for a fair presentation of the results of
operations in the quarterly periods. The data set forth should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The operating results for any quarter
are not necessarily indicative of results for future quarters.
32
<PAGE> 34
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997
------------------------------------------- -------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues................... $12,963 $13,530 $14,244 $14,034 $13,779 $14,566 $15,766 $16,136
Gross profit................... $ 3,635 $ 3,744 $ 4,655 $ 4,418 $ 4,258 $ 4,708 $ 5,232 $ 5,404
% of net revenues............ 28.0% 27.7% 32.7% 31.5% 30.9% 32.3% 33.2% 33.5%
Operating profit............... $ 304 $ 677 $ 1,543 $ 1,276 $ 832 $ 1,238 1,596 $ 1,186
% of net revenues............ 2.4% 5.0% 10.8% 9.1% 6.0% 8.5% 10.1% 7.4%
Net earnings (loss)............ $ (127) $ 285 $ 1,055 $ 571 $ 363 $ 534 $ 862 $ 967
% of net revenues............ (1.0%) 2.1% 7.4% 4.1% 2.6% 3.8% 5.2% 6.0%
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------
FISCAL 1998
-------------------------------
DEC. 31, MARCH 31, JUNE 30,
1997 1998 1998
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues................... $17,607 $17,310 $20,036
Gross profit................... $ 5,917 $ 5,155 $ 6,556
% of net revenues............ 33.6% 29.8% 32.7%
Operating profit............... $ 1,862 $ 1,269 $ 1,819
% of net revenues............ 10.6% 7.3% 9.1%
Net earnings................... $ 953 $ 690 $ 651
% of net revenues............ 5.4% 4.0% 3.2%
</TABLE>
Quarterly fluctuations. The Company has experienced, and expects to
continue to experience, significant fluctuations in net revenues and operating
results from quarter to quarter. In general, fluctuations in the Company's
quarterly net revenues and operating results can be caused by a variety of items
including, among other things, fluctuations in the timing and size of customer
orders, volatility in the market for single use medical devices, and the timing
of construction and commencement of new capacity. Historically, due to the
seasonality of the manufacturing cycles for the single use medical device
industry, the Company's first and second fiscal quarters' net revenues and
operating results tend to be lower than such amounts in the third and fourth
quarters. The Company's third quarter net revenues and operating results have
typically benefited from increased sterilization processing resulting from
European manufacturers' desire to sterilize products prior to the traditional
European holiday month of August.
Gross and operating profits for the quarters ended December 31, 1995 and
March 31, 1996 were negatively impacted by start-up costs associated with the
opening of the Charlotte, North Carolina ethylene oxide sterilization facility.
Operating profit decreased between the quarters ended June 30, 1997 and
September 30, 1997 primarily due to the establishment of a reserve related to
the Griffith Mediris operation during the quarter ended September 30, 1997 which
was subsequently reversed in the quarter ended March 31, 1998. The decrease in
gross margins between the quarters ended December 31, 1997 and March 31, 1998
primarily resulted from increased costs incurred in the quarter ended March 31,
1998 related to adding new capacity that became operational primarily in the
following quarter.
Because it has experienced significant fluctuations in net revenues and
operating results, 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. See "Risk Factors --
Unpredictability of Future Operating Results; Likely Fluctuations in Quarterly
Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date with cash flow from
operations, Industrial Revenue Bonds ("IRB's"), Parent Company financing and
bank financing. In addition to providing direct financing to the Company in the
form of capital contributions and loans, historically the Parent Company has
also guaranteed the Company's obligations for some of its bank debt and for
letters of credit required pursuant to
33
<PAGE> 35
the IRB's. Bank financing utilized by the Company has historically been in the
form of bank short-term credit facilities and term loans generally bearing
interest at floating market interest rates.
Following completion of the Offering, no further financing can be expected
to be available to the Company directly or indirectly from the Parent Company.
Therefore, in the future the Company expects to finance operations with cash
flows from operations, existing financial resources, including existing
short-term credit facilities with various banks in the United States and Europe,
a proposed new $50.0 million unsecured Revolving Credit Agreement which the
Company expects to enter into with a syndicate of banks prior to the completion
of this Offering, and, if necessary and to the extent allowed under the
provisions of the Revolving Credit Agreement, obtaining additional debt
financing. The Company may also raise cash to finance operations by the issuance
of additional equity securities.
In early July 1998, the Company and The First National Bank of Chicago (the
"Bank") signed a commitment letter for the Revolving Credit Agreement referred
to above. Although the commitment letter expired on September 30, 1998, the Bank
(which would form a syndicate with other banks) has informally indicated to the
Company its willingness to proceed with the financing on terms similar to those
proposed in the commitment letter, subject to pricing conditions prevailing in
the market at the time any such commitment is reissued. The following summary of
the proposed Revolving Credit Agreement is based upon the provisions of the
recently expired commitment letter, all of which are subject to change as a
result of further negotiation between the Company and the Bank. The Revolving
Credit Agreement is expected to provide for aggregate borrowings of $50.0
million, be unsecured, require interest at a floating rate based upon a leverage
formula, expire in three years and contain a number of restrictive covenants
including, among other restrictions, required minimum net worth and interest
coverage ratios, maximum levels of debt and annual capital expenditures, and
limitations regarding acquisitions and the payment of dividends. It is expected
that the Revolving Credit Agreement will restrict the Company's ability to
create indebtedness (as defined) to specific types of indebtedness (including
such items as borrowings under existing credit facilities, intercompany
indebtedness, certain rate hedging obligations, indebtedness of acquired
subsidiaries that was not incurred in connection with or in anticipation of such
acquisition, and certain contingent obligations) and to other indebtedness at no
time exceeding $15 million in aggregate principal amount. Additionally, the
Company expects that the Revolving Credit Agreement will require that the
Company's ratio of consolidated indebtedness (as defined) to EBITDA (i.e.,
earnings before interest, taxes, depreciation and amortization expenses) for the
preceding four quarters not exceed 3.0 to 1.0 at the end of each fiscal quarter.
The letter of credit provisions of the Revolving Credit Agreement are expected
to reduce amounts available for borrowing under the Revolving Credit Agreement
by the principal amount of letters of credit issued. It is anticipated that,
concurrent with the execution of the Revolving Credit Agreement, the provisions
of the IRB agreements requiring that the Parent Company guaranty IRB-related
letters of credit will be canceled. Similarly, it is expected that a Parent
Company guaranty of the Company's debt payable to a German bank will be removed.
As of June 30, 1998, the Company had approximately $3.1 million in cash and
cash equivalents and a $25.6 million working capital deficit. The working
capital deficit is primarily a result of: (i) a $12.0 million promissory note
payable to the Parent Company in payment of a dividend; (ii) short-term bank
debt incurred to finance approximately $9.6 million of the cost of acquiring
Sorex Medical, Inc.; and (iii) amounts borrowed from banks and the Parent
Company under short-term credit facilities to finance various facility expansion
projects. Historically, the Company's cash in the United States has been pooled
with the Parent Company's cash resources, with separate records maintained. The
Company has sometimes had an overdraft due to the Parent Company.
At June 30, 1998, the Company's short-term debt consisted of approximately
$14.8 million of bank short-term credit facilities with a variable interest rate
(weighted average interest rate of 6.15% at June 30, 1998). At June 30, 1998,
the Company had approximately $5.5 million of unused lines of credit available.
The Company's existing short-term credit facilities have various maturities
extending to April 2003, and contain various restrictive covenants. The Company
plans to use a portion of the proceeds of the Offering to repay short-term debt.
See "Use of Proceeds."
Long-term debt at June 30, 1998 consisted of $9.5 million of IRB's in the
United States and approximately $9.9 million (of which $1.4 million represents
the current portion) of notes payable to various
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European banks. This debt contains certain restrictive covenants, including
restrictions as to payment of dividends and requirements that specified minimum
levels of working capital and tangible net worth be maintained. The IRB's are
supported by bank letters of credit. Further, the Company has pledged most of
its shares in Griffith Mediris, its 82.8% owned Belgian gamma entity, against
the approximate $2.6 million acquisition loan facility with a European bank
expiring February 2003. The IRB's and the majority of the European bank notes
had floating market interest rates approximating 4.5% at June 30, 1998. The
weighted average interest rate on the Company's total debt was approximately
4.7% on June 30, 1998.
Net cash provided by operating activities was $6.7 million, $8.3 million,
$10.7 million and $8.7 million in Fiscal 1995, 1996 and 1997, and the nine
months ended June 30, 1998, respectively. The increases between fiscal years are
primarily the result of increased operating profits and increased depreciation
and amortization reflecting increased capacity. Deferred income tax expense also
significantly contributed to net cash provided by operating activities in Fiscal
1995, while working capital changes significantly impacted net cash provided by
operating activities in Fiscal 1997.
Net cash used in investing activities was $9.8 million, $3.8 million, $9.2
million and $20.4 million in Fiscal 1995, 1996 and 1997, and the nine months
ended June 30, 1998, respectively. The investing activities were primarily
attributable to the purchase of property, plant and equipment and, in the nine
months ended June 30, 1998, the Company's acquisition of Sorex Medical, Inc.
Fiscal 1997 net cash used in investing activities also reflected the Company's
acquisition of its majority interest in the Belgian gamma operation, and a
$923,000 advance made by the Company to the Parent Company which was repaid
during the first six months of Fiscal 1998 before an additional advance of
$725,000 was made by the Company to the Parent Company in the third quarter of
Fiscal 1998. Net cash used in investing activities in Fiscal 1995 also included
a $910,000 increase in restricted cash and investments representing unused
proceeds of IRB's held in trust until expended. In Fiscal 1996 and 1997, net
cash of $457,000 and $413,000, respectively, was provided by reductions in such
restricted cash and investments.
The Company made capital expenditures (including acquisitions) of $8.5
million, $3.9 million, $8.9 million and $19.7 million in Fiscal 1995, 1996, 1997
and the nine months ended June 30, 1998, respectively. The Company currently
expects to make additional capital expenditures of approximately $6.3 million
during the last three months of Fiscal 1998. However, in order to expand its
sterilization capacity sufficiently to meet anticipated increases in the demand
for its services, as well as to carry out other components of its business
strategy, the Company expects that its annual capital expenditures in the next
three fiscal years will be substantial and are likely to exceed historical
levels, more closely resembling the level of capital expenditures in Fiscal
1998. During the first nine months of Fiscal 1998, the Company added capacity at
seven facilities, and is currently adding capacity at four facilities.
Additionally, the Company, through its joint venture with MDS Nordion Inc., has
a commitment of approximately $3.6 million over the next 15 months for work
related to its planned Mexican gamma facility. While management believes that
revenues will ultimately be generated from additional capacity created by such
capital expenditures, the timing of the realization of such additional revenues
cannot be known with certainty. Typically, there is a lag between the start-up
of a new facility or expansion of an existing facility and the point when such
facility generates adequate amounts of annual revenues to achieve profitability.
Net cash provided by (used in) financing activities was $4.1 million,
($4.9) million, $424,000 and $12.2 million in Fiscal 1995, 1996 and 1997 and the
nine months ended June 30, 1998, respectively. Net cash provided by financing
activities in Fiscal 1995 was primarily the net result of $5.3 million of IRB
proceeds relating to the Glens Falls, New York facility, $1.0 million of
proceeds from other long-term debt, $1.2 million from short-term credit
facilities and a $1.1 million capital contribution from the Parent Company
offset partially by $3.0 million of net repayments of debt payable to the Parent
Company and $1.2 million of other debt payments. In Fiscal 1996, net cash used
in financing activities was primarily attributable to repayments of $7.1 million
of short-term credit facilities, repayment of $2.7 million of amounts owed to
the Parent Company, and $1.4 million of principal payments on some of the
Company's long-term debt and notes payable, partially offset by approximately
$6.4 million of proceeds from additional long-term debt and notes payable,
including $4.2 million of proceeds from IRB's relating to the Company's
Charlotte, North Carolina facility. Net cash provided by financing activities in
Fiscal 1997 was primarily attributable to $6.7 million of long-term debt
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proceeds in several European countries pursuant to bank agreements finalized
with a European bank in January 1997 and pursuant to an approximate $800,000
floating rate note related to the Company's acquisition of its majority interest
in the Belgian gamma operation, largely offset by repayments of bank short-term
credit facilities and notes payable to the Parent Company and banks of $2.4
million and $4.0 million, respectively. Net cash provided by financing
activities during the nine months ended June 30, 1998 consisted primarily of
approximately $13.9 million of short-term credit provided to the Company by
banks, offset by net repayment of approximately $1.7 million of long-term bank
debt.
In April 1998, the Company obtained approximately $9.6 million to finance
substantially all of the cost of acquiring Sorex Medical, Inc. under a
short-term variable rate (approximately 6.3% per annum rate to date) bank credit
line guaranteed by the Parent Company. In conjunction with the acquisition of
Sorex Medical, Inc., approximately $2.5 million of deferred tax assets were
recorded and are included in the consolidated balance sheet of the Company at
June 30, 1998. These deferred tax assets pertain principally to approximately
$6.7 million of net operating loss carryforwards generated by Sorex Medical,
Inc. prior to its acquisition by the Company. These losses will be available to
offset future taxable income of the acquired company subject to an annual
limitation of approximately $821,000. These losses begin to expire in 2005
through 2018.
In July 1998, the Company obtained approximately $1.6 million under its
unsecured long-term facility with a European bank to purchase ethylene oxide
sterilization assets in eastern Belgium. Since October 1997, the Company had
been operating the eastern Belgian sterilization facility pursuant to
arrangements with the seller. Net revenues and operating income of approximately
$234,000 and $78,000 respectively, for such Belgian operation were included in
the Company's consolidated results for the nine months ended June 30, 1998.
On June 1, 1998 the Company issued a promissory note payable on demand to
the Parent Company for $12.0 million in payment of a dividend declared by the
Company on May 21, 1998. Such promissory note bears interest at an annual rate
of 6.0%, payable at maturity. The Company will use approximately $12.2 million
of its net proceeds from the Offering to discharge the principal of this
promissory note and related accrued interest and will use most of the remaining
net proceeds for repayment of short-term debt payable to banks incurred for
capital expenditures and general corporate purposes. See "Use of Proceeds."
The Company believes that the net proceeds of the Offering, together with
existing cash, cash generated from operations, its existing credit facilities
and the proposed $50.0 million unsecured Revolving Credit Agreement which the
Company expects to enter into with a syndicate of banks prior to the completion
of the Offering will be sufficient to fund the Company's anticipated capital
expenditures and operations through at least the end of Fiscal 2001. The Company
also believes that it may be able to finance certain of its expansion projects
via the issuance of additional IRB's (until the maximum tax-free IRB limit of
$40.0 million is reached), although eligibility to receive IRB proceeds is
subject to specific rules and regulations, and the availability of IRB funds
from governmental Industrial Development Agencies in the specific geographic
regions of the Company's expansion therefore cannot be assured. Overall, there
can be no assurance that adequate sources of capital will be available to the
Company in the future or, if available, will be on terms acceptable to the
Company. See "Risk Factors -- Capital Requirements."
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on its
overall financial condition or results of operations during the nine months
ended June 30, 1998 and Fiscal 1997, 1996 and 1995.
YEAR 2000 ISSUES
The Company's principal computer applications cover three broad areas of
its operation: (i) those associated with the process controls at its
sterilization facilities (which include both information technology and embedded
technology); (ii) those which relate to its general operations (including
invoicing, purchasing, receiving and payroll); and (iii) those which pertain to
its financial and accounting systems (including its general ledger, receivables,
payables and fixed assets). The Company currently utilizes the Parent Company as
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a service provider with respect to its financial and accounting systems
throughout North America and also with respect to its general operations systems
in Mexico.
Commencing late in 1997, the Company began an evaluation and conversion
project covering all of its systems to identify and address all necessary code
changes, testing and implementation related to Year 2000 compliance issues. At
the same time, the Company also began an evaluation of Year 2000 compliance
issues for its critical customers and suppliers. Internal resources are being
used to make the evaluation and test Year 2000 compliance. The Company expects
to conclude its evaluation and testing of all systems under its direct control
by the end of February 1999 and to complete necessary systems modifications or
conversions and testing by mid-1999. The Parent Company has informed the Company
that (i) it has undertaken a similar evaluation and conversion project with
respect to its computer systems including those which are used by the Company
and (ii) it expects to bring such systems into Year 2000 compliance by mid-1999.
Based upon its evaluation to date, the Company estimates its aggregate cost
will not be material to bring into Year 2000 compliance all of the computer
systems utilized by the Company, including those of the Parent Company. The
Company expects to be able to better estimate the cost which it may incur to
repair any software problems and to replace any problem systems and equipment
following completion of its evaluation. Through August 31, 1998, the Company had
incurred costs approximating $25,000 to perform the evaluation and testing of
its systems. No other technology projects have been deferred by the Company due
to its Year 2000 compliance efforts.
There can be no assurance that the foregoing compliance schedule will be
met by the Company or the Parent Company or that any software or systems of the
Company's customers and suppliers, on which the Company's business is dependent,
will be corrected in a timely manner. The Company has not prepared contingency
plans pending completion of its evaluation of the extent and nature of its
compliance issues. The Company expects to complete its contingency plans by the
end of February 1999. In a worst case scenario, any failure by the Company, the
Parent Company or such third parties to become Year 2000 compliant on a timely
basis could result in disruption of the Company's normal operations and in the
inability or unwillingness of its customers to utilize the Company's services.
Any such failure or disruption could have a material adverse effect on the
Company's business, financial condition and results of operations and could
result in litigation against the Company based upon any such disruption or
failure. See "Risk Factors -- Year 2000 Issues."
ANTICIPATED IMPLICATIONS OF THE EUROPEAN MONETARY UNION
On January 1, 1999 eleven of the fifteen members of the European Union will
adopt the euro as their common legal currency. These eleven countries are:
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal and Spain. Denmark, Greece, Sweden and the United Kingdom
will not participate initially, but may do so at a later date. On January 1,
1999 a fixed conversion rate between the local currency of each of the eleven
participating countries and the euro will be established, and the euro will
begin trading on world currency exchanges. Exchange rates between each of the
individual local currencies will no longer be quoted. Additionally, the monetary
policy for these eleven countries will be directed by the new European Central
Bank.
During the period from January 1, 1999 through January 1, 2002, also known
as the transition period, the local currencies will remain legal tender as
sub-denominations of the euro in the eleven countries. However, parties may use
either the euro or the local currencies to pay for goods and services. Beginning
on January 1, 2002 the participating countries will introduce new euro
denominated currency and withdraw their local currencies from circulation. After
July 1, 2002 the euro will be the only legal tender for the participating
countries.
While the euro is expected to provide benefits to the members of the
European Union in terms of increased economic importance in the world, reduction
of exchange risk, greater price stability, the promotion of competition and the
opportunity for improved political cooperation among member countries, it does
present certain challenges to companies operating in Europe. These challenges
include the readiness of computer systems to accommodate the euro, increased
cross-border competition and price transparency, currency risks and continuity
of contracts. Given the Company's significant operations within the European
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Union, it will be subject to the changes brought about by the introduction of
the euro. See "Risk Factors -- Changes in Exchange Rates."
However, the Company believes that the impact of the euro on the Company's
operations will not be significant. The Company's existing computer systems can
already accommodate transactions in both local currencies and the euro, as well
as the required currency translations and decimal requirements for the euro. In
addition, given the service nature of the Company's business, the geographical
limitations on the areas which can be served by individual sterilization
facilities and the factors which affect pricing within the industry, the
introduction of the euro is not expected to alter the Company's ability to price
its services effectively nor to increase the cross-border competition
experienced by the Company. See "Business -- Customers," "-- Sales and
Marketing" and "-- Competition." Substantially all of the Company's net revenues
from its European operations are derived from countries within the European
Union. Consequently, the continuity of customer and supplier contracts within
those countries is facilitated by European Union regulations. Existing risk to
the Company from cross-border currency flow is minimal and is expected to be
reduced through the introduction of euro.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. For the Company, comprehensive income will basically
consist of reported income plus the change in the balance of the cumulative
translation account. SFAS No. 130 is effective for the Company for Fiscal 1999
and requires comparative information for earlier years to be restated.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, establishes standards for the way that public enterprises
report information about operating segments in annual and interim financial
statements. It also establishes new standards for disclosures regarding products
and services, geographic areas and major customers. This statement is effective
for the Company for Fiscal 1999. However, the segment disclosures in the
footnotes to the Company's financial statements included in this registration
statement have already presented information regarding the Company's North
American and European operations in accordance with the provisions of SFAS No.
131.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
establishes the accounting and reporting standards for derivative instruments
and for hedging activities. This statement will be effective for the Company's
Fiscal Year 2000. Given the Company's current and anticipated use for derivative
instruments, SFAS No. 133 is not expected to have a material effect on the
Company's results of operations or financial position.
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BUSINESS
INTRODUCTION
Griffith Micro Science is the largest multinational provider of
sterilization management services and the only one with extensive operations in
both North America and Europe. See "Business -- Competition." The Company offers
comprehensive sterilization processing and related laboratory testing,
consulting and logistics management services to manufacturers of single use
medical devices and, to a much lesser extent, pharmaceuticals, cosmetics and
food products. The Company pioneered the development and use of ethylene oxide
as a sterilant beginning in the 1930s. Griffith Micro Science regards itself as
the premier full service provider of ethylene oxide sterilization management
services and has recently begun to offer gamma sterilization services. See
"Business -- Sterilization Management Services." The Company currently operates
a network of eleven ethylene oxide sterilization facilities in North America
(eight in the United States, two in Canada and one in Mexico) and a network of
seven ethylene oxide sterilization facilities and one gamma sterilization
facility in Europe. The Company has also formed a joint venture to design,
construct and operate a gamma sterilization facility in Mexico. Over the past
five years, the Company has opened three new sterilization facilities, acquired
five others, replaced one and closed one.
THE STERILIZATION PROCESSING INDUSTRY
Overview
A substantial portion of single use prepackaged medical devices and kits
are required by government regulation in the United States and many other
countries to be "sterile" or to have minimal levels of microbial contamination
when sold. Similar regulations apply to certain pharmaceutical products and
packaging materials. In addition, other products, such as cosmetics, spices and
herbs, frozen and dried foods, and animal feed are sterilized to improve their
safety, reduce microbial contamination and extend shelf-life. Manufacturers
sterilize their products after assembly and packaging using either or both of
their own in-house sterilization facilities ("captive processors") or the
services of contract sterilization processing companies such as Griffith Micro
Science ("contract processors"). The two most widely used methods of
sterilization utilize either ethylene oxide in gaseous form ("ethylene oxide
sterilization") or gamma radiation from a radioactive Cobalt 60 isotope ("gamma
sterilization"). Other methods include E-beam sterilization ("E-beam"),
accomplished using a high-energy electron beam, and steam sterilization, which
to date have only been employed to a limited extent for contract sterilization.
Until the 1980s, most major manufacturers of single use medical devices
performed the bulk of their sterilization in-house. As a result of a number of
factors, in the mid-1980s manufacturers began to outsource an increasing amount
of their sterilization requirements. The increased volume of outsourced
sterilization to contract processors reflects a trend among manufacturers to
focus on their core competencies. Specific factors contributing to this trend
include the logistical flexibility afforded by contract processors, the
significant capital required to construct and maintain an in-house sterilization
facility and the need to comply with dynamic environmental and health and safety
regulations. Today, the sterilization of single use medical devices represents
by far the largest component of the overall contract sterilization business. The
Company estimates that in 1997 a substantial majority of the aggregate revenues
of all contract processors was derived from the sterilization of single use
medical devices and related services.
Although the Company is not aware of any published industry statistics and
precise numbers are difficult to determine, the Company estimates that in 1997
the market for sterilization services in North America and those European
countries in which the Company has sterilization facilities was approximately
$500 million and that it consisted of the following components:
- contract processors generated aggregate net revenues of approximately
$300 million, including approximately $200 million in North America and
approximately $100 million in Europe; of this total, approximately 50% to
55% was attributable to ethylene oxide sterilization, 40% to 45% to gamma
sterilization and 5% to 7% to E-beam and other forms of sterilization;
and
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- captive processors sterilized a volume of products which, had they been
sterilized by contract processors, would have generated aggregate net
revenues of approximately $200 million, including approximately $140
million in North America and approximately $60 million in Europe; the
Company estimates the breakdown of this total volume among sterilization
technologies is similar to that for contract processors.
In determining whether to use a contract processor for its sterilization
needs, a manufacturer considers a number of factors, including the cost of
transporting its products to the contract processor's sterilization facility,
the turn-around time required for processing, the price charged by the contract
processor and the expense associated with in-house processing. Sterilization
facilities operated by contract processors have traditionally tended to be
located within a 300-mile radius of most of the manufacturing plants served by
such facilities. In many cases, contract processors have chosen to strategically
locate a particular sterilization facility in close proximity to a large
customer's manufacturing facility. In those cases, the financial viability of
the sterilization facility is often tied to the volume of sterilization business
received from that customer.
Beginning in the 1960's, the medical products industry in the United States
began to develop and market an array of single use medical devices for a variety
of often highly specialized surgical and other applications. Some of these
single use devices replaced reusable medical devices, while many others were
employed in new procedures or applications for which reusables would have been
impractical or impossible. Today, throughout North America and Europe, a broad
range of single use medical devices are used by hospitals, clinics and other
healthcare organizations in performing surgical and other medical procedures and
in the treatment and care of patients. Such devices include catheters,
intravenous feeding sets, dental and orthopedic implants, surgical instruments,
blood collection devices, gowns and caps, specimen bottles and syringes. A
recent and rapidly-developing trend is the assembly and sale by medical device
manufacturers of specialized "kits" containing all of the individual single use
medical devices necessary to perform a particular surgical or other medical
procedure or sub-procedure. Some of these kits are customized for individual
hospitals and even individual physicians.
A variety of non-medical products are also commercially processed,
primarily due to concerns over health risks and potential product liability as
well as economic considerations such as losses due to infestation and spoilage.
The principal types of non-medical products being commercially processed include
certain food ingredients and products, food packaging materials, cosmetics and
pharmaceuticals. The FDA has approved the use of gamma processing for spices,
fruits, vegetables, chicken and most recently red meat to kill bacteria and
other disease-causing microorganisms. However, the Company believes commercial
development of gamma radiation for food products such as poultry and red meat is
subject to several significant uncertainties, including the need for consumer
education and acceptance of foods processed using gamma and the willingness of
consumers to pay the higher prices likely to be charged for such products. In
addition, most existing gamma facilities will require significant modifications
or new gamma facilities will have to be built in order to meet the particular
design requirements for the processing of such food products, including the
installation of refrigeration facilities. The Company believes the use of
ethylene oxide processing for such food products as red meat, poultry and fish
is unlikely to develop.
The principal sterilization processes
Validation. Prior to the commencement of sterilization of any medical
product, whether accomplished by ethylene oxide, gamma or any other
sterilization technology, the process parameters for each step in the
sterilization cycle require "validation" in each chamber or cell in which the
product will be sterilized. The manufacturer establishes the cycle parameters or
dosage specifications for its products, often in consultation with the contract
processor. The cycle parameters or dosage specifications for any given product
vary, often significantly, among different products. The validation process is
intended to assure that the proposed sterilization cycle will consistently
achieve the desired sterility assurance level and that the product and its
packaging will be able to withstand the sterilization process. Validation
involves test runs of the proposed cycle or dosage in the contract processor's
chamber or cell, the results of which are documented in detail.
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Ethylene oxide sterilization. Ethylene oxide sterilization is accomplished
by exposing products to ethylene oxide in gaseous form, which destroys
microorganisms by disrupting their cells' metabolism and ability to reproduce.
Ethylene oxide sterilization in a contract processor's facility typically
involves five principal steps: (i) product pre-processing; (ii) preconditioning;
(iii) exposure to ethylene oxide; (iv) aeration; and (v) storage and shipment.
Product pre-processing involves completing the appropriate documentation and
preparing the product for sterilization, which includes placement of biological
indicators ("BIs") throughout the palletized product load. BIs are test strips,
test packs or product samples rich in microorganisms which, upon exposure to a
critical amount of ethylene oxide, will be destroyed, confirming sterility of
the processed batch. The preconditioning step involves exposure of the product
to elevated temperature and humidity to ensure that any microorganisms on the
product are active and therefore susceptible to the ethylene oxide. Exposure to
ethylene oxide occurs in an airtight chamber under specific parameters of time,
temperature, humidity and pressure. Once exposure to ethylene oxide is complete,
the product is removed from the chamber, the BIs are sent to a laboratory for
analysis and the product is transferred to an aeration area where residual
ethylene oxide is removed. Once aeration is complete and the test results of the
BIs are received confirming sterility, the product is released for use.
Gamma sterilization. Gamma sterilization is accomplished by exposing
products to Cobalt 60, an isotope that emits gamma radiation and disrupts the
DNA structure of microorganisms, thereby eliminating their ability to reproduce.
Similar to ethylene oxide sterilization, gamma sterilization is a multi-step
process that involves: (i) product staging and pre-processing; (ii) exposure to
Cobalt 60; and (iii) storage and shipment. Product staging involves completing
the appropriate documentation and preparing the product for sterilization.
Typically this includes removing the product from its pallets, placing it in
tote boxes, inserting a dose monitor in the tote to verify appropriate radiation
exposure and staging the product with other products requiring similar exposure
parameters. Once a staged batch of products has been prepared, the totes are
loaded on a conveyor and passed through a radiation cell (a concrete enclosure
in which the product is exposed to radiation). After exposure to the radiation,
the dose monitors are verified to confirm achievement of the desired sterility
assurance level and the product is re-palletized and then released for use.
Comparison of ethylene oxide sterilization and gamma sterilization
Versatility. Ethylene oxide sterilization is highly versatile. Ethylene
oxide is compatible with, and will not change the molecular structure of,
virtually all types of materials which are used in manufactured products and
permeable packaging. Gamma sterilization, on the other hand, causes certain
plastics, rubber and other materials to discolor, become brittle, deform or
otherwise degrade. As a result, gamma sterilization may not be used to sterilize
such gamma sensitive materials, which are contained in many single use medical
devices or their packaging. In addition, gamma cannot be used to sterilize
multiple product surgical kits if they contain any item that is not gamma
compatible or any medications that have not been approved by the FDA for gamma
sterilization.
Turn-around time. Turn-around time (measured from intake of the product to
its release following confirmation of sterility) for ethylene oxide
sterilization in the Company's facilities is typically five to ten days, with
the average being approximately seven to eight days, while the industry standard
for turn-around time for gamma sterilization is approximately five days. The
Company believes this difference in average turn-around time between the two
technologies exists principally because: (i) the gamma process involves fewer
steps than the ethylene oxide process; (ii) the gamma process does not require
the use and testing of BIs to confirm sterility; and (iii) surgical and medical
kits, most of which can only be sterilized using ethylene oxide, tend to have
longer turn-around times. The Company believes there are additional
opportunities to optimize the ethylene oxide sterilization process and thereby
further reduce the average turn-around time through its facilities. See
"Business -- Sterilization Management Services -- Continuous improvement
initiatives."
Service pricing. The Company believes there is little difference in
customer pricing of ethylene oxide and gamma sterilization. In the case of both
technologies, the Company believes that contract processors typically charge
prices which range from 1% to 5% of the unit manufacturing cost of the products
being processed.
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Current trends in use of the two technologies. Ethylene oxide sterilization
was the dominant technology for sterilization until the 1980s. Although
commercial gamma sterilization began in the early 1960s, its widespread use did
not occur until the 1980s when radiation compatible plastics became readily
available for use in products and packaging materials. This was also the period
when manufacturers of single use medical devices began to significantly increase
the outsourcing of their sterilization requirements to contract processors. As a
result, while the business of both ethylene oxide and gamma contract processors
has grown rapidly during the past ten years, the use of gamma sterilization
increased at a significantly faster rate as many medical device manufacturers
which could easily do so converted the sterilization method used for certain of
their products from ethylene oxide to gamma and increasingly designed new
products and packaging to be gamma compatible.
The Company believes that most of the sterilization processing business
which can be feasibly converted from ethylene oxide to gamma (taking into
account technical, operational, financial and FDA regulatory considerations) has
already been converted by medical device manufacturers. The Company also
believes that innovations in gamma compatible resins have slowed. Based upon
these considerations, the Company believes that over the next several years any
further shift by manufacturers of medical devices from ethylene oxide to gamma
sterilization will occur at a very moderate rate. The Company is also aware of
two recent instances in which manufacturers of certain medical devices have
shifted their sterilization from gamma to ethylene oxide due to concerns about
possible degradation caused by exposure to gamma.
The Company believes the overall trend among single use medical device
manufacturers is distinctly toward a technology neutral position with respect to
those products for which manufacturers have a choice of sterilization
technologies, with much greater emphasis being placed by customers on the
quality and extent of the service being offered by contract processors.
The Company's beliefs set forth in the preceding two paragraphs are
principally based on discussions with many of the Company's major customers,
publicly available information with respect to certain other contract and
captive processors and the Company's overall knowledge of and experience with
respect to the market for single use medical devices in North America and
Europe.
BUSINESS STRATEGY
The Company's primary strategic objective is to expand and strengthen its
position as the largest multinational provider of a full range of sterilization
management services. The Company believes the extensive experience, know-how,
expertise and data it has gathered over the more than 60 years since it
pioneered the use of ethylene oxide sterilization has created a significant and
unique core competency, which it refers to as its "scientific platform." The
Company's business strategy is to continue to leverage its scientific platform,
enhancing its position as a full service provider of comprehensive sterilization
management services and allowing it to further pursue "Value Managed
Relationships" with its customers. The key components of this strategy include
the following:
Expand its core medical device sterilization business. The Company will
seek to increase revenues in its core medical device sterilization business
through a combination of methods, including the following:
- increase its ethylene oxide sterilization capacity in North America and
Europe through the further expansion of existing facilities, the start-up
of new facilities and the completion of strategic acquisitions;
- continue to promote outsourcing by manufacturers which currently
sterilize their products in-house;
- continue to pursue business from manufacturers currently served by other
contract processors;
- pursue expansion into additional foreign countries consistent with the
needs of its multinational customer base;
- increase its gamma sterilization capacity on a selective basis; and
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- continue to build long-term "Value Managed Relationships" with new and
existing customers by offering coordinated "one-stop shopping" for all of
their sterilization management requirements.
Optimize the sterilization process through continuous improvement programs
with customers. The Company believes it is uniquely positioned, due to its
scientific platform and the continuous improvement initiatives which it is
implementing (see "Business -- Sterilization Management Services -- Continuous
improvement initiatives"), to assist its customers in increasing the efficiency
of the ethylene oxide sterilization process for their products, thereby reducing
turn-around time and cost. By optimizing the ethylene oxide sterilization
process, the Company seeks to establish a technology neutral position with
respect to those products for which manufacturers have a choice of sterilization
technologies. The Company is taking the following actions, among others:
- develop alternative sterility assurance measurement practices, such as
the use of innovative technologies to measure achievement of key cycle
parameters;
- continue to collaborate with its customers in designing the optimum
ethylene oxide cycles for the sterilization of their products; and
- improve validation efficiency and flexibility through the use of
statistical methods to achieve cycle revalidation and multiple chamber
validation.
Broaden its laboratory and related services offering. The Company believes
the market for sterilization related and other laboratory services offers an
opportunity to broaden its testing and consulting services through a combination
of methods, including the following:
- capitalize upon the trend among the Company's current sterilization
processing customers toward outsourcing their laboratory testing
requirements;
- establish additional satellite laboratories; and
- expand its laboratory service offering through the employment of
additional technical personnel or through selective acquisitions.
Expand processing of non-medical products. The Company currently processes
a wide range of non-medical products at its ethylene oxide facilities in the
United States and Europe. Approximately 60% of the net revenues generated by its
gamma facility in Belgium are derived from processing food products. The gamma
facility in Mexico, which is being built by the Company's joint venture with MDS
Nordion, has been designed to process both food and non-food products. The
Company intends to continue its current overall sterilization focus on single
use medical devices, while maintaining the operational and financial flexibility
necessary to expand its non-medical products business if and to the extent
warranted by changing market conditions or opportunities.
STERILIZATION MANAGEMENT SERVICES
Ethylene oxide sterilization services. The Company's greatest expertise and
experience is in ethylene oxide sterilization processing and related
sterilization management services. This expertise represents the culmination of
over 40 years of commercial ethylene oxide processing experience and is based
upon and derived from the basic ethylene oxide sterilization research conducted
in the 1930s and 1940s by the Parent Company.
The Company currently operates a network of eleven ethylene oxide
processing facilities in North America (eight in the United States, two in
Canada and one in Mexico) and a network of seven ethylene oxide processing
facilities in Europe (two each in Belgium and France and one each in Germany,
the Netherlands and the United Kingdom). Since the beginning of 1994, in
addition to expanding sterilization processing capacity at a number of its
existing facilities, the Company opened newly constructed ethylene oxide
sterilization facilities in Ontario, California in August 1994, Glens Falls, New
York in October 1994 and Charlotte, North Carolina in October 1995. During the
same period, the Company acquired ethylene oxide
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<PAGE> 45
sterilization facilities near Paris and Lyon, France in July 1994, in Salt Lake
City, Utah in April 1998 and near Verviers, Belgium in July 1998. See
"Business -- Strategic Acquisitions and Alliances" and "-- Facilities."
Each of the Company's 18 ethylene oxide processing facilities is equipped
with multiple sterilization chambers which typically vary in size. This provides
flexibility and operational efficiency, so that the Company can more effectively
and quickly serve the sterilization needs of its small and medium-sized
customers, as well as those of its larger customers. The ethylene oxide
sterilization process, as practiced in substantially all of the chambers at the
Company's facilities, is precisely managed by computer systems which constantly
monitor and control the process and record and store detailed data covering key
parameters of the sterilization cycle. Each product to be sterilized has
specific cycle instructions which incorporate the manufacturer's sterilization
cycle parameters for that product. All of the Company's sterilization facilities
are designed to be operated 24 hours per day, 7 days a week. The Company
typically operates each facility on three eight-hour shifts, requiring two to
seven employees for each shift.
The Company promotes sterilization processing at convenient points along
the distribution routes for its customers' products, rather than solely at the
facilities closest to their manufacturing plants. The effect of this has been to
increase the geographic area served by those sterilization facilities which are
positioned to take advantage of this trend. The Company's extensive geographic
networks of facilities in North America and Europe contribute to its ability to
capitalize on this trend.
Gamma sterilization services. The Company expanded its service offering to
include gamma sterilization processing with its purchase in August 1997 of Caric
Mediris, S.A., a Belgian company now named Griffith Mediris (in which the
Company holds an 82.8% equity interest). Griffith Mediris operates an
established gamma facility in southern Belgium which contains two completely
automated and segregated gamma systems and storage areas, one for food products
(with temperature controlled storage areas, both refrigerated and deep-freeze)
and the other for medical devices and pharmaceuticals. It also possesses a
laboratory gamma irradiator for testing purposes as well as a dosimetry
laboratory. The Griffith Mediris irradiators are designed to optimize dose
uniformity. Their processing parameters are controlled and monitored by computer
systems which also provide associated process documentation. Each product to be
sterilized has specific cycle instructions which incorporate the manufacturer's
sterilization cycle parameters for that product. Currently approximately 60% of
the net revenues generated by the Griffith Mediris facility is derived from
processing various food products (including fresh or frozen shrimp, clams, frog
legs, cheese, pasta and spices) and 40% is derived from processing medical
products and pharmaceuticals.
The Company is further expanding its gamma processing facilities with its
joint venture entered into in June 1997 with MDS Nordion Inc. The purpose of the
joint venture is to design, construct and operate a state-of-the-art gamma
sterilization facility near Mexico City, Mexico (where the Company already
operates an ethylene oxide sterilization facility). The joint venture's gamma
facility has been designed to process both medical and food products. The
Company currently anticipates that the facility will become operational early in
Fiscal 2000, although no assurance can be given that the current target for
start-up will be met. See "Business -- Strategic Acquisitions and Alliances."
Continuous improvement initiatives. The Company has undertaken a number of
initiatives, some of which are ongoing, primarily designed to increase the
efficiency of the sterilization process at its ethylene oxide facilities. During
the last three years, largely as a result of these initiatives, the Company has
significantly reduced the average turn-around time through its ethylene oxide
facilities. The Company is aggressively continuing to develop, promote and
implement several initiatives which it believes will further reduce its average
turn-around time or otherwise increase the operating efficiency and thereby the
capacity of its facilities and reduce overall processing costs. These
initiatives include:
- Parametric release. "Parametric release" is a system which permits
release of a processed product for use based on the measured and
confirmed achievement of key processing cycle parameters, including heat,
humidity, ethylene oxide concentration and time. This avoids the
time-consuming laboratory testing of BIs, a step which often delays the
release of sterilized products. The system being implemented by the
Company uses proprietary technology for measuring ethylene oxide
concentration which was developed by the University of Wales College of
Medicine ("UWCM") and the Company.
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<PAGE> 46
The Company has licensed the acquisition and use of 15 of these measuring units
from UWCM and has exclusive rights until January 1, 2000. The Company has
installed measuring units on three of its sterilization chambers and is
processing certain products of one of its customers through one such
chamber using parametric release. It intends to install units on
additional chambers when and as warranted by customer demand. At the
present time, the Company has not identified the need for additional
measuring units beyond the licensed number. However, if customer demand
warrants acquisition of additional measuring units and the Company is
unable to license these units from UWCM, parametric release alternatives
are available. See "Risk Factors -- Risks Related to Other Government
Regulations and Standards Compliance."
- Optimization of cycle efficiency. For many years it was the industry
practice to use substantial amounts of ethylene oxide for virtually all
product sterilization cycles, regardless of the particular features of
the product or its packaging. In recent years, the Company has actively
sought to change this "overkill" approach to ethylene oxide
sterilization. Using its scientific platform, the Company assists its
customers to determine the amount of ethylene oxide sufficient, in
combination with the other ethylene oxide cycle parameters, to achieve
the desired sterility assurance level. The primary objectives of this
effort have been to reduce ethylene oxide residuals in sterilized
products and turn-around times through the Company's facilities.
- Statistical cycle revalidation and multiple chamber validation. Utilizing
its scientific platform, the Company is able to revalidate the cycle
parameters for a customer's product based upon the demonstrated
statistical results of their use on the same or similar products. This
avoids the delay, cost and normal processing downtime associated with
traditional physical validation of cycle parameters. The Company also
uses a similar process, based upon its ability to statistically
demonstrate chamber equivalency, to validate a customer's product for
sterilization in multiple chambers operated by the Company, including
chambers at more than one facility, without the need to physically
validate the product at each additional chamber. The Company promotes
this "retrospective validation" process among its customers.
- Fully integrated plant information system. The Company is currently
designing a new and more sophisticated plant information system for use
in all of its facilities. When fully operational, the new system will
strengthen the Company's scientific platform and make it more accessible
to customers. The Company plans to install and test the new system in two
of its North American facilities later this year and in one of its
European facilities in 1999. The initial functions of the new system will
include product tracking, processing data and electronic data interchange
with customers. When fully installed and operational, which as currently
planned will require approximately five years, the new system will
integrate all of the Company's operating facilities and create a
worldwide data bank accessible to the Company's customers.
Laboratory and consulting services. The Company offers a variety of
microbiological and analytical laboratory testing and consulting services
related to and built upon the Company's expertise in sterilization. The
manufacture and sale of a medical device involves several stages, starting with
product development, design and testing, followed by the establishment and
validation of sterilization cycle parameters (where applicable), commercial
production and thereafter, as the final step for some but not all such products,
sterilization. Laboratory services are required at most of these stages. They
include testing pertaining to product validation, biocompatibility, package
integrity, bioburden, sterility assurance and endotoxins, as well as
environmental and air monitoring. The Company's current focus is on providing
services with respect to the sterility assurance stage. Future plans include
providing services during the product development and production stages. The
Company also assembles sterilization test packs, including biological
indicators, which are marketed primarily to the Company's sterilization
processing customers.
As in the case of sterilization services, laboratory services are performed
both in-house by product manufacturers and outsourced to commercial
laboratories. The Company believes that its existing sterilization processing
relationships with a large number of medical device manufacturers and its
reputation as a leading
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<PAGE> 47
sterilization management company provide it with a significant advantage in
marketing its laboratory services and test pack offerings.
In 1989 the Company established a central laboratory in the United States,
now located in Burr Ridge, Illinois, a suburb of Chicago. It opened satellite
laboratories at its Santa Teresa, New Mexico sterilization facility in 1990 and
at its Ontario, California sterilization facility in 1997. In 1995, the Company
provided greater focus to its laboratory services offering in the United States
by organizing it into a distinct operating division named Griffith Analytical.
In every country in Europe in which the Company operates sterilization
facilities, it maintains a microbiological and analytical laboratory capable of
offering a range of testing and other services to its sterilization processing
customers. The Company's European laboratory facilities grew out of applicable
regulatory requirements and have typically been operating for as long as the
sterilization facilities with which they are associated.
Logistics management services. The Company has recently begun to offer a
variety of logistics management services to certain of its sterilization
processing customers. They include product deployment, coordination of product
transportation and shipping, order fulfillment and warehousing services, cross
docking operations and related types of services. Since sterilization is the
final step in the manufacturing process, the Company's sterilization facilities
in some cases perform the function of a regional distribution center for its
customers. The Company's logistics management services facilitate the movement
of a customer's products, following sterilization, along the customer's
distribution system and in some cases direct to the end user, such as a hospital
or other healthcare facility.
Other activities. The Company engages in the distribution throughout Europe
of a wide range of sterilization packaging materials, plastic disposables and
indicator systems and disinfection products direct to manufacturers of medical
devices, industrial users and hospitals. The Company estimates that
approximately 8% of its Fiscal 1997 net revenues was derived from this
distribution business.
Achieving "sterility." The Company, in common with industry practice, does
not guarantee or warrant sterility in the United States or in most of the other
countries in which it operates. Its only responsibility to its customer is to
process the customer's products in accordance with the ethylene oxide cycle
parameters (heat, humidity, gas concentration and time) specified by the
customer (or, in the case of the Company's gamma facility, in accordance with
the dosage level specified by the customer). The customer is responsible for
validation of the sterilization cycle parameters for its products, for
determining achievement of product sterility assurance, for the integrity of
product packaging to withstand the vacuum, heat and humidity levels of the
sterilization process and for the adequacy and regulatory compliance of the
labeling of its products.
In the event of the failure of the Company to process the customer's
product in accordance with the cycle parameters or dosage specifications
prescribed by the customer (commonly referred to as a "nonconformance"), the
Company is typically required by contract to inform its customer of the
nonconformance, to reprocess the product if feasible and to reimburse the
customer, subject to a maximum, for the cost of any such product which is
damaged as a result of such nonconformance. In Belgium and France, ethylene
oxide contract processors, including the Company, are required by law to certify
that a product which has been processed at one of its facilities in those
countries is sterile and in both countries, gamma processors must certify that
the correct dosage has been given.
Availability of raw materials. The only significant raw materials required
by the Company's processing operations are ethylene oxide and nitrogen for its
ethylene oxide facilities and Cobalt 60 for its gamma facility. While ethylene
oxide is a relatively common chemical with many different uses, its production
in the United States for use as a sterilant is subject to stringent regulation
under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"). The
Company is aware of only two sources in the United States which possess the
necessary FIFRA registration to package ethylene oxide for use as a sterilant,
only one of which, the ARC Chemical Division of Balchem Corporation ("ARC"),
currently engages in such production. ARC has been the Company's principal
supplier of ethylene oxide in North America for many years. In September 1997,
the Company and ARC entered into a new multi-year supply and service agreement,
pursuant to which ARC
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agrees to supply all of the Company's requirements for ethylene oxide for its
facilities in the United States and Canada for a seven-year period. While there
is only one source within Mexico of which the Company is aware for the ethylene
oxide required by the Company's facility in Mexico City, if necessary ARC is
also able to supply that facility's ethylene oxide requirements from its plants
in the United States.
Subject to obtaining necessary regulatory approvals, which it believes
might take at least a year, the Company could package ethylene oxide for use as
a sterilant in its North American facilities. Any interruption in the supply of
ethylene oxide to the Company's sterilization facilities in North America, or
any substantial increase in the cost of such supply, would have a material
adverse affect on the Company's results of operations. In Europe, ethylene oxide
for use as a sterilant is readily available from a number of different sources
on competitive terms. Liquid nitrogen, which is used in certain of the Company's
ethylene oxide cycles, is readily available from a number of different sources
in both North America and Europe.
The Cobalt 60 radioactive isotope for use as a sterilant in the Company's
gamma facility in Belgium is available from two primary sources, one in Canada
(MDS Nordion, the world's largest supplier and the Company's joint venture
partner in Mexico), and one in the United Kingdom (Puridec Irradiation
Technologies, a division of Amersham International, plc). The Company purchases
"pencils" of Cobalt 60 each year sufficient to compensate for the normal decay
of the existing Cobalt 60 source. The Company currently purchases its Cobalt 60
requirements from Puridec on competitive terms. The gamma facility which the
Company's joint venture plans to establish near Mexico City is committed to
acquire its Cobalt 60 from MDS Nordion.
CUSTOMERS
Medical device manufacturers. The Company's principal customers in both
North America and Europe are manufacturers of single use medical devices,
including most of the major companies engaged in that business. In many cases,
the Company renders services to these customers at more than one of its
sterilization facilities, including in some cases facilities located in both
North America and Europe. In Fiscal 1997, the Company performed sterilization
processing and related services for approximately 300 manufacturers of single
use medical devices in North America and approximately 650 in Europe. However, a
substantial portion of its net revenues each year is typically derived from a
relatively small number of major medical device manufacturers. A representative
sample of major medical device manufacturers which are significant customers of
the Company is set forth below:
<TABLE>
<S> <C>
Abbott Laboratories The Kendall Company
Alcon Laboratories, Inc. (subsidiary of Tyco International,
Allegiance Healthcare Corporation Ltd.)
C. R. Bard, Inc. Mallinckrodt Inc.
Baxter International, Inc. Medtronic, Inc.
Becton, Dickinson and Co. Merck & Co., Inc.
Boston Scientific Corporation Pfizer, Inc.
The Clinipad Corporation Rusch, Inc.
Gambro AB Schering-Plough Corporation
Fresenius USA, Inc. Smith & Nephew plc
Hartmann AG Terumo Medical Corporation
</TABLE>
Most major manufacturers of single use medical devices in North America and
Europe have multiple plants at disparate locations in a given country or, in
many cases, in more than one country. The Company believes that its geographic
network of strategically located sterilization processing facilities in North
America and Europe and its ability to effectively serve all of the contract
ethylene oxide sterilization needs of many of its largest customers give it a
unique marketing tool and have been factors in its success to date.
The Company's five largest customers accounted for approximately 38% of its
net revenues in Fiscal 1997, including Allegiance Healthcare Corporation, which
accounted for approximately 20% of such revenues. While the loss of Allegiance's
business would likely have a material adverse effect on the Company, the
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<PAGE> 49
Company has been the principal supplier of contract ethylene oxide sterilization
services to Allegiance and its predecessors for many years. The Company and
Allegiance are parties to a multi-year sterilization contract pursuant to which
Allegiance purchases from the Company all of Allegiance's requirements in the
United States for ethylene oxide sterilization of products which Allegiance does
not perform in house. The initial term of the contract expires on June 30, 2001
and may be renewed with the consent of both parties for an additional term of
three years and thereafter for additional one-year terms. If purchases by
Allegiance of sterilization management services in any calendar year exceed
certain predetermined amounts, then Allegiance may renegotiate or terminate the
agreement; if purchases by Allegiance during a calendar year fall short of
certain predetermined amounts, then the Company may renegotiate or terminate the
agreement. In October 1998, Allegiance and Cardinal Health, Inc. announced an
agreement to merge the two companies pursuant to which Allegiance would operate
as a wholly owned subsidiary of Cardinal Health, Inc. Cardinal Health, Inc.,
headquartered in Dublin, Ohio, is a wholesale distributor of pharmaceuticals,
surgical and hospital supplies, and health and beauty aids to retail drug
stores, hospitals and other health care providers. The Company does not believe
that the proposed merger, if consummated, will have any adverse effect on the
Company's commercial relationship or the volume of business it does with
Allegiance.
An important class of the Company's customers are medium and small-sized
manufacturers of single use medical devices which cannot justify the
establishment of their own processing facilities and which utilize the Company
for virtually all of their sterilization processing and related validation,
laboratory and logistics management services. A representative sample of medium
and small medical device manufacturers which are customers of the Company is set
forth below:
<TABLE>
<S> <C>
Advance Medical Designs, Inc. Medcomp, Inc.
Cordis Corporation Medi-Flex Hospital Products, Inc.
Cyberonics, Inc. Rovers B.V.
Ethicon, Inc. Sterile Recoveries, Inc.
Guidant Ltd. Sterima N.V.
Lincoln Diagnostics, Inc. Wagner GmbH
</TABLE>
There has been a consolidation trend in recent years in the medical device
manufacturing industry, with a smaller number of larger companies having
multiple plants and more extensive distribution networks. The Company expects
this trend to continue. The Company believes that consolidation among its core
business customer base has worked to its competitive advantage. Because the
Company has the most extensive ethylene oxide sterilization network in both
North America and Europe, it believes it is in a superior position to take
advantage of the consolidation trend among medical device manufacturers by
serving the increasing number of manufacturing plants operated by fewer
customers. While some large medical device manufacturers divide their business
between their own captive sterilization facilities and those of one or more
contract processors such as the Company, the Company's extensive geographic
facilities network enables it to more aggressively seek to encourage such
customers to outsource more of their captive processing volume to one or more of
the Company's facilities. At the same time, the greater size and sterilization
volume requirements of certain of the Company's customers, resulting in part
from this consolidation trend, may also enhance their bargaining power over
contract terms with the Company.
Other customers. The Company also furnishes sterilization processing
services to producers of a variety of non-medical device products and to
hospitals. In Fiscal 1997, the Company performed sterilization processing
services for approximately 230 such customers in North America and approximately
330 in Europe. These customers include producers or processors of a wide range
of dry or frozen food products, cosmetics, pharmaceuticals and packaging
products, as well as hospitals.
Contracts with customers. The Company's commercial agreements with its
customers vary from purchase order arrangements to multiple year contracts. Its
standard contract, which it uses for most of its medium-sized and small
customers and some of its large customers, typically has a term of one year and
provides for price adjustments based upon changes in ethylene oxide prices. The
Company enters into separately negotiated, customized and in most cases
multi-year contracts with many of its larger North American sterilization
processing customers. These contracts with its larger customers typically
require the
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customer to purchase from the Company all of its ethylene oxide sterilization
processing requirements which it does not perform in-house or provide for a
minimum specified annual volume of sterilization processing business to the
Company. They also typically provide for price adjustments based upon changes in
ethylene oxide prices, the amount of ethylene oxide used in providing the
services, increases in processing times of the products being sterilized, and
regulatory changes.
In its European operations, the Company enters into a standard commercial
contract with some customers, separately negotiated, customized contracts with a
few of its larger customers and relies on traditional purchase order
arrangements with the rest of its customers.
In combination with its commercial contracts, the Company enters into
technical agreements, specifying cycle parameters and related technical terms,
with its customers covering virtually all of the products it processes.
SALES AND MARKETING
The Company's sterilization management services are sold principally by its
direct sales force based throughout North America and Europe, the efforts of
which are coordinated with respect to many of its global customers. In most
cases, a single senior sales representative is assigned to each of the Company's
largest customers, with overall responsibility for the Company's relationship
with that customer on a worldwide basis.
The Company's sales force is trained to assist customers in maximizing
their sterilization efficiency and cost effectiveness. This marketing focus
seeks to ensure that each of the sterilization cycle parameters for the
customer's products has been optimized so as to shorten and improve the cycle
and otherwise assure that the required sterility assurance level is achieved as
quickly and cost-effectively as possible. The Company's sales staff and senior
management draw upon their experience in sterilization, engineering,
microbiology, component materials and packaging, medical devices and regulatory
compliance, as well as the Company's scientific platform, to assist customers in
devising the optimal cycle for its product and sterility assurance level.
The Company promotes its sterilization management services by participating
in industry trade shows, advertising in trade journals, sponsoring educational
seminars and promotional events, direct mail campaigns and addressing industry
organizations. The Company also encourages participation by members of its
corporate staff in the United States and Europe on technical committees and
advisory boards responsible for implementing industry standards or advising
government bodies with respect to the establishment of regulations applicable to
the provision of sterilization services.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company engages in research, development and engineering projects aimed
at, among other goals, improving the efficiency and reducing the cost of
operating its sterilization facilities, reducing and more effectively
controlling emissions arising from its ethylene oxide sterilization operations
and reducing the turn-around times for processing its customers' products at
those facilities. The Company's engineering group is also responsible for
designing the Company's operating facilities and process equipment and for
overseeing the fabrication and installation of such equipment. The Company's
total expenses for research, development and engineering activities in Fiscal
1995, Fiscal 1996 and Fiscal 1997 were $910,000, $764,000 and $695,000,
respectively.
QUALITY ASSURANCE
The Company's quality control systems and procedures are intended to ensure
that each of the Company's sterilization facilities complies with the processing
and operating standards and specifications required by various governmental and
industry standards organizations and customers, such as the FDA's Quality System
Regulation which sets forth the good manufacturing practices that contract
sterilizers of medical devices are required to follow. The Company maintains a
quality assurance support staff at the corporate level and a quality assurance
manager at each of its sterilization facilities. The principal responsibilities
of the support staff are to design, review and refine the Company's quality
control system and
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<PAGE> 51
the operating procedures necessary to implement that system. The support staff
also monitors regulatory developments at all levels of government and within
international standards organizations which pertain to sterilization. The
primary responsibilities of the quality assurance managers are to ensure that
the Company's Total Quality Management (TQM) system is observed and all customer
processing specifications are complied with at each of the Company's
sterilization facilities. The quality assurance manager at each facility also
represents the Company in the many audits of that facility's procedures and
processes which are conducted by or on behalf of governmental agencies,
standards organizations and customers.
All but two of the Company's 18 ethylene oxide sterilization facilities in
North America and Europe are certified as compliant with: (i) International
Organization for Standardization ("ISO") 9001, Quality Systems -- Model for
Quality Assurance in Design, Development, Production, Installation, and
Servicing; (ii) the Committee for European Normalization ("EN") 46001, Quality
Systems -- Medical Devices -- Particular Requirements for the Application of ISO
9001; and (iii) EN 550, Sterilization of Medical Devices -- Validation and
Routine Control of Ethylene Oxide Sterilization (the only exceptions are the
recently acquired facility at Verviers, Belgium, which was so certified under
its prior owner, and the facility at Montreal, Canada, which is currently
scheduled to be closed during the third quarter of Fiscal 1999). The Company's
gamma sterilization facility in Belgium is certified as compliant with ISO 9002,
Quality System -- Model for Quality Assurance in Production, Installation and
Servicing and with EN 46002 -- Quality Systems -- Medical Devices -- Particular
Requirements for the Application of ISO 9002.
The Company's headquarters and North American facilities were audited by
and received their certifications from TUV Product Service GmbH; its European
facilities were audited by and received their certifications from BSI Quality
Assurance. Both TUV and BSI are approved Quality Registrars for ISO and EN,
respectively. The Company's headquarters and each of its operating facilities
are subject to periodic quality system surveillance audits by such Quality
Registrars to ensure continued compliance with such standards.
Certification to the ISO 9000 standards demonstrates that the facility has
implemented the essential elements necessary for an effective quality control
system. Of the ISO 9000 standards, the ISO 9001 is the most comprehensive in
scope and the most difficult to achieve. Demonstrated compliance by a contract
sterilizer with the requirements for such ISO and EN certifications is becoming
a requirement for doing business in or exporting sterilized products to Canada
and Europe and is expected by most medical device manufacturers in the United
States. Medical devices to be sold in countries which are members of the
European Community must carry the "CE" symbol on their labels; in order to affix
the CE symbol to any medical device it must have been sterilized in a facility
which is certified as ISO 9000 series and EN 46000 series compliant. The Company
believes that its ability to obtain and maintain these certifications for its
facilities is an important factor in its success. See "Risk Factors -- Risks
Related to Government Regulations and Standards Compliance."
STRATEGIC ACQUISITIONS AND ALLIANCES
The Company has effected a number of strategic acquisitions and established
several strategic alliances during the past five years, principally those
identified below.
On July 2, 1998, the Company completed the purchase from a subsidiary of
Boston Scientific Corporation of an ethylene oxide sterilization facility
located at Verviers, Belgium, near the border with Germany. The seller had
operated the facility as an in-house sterilizer for its medical device
manufacturing operations in the same plant. Boston Scientific, having moved the
device manufacturing operations to another European country, subdivided the
building and sold the sterilization facility to the Company. The Company had
operated the facility since October 1997 under arrangements with Boston
Scientific.
On April 28, 1998, the Company completed the purchase of Sorex Medical,
Inc., which owns and operates a full service ethylene oxide sterilization
facility located in Salt Lake City, Utah, a major medical products manufacturing
and distribution center. This strategic acquisition increased the Company's
sterilization processing presence in the western United States.
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<PAGE> 52
In August 1997, the Company acquired Caric Mediris, S.A., a Belgian company
now named Griffith Mediris (in which the Company holds an 82.8% equity interest)
which operates a full service gamma sterilization facility in southern Belgium.
The remaining interest is held by an agency of the Belgian government (the
National Institute of Radioelements), which owned and operated the facility
until 1990, when it was largely privatized. The facility contains two
independent gamma irradiation cells. Most of the Company's shares in Griffith
Mediris are pledged to a European bank as collateral for a loan, the proceeds of
which were used to fund the purchase price for that company.
In June 1997, the Company entered into a joint venture with MDS Nordion
Inc. to design, construct and operate a state-of-the-art gamma sterilization
facility near Mexico City, Mexico. The Company has a 60% interest in the joint
venture, subject to an agreement to divide equally the aggregate net profit, if
any, generated by the joint venture during the first five years of the
facility's operation. MDS Nordion, a Canadian company, is the leading designer
and supplier of gamma processing facilities and the world's largest supplier of
Cobalt 60. The gamma facility has been designed to process both medical and food
products. The Company currently anticipates that the facility will become
operational during the second half of 1999. However, there is no assurance that
the current target for start-up will be met.
In July 1994, the Company acquired all of the outstanding capital stock of
and the Rantigny real estate used by Laboratoires Perouse, S.A., a French
company which owns and operates two ethylene oxide sterilization processing
facilities in France (one of which the Company has since replaced).
FACILITIES
The following table provides information, as of September 30, 1998, with
respect to each of the Company's sterilization processing facilities and the
laboratory facilities of Griffith Analytical, including its location,
approximate building size, occupancy status (whether the building is owned or
leased by the Company and, if leased, the expiration date of the lease) and
sterilization capacity. Each such sterilization facility includes multiple
sterilization chambers, preconditioning and aeration rooms and/or cells,
staging, quarantine and warehouse space, control rooms, an office area,
receiving and shipping docks and, where specifically indicated, a testing
laboratory.
<TABLE>
<CAPTION>
ANNUAL
LEASE EXPIRATION STERILIZATION
APPROXIMATE DATE (INCLUDING CAPACITY
BUILDING SIZE COMPANY (IN MILLIONS
LOCATION (SQUARE FEET) OCCUPANCY STATUS RENEWAL OPTIONS) OF CUBIC FEET)(1)
-------- ------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
North American Facilities:
Ontario, CA............................ 69,000(2) Leased March 2011 4.7(3)
Los Angeles, CA........................ 90,000(4) (4) (4) 6.8
Santa Teresa, NM....................... 72,000(2) Leased March 2019 5.9
(near El Paso, TX)
Salt Lake City, UT..................... 59,000 Owned NA 4.6
Burr Ridge, IL(5)...................... 11,200 Leased February 2006 NA
(near Chicago)
Willowbrook, IL........................ 112,000(6) Leased (6) 6.8(6)
(near Chicago)
Smyrna, GA............................. 45,000 Leased June 2004 5.6
(near Atlanta)
Charlotte, NC.......................... 40,000 Leased(7) January 2017 3.7(3)
Glens Falls, NY........................ 33,000 Leased(8) December 2014 6.1(3)
(upstate New York)
Toronto, Canada(10).................... 23,000 Leased(9) September 2008 2.5
</TABLE>
51
<PAGE> 53
<TABLE>
<CAPTION>
ANNUAL
LEASE EXPIRATION STERILIZATION
APPROXIMATE DATE (INCLUDING CAPACITY
BUILDING SIZE COMPANY (IN MILLIONS
LOCATION (SQUARE FEET) OCCUPANCY STATUS RENEWAL OPTIONS) OF CUBIC FEET)(1)
-------- ------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Montreal, Canada(10)................... 10,000 Leased May 1999 1.1
Mexico City, Mexico.................... 43,000 Leased March 2003 5.0
European Facilities:
Somercotes, England.................... 55,500(11) Owned NA 2.9
(near Birmingham)
Zoetermeer, the Netherlands............ 28,000(11) Leased (12) 2.3
(between Amsterdam and
Rotterdam)
Herentals, Belgium..................... 66,700(11)(13) Leased July 2000 1.9
(near Antwerp)
Verviers, Belgium...................... 21,500 Owned(14) NA 0.9
(near the border with Germany)
Fleurus, Belgium....................... 46,000(15) Owned NA 2.3million
(near the border with France) curies
Rantigny, France....................... 35,500(11) Owned NA 1.4(3)
(40 miles north of Paris)
Anse, France........................... 22,000(11) Leased August 2005 1.5
(15 miles north of Lyon)
Moerfelden, Germany.................... 35,400(11) Leased (16) 2.8
(near Frankfurt)
</TABLE>
- ---------------
(1) Annual sterilization capacity figures were calculated using standard
pallet cubic foot equivalents and maximum pallet capacity for each
facility assuming an approximate 91% maximum utilization rate, allowing
principally for maintenance downtime. Further, the maximum pallet capacity
for each facility used in the computation of the annual sterilization
capacity figures in the above table reflected the actual mix of customers
at each facility as of September 30, 1998. Actual utilization rates vary
at any given point in time among facilities and from time to time at each
individual facility. The Company estimates that at September 30, 1998 the
weighted average utilization rate across all of its facilities was
approximately 72% of aggregate capacity.
(2) Includes a full service Griffith Analytical satellite laboratory
(occupying 1,650 square feet at the Ontario, CA facility and 610 square
feet at the Santa Teresa, NM facility).
(3) Projects are under construction or in an advance planning stage to add
additional sterilization capacity as follows: Ontario, CA -- 1.3 million
cubic feet; Charlotte, NC -- 3.9 million cubic feet; Glens Falls,
NY -- 1.7 million cubic feet; and Rantigny, France -- 0.5 million cubic
feet. See also note (6).
(4) Consists of two separate, but adjacent buildings, one of which is owned
(19,000 square feet) and one of which is leased (71,000 square feet).
(5) The central full service laboratory and headquarters of the Griffith
Analytical Division.
(6) Consists of two separate, but adjacent buildings, both of which are
leased; the lease on one building (67,000 square feet) expires in
September 2004 and the lease on the other building (45,000 square feet),
entered into in August 1998, expires in November 2018. A project is now
underway to initially add 1.7 million cubic feet of sterilization capacity
in the recently leased building. See also note (3).
(7) Certain equipment and leasehold improvements are subject to a financing
lease expiring in 2007 used to fund repayment of industrial development
revenue bonds.
52
<PAGE> 54
(8) Occupied under a financing lease to fund repayment of industrial
development revenue bonds; Company will acquire ownership of the facility
when bonds are paid at maturity in 2014.
(9) Located within a physically segregated portion of a food plant owned by,
and leased from, the Canadian subsidiary of the Parent Company.
(10) The Company intends to close the small facility at Montreal when its lease
expires in May 1999 and to consolidate its operations with the larger
existing Toronto facility.
(11) Includes a testing laboratory.
(12) Consists of two separate leases, one of which expires July 1999 and one of
which expires July 2001.
(13) Includes approximately 10,000 square feet of space used by the Company's
distribution business and approximately 3,500 square feet of office space
which houses the Company's European headquarters staff.
(14) Occupies physically segregated premises comprising approximately 30% of a
larger building.
(15) Includes a dosimetry laboratory with a gamma irradiator used for testing
purposes.
(16) Consists of two separate leases, one of which expires September 1999 and
one of which expires August 2000.
The Company's corporate headquarters is located in approximately 13,000
square feet of leased space in an office building located in Oak Brook,
Illinois, a suburb of Chicago. The lease expires in March 2000.
The Company's operating facilities are well maintained and generally
adequate to meet the current demand for its sterilization services. The Company
has installed and is testing a new maintenance software system at one of its
U.S. facilities which enables it to monitor and statistically determine when
virtually every important piece of equipment at the facility requires
maintenance or replacement. The system is designed to increase the operational
efficiency of the facility and minimize unscheduled maintenance downtime or
equipment malfunctions. If the test system is successful, as to which no
assurance can be given, the Company currently plans to install the system in all
of its facilities by the end of the year 2000.
COMPETITION
The Company is subject to intense competition in the provision of
sterilization services. The sterilization industry is fragmented as a result of
geographical limitations on the area which can be served by each sterilization
processing facility, multiple sterilization technologies and the mix of captive
and contract facilities. The Company believes that quality of service, price,
location and capacity, customer relationships, turn-around time and availability
of support services are the key factors on which competition is based in the
sterilization processing industry.
The market for contract sterilization services is characterized by
significant price competition, particularly in gaining new business. However,
since achieving the specified sterility assurance level is so important to
customers and the cost of sterilization is a relatively small part of the total
cost of the product, the Company believes the quality of service rendered by the
contract processor becomes as important as price once a customer relationship is
established. Due to validation requirements, design and materials compatibility
limitations and regulatory constraints, switching from one contract processor to
another or from one sterilization technology to another can be costly and
administratively burdensome to customers. The Company believes that its long
experience with and widely recognized expertise in sterilization helps it
attract and retain business.
Facility location and capacity are also important marketing factors,
particularly for large medical device manufacturers. The Company's extensive
ethylene oxide sterilization facility network in North America and Europe, and
its ability to add sterilization capacity to most of its facilities, also give
it a valuable marketing tool.
In North America, the principal contract processors other than the Company
are: Isomedix, Inc. (a subsidiary of Steris Corporation), which operates
multiple gamma and ethylene oxide processing facilities in
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<PAGE> 55
the United States and Canada and one E-beam facility in the United States;
SteriGenics International, Inc., which operates multiple gamma facilities and
one E-beam facility in the United States; and Cosmed Group, Inc. and the
Sterilization Services subsidiaries of Vacudyne Incorporated, both of which
operate multiple ethylene oxide facilities in the United States. In addition,
the Company competes in North America against many local contract processors,
each of which typically operates only a single ethylene oxide sterilization
facility.
In Europe, the Company believes that only two other contract processors
operate sterilization facilities in more than one country, and the competition
within each country is more fragmented than in the United States, typically
involving a greater number of smaller firms. The largest contract processors,
each of which is believed to be smaller than the Company, are: Isotron plc,
which operates gamma, ethylene oxide and E-beam facilities in the United Kingdom
and an ethylene oxide facility in Ireland; and Gammaster B.V., which operates
gamma facilities in France, Germany, the Netherlands and Ireland.
In addition to other contract processors, the Company competes in both
North America and Europe with manufacturers which have existing, or may in the
future establish, captive sterilization processing operations.
Certain of the Company's competitors have greater financial, marketing,
technical and other resources than the Company or offer a broader range of
sterilization technologies, which may give them a competitive advantage over the
Company. Steris Corporation (the parent of Isomedix), SteriGenics International,
Inc. and Isotron plc are publicly traded companies with access to public debt
and equity capital markets. Isomedix and SteriGenics have extensive gamma
sterilization networks in the United States, giving them a competitive advantage
over the Company with those customers which prefer to sterilize their products
using gamma. In Europe, some of the Company's smaller local competitors have
close relationships with important individual customers, established over long
periods of time. To the extent that the Company expands into additional foreign
countries it could be faced with competition from existing providers of contract
sterilization services in those countries. See "Risk Factors -- Competition" and
"-- Availability of Alternative Technologies" and "Business -- The Sterilization
Processing Industry -- Comparison of ethylene oxide sterilization and gamma
sterilization."
REGULATORY, ENVIRONMENTAL AND HEALTH AND SAFETY MATTERS
Ethylene oxide is a toxic and hazardous chemical which is flammable and
explosive. It has also been identified as a cancer and reproductive hazard. As a
result, to varying degrees in each of the countries in which the Company
operates, the use of ethylene oxide is subject to a variety of existing and
proposed national, state and local regulations which limit permissible emission
levels, worker exposure and residues on sterilized products and provide for
labeling requirements. In addition, the operation of the Company's gamma
facility in Belgium, including the use of radioactive Cobalt 60 therein, is
subject to extensive regulation by the Belgian government, and the design,
construction, use and operation of the gamma facility proposed to be built near
Mexico City by the Nordion Joint Venture is and will be similarly regulated by
the Mexican government.
The Company believes that it possesses all licenses and permits necessary
to conduct its business and that it is in material compliance with all
environmental and health and safety regulations which govern its operations.
Nevertheless, changes in, or reinterpretations of, existing requirements or
adoption of new requirements beyond those described below, the failure of the
Company at any time to comply with any applicable material regulations and
standards or the loss by the Company of any of its material licenses and permits
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. See "Emission control regulations."
Emission control regulations. Ethylene oxide is evacuated in a high
concentration when the sealed sterilization chamber is purged at the end of each
cycle. Thereafter, residual ethylene oxide is evacuated in a
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<PAGE> 56
low concentration after the chamber is opened and during aeration following
removal of the sterilized products from the chamber. The release of high
concentration emissions into the atmosphere is prohibited or strictly limited in
most of the countries in which the Company has facilities. Each of the Company's
sterilization facilities throughout North America utilizes either a wet scrubber
system or catalytic oxidizer to treat its high concentration emissions. The wet
scrubber system converts the ethylene oxide into ethylene glycol, a byproduct
which in most cases the Company sells for various commercial applications. The
catalytic oxidizer converts the ethylene oxide into carbon dioxide and water in
a catalyst bed. In its European ethylene oxide facilities, the Company uses
several different technologies (including wet scrubbers, incinerators and
catalytic converters) to control their high concentration emissions.
Low concentration ethylene oxide emissions are currently regulated by state
and local governmental entities in certain of the U.S. states in which the
Company's facilities are located. In addition, regulations to control low
concentration emissions were adopted by the EPA in 1994 and were originally
scheduled to become effective in December 1997. However, certain types of low
concentration emissions control equipment used by ethylene oxide sterilizers,
including the Company, have a risk of explosion. As a result, the original
effective date was postponed to December 1998, and the EPA has announced its
intention to again postpone the effective date of the regulations to December
1999 to assure that most sterilizers can comply without compromising the safety
of their operations. All but three of the Company's facilities in the United
States are already operating with control systems which the Company believes are
capable of satisfying the new regulations if they take effect in their present
form. However, in that event, the Company would be required to incur substantial
cost to acquire control systems at those three facilities.
Regulations restricting low concentration emissions in the European
countries in which the Company has facilities vary from country to country. The
Company believes that all of its European facilities are in material compliance
with applicable low concentration emissions regulations. However, due to the
greater volume of absorbent products now being sterilized at its facility at
Herentals, Belgium, the Company believes that a new control system will be
required in order for that facility to remain in compliance with those
regulations. Accordingly, the Company has proposed to local governmental
authorities the installation of a new state-of-the-art system which would
control both the high concentration and low concentration emissions at the
Herentals facility. The Company believes that the installation of the new
equipment (currently planned for Fiscal 1999 and Fiscal 2000) will be approved
by such authorities and that any necessary waivers pending its installation will
be obtained.
The use of environmental control equipment at an ethylene oxide
sterilization facility requires care in order to avoid circumstances which could
result in an explosion or fire and the interruption of normal operations at or
the temporary shut-down of the facility while repairs are made. During the last
five years, there have been three such incidents at the Company's facilities in
North America (one in 1994 at its Montreal facility which did not interrupt
normal operation, one in 1995 at its Charlotte facility which interrupted normal
operation for approximately 30 days, and one in 1997 at its Los Angeles facility
which resulted in a shut-down of the facility for four days) and two at its
facilities in Europe (one in 1994 at its Herentals, Belgium facility which
prevented the start-up of a new sterilization chamber for approximately five
months and one in 1995 at its facility in the Netherlands which interrupted
production for about 10 days). In order to reduce the commercial risks
associated with any such mishap, the Company encourages its customers to cross
validate, at two or more of its facilities, those products which the Company
processes in large volume.
Compliance by the Company with applicable environmental regulations
significantly increases the cost of constructing and operating its ethylene
oxide facilities. The Company estimates that its capital expenditures for
environmental control equipment for the last quarter of Fiscal 1998 and for
Fiscal 1999 and Fiscal 2000 will be approximately $175,000, $4.1 million and
$2.45 million, respectively; such estimates are based upon current and proposed
regulations and include the projects discussed above. See "Risk Factors -- Risks
Related to Compliance With Environmental Regulations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview" and "-- Liquidity and Capital Resources."
Worker and patient safety regulations and standards. Because of its status
as a cancer and reproductive hazard, government regulations in the countries in
which the Company operates strictly limit the exposure of
55
<PAGE> 57
workers to ethylene oxide. The United States Occupational Safety and Health
Administration ("OSHA") limits worker exposure to one part per million as an
8-hour time weighted average and five parts per million in any 15-minute
short-term exposure. The regulations in most other countries where the Company
has facilities are similar. These regulations also have the indirect effect of
limiting the permissible amount of residual ethylene oxide left on a product
following completion of the sterilization process, since such residuals are one
source of exposure to ethylene oxide. OSHA regulations also require that
equipment used in connection with ethylene oxide at the Company's facilities be
designed and operated in a manner which is safe and that the Company use proper
safety precautions and practices when handling, monitoring and storing ethylene
oxide.
In order to provide a safe working environment for its employees and to
comply with such regulations, the Company utilizes a combination of methods,
including engineering controls, respiratory and other personal protection
apparatus and clothing, designation of restricted areas, continuous monitoring
equipment, detailed and strictly enforced employee safety procedures and
periodic physical examinations. The Company believes that all of its facilities
are in material compliance with all applicable regulations.
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 ISO. The ISO 10993-7 standard, adopted in 1995, limits the permissible
levels of residual ethylene oxide on sterilized medical devices in order to
protect patients who come into contact with such devices. See "Risk
Factors -- Health and Safety Risks of Ethylene Oxide and Gamma."
Health regulations. Sterilization of medical devices is subject to
pervasive regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic
Act. The FDA has promulgated a Quality System Regulation which sets forth
detailed Good Manufacturing Practices that manufacturers of medical devices are
required to follow. Under the QSR, a medical device manufacturer includes those
who perform the function of contract sterilization of medical devices.
Consequently, the Company is required, with respect to its operating facilities
in the United States and those outside the United States which sterilize devices
for export to the United States, to comply with the requirements set forth in
the QSR. All such facilities are subject to periodic audits by the FDA to
determine whether they are in compliance with such requirements.
Failure by the Company at any time to comply with applicable FDA
requirements could lead the FDA to institute enforcement actions against the
Company or its customers, including, among other things, warning letters, recall
or seizure of products, fines, injunctions, civil penalties, total or partial
suspension of sterilization operations and criminal prosecution. Such
enforcement actions would also harm the Company's business reputation and could
cause the Company to lose customers to competitors. During the last five years,
the Company has not received any warning letters from or been subjected to any
more stringent compliance action by the FDA.
A similar regulatory framework, also administered by the FDA, applies to
the processing in the United States of food, cosmetics and pharmaceutical
products. Regulatory agencies in each of the other countries in which the
Company has ethylene oxide sterilization facilities conduct periodic inspections
and otherwise enforce local regulations applicable to their operation.
Regulation of gamma sterilization facilities. Regulations of the Belgian
government apply to various aspects of the operation of the Company's gamma
sterilization facility in that country, including regulations designed to
protect workers and others from exposure to gamma radiation. Government
inspectors visit the facility on a bi-monthly basis to audit the Company's
compliance with such regulations. Failure by the Company at any time to comply
with these regulations could subject it to a variety of sanctions, including
citations, fines or total or partial suspension of sterilization operations.
Any gamma sterilization facility located in Mexico, including the one to be
built near Mexico City by the Company's joint venture, is subject to extensive
regulation by the national and local governments of Mexico with respect to its
design, construction and operation. The Company's joint venture is currently
seeking to obtain the necessary government permits and licenses needed to
construct and operate the facility. Although not contemplated, any material
delay in or inability to obtain such approvals on satisfactory terms could
compromise the success of the project. The gamma sterilization of medical
devices, foods, cosmetics and other
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<PAGE> 58
products is regulated by the Mexican National Commission on Nuclear Safety and
Safeguards. Failure to comply with the Commission's regulations could result in
significant fines, penalties or the shut-down of the facility.
The design, construction, use and operation in the United States of
commercial gamma sterilization facilities, and the radioactive materials used in
such facilities, are extensively regulated by the United States Nuclear
Regulatory Commission, or in some cases by various state regulatory agencies and
authorities that undertake a comparable regulatory function from the Nuclear
Regulatory Commission. Such facilities are also subject to regulation by other
regulatory bodies at the federal, state and local levels, depending upon the
type of product that is being irradiated. Requirements of the FDA similar to
those described above for ethylene oxide facilities in the United States apply
to the use of gamma to sterilize medical devices, foods, cosmetics and
pharmaceuticals. When and if the Company constructs or acquires one or more
gamma sterilization facilities in the United States, it would be required to
comply with all such regulations.
EMPLOYEES
At June 30, 1998, the Company had a total of 483 employees, 303 of whom
were employed in North America and 180 in Europe. The only Company employees
subject to collective bargaining agreements are those in Belgium, France and
Mexico. The Company has never experienced a labor related work stoppage. It
considers its relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. The Company believes that no pending or
threatened litigation to which it is or may be a party will have a material
adverse effect on its business, financial condition or results of operations.
57
<PAGE> 59
MANAGEMENT
DIRECTORS AND OFFICERS
The directors, nominees for director and executive officers of the Company
and their respective ages and positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dean L. Griffith(1)(4)................ 71 Chairman of the Board and a Director
Kevin M. Swan......................... 41 President, Chief Executive Officer and
a Director
John P. Sabalaskey.................... 39 Senior Vice President and Chief
Financial Officer
Peter D. Gortz........................ 39 Senior Vice President and Chief
Operating Officer -- North America
Dirk Barrie........................... 47 Senior Vice President and President --
European Group
Brian J. Tuttle....................... 48 Treasurer
James S. Legg......................... 42 Secretary and General Counsel
Joseph R. Maslick(2)(4)............... 50 Director
John G. Kringel(1)(2)(3)(4)........... 59 Nominee for Director
L. Peter Smith(1)(2)(3)(4)............ 50 Nominee for Director
</TABLE>
- ---------------
(1) Member or nominee to be a member of the Compensation Committee of the Board
of Directors
(2) Member or nominee to be a member of the Audit Committee of the Board of
Directors
(3) Nominee to be a member of the Committee of Independent Directors of the
Board of Directors
(4) Messrs. Griffith and Maslick are the current members of the Stock Option
Committee; they will be succeeded by Messrs. Kringel and Smith upon the
election of the latter as directors of the Company following completion of
the Offering.
Dean L. Griffith has served as Chairman of the Board of the Company since
its incorporation in 1987. Mr. Griffith has been President and Chief Executive
Officer since 1975 and Chairman of the Board since 1989 of the Parent Company.
Mr. Griffith joined the Parent Company in 1950 and thereafter worked in a
succession of administrative and executive positions of increasing
responsibility.
Kevin M. Swan has served as President, Chief Executive Officer and a
Director of the Company since September 1994. Prior thereto, Mr. Swan served in
various capacities at Baxter International, Inc. including as President of Multi
Hospital Systems during 1994, as Vice President and General Manager of the
Ambulatory Infusion Division from 1992 to 1993 and as Vice President of the
Interlink(TM) Business Unit from 1991 to 1992.
John P. Sabalaskey has served as Senior Vice President and Chief Financial
Officer of the Company since March 1998. Prior thereto, Mr. Sabalaskey served in
various capacities at Information Resources, Inc., including as an Executive
Vice President from 1994 until 1998, head of International Finance from 1992
through 1998 and Director of Internal Audit from 1991 to 1992. Previously, Mr.
Sabalaskey was a Senior Manager in the Audit and Financial Consulting Division
of Arthur Andersen & Co. Mr. Sabalaskey is both a Certified Public Accountant
and a Certified Management Accountant.
Peter D. Gortz has served as Senior Vice President and Chief Operating
Officer -- North America of the Company since February 1998. Mr. Gortz joined
the Company's operating subsidiary in the United States as Vice President of
Sales and Marketing in November 1994 and continued to serve in that capacity
until February 1998. Prior to joining the Company, Mr. Gortz was employed by
Baxter International, Inc. since 1988 in various positions, including as
Director of Business Development of its Ambulatory Infusion Division from
November 1993 to November 1994. Prior to joining Baxter, Mr. Gortz was a
co-founder of Infusion Systems Corporation, which was acquired by Baxter in
1988.
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<PAGE> 60
Dirk Barrie has served as Senior Vice President of the Company and
President of its European Group since February 1998. Prior thereto, Mr. Barrie,
who joined the Parent Company in 1979, served in various senior management
capacities for the European subsidiaries of the Company, most recently as
Managing Director.
Brian J. Tuttle has served as Treasurer of the Company since February 1992.
He is principally employed as Vice President, a position he has held since 1997,
and Treasurer, a position he has held since 1992, of the Parent Company. Prior
thereto, Mr. Tuttle served as Treasurer of Applied Power, Inc. from 1986 to
1992.
James S. Legg has served as Secretary of the Company since February 1991
and General Counsel since February 1995. Mr. Legg is principally employed as
Vice President and General Counsel of the Parent Company, positions he has held
since 1997. Prior thereto, Mr. Legg served as Assistant General Counsel from
1984 to 1989 and Corporate Counsel from 1989 to 1997 of the Parent Company.
Joseph R. Maslick has served as a Director of the Company since 1989. Mr.
Maslick is principally employed as Executive Vice President and Chief Financial
Officer of the Parent Company, positions he has held since 1993 and 1988,
respectively. After holding several positions in accounting and finance at the
Parent Company, he was elected Vice President and Treasurer in 1983 and Senior
Vice President and Chief Financial Officer in 1988. Mr. Maslick joined the
Parent Company in 1970.
The Company's Board of Directors has nominated, and shortly after
completion of the Offering intends to elect, two independent directors of the
Company. The nominees, John G. Kringel and L. Peter Smith, are not affiliated
with the Company or with the Parent Company.
John G. Kringel retired July 1, 1998 as Senior Vice President -- Hospital
Products of Abbott Laboratories, a position he held since October 1990. Prior
thereto he was employed since 1980 in several other senior management positions
with Abbott Laboratories, including Vice President -- Hospital Products from
September 1983 to October 1990. He is also a director of Navix Radiology
Systems, Inc.
L. Peter Smith is the Chief Executive Officer of Ralin Medical, Inc., a
position he has held since 1989. Ralin Medical, headquartered in Buffalo Grove,
IL, provides a variety of cardiac disease management services to managed
healthcare organizations, large physician practice groups, hospitals, employers
and others. Prior to joining Ralin Medical, Mr. Smith was employed for 11 years
in a series of positions of increasing management responsibility with Baxter
International, Inc., including serving from 1987-89 as President of its
Caremark, Inc. subsidiary. While at Baxter, Mr. Smith had significant
international management experience. He is also a director of Ralin Medical,
Inc., Coram Healthcare Corporation and Sabratek Corporation.
COMMITTEES OF THE BOARD
The Board of Directors has designated a Compensation Committee, an Audit
Committee, a Committee of Independent Directors and a Stock Option Committee,
the members of each of which will include or consist of the two independent
directors to be elected shortly after completion of the Offering.
The Compensation Committee when fully constituted will be composed of three
members, none of whom may be an employee of the Company. The Compensation
Committee is responsible for establishing all executive officer compensation and
adopting and administering stock option and variable compensation programs
applicable to employees and officers.
The Audit Committee when fully constituted will be composed of three
members, a majority of whom must be independent directors. The committee will
meet periodically with management and representatives of the Company's
independent auditors to assure that appropriate audits of the Company's affairs
are being conducted. In carrying out these responsibilities, the committee will
review the scope of audit activities and the results of the annual audit. The
committee is also responsible for recommending to the Board of Directors a
public accounting firm to serve as independent auditors each year. The
independent auditors have direct access to the Audit Committee to discuss the
results of their examinations, the adequacy of internal accounting controls, and
the integrity of financial reporting.
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<PAGE> 61
The Committee of Independent Directors when constituted will be composed of
two members, both of whom must be independent directors having no other
affiliation with either the Company or the Parent Company. It will be the
principal responsibility of this Committee to review and approve the terms of
all material agreements and transactions, and any material amendments to such
agreements, between the Company and the Parent Company which are entered into or
occur subsequent to the Offering.
The Stock Option Committee is composed of two members, neither of whom may
receive an option granted under the Company's 1998 Employee Stock Option Plan
and each of whom is required to be, if and to the extent any member or members
of the Board of Directors so qualify, a "non-employee director" of the Company
(as defined in Rule 16b-3 of the Securities and Exchange Commission under the
Securities Exchange Act of 1934) and an "outside director" of the Company
(within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended). The principal duties of the Stock Option Committee are to administer
the Company's employee stock option plans.
COMPENSATION OF NON-AFFILIATED DIRECTORS
Each director of the Company, except any director who is also an employee
of the Company or the Parent Company, will receive from the Company for his or
her services: (i) an annual retainer of $10,000, payable in quarterly
installments; (ii) an annual fee of $2,000 for each committee of the Board of
Directors of which he or she is the chairman; and (iii) a fee of $500 for each
meeting of the Board of Directors or any committee of the Board of Directors
which he or she attends. Each such non-employee director will also be eligible
to participate in the 1998 Director Stock Option Plan described below. In
addition, all directors will be reimbursed for travel and other out-of-pocket
expenses related to attending meetings of the Board of Directors and its
committees.
1998 DIRECTOR STOCK OPTION PLAN
The Board of Directors of the Company has adopted, and the Parent Company
as sole stockholder of the Company has approved, the Company's 1998 Director
Stock Option Plan (the "DSOP"). The DSOP is administered by the Board of
Directors.
A total of 50,000 shares of Class A Common Stock will be subject to the
DSOP and reserved for the grant of options thereunder (subject to antidilution
and similar adjustment provisions). If an option expires or is terminated or
canceled unexercised as to any shares, such released shares may again be
optioned. No options may be granted under the DSOP after August 31, 2008.
The DSOP provides for the automatic granting of options to purchase shares
of Class A Common Stock to certain directors of the Company ("Eligible
Directors"). An Eligible Director consists of (i) every incumbent director who
at the time of grant is not an employee of the Company or any of its
subsidiaries and (ii) every newly elected or appointed director who at the time
of his or her initial election or appointment is neither an employee of the
Company or any of its subsidiaries nor a director, officer or employee of any
other company which directly or indirectly controls the Company (a "Newly
Elected Independent Director").
Effective at the time of the Offering, Messrs. Kringel and Smith (each of
whom is deemed by the DSOP, as of that time, to be a Newly Elected Independent
Director) and Mr. Maslick will each be automatically granted an option under the
DSOP to purchase 3,000 shares of Class A Common Stock at an exercise price per
share equal to the initial public offering price. Thereafter, (i) each incumbent
Eligible Director, on the date he or she is annually reelected a director of the
Company, will be automatically granted an option under the Plan to purchase
1,000 shares of Class A Common Stock at an exercise price per share equal to the
fair market value of a share of Class A Common Stock on the date of grant and
(ii) each Newly Elected Independent Director, on the date he or she first
becomes a director of the Company, will be automatically granted an option under
the Plan to purchase 3,000 shares of Class A Common Stock at an exercise price
per share equal to the fair market value of a share of Class A Common Stock on
the date of grant.
Options granted under the DSOP will be for a term of ten years. Each such
option will vest and become exercisable in full on the first anniversary of its
date of grant. In the event a director is removed for cause, his
60
<PAGE> 62
or her options granted under the DSOP will expire immediately. In the event a
director ceases to serve as such because of any other reason, including not
being reelected, such director may exercise his or her options at any time prior
to the earlier of (i) the close of business on the normal expiration date of
such options or (ii) the close of business on the first anniversary of the date
of such cessation to the extent his or her options were exercisable as of the
date of such cessation. No option is transferable by the optionee other than by
the laws of descent and distribution, pursuant to a qualified domestic relations
order or upon the consent of the Board of Directors.
The exercise price of any option granted under the DSOP may be paid by a
director, in his or her discretion, by delivery to the Company of any of the
following: (i) a certified or cashier's check; (ii) a one year promissory note
(with shares purchased thereby having a value equal to at least 150 percent of
the principal amount of the note pledged thereunder); (iii) other shares of
Class A Common Stock owned by the director which have an aggregate fair market
value equal to the exercise price; (iv) notice to withhold from the shares
otherwise deliverable upon exercise that number of such shares having an
aggregate fair market value equal to the exercise price; or (v) notice to
deliver to a broker selected by the Company, for sale by the broker, a
sufficient number of such shares to enable the broker to deliver to the Company
a guarantee of cash equal to the aggregate exercise price. The payment methods
specified in clauses (iv) and (v) above may only be utilized by a director for
options exercised during a specified "window period" following the date of
public release of the Company's quarterly or annual results of operations.
The Board of Directors may amend or discontinue the DSOP at any time.
However, no such amendment or discontinuation may: (i) without the consent of
the optionee, change or impair any outstanding option in a manner detrimental to
the optionee; or (ii) without the approval of stockholders, (x) materially
increase the benefits accruing to optionees, (y) materially increase the maximum
number of shares which may be purchased upon exercise of options granted under
the DSOP or (z) materially modify the requirements for eligibility for
participation in the DSOP.
The Company understands that no gain or loss will be recognized to an
optionee upon the grant of an option under the DSOP, but that upon exercise of
the option ordinary income will be recognized by the optionee measured by the
excess of the fair market value of the shares of Class A Common Stock acquired
over the option price. The Company will be entitled to a deduction equal to the
amount of ordinary income recognized to the optionee. An optionee's basis in
shares acquired upon the exercise of an option will be equal to the option price
plus the amount of ordinary income recognized to the optionee. An optionee's
holding period begins on the date on which the option is exercised.
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation paid
to the Company's Chief Executive Officer and to each of its other executive
officers whose total annual salary and bonus exceeded $100,000 (collectively,
the "Named Executive Officers") for all services rendered to the Company during
Fiscal 1998.
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<PAGE> 63
SUMMARY COMPENSATION TABLE FOR FISCAL 1998
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- -------------
OTHER SECURITIES
FISCAL ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS(#)(3) COMPENSATION(4)
- --------------------------- ------ -------- -------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. Swan(5).......... 1998 $293,613 $ -- $ 955 66,000 $13,341
President and Chief
Executive Officer
Peter D. Gortz(5)......... 1998 146,349 -- -- 16,500 7,351
Senior Vice President and
Chief Operating
Officer -- North America
Dirk Barrie(6)............ 1998 150,172 -- -- 16,500 4,870
Senior Vice President and
President -- European
Group
John P. Sabalaskey(7)..... 1998 73,846 -- -- 22,000 11,115
Senior Vice President and
Chief Financial Officer
</TABLE>
- ---------------
(1) Each of the Named Executive Officers is eligible to receive a bonus for
Fiscal 1998. The bonuses for Messrs. Swan, Gortz and Sabalaskey will each
consist of a formula based nondiscretionary payment and a discretionary
payment pursuant to a bonus plan for domestic employees of the Company. The
bonus for Mr. Barrie will include a formula based nondiscretionary payment
and a discretionary payment pursuant to a bonus plan for European employees
of the Company. Bonus awards for Fiscal 1998 have not yet been determined
and made by the Board of Directors.
(2) The amount reported in this column reflects the payment by the Company of
federal income tax incurred by the Named Executive Officer relating to
certain executive officer benefits. This column excludes perquisites and
other personal benefits because for each Named Executive Officer those items
are not expected to exceed the lesser of $50,000 or 10% of his total annual
salary and bonus for Fiscal 1998.
(3) The underlying securities shown consist of shares of Class B Common Stock
subject to options granted under the Company's 1996 Key Employee Stock
Option Plan.
(4) The amount reported in this column for Mr. Barrie is a pension allowance.
Amounts reported in this column for Messrs. Swan, Gortz and Sabalaskey
include the following:
<TABLE>
<CAPTION>
COMPANY PAID
PARENT COMPANY PORTION OF PREMIUMS
CONTRIBUTIONS TO ITS FOR EXECUTIVE OFFICER
SUPPLEMENTAL RETIREMENT LIFE INSURANCE HIRING
NAME YEAR AND SAVINGS PLAN* PROGRAMS** BONUS
---- ---- ----------------------- --------------------- -------
<S> <C> <C> <C> <C>
Kevin M. Swan................ 1998 $10,550 $2,791 --
Peter D. Gortz............... 1998 6,885 466 --
John P. Sabalaskey........... 1998 -- 115 $11,000
</TABLE>
- ---------------
* The Parent Company allocated 17.8 shares of its capital stock to the
account of Mr. Swan and 14.3 shares of its capital stock to the account
of Mr. Gortz under its Supplemental Retirement and Savings Plan. The
fair market value of those shares was determined by independent
appraisal in connection with the annual valuation of the Parent
Company's capital stock for the Trustees of the Parent Company's
Supplemental Retirement and Savings Trust.
** The Company maintains group life insurance for each of the Named
Executive Officers. The Company also pays the premiums for a
supplemental life insurance policy for the benefit of Mr. Swan. Mr. Swan
is entitled to the cash surrender value of the supplemental life
insurance policy if his employment with the Company terminates.
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<PAGE> 64
(5) Mr. Swan also participated in the Parent Company's long-term incentive plan
for senior management personnel (the "Parent Incentive Plan"). The Parent
Incentive Plan, which is based upon economic value added (EVA(R))
principles, is administered with respect to separate three-year periods.
Prior to the commencement of each three-year period, every participant is
assigned a target award for each of the three years; the target award for
any given year may or may not be met or exceeded based upon the EVA
performance for that year of the business unit or units for which the
participant renders services (the Company, in the case of Mr. Swan). The
amount actually earned for each such year (there is no maximum limit on any
such earned amount) is not paid out until after completion of the third and
final year of each three-year period; instead, the earned amount is credited
to the participant's account under the Parent Incentive Plan. The current
three-year period under the Parent Incentive Plan consists of Fiscal 1996,
1997 and 1998. The amounts earned by Mr. Swan for Fiscal 1996 and 1997 were
$143,325 and $178,875, respectively, and his target award for Fiscal 1998 is
$135,000. The actual amount earned by Mr. Swan for Fiscal 1998 has not yet
been determined. It is anticipated that Mr. Swan will receive payment of the
aggregate earned amount for the three-year period ended September 30, 1998
in January 1999.
(6) Mr. Barrie's compensation is paid in Belgium francs. Accordingly, the
amounts reported in the table have been translated into U.S. dollars based
upon the average exchange rate during Fiscal 1998 of .028265 U.S. dollar per
Belgium franc.
(7) Mr. Sabalaskey joined the Company in March 1998. All compensation and
related data for Mr. Sabalaskey set forth herein covers the portion of
Fiscal 1998 during which he was employed by the Company.
Stock Option Grants in Fiscal 1998
The following table provides information concerning grants of options to
purchase shares of Class B Common Stock made during Fiscal 1998 to the Named
Executive Officers under the Company's 1996 Key Employee Stock Option Plan.
OPTION GRANTS IN FISCAL 1998(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR SHARE(2) DATE 5% 10%
---- ---------- ------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. Swan........ 66,000 44.53% $10.09 4-9-08 $418,844 $1,061,432
Peter D. Gortz....... 16,500 11.13 10.09 4-9-08 104,711 265,358
Dirk Barrie.......... 16,500 11.13 10.09 4-9-08 104,711 265,358
John P. Sabalaskey... 22,000 14.84 10.09 4-9-08 139,615 353,811
</TABLE>
- ---------------
(1) The Company intends to grant additional options effective at the
commencement of the Offering under the Company's 1998 Employee Stock Option
Plan with an exercise price per share equal to the initial public offering
price to the Named Executive Officers for the following numbers of shares of
Class A Common Stock: Mr. Swan -- 100,000; Mr. Gortz -- 25,000; Mr.
Barrie -- 20,000; and Mr. Sabalaskey -- 11,000.
(2) The exercise price of options granted under the 1996 Key Employee Stock
Option Plan is equal to the fair market value of the Company's Class B
Common Stock on the date of grant. The fair market value was determined in
reliance upon an appraisal prepared by an independent investment banking
firm, ABN AMRO Incorporated, at the direction of the Board of Directors.
(3) The assumed 5% and 10% rates of stock appreciation are provided in
accordance with rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the possible future
appreciation of the Company's Common Stock. The dollar amounts in these
columns are not discounted to present value and are prior to the payment of
applicable taxes. This table does not account for any appreciation in the
actual price of the Common Stock from the date of grant to the current date.
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<PAGE> 65
Option Exercises in Fiscal 1998 and Fiscal 1998 Year-End Values
None of the Named Executive Officers exercised any options to purchase
Common Stock during Fiscal 1998. The following table provides certain
information concerning the value of unexercised options held by the Named
Executive Officers at September 30, 1998.
AGGREGATE OPTION VALUES AT FISCAL 1998 YEAR-END
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT SEPTEMBER 30, 1998 AT SEPTEMBER 30, 1998(1)
------------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Kevin M. Swan...................... 51,502 119,245 $317,440 $312,183
Peter D. Gortz..................... 12,017 30,756 70,571 79,574
Dirk Barrie........................ 12,017 30,756 70,571 79,574
John P. Sabalaskey................. -- 22,000 -- --
</TABLE>
- ---------------
(1) The amounts reported were calculated by subtracting the exercise price from
$10.09, the most recently determined fair market value of the Company's
Class B Common Stock. The $10.09 fair market value was determined in March
1998 in reliance upon an appraisal prepared by an independent investment
banking firm, ABN AMRO Incorporated, at the direction of the Board of
Directors.
EMPLOYEE STOCK OPTION PLANS
1998 Plan
The Board of Directors of the Company has adopted, and the Parent Company
as sole stockholder of the Company has approved, the Company's 1998 Employee
Stock Option Plan (the "1998 Plan"). The 1998 Plan is administered by the Stock
Option Committee of the Board of Directors (the "Committee"). See
"Management -- Committees of the Board." The Committee has authority, among
other things, to determine the persons to be granted options under the 1998
Plan, the number of shares subject to each option and the time or times at which
options will be granted.
Options may be granted under the 1998 Plan to employees of the Company and
its subsidiaries. Initially, options may be granted under the 1998 Plan with
respect to a total of not more than 300,000 shares of Class A Common Stock
(subject to antidilution and similar adjustment provisions). An additional
150,000 shares of Class A Common Stock will be reserved for options to be
granted under the 1998 Plan on October 1 of each of the years 1999 through 2001
(subject to the same adjustment provisions). No options may be granted under the
1998 Plan after August 31, 2008. If an option expires or is terminated or
canceled unexercised as to any shares, such released shares may again be
optioned (including a grant in substitution for a canceled option). No single
optionee may be granted, in any calendar year, options which in the aggregate
cover more than 125,000 shares.
Unless otherwise determined by the Committee, options granted under the
1998 Plan will be for a term of ten years and will vest and become exercisable
as to one-fourth of the shares subject thereto on each of the first, second,
third, and fourth anniversaries of the date of grant. The Committee may
accelerate the exercisability of any option or, at any time before the
expiration or termination of an option previously granted, extend the term of
such option for such additional period as the Committee, in its discretion,
shall determine, except that the aggregate option period with respect to any
option, including the original term of the option and any extensions thereof,
may not exceed ten years. In addition, in the event of a Change in Control (as
defined) of the Company, all options then outstanding under the 1998 Plan will
become immediately exercisable.
The exercise price per share of each option granted under the 1998 Plan
must be the fair market value of a share of Class A Common Stock on the date of
grant. Upon exercise of an option, the optionee is required to pay the aggregate
exercise price to the Company by means of a certified or cashier's check.
However, the Committee may permit the exercise price to be paid by delivery to
the Company of any of the following: (i) a
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<PAGE> 66
one year promissory note (with shares purchased thereby having a value equal to
at least 150 percent of the principal amount of the note pledged thereunder);
(ii) other shares of Class A Common Stock owned by the optionee which have an
aggregate fair market value equal to the exercise price; (iii) notice to
withhold from the shares otherwise deliverable upon exercise that number of such
shares having an aggregate fair market value equal to the exercise price; or
(iv) notice to deliver to a broker selected by the Company, for sale by the
broker, a sufficient number of such shares to enable the broker to deliver to
the Company a guarantee of cash equal to the aggregate exercise price. The
payment methods specified in clauses (iii) and (iv) above may only be utilized
by an optionee for options exercised during a specified "window period"
following the date of public release of the Company's quarterly or annual
results of operations.
In the event an optionee's employment with the Company is terminated for
cause (as defined) or an optionee voluntarily resigns, such optionee's options
will expire immediately. In the event of an optionee's death, permanent
disability or retirement after reaching the age of 65, any option then held by
such optionee may continue to be exercised by the optionee (or, in the case of
death or permanent disability, his or her heirs or legal representative), to the
extent such option was exercisable on the date his or her employment was so
terminated, until the earlier of (i) the close of business on the first
anniversary of the date his or her employment was so terminated or (ii) the
close of business on the normal expiration date of such option. In the event an
optionee's employment with the Company terminates due to his or her discharge
without cause, any option then held by such optionee may continue to be
exercised by such optionee, to the extent such option was exercisable on the
date his or her employment was so terminated, until the earlier of (i) the close
of business on the 90th day after the date his or her employment was so
terminated or (ii) the close of business on the normal expiration date of such
option. No option is transferable by the optionee other than by the laws of
descent and distribution, pursuant to a qualified domestic relations order or
upon the consent of the Committee.
The Board of Directors may amend or discontinue the 1998 Plan at any time.
However, no such amendment or discontinuation may: (i) without the consent of
the optionee, change or impair any outstanding option in a manner detrimental to
the optionee; or (ii) without the approval of stockholders, (x) materially
increase the benefits accruing to optionees; (y) materially increase the maximum
number of shares of Class A Common Stock that may be purchased upon exercise of
options granted under the 1998 Plan or (z) materially modify the requirements of
eligibility for participation in the 1998 Plan.
The Company understands that no gain or loss will be recognized to an
optionee upon the grant of an option under the 1998 Plan, but that upon exercise
of the option ordinary income will be recognized to the optionee measured by the
excess of the fair market value of the shares of Common Stock acquired over the
option price. The Company will be entitled to a deduction equal to the amount of
ordinary income recognized to the optionee. An optionee's basis in shares
acquired upon the exercise of an option will be equal to the option price plus
the amount of ordinary income recognized to the optionee. An optionee's holding
period begins on the date on which the option is exercised.
1996 Plan
Under the Company's 1996 Key Employee Stock Option Plan, as amended and
restated ("1996 Plan"), a committee of the Company's Board of Directors granted
options to purchase shares of the Company's common stock in each of the years
1996, 1997 and 1998 to certain employees, including executive officers of the
Company. Options granted under the 1996 Plan are intended not to be treated as
"incentive stock options" as that term is defined in Section 422 of the Internal
Revenue Code of 1986, as amended. When the Recapitalization becomes effective,
the options granted under the 1996 Plan will be reclassified as options to
purchase shares of Class B Common Stock of the Company. See "Description of
Capital Stock -- Recapitalization." No additional options will be granted
pursuant to the 1996 Plan. The 1996 Plan is now administered by the Stock Option
Committee of the Board of Directors.
Each option granted under the 1996 Plan has a term of ten years. The
exercise price per share of each such option is the fair market value of a share
of the Company's common stock on the date the option was granted, as determined
by the committee which granted the option. As determined by the committee at the
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<PAGE> 67
time of grant, each option granted under the 1996 Plan vests and becomes
exercisable either (i) with respect to the total number of shares subject to the
option on the first anniversary of the date of grant, (ii) with respect to
one-third of the total number of shares subject to the option on each of the
first, second and third anniversaries of the date of grant or (iii) as otherwise
determined by the committee. The Stock Option Committee may accelerate the
exercisability of any option granted under the 1996 Plan. All options granted
under the 1996 Plan will expire not later than April 9, 2006.
The purchase price of the shares subject to any option granted under the
1996 Plan which is exercised after the completion of the Offering may be paid,
in the optionee's discretion, either by delivery to the Company of (i) a
cashier's or certified check or (ii) irrevocable instructions directing the
Company to deliver that portion of shares being purchased pursuant to such
exercise to a broker for sale in the public market subject to such broker's
guarantee to deliver cash sufficient to cover the exercise price in full.
In the event of an optionee's death or permanent disability any option
granted to such optionee may continue to be exercised by such optionee (or, in
the case of death or permanent disability, his or her heirs or legal
representative) to the extent such option was exercisable on the date his or her
employment was so terminated, until the earlier of (i) the close of business on
the 90th day after the date his or her employment was so terminated or (ii) the
close of business on the normal expiration date of such option. In the event an
optionee's employment with the Company is terminated without cause, any option
granted to such optionee may continue to be exercised by such optionee, to the
extent such option was exercisable on the date his or her employment was so
terminated, until the earlier of (i) the close of business on the 60th day after
the date his or her employment was so terminated or (ii) the close of business
on the normal expiration date of such option. In the event an optionee's
employment with the Company is terminated for any other reason, such optionee's
options and all rights pursuant thereto will expire immediately.
No option is transferable by the optionee other than by the laws of descent
and distribution or upon the consent of the Committee. The Board of Directors
may amend or discontinue the 1996 Plan at any time. However, no such amendment
or discontinuation shall change or impair any option previously granted in a
manner detrimental to the optionee without his or her consent.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this Offering, the compensation of the Company's executive
officers was determined and fixed by the Company's Board of Directors,
consisting of Dean L. Griffith, Joseph R. Maslick and Kevin M. Swan, the
Company's President and Chief Executive Officer. Subsequent to this Offering,
the terms of compensation of the Company's executive officers will be determined
by the Compensation Committee of the Company's Board of Directors, none of whose
members will be employees of the Company. No executive officer of the Company
serves as a member of the board of directors or compensation committee of any
entity which has one or more executive officers serving as members of the
Company's Board of Directors or Compensation Committee.
TRANSACTIONS WITH MANAGEMENT
In accordance with a standing policy of the Parent Company applicable to
certain senior officers of the Parent Company and its subsidiaries, including
the Company, in May 1995 the Company made a loan to Mr. Swan in the principal
amount of $50,000. Interest on the principal amount of the Company's loan to Mr.
Swan accrues at a rate of 7%, compounded annually. Mr. Swan is obligated to pay
the Company the outstanding amount of the loan, including accrued interest, in
the event his employment with the Company terminates for any reason prior to May
4, 2000. If he remains in the employ of the Company through that date, the loan
and related accrued interest will be forgiven by the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the date of this Prospectus, no shares of Class A Common Stock are
outstanding. Upon completion of the Offering, the only shares of Class A Common
Stock that will be outstanding are those that will be
66
<PAGE> 68
issued in the Offering. The following table sets forth as of June 30, 1998, and
as adjusted to reflect the sale of the shares of Class A Common Stock offered
hereby, certain information regarding the beneficial ownership of the Class B
Common Stock by (i) each person known by the Company to be the beneficial owner
of 5% or more of any class of the Company's voting securities, (ii) each of the
Company's directors and nominees for director, (iii) each of the Named Executive
Officers, and (iv) all directors, nominees for director and executive officers
of the Company as a group. Certain employees of the Company, including the Named
Executive Officers, will be given the opportunity to purchase shares of Class A
Common Stock in the Offering at the public offering price set forth on the cover
page of this Prospectus.
<TABLE>
<CAPTION>
SHARES OF CLASS B
COMMON STOCK BENEFICIALLY SHARES OF CLASS B
OWNED BEFORE OFFERING(1) COMMON STOCK BENEFICIALLY
---------------------------- OWNED AFTER OFFERING(1)
% OF TOTAL -------------------------------------
EQUITY AND TOTAL % OF TOTAL % OF TOTAL
NAME(2) NUMBER VOTING POWER NUMBER EQUITY VOTING POWER
------- --------- ---------------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Griffith Laboratories International,
Inc.(3).............................. 5,225,000 97.6 5,225,000 66.6 93.3
Dean L. Griffith(3).................... 5,225,000 97.6 5,225,000 66.6 93.3
Joseph R. Maslick...................... -- -- -- -- --
Kevin M. Swan(4)....................... 51,502 * 51,502 * *
Peter D. Gortz(4)...................... 12,017 * 12,017 * *
Dirk Barrie(4)......................... 12,017 * 12,017 * *
John P. Sabalaskey..................... -- -- -- -- --
John G. Kringel........................ -- -- -- -- --
L. Peter Smith......................... -- -- -- -- --
All directors, nominees for director
and executive officers as a group (10
persons)(4).......................... 75,536 1.4 75,536 * 1.4
</TABLE>
- ---------------
* Represents less than 1% of the outstanding shares of Class B Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Under those rules, a person is generally
regarded as the beneficial owner of: (i) shares as to which he, she or it
possesses sole or shared voting or investment power; and (ii) shares which,
although not issued, such person has the right to acquire (upon exercise of
stock options, conversion rights or otherwise) within 60 days of the date of
this Prospectus. Each outstanding share of Class B Common Stock is
convertible at any time by the holder thereof into one share of Class A
Common Stock. See "Description of Capital Stock." Accordingly, each
beneficial owner of shares of Class B Common Stock set forth in the table is
deemed, under the foregoing rules of the Securities and Exchange Commission,
to beneficially own the same number of shares of Class A Common Stock. Mr.
Griffith disclaims beneficial ownership of all such shares of Class A Common
Stock.
(2) Unless otherwise indicated, the address of such person is c/o Griffith Micro
Science International, Inc., 2001 Spring Road, Suite 500, Oak Brook,
Illinois 60523-1887.
(3) Griffith Laboratories International, Inc. ("GLII") is a wholly-owned
subsidiary of Griffith Laboratories, Inc. ("GLI"). As a result of his
beneficial ownership of voting securities of GLI, the positions which he
holds with GLI and GLII and his authority under the bylaws of GLI and GLII,
Mr. Griffith may be deemed to be the indirect beneficial owner of all of the
shares of Class B Common Stock which are beneficially owned by GLII, as
beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission summarized in note (1). Mr. Griffith
disclaims beneficial ownership of all such shares of Class B Common Stock.
The address of GLII, GLI and Dean L. Griffith is in each case One Griffith
Center, Alsip, Illinois 60803-3495.
(4) Consists entirely of shares of Class B Common Stock subject to outstanding
stock options held by such person which are exercisable within 60 days of
the date of this Prospectus.
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<PAGE> 69
RELATIONSHIP WITH PARENT COMPANY
BACKGROUND
The Parent Company, which was organized in 1919 and is headquartered in
Alsip, Illinois, a suburb of Chicago, is engaged through subsidiaries which
comprise its Food Group in the creation and manufacture of custom blended
coatings, flavorings and flour-based blends used by food processing and food
service companies worldwide to impart or improve the taste, texture and
appearance of a variety of food products and in the production of soup bases.
During the 1930s, the Parent Company patented the use of ethylene oxide to
sterilize dry food ingredients. During the 1940s, the Parent Company received
patents for ethylene oxide sterilization of hospital and medical devices.
Initially, the Parent Company used the process to sterilize herbs and spices
which it imported for use by its Food Group. Beginning in the 1950s, while
continuing to do its own sterilization, the Parent Company began offering
contract ethylene oxide sterilization services to others. In 1970, the Parent
Company organized a separate division to operate its contract ethylene oxide
sterilization business. Thereafter, the business was transferred to the Company,
except that its attendant intellectual property was retained by the Parent
Company and its use licensed to the Company.
Today, there is relatively little operational overlap between the business
of the Parent Company and the business of the Company. The Parent Company does
render a variety of administrative and financial support services to the
Company, and it is expected to continue to do so after completion of the
Offering. The Parent Company is also the owner of certain intellectual property
which it licenses to the Company for use in the Company's business. Prior to
completion of the Offering, the Parent Company will have assigned this
intellectual property to the Company as a contribution to capital. In order to
document and establish the terms of these arrangements and other aspects of
their continuing relationship, the Company and the Parent Company will, prior to
the completion of the Offering, have entered into the Intercompany Agreements,
which are described below.
The Intercompany Agreements are not the result of arm's length negotiations
between independent parties, and their terms were not reviewed or approved by
the Committee of Independent Directors of the Company's Board of Directors
(which will not be constituted until after completion of the Offering). There
can be no assurance that their terms and conditions are or will remain the same
as those for agreements negotiated at arm's length. It is the intention of the
Company and the Parent Company, however, that the Intercompany Agreements, taken
as a whole, should accommodate the parties' respective interests in a manner
that is fair to each of them, while continuing certain mutually beneficial
arrangements. In addition, the principal responsibility of the Committee of
Independent Directors, whose members will not be otherwise affiliated with
either the Company or the Parent Company, will be to review and approve the
terms of all material agreements and transactions, and any material amendments
to such agreements (including amendments to the Intercompany Agreements) between
the Company and the Parent Company which are entered into or occur subsequent to
the Offering.
The following summary of the material terms of the Intercompany Agreements
is qualified in its entirety by reference to the provisions of such agreements,
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
SHAREHOLDER AGREEMENT
Prior to the completion of the Offering, the Company and the Parent Company
will have entered into a Shareholder Agreement (the "Shareholder Agreement"),
pursuant to which the Company has granted certain rights (the "Registration
Rights") to the Parent Company with respect to the registration under the
Securities Act of: (i) the shares of Class B Common Stock owned by the Parent
Company at the closing of the Offering; and (ii) the shares of Class A Common
Stock into which such shares of Class B Common Stock are convertible (together,
the "Registrable Securities"). Pursuant to the Shareholder Agreement, the Parent
Company will be able to require the Company, not more than once in any 365-day
period, commencing on the first anniversary of the closing of the Offering, to
file a registration statement under the Securities Act covering the registration
of the Registrable Securities, including in connection with an offering by the
Parent Company
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of its securities that are exchangeable for the Registrable Securities (the
"Demand Registration Rights"). The Parent Company's Demand Registration Rights
are subject to certain limitations, including that any such registration cover a
number of Registrable Securities having a fair market value of at least $2.5
million at the time of the request for registration and that the Company may be
able to temporarily defer a Demand Registration to the extent it conflicts with
another public offering of securities by the Company or would require the
Company to disclose certain material non-public information. In addition, after
the Parent Company no longer owns a majority of the voting power of the
outstanding capital stock of the Company, it may exercise its Demand
Registration Rights on not more than three occasions. The Parent Company will
also be able to require the Company to include Registrable Securities owned by
the Parent Company in a registration by the Company of its securities (the
"Piggyback Registration Rights"), subject to certain conditions, including the
ability of the underwriters to limit or exclude Registrable Securities from such
an offering.
The Company and the Parent Company will share equally the out-of-pocket
fees and expenses of the Company associated with a demand registration and the
Parent Company will pay its pro rata share of underwriting discounts,
commissions, and related expenses (the "Selling Expenses"). The Company will pay
all expenses associated with a piggyback registration except that the Parent
Company will pay its pro rata share of the Selling Expenses. The Shareholder
Agreement contains certain indemnification and contribution provisions (i) by
the Parent Company for the benefit of the Company and related persons, as well
as any potential underwriter, and (ii) by the Company for the benefit of the
Parent Company and related persons, as well as any potential underwriter. The
Parent Company's Demand Registration Rights will terminate on the date that the
Parent Company owns, on a fully converted or exercised basis with respect to
such securities held by the Parent Company, Registrable Securities representing
less than 10% of the then issued and outstanding voting stock of the Company.
The Parent Company's Piggyback Registration Rights will terminate at such time
as it is able to sell all of its Registrable Securities pursuant to Rule 144
under the Securities Act within a three-month period. The Parent Company also
may transfer its Registration Rights to any Permitted Transferee of Class B
Common Stock, as defined in the Company's Restated Certificate of Incorporation,
or to any transferee from it of Registrable Securities that represent, on a
fully converted or exercised basis with respect to the Registrable Securities
transferred, at least 20% of the then issued and outstanding voting stock of the
Company at the time of transfer; provided, however, that any such transferee
will be limited to (i) two demand registrations if the transfer conveys less
than a majority but more than 30% and (ii) one demand registration if the
transfer conveys 30% or less of the then issued and outstanding voting stock of
the Company.
The Shareholder Agreement also provides that the Parent Company, at any
time when it holds less than 50% of the combined voting power of all outstanding
shares of capital stock of the Company, may demand that within 12 months the
Company: (i) change its name to a name that does not include the word
"Griffith," cease using any trademark or trade name that contains the word
"Griffith," and cease using the word "Griffith" in any manner in connection with
the Company's business; and (ii) cease using the "flask and world" logo and
trademark (a version of which appears on the cover page of this Prospectus) in
any manner in connection with the Company's business and assign to the Parent
Company all of the Company's right, title and interest in and to that trademark.
ADMINISTRATIVE SERVICES AGREEMENT
Prior to the completion of the Offering, the Company and the Parent Company
will have entered into an agreement (the "Administrative Services Agreement")
governing the terms upon which the Parent Company may continue to provide
various services to the Company. These services include information systems,
finance and accounting, treasury, legal, insurance and risk management,
taxation, human resources and employee benefits, strategic planning, management
services and systems and procedures. Services governed by the Administrative
Services Agreement will be performed only upon the request of the Company and at
the discretion of the Parent Company. The Administrative Services Agreement will
have an initial term of five years and thereafter will renew automatically for
successive one year terms unless either party gives the other not less than six
months' prior written notice of termination. In addition, the Agreement may be
terminated at
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any time by mutual consent or by the Parent Company at any time after it owns
less than 20.1% of the outstanding Common Stock of the Company.
The Company will pay a quarterly fee for these services intended to reflect
a reasonable approximation of the cost to the Parent Company of providing such
services to the Company. A portion of the services have been and will continue
to be provided by the Parent Company's Food Group. In prior periods, the Company
has paid the Parent Company for the cost of the Food Group services, which
amounted to approximately $313,000 in Fiscal 1997. The balance of the services
have been and are expected to continue to be provided principally by the Parent
Company's Corporate Group. No charge was previously made to the Company for the
Corporate Group services. The Company believes that in Fiscal 1999 its aggregate
cost for the Corporate Group services is not likely to exceed $500,000. At the
request of the Company, the Parent Company may also elect, at its sole option
and discretion, to provide guaranties of specified financial obligations of the
Company, in which case the Parent Company would receive additional fees.
TAX MATTERS AGREEMENT
Prior to the completion of the Offering, the Company and the Parent Company
will have entered into an agreement (the "Tax Matters Agreement") which governs
the allocation between the parties of state and federal tax liabilities and
obligations. Pursuant to the Tax Matters Agreement, for periods prior to the
date of completion of the Offering (the "Deconsolidation Date"), the Company is
responsible for its tax liabilities computed as though it filed separate tax
returns for such periods. From and after the Deconsolidation Date, the Company
is responsible for all tax liabilities incurred by it but the Parent Company
will have the right and obligation, subject to certain constraints, to: (i)
prepare and file the Company's tax returns; (ii) conduct all audits of and
litigation regarding the Company's tax returns; and (iii) determine the final
disposition of all tax matters. The Company will reimburse the Parent Company
through the Administrative Services Agreement for all internal tax
administration costs relating to the Company incurred by the Parent Company. The
Tax Matters Agreement will have an initial term of five years and thereafter
will renew automatically for additional terms of one year unless either party
gives the other not less than 90 days prior written notice of termination.
INTELLECTUAL PROPERTY ASSIGNMENT
Effective upon the completion of the Offering, the Parent Company will have
assigned to the Company all of the trademarks, technical know-how, and other
intellectual property owned by the Parent Company and used in or associated with
the business of the Company (which intellectual property is currently licensed
by the Parent Company to the Company). As a result of such assignment, the
Company will no longer pay a royalty to the Parent Company for the license of
such intellectual property.
CERTAIN OTHER ARRANGEMENTS
The Company's sterilization facility near Toronto, Canada is located in
space leased from the Parent Company. The leased premises occupy a portion of a
building which also houses production facilities of the Parent Company's Food
Group. The space leased by the Company is physically separated from the rest of
the building. The lease will expire in September 2008. In Fiscal 1997, the
Company paid the Parent Company approximately $219,000 in rent and related
charges for this space. See "Business -- Facilities" and Note 12 of the Notes to
Consolidated Financial Statements.
The Company also renders services in the ordinary course of its business
and on customary and competitive terms for the Parent Company's Food Group, the
aggregate amount of which in Fiscal 1997 was approximately $371,000 and which
consist principally of laboratory testing services performed by the Company for
the Food Group in the United Kingdom and sterilization processing performed for
the Food Group in North America. The Company also purchases certain
administrative services in the ordinary course of its business from various
operating units of the Parent Company's Food Group in North America. Subsequent
to the Offering, these services, the aggregate cost of which was approximately
$313,000 in Fiscal 1997, will be performed pursuant to the Administrative
Services Agreement. See Note 12 of the Notes to Consolidated Financial
Statements. In addition, the Parent Company has issued non-binding "comfort
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letters" to various European financial institutions in support of borrowings
made by the Company from those institutions.
The Company participates in the qualified profit sharing plan maintained by
the Parent Company, under which substantially all of the Company's employees in
the United States are eligible to participate after six months of employment.
Contributions charged to earnings consist of matching contributions based on the
amount contributed by employees and discretionary amounts set by the Board of
Directors of the Parent Company, a portion of which is allocated to the Company.
The Company will continue to participate in this plan after completion of the
Offering.
DESCRIPTION OF CAPITAL STOCK
RECAPITALIZATION
Prior to the completion of the Offering, a recapitalization of the Company
will have been effected pursuant to which the following will occur
(collectively, the "Recapitalization"):
(i) the total number of authorized shares of capital stock of the
Company will be increased to 100,000,000, consisting of 50,000,000 shares
of Class A Common Stock, 40,000,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock; and
(ii) each of the currently outstanding 950,000 shares of common stock
of the Company, all of which are owned by the Parent Company, will be
reclassified into 5.5 shares of Class B Common Stock.
Upon the effectiveness of and to give effect to the Recapitalization, each
of the outstanding options to purchase shares of existing common stock of the
Company which were previously granted pursuant to the 1996 Plan will be
converted, pursuant to the provisions of the 1996 Plan, into an option to
purchase that number of shares of Class B Common Stock determined by multiplying
the number of shares of existing common stock subject to the option by 5.5 at an
exercise price per share equal to the current exercise price divided by 5.5.
Each share of Class A Common Stock to be sold by the Company in the
Offering will be issued by the Company from its newly authorized but unissued
shares of Class A Common Stock.
After giving effect to the Recapitalization, the authorized capital stock
of the Company will consist of: (i) 50,000,000 shares of Class A Common Stock,
$.01 par value per share; (ii) 40,000,000 shares of Class B Common Stock, $.01
par value per share; and (iii) 10,000,000 shares of Preferred Stock, $.01 par
value per share. Upon completion of the Offering, there will be outstanding:
2,500,000 shares of Class A Common Stock (2,875,000 if the Underwriters'
over-allotment option is exercised in full); 5,225,000 shares of Class B Common
Stock; and no shares of Preferred Stock. The following summary of the material
terms of the capital stock of the Company is qualified in its entirety by
reference to the provisions of the Restated Certificate of Incorporation of the
Company, which has been included as an exhibit to the Registration Statement of
which this Prospectus is a part.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
Except as described below under "Voting," "Dividends and Distributions,"
"Conversion and Other" and "Liquidation and Mergers," the Class A Common Stock
and the Class B Common Stock are identical to each other.
Voting. Each share of Class B Common Stock entitles the holder thereof to
ten votes per share on all matters on which stockholders are entitled to vote
(including election of directors). Each share of Class A Common Stock entitles
the holder thereof to one vote per share on all such matters. All actions
submitted to a vote of stockholders will be voted on by holders of Class A and
Class B Common Stock voting together as a single class, except on matters where
a separate class vote is required by Delaware law. Such matters include
amendments of the Certificate of Incorporation to change the number of
authorized shares of such class, to
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change the par value of the shares of such class, or to alter or change the
powers, preferences or special rights of the shares of such class so as to
affect them adversely.
There is no provision in the Certificate of Incorporation permitting
cumulative voting.
All of the currently outstanding shares of Class B Common Stock are owned
by the Parent Company. As a result, the Parent Company will be able to control
the election of directors and the vote on other matters submitted to
stockholders, including the approval of extraordinary corporate transactions.
See "Risk Factors -- Control by the Parent Company" and "-- Antitakeover Effects
of the Company's Capital Structure" and "Relationship With Parent Company."
Dividends and Distributions. Subject to the paragraph below, the Class A
Common Stock and Class B Common Stock have identical dividend rights, with any
payment of dividends to one class of Common Stock requiring payment of an
identical dividend to the other class.
Dividends consisting of one class of Common Stock may be paid on that class
of Common Stock if dividends consisting of the other class of Common Stock are
paid on the other class of Common Stock on an equal per share basis. The shares
of one class may not be reclassified, subdivided or combined unless there is a
simultaneous equivalent reclassification, combination or subdivision of the
shares of the other class.
The Revolving Credit Agreement which the Company expects to enter into
prior to the Offering will contain a covenant restricting the amount of
dividends which the Company will be permitted to pay. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Conversion and Other. The Class B Common Stock is convertible, at the
option of the holder, into Class A Common Stock on a share-for-share basis. Any
shares of Class B Common Stock which are transferred (other than to certain
Permitted Transferees) shall automatically be converted into Class A Common
Stock on a share-for-share basis. For such purpose, a "Permitted Transferee"
shall mean: (i) any Person which directly or indirectly controls, is controlled
by or is under common control with, the Company (an "affiliate of the Company");
(ii) the shareholders of the Parent Company, but only pursuant to a single
transaction in which all outstanding shares of Class B Common Stock then held by
the Parent Company are distributed to the shareholders of the Parent Company as
part of a tax free spin off; and (iii) any other corporation or business entity
which is not an affiliate of the Company, but only pursuant to a single
transaction approved by the Board of Directors of the Parent Company in which
all outstanding shares of Class B Common Stock held by the Parent Company are
sold to, exchanged with or otherwise transferred to such other corporation or
business entity; and "Person" means any individual, corporation, association,
partnership, limited liability company, joint venture, trust, organization,
business, government or any government agency or political subdivision thereof
or any other entity. In addition, at the close of business on the first date
that the number of outstanding shares of Class B Common Stock represents less
than 10% of the aggregate number of then outstanding shares of Common Stock, all
of the Class B Common Stock shall be automatically converted into Class A Common
Stock on a share-for-share basis. See "Risk Factors -- Control by the Parent
Company."
Shares of Class B Common Stock which are converted become authorized and
unissued shares which may be issued by the Board of Directors without further
action by stockholders, except as required by law, and subject to the
limitations on future issuances of Class B Common Stock described below.
Neither the Class A Common Stock nor the Class B Common Stock has any
preemptive rights enabling a holder to subscribe for or receive shares of stock
of the Company of any class.
Shares of Class B Common Stock currently outstanding are, and shares of
Class A Common Stock offered by the Company hereby will be, fully paid and
non-assessable.
Under provisions of the Restated Certificate of Incorporation, every
reference in the Company's Restated Certificate of Incorporation or Bylaws to a
majority or other proportion of stock shall refer to such majority or other
proportion of the votes of such stock (except with respect to the provision
providing for conversion of the
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Class B Common Stock into Class A Common Stock upon the Class B Common Stock
representing less than 10% of the Common Stock).
Limitation on Future Class B Issuances. The Restated Certificate of
Incorporation prohibits issuances of additional Class B Common Stock other than
upon exercise of existing options or pursuant to any permitted stock dividend or
distribution, as described above.
Liquidation and Mergers. The holders of the Class A Common Stock and Class
B Common Stock will have equal rights, on a share-for-share basis, in the event
of liquidation of the Company (subject to any preferential rights of any
outstanding series of Preferred Stock) or mergers or consolidations of the
Company in which shares of Common Stock are converted into cash, securities or
other property, provided that if the consideration in a merger or consolidation
consists of voting securities, the merger or consolidation agreement may provide
for the holders of Class B Common Stock to receive, on a per share basis, voting
securities with ten times the number of votes per share as those voting
securities to be received by the holders of shares of Class A Common Stock.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the voting powers, designations, preferences, and relative,
participating, optional, or other special rights, and qualifications,
limitations, and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, and the
number of shares constituting any series. Because the Board of Directors has the
power to establish the preferences and rights of the shares of any such series
of preferred stock, it may afford holders of any preferred stock preferences,
powers and rights (including voting rights), senior to the rights of holders of
Common Stock, which could adversely affect the rights of holders of Common
Stock. The Company has no present plan to issue any shares of Preferred Stock.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock. The
Company cannot predict the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
prevailing market prices of the Common Stock.
Upon completion of the Offering, the Company will have 2,500,000 shares of
Class A Common Stock outstanding (2,875,000 if the Underwriters' over-allotment
option is exercised in full). All such shares of Class A Common Stock will be
freely tradable (other than by an "affiliate" of the Company as such term is
defined in the Securities Act) without restriction or registration under the
Securities Act.
Upon completion of the Offering, the Parent Company will own 5,225,000
shares of Class B Common Stock. All such shares were issued and sold by the
Company in a private transaction and are "restricted securities" as such term is
defined in the Securities Act ("Restricted Shares"). Accordingly, neither they
nor the shares of Class A Common Stock into which they are convertible may be
resold by the Parent Company unless registered under the Securities Act or sold
in accordance with an exception therefrom, such as Rule 144 or Rule 144A
thereunder. Due to the restrictions on transferability of the Class B Common
Stock contained in the Company's Restated Certificate of Incorporation, no
public market is expected to develop in the shares of Class B Common Stock. Each
share of Class B Common Stock is however, convertible at any time by the holder
thereof (including the Parent Company) into a share of Class A Common Stock. The
Parent Company has informed the Company that it has no present intention to
convert and sell any shares of Common Stock owned by it and has also agreed not
to convert and sell any Common Stock owned by it prior to the expiration of 180
days from the date of this Prospectus without the prior written consent of ABN
AMRO Incorporated.
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In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an affiliate of the Company, or a holder of
Restricted Shares who beneficially owns shares that were not acquired from the
Company or an affiliate of the Company within the previous year (all of the
Restricted Shares held by the Parent Company were acquired more than one year
ago for purposes of this condition), would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Class A Common Stock (approximately 25,000 shares
of Class A Common Stock immediately after the Offering, assuming no exercise of
the Underwriters' over-allotment option) or the average weekly trading volume of
Class A Common Stock during the four calendar weeks preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission. Sales
under Rule 144 are subject to certain requirements relating to manner of sale,
notice and availability of current public information about the Company.
However, a person (or persons whose shares are aggregated) who is not deemed to
have been an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who owns beneficially Restricted Shares is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above, provided that at least two years have elapsed since the later of the date
the shares were acquired from the Company or from an affiliate of the Company.
The foregoing is a summary of Rule 144 and is not intended to be a complete
description of it.
In addition, as of June 30, 1998 there were outstanding options, granted
under the Company's 1996 Plan, to purchase a total of 504,306 shares of Class B
Common Stock; as of such date, these options had vested and were exercisable as
to 124,806 such shares. Upon the exercise of any such options and the conversion
of the shares of Class B Common Stock issued upon such exercise, the resulting
shares of Class A Common Stock may be publicly sold by the holders thereof,
subject to compliance with the Securities Act. The directors and officers of the
Company have agreed not to convert and sell any Common Stock owned by them prior
to the expiration of 180 days from the date of this Prospectus without the prior
written consent of ABN AMRO Incorporated. The Company also expects to grant
options to purchase an aggregate of 179,000 shares of Class A Common Stock
effective on the date of the Offering pursuant to its 1998 Plan and its DSOP.
None of these options would begin to vest until the first anniversary of their
date of grant. Upon the exercise of any such options, the shares of Class A
Common Stock purchased thereby may also be publicly sold by the holders thereof
subject to compliance with the Securities Act.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering approximately 856,000 shares of Class A Common Stock
reserved for issuance under the 1996 Plan and the 1998 Plan and DSOP. Such
registration statement is expected to be filed soon after the Offering and will
automatically become effective upon filing. Accordingly, shares registered under
such registration statement will be available for sale in the open market when
and as such options are exercised.
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom ABN AMRO
Incorporated and Robert W. Baird & Co. Incorporated are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions specified in the underwriting agreement between the Company
and the Representatives (the "Underwriting Agreement"), to purchase from the
Company the respective numbers of shares of Class A Common Stock set forth
opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
UNDERWRITER CLASS A COMMON STOCK
----------- ---------------------
<S> <C>
ABN AMRO Incorporated.......................................
Robert W. Baird & Co. Incorporated..........................
---------
Total............................................. 2,500,000
=========
</TABLE>
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The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions and that the Underwriters will be
obligated to purchase all of the shares of Class A Common Stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased. The Underwriting Agreement provides that, in the event of
a default by an Underwriter, in certain circumstances the purchase commitments
of non-defaulting Underwriters may be increased or the Underwriting Agreement
may be terminated.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Class A Common Stock to the public initially at
the public offering price set forth on the cover page of this Prospectus and to
certain selected dealers at such public offering price less a concession not in
excess of $
per share, and that the Underwriters and such dealers may reallow to certain
other dealers, including any Underwriters, a discount not in excess of $ per
share. After the initial offering to the public, the public offering price and
other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable by the
Representatives, expiring at the close of business on the 30th day after the
date of the execution of the Pricing Agreement referred to in the Underwriting
Agreement, to purchase up to an aggregate of 375,000 additional shares of Class
A Common Stock from it at the public offering price less the underwriting
discount, all as set forth on the cover page of this Prospectus. Such option may
be exercised only to cover over-allotments in the sale of the shares of Class A
Common Stock offered hereby. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Class A Common
Stock as it was obligated to purchase pursuant to the Underwriting Agreement.
The Company, all of the Company's directors and officers and the Parent
Company have agreed for a period of 180 days after the date of this Prospectus
not to register for sale, sell, offer, contract to sell, grant an option for
sale or otherwise dispose of or transfer any capital stock of the Company or any
securities convertible into or exchangeable or exercisable for capital stock of
the Company, without the prior written consent of ABN AMRO Incorporated, except,
in the case of the Company, registration and issuances of capital stock pursuant
to the exercise of director and employee stock options granted under the
Company's existing incentive plans and in connection with acquisitions (provided
that any recipient in an acquisition of Class A Common Stock during such 180 day
period agrees to be bound by such prohibition during the remainder of the 180
day period) and, in the case of the officers and directors, pledges of shares
and gifts of shares where the pledgees agree in writing to be bound by the terms
of such agreement.
Prior to the Offering, there has been no public market for the Class A
Common Stock. The initial public offering price will be determined by
negotiations between the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price will be the
future prospects of the Company and its industry in general, revenues, earnings
and certain other financial operating information of the Company in recent
periods, the experience of the Company's management, the general condition of
the equity securities markets, and the price-earnings ratios, price-sales
ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the Company.
The estimated initial public offering price range set forth on the cover page of
this Preliminary Prospectus is subject to change as a result of market
conditions and other factors.
The Company and GLII have agreed to indemnify the Underwriters and their
controlling persons against certain liabilities, including civil liabilities
under the Securities Act, or contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company has submitted an application to list the shares of Class A
Common Stock offered hereby on the Nasdaq National Market under the symbol GMSI.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M of the Exchange Act. Over-allotment
involves syndicate sales in excess of the size of the Offering, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the Class A Common
Stock in the open market after the distribution has been completed in order to
cover syndicate short
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positions. Penalty bids permit the Representatives to reclaim a selling
concession from a syndicate member when the Class A Common Stock originally sold
by such syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Class A Common
Stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
The Representatives have informed the Company that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
of Class A Common Stock offered by them.
ABN AMRO Incorporated, one of the Representatives, has for many years been
retained by the Parent Company to provide financial advisory and investment
banking services to the Parent Company and, more recently, to the Company as
well. These services have included stock valuation appraisals and assistance in
connection with certain asset acquisitions and dispositions.
LEGAL MATTERS
The validity of the Class A Common Stock will be passed upon for the
Company by Bell, Boyd & Lloyd, Chicago, Illinois. Certain legal matters will be
passed upon for the Underwriters by Lord, Bissell & Brook, Chicago, Illinois.
EXPERTS
The consolidated financial statements as of September 30, 1996 and 1997 and
for each of the periods ended September 30, 1995, 1996 and 1997 included in this
Prospectus and elsewhere in the Registration Statement have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the Class A
Common Stock offered hereby. As used herein, the term "Registration Statement"
means the initial Registration Statement and any and all amendments thereto.
This Prospectus omits certain information contained in said Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Class A Common Stock
offered hereby, reference is made to the Registration Statement, including the
exhibits thereto. Statements herein concerning the contents of any contract or
other document are not necessarily complete and in each instance reference is
made to such contract or other document filed with the Commission as an exhibit
to the Registration Statement, or otherwise, each such statement being qualified
by and subject to such reference in all respects.
As a result of this offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith will file reports and other information with the
Commission. Reports, registration statements, proxy statements, and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's Regional Offices: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of
such materials can be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. In addition, the Commission has a web site on the World Wide Web at
http://www.sec.gov, containing registration statements, reports, proxy and
information statements and other information that registrants, such as the
Company, file electronically with the Commission. The Class A Common Stock will
be listed on the Nasdaq National Market, and such reports, registration
statements, proxy statements and other information concerning the Company will
be available at the offices of the Nasdaq National Market, located at 1735 K
Street, N.W., Washington, D.C. 20006.
76
<PAGE> 78
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Earnings......................... F-4
Consolidated Statements of Changes in Stockholder's
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 79
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Griffith Micro Science International, Inc.
We have audited the accompanying consolidated balance sheets of Griffith
Micro Science International, Inc. (a wholly owned subsidiary of Griffith
Laboratories International, Inc.), and its subsidiaries as of September 30, 1996
and 1997, and the related consolidated statements of earnings, changes in
stockholder's equity, and cash flows for each of the years in the three-year
period ended September 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Griffith
Micro Science International, Inc. and its subsidiaries as of September 30, 1996
and 1997 and the results of their operations and their cash flows for each of
the years in the three-year period ended September 30, 1997, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
December 3, 1997
Chicago, Illinois
F-2
<PAGE> 80
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------ JUNE 30,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR
SHARE INFORMATION)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,077 $ 2,722 $ 3,069
Due from Parent -- advance................................ -- 923 1,648
Receivables:
Trade, less allowance for doubtful accounts of $78 in
1996, $201 in 1997 and $221 in 1998................... 6,799 9,233 9,795
Affiliates.............................................. 11 18 76
Other................................................... 379 456 483
------- ------- --------
Receivables, net.......................................... 7,189 9,707 10,354
------- ------- --------
Inventories............................................... 817 737 776
Prepaid expenses and other current assets................. 580 657 846
Income taxes recoverable.................................. 165 -- --
Current deferred income taxes............................. 145 652 521
------- ------- --------
Total current assets................................ 9,973 15,398 17,214
------- ------- --------
Other assets:
Intangible and other assets............................... 7,205 7,549 7,004
Restricted cash and investments........................... 453 40 --
Long-term receivable -- affiliate......................... 374 -- --
Deferred income taxes..................................... 132 536 2,895
------- ------- --------
Total other assets.................................. 8,164 8,125 9,899
------- ------- --------
Property, plant and equipment:
Land...................................................... 443 480 778
Buildings and improvements................................ 15,385 16,201 20,402
Equipment................................................. 53,778 59,868 64,586
Cobalt source............................................. -- 3,821 3,746
Construction in progress.................................. 3,364 2,591 11,138
------- ------- --------
Total property, plant and equipment....................... 72,970 82,961 100,650
Less accumulated depreciation and amortization............ 32,813 39,765 46,287
------- ------- --------
Property, plant and equipment, net.................. 40,157 43,196 54,363
------- ------- --------
$58,294 $66,719 $ 81,476
======= ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank overdrafts........................................... $ 393 $ -- $ 183
Short-term credit facilities.............................. 318 951 14,635
Current maturities of long-term notes payable............. 2,224 2,020 2,371
Due to Parent -- overdraft................................ 1,962 -- --
Note payable -- Parent.................................... -- -- 12,060
Accounts payable:
Trade and other......................................... 4,308 4,919 4,557
Affiliates.............................................. 407 262 78
Accrued liabilities....................................... 3,861 6,768 7,836
Income taxes.............................................. -- 1,058 1,058
Current deferred income taxes............................. -- 3 26
------- ------- --------
Total current liabilities........................... 13,473 15,981 42,804
------- ------- --------
Long-term liabilities and deferred credits:
Notes payable, less current maturities.................... 15,391 19,208 17,015
Notes payable -- Parent................................... 392 -- --
Deferred income taxes..................................... 2,650 2,956 3,169
Minority interest in consolidated subsidiary.............. -- 360 419
Other..................................................... 3 208 218
------- ------- --------
Total long-term liabilities and deferred credits.... 18,436 22,732 20,821
------- ------- --------
Stockholder's equity:
Common stock, par value $.01 per share. Authorized
1,000,000 shares in 1996 and 1997 and 1,050,000 in 1998;
issued and outstanding 950,000 shares in 1996, 1997 and
1998.................................................... 10 10 10
Additional paid-in capital................................ 12,004 12,004 12,004
Retained earnings......................................... 14,774 17,500 7,794
Equity adjustment from foreign currency translation....... (403) (1,508) (1,957)
------- ------- --------
Total stockholder's equity.......................... 26,385 28,006 17,851
------- ------- --------
$58,294 $66,719 $ 81,476
======= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 81
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Net revenues................................. $50,117 $54,771 $60,247 $44,111 $54,953
Cost of revenues............................. 34,842 38,319 40,645 29,913 37,325
------- ------- ------- ------- -------
Gross profit................................. 15,275 16,452 19,602 14,198 17,628
Selling and administrative expenses.......... 10,088 10,171 12,003 8,504 10,246
Royalty expense to Parent.................... 2,275 2,481 2,747 2,027 2,432
------- ------- ------- ------- -------
Operating profit............................. 2,912 3,800 4,852 3,667 4,950
------- ------- ------- ------- -------
Other (income) and expense:
Interest expense........................... 1,774 1,519 1,020 805 914
Interest income............................ (69) (164) (145) (94) (131)
Insurance recoveries....................... -- (653) -- -- --
Other, net................................. 151 337 278 150 370
------- ------- ------- ------- -------
Other expense, net........................... 1,856 1,039 1,153 861 1,153
------- ------- ------- ------- -------
Earnings before income taxes................. 1,056 2,761 3,699 2,806 3,797
------- ------- ------- ------- -------
Income tax expense........................... 39 977 973 1,064 1,503
------- ------- ------- ------- -------
Net earnings................................. $ 1,017 $ 1,784 $ 2,726 $ 1,742 $ 2,294
======= ======= ======= ======= =======
Net earnings per common share:
Basic...................................... $ 1.07 $ 1.88 $ 2.87 $ 1.83 $ 2.41
======= ======= ======= ======= =======
Diluted.................................... $ 1.07 $ 1.88 $ 2.86 $ 1.83 $ 2.38
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 82
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
ADDITIONAL FROM FOREIGN TOTAL
COMMON PAID-IN RETAINED CURRENCY STOCKHOLDER'S
STOCK CAPITAL EARNINGS TRANSLATION EQUITY
------ ---------- -------- ------------ -------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994........... $ 1 $ 9,728 $11,983 $ 240 $21,952
Net earnings............................ -- -- 1,017 -- 1,017
Capital contribution from Griffith
Laboratories International, Inc....... -- 2,275 -- -- 2,275
Current year foreign currency
translation effect.................... -- -- -- 18 18
--- ------- ------- ------- -------
Balance at September 30, 1995........... 1 12,003 13,000 258 25,262
Net earnings............................ -- -- 1,784 -- 1,784
Reduction of par value from $1.00 per
share to $.01 per share............... (1) 1 -- -- --
Issuance of 949,000 shares of common
stock to effect a 950-for-1 stock
split................................. 10 -- (10) -- --
Current year foreign currency
translation effect.................... -- -- -- (661) (661)
--- ------- ------- ------- -------
Balance at September 30, 1996........... 10 12,004 14,774 (403) 26,385
Net earnings............................ -- -- 2,726 -- 2,726
Current year foreign currency
translation effect.................... -- -- -- (1,105) (1,105)
--- ------- ------- ------- -------
Balance at September 30, 1997........... 10 12,004 17,500 (1,508) 28,006
Net earnings (unaudited)................ -- -- 2,294 -- 2,294
Dividend paid to Parent (unaudited)..... -- -- (12,000) -- (12,000)
Current period foreign currency
translation effect (unaudited)........ -- -- -- (449) (449)
--- ------- ------- ------- -------
Balance at June 30, 1998 (unaudited).... $10 $12,004 $ 7,794 $(1,957) $17,851
=== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 83
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 1,017 $ 1,784 $ 2,726 $ 1,742 $ 2,294
Adjustments to reconcile net earnings to net cash provided
by operating activities net of acquisitions:
Depreciation and amortization........................... 5,380 5,884 6,108 4,564 5,629
Deferred income tax (benefit) expense................... 1,049 370 (795) 91 205
Provision for plant closing costs....................... -- -- -- -- 320
Cash provided by (used in) changes:
Receivables, net...................................... (251) (95) (1,699) (1,947) (110)
Inventories........................................... (120) (159) 109 19 (13)
Prepaid expenses and other current assets............. (21) (173) (13) (6) (109)
Accounts payable and accrued liabilities.............. 1,237 (700) 2,992 84 (6)
Income taxes.......................................... (1,513) 1,296 1,163 267 153
Other, net.............................................. (44) 124 59 (2) 377
------- ------- ------- ------- -------
Net cash provided by operating activities................... 6,734 8,331 10,650 4,812 8,740
------- ------- ------- ------- -------
Cash flows from financing activities:
Increase (decrease) in bank overdrafts and short-term
credit facilities....................................... 1,209 (7,066) (1,019) 2,077 13,867
Decrease in due to Parent -- overdraft.................... (3,858) (1,636) (1,962) (1,962) --
Proceeds from additional long-term debt and notes
payable................................................. 6,343 6,440 6,735 2,859 171
Principal payments of long-term debt and notes payable.... (1,240) (1,441) (2,965) (2,567) (1,827)
Increase (decrease) in notes payable -- Parent............ 864 (1,016) (392) (392) --
Increase in debt issuance costs........................... (199) (134) -- -- --
(Decrease) increase in other long-term liabilities and
deferred credits........................................ (83) (21) 27 1 16
Capital contribution from Griffith Laboratories
International, Inc. .................................... 1,090 -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing activities......... 4,126 (4,874) 424 16 12,227
------- ------- ------- ------- -------
Cash flows from investing activities:
Increase in due from Parent -- advance.................... -- -- (923) (1,017) (725)
Proceeds from disposition of property, plant and
equipment............................................... 3 18 5 5 --
Additions to property, plant and equipment................ (8,533) (3,943) (6,300) (3,560) (9,944)
Acquisitions, net of cash and cash equivalents............ -- -- (2,585) -- (9,727)
(Increase) decrease in restricted cash and investments.... (910) 457 413 413 40
(Increase) decrease in long-term receivables and other
assets.................................................. (403) (378) 173 349 (36)
------- ------- ------- ------- -------
Net cash used in investing activities....................... (9,843) (3,846) (9,217) (3,810) (20,392)
------- ------- ------- ------- -------
Effect of foreign currency rate fluctuations................ (275) 97 (212) (187) (228)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 742 (292) 1,645 831 347
Cash and cash equivalents at beginning of the period........ 627 1,369 1,077 1,077 2,722
------- ------- ------- ------- -------
Cash and cash equivalents at end of the period.............. $ 1,369 $ 1,077 $ 2,722 $ 1,908 $ 3,069
======= ======= ======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 1,273 $ 1,165 $ 996 $ 668 $ 873
Income taxes............................................ 494 731 992 986 1,051
======= ======= ======= ======= =======
Noncash financing and investing activities:
Stock split............................................. $ -- $ 10 $ -- $ -- $ --
Reduction in par value of common stock.................. -- 1 -- -- --
Dividend paid to Parent in the form of a promissory
note.................................................. -- -- -- -- 12,000
Contribution to capital by Griffith Laboratories
International, Inc. of its receivable from Griffith
Micro Science, Limited (U.K.)......................... $ 1,185 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 84
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE NINE MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Griffith Micro Science International, Inc. (the Company) is a multinational
provider of contract sterilization services utilizing ethylene oxide and gamma
radiation technologies. The Company's principal line of business is providing
sterilization management services to manufacturers of single-use medical
devices, and to a much lesser extent pharmaceuticals, cosmetics and food
products and to hospitals. In addition, the Company also provides related
laboratory testing, consulting and logistics management services to its
customers. Sterilization services are sold to customers primarily in the United
States, Europe, Canada and Mexico.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, after elimination of significant intercompany balances and
transactions. The Company is a wholly owned subsidiary of Griffith Laboratories
International, Inc. (Parent). The ultimate parent of the Company is Griffith
Laboratories, Inc. (the Holding Company).
Fiscal Year
The fiscal year-end of the Company and its subsidiaries is September 30.
Prior to 1996, the fiscal year of certain subsidiaries of the Company ended on
the last Saturday in September. The fiscal years ended September 30, 1997 and
1996 contained 52 weeks, and the year ended September 30, 1995 contained 53
weeks.
Revenue Recognition
Revenue from the Company's contact sterilization services is recognized
upon the completion of an error free sterilization cycle as defined by the
individual parameters or dosage level specified for the customer's product.
Revenue for laboratory testing, consulting and logistics management is
recognized when the related service is performed.
Translation of Currencies
Assets and liabilities of the Company's non-U.S. subsidiaries are
translated into U.S. Dollars at the current rate of exchange in effect on the
balance sheet date. The resulting translation adjustments are recorded as a
currency component in stockholder's equity. Income and expenses are translated
at the average rates of exchange prevailing during the year.
Inventories
Inventories are stated at the lower of cost or realizable value. The cost
of inventory is determined by the first-in, first-out (FIFO) method.
F-7
<PAGE> 85
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed
principally on a straight-line basis over the estimated useful lives of the
related assets. The following ranges of lives are used for depreciation and
amortization purposes:
<TABLE>
<CAPTION>
TYPE YEARS
---- -----
<S> <C>
Buildings................................................... 20-40
Leasehold improvements...................................... 5-10
Machinery and equipment..................................... 3-10
Furniture and fixtures...................................... 5-10
</TABLE>
Cobalt Source
Cobalt 60 isotope is used by the Company in providing gamma sterilization
services. The isotope is stated at acquired cost and is amortized using the
declining balance method, which is similar to the natural decay factor of the
material. The annual amortization charge is approximately 12.3% of the net book
value per year, plus the residual value amortized on a straight-line basis over
a useful life of 20 years.
Intangible and Other Assets
Intangible and other assets include primarily goodwill and debt issuance
costs. Goodwill represents the cost in excess of the fair value of the net
assets of acquired companies, and is amortized on a straight-line basis over a
20-year period. Debt issuance costs are amortized on the straight-line method
over the term of the related debt.
Management periodically reviews whether there has been a permanent
impairment to the value of goodwill and other assets by evaluating various
factors including current operating results, market and economic conditions, and
anticipated future results and cash flows.
Income Taxes
The operating results of the Company and the Parent are included in the
consolidated federal income tax returns of the Holding Company. U.S. income
taxes have been allocated to the Company based upon income taxes which the
Company would have provided on a separate company basis.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company provides U.S. income taxes on its equity in the undistributed
earnings of those subsidiaries when management intends that such earnings will
be remitted in the future. For all other subsidiaries (principally non-U.S.
subsidiaries), management intends to reinvest its equity in undistributed
earnings (approximately $6,832 at September 30, 1997) indefinitely, and
accordingly, no U.S. income taxes have been provided thereon.
F-8
<PAGE> 86
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks,
treasury bills, commercial paper and money market funds.
Restricted Cash and Investments
Restricted cash and investments consist of unused proceeds of industrial
revenue bonds issued for purposes of plant construction. The restricted cash and
investments are held in trust until expended, and are presented as a long-term
asset on the consolidated balance sheets.
Financial Instruments and Risk Management
The Company does not hold or issue financial instruments for trading
purposes nor is it party to any leveraged derivatives. The Company utilizes
interest rate cap, collar and swap agreements which involve little complexity to
reduce the impact of increases in interest rates on certain of its floating rate
debt. Premiums paid for interest rate agreements are recorded on the balance
sheet and amortized to interest expense over the life of the agreement. Gains
and losses on these contracts have not been significant and are recorded as a
component of interest expense.
Stock-based Compensation
In fiscal 1997, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("Statement 123"). As allowed under Statement 123, the Company
continues to account for its employee stock option plans in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Under APB 25, no compensation expense is
recognized when the exercise price of the Company's stock options equals the
fair market value of the underlying stock on the date of grant. Pro forma
disclosure of net earnings is provided in Note 17 as if the fair value basis
method prescribed by Statement 123 had been applied in measuring employee
compensation expense.
Net Earnings Per Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share," ("Statement 128") which replaces the
provisions of Accounting Principles Board Opinion No. 15, "Earnings per Share".
Statement 128, which establishes the standards for computing and reporting
earnings per share, requires the presentation of basic and diluted earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Minority Interest in Consolidated Subsidiary
The minority interest in consolidated subsidiary represents the minority
stockholder's proportionate share of the equity of Griffith Mediris S.A. At
September 30, 1997 and June 30, 1998, the Company's ownership interest in
Griffith Mediris S.A. was 82.8%.
F-9
<PAGE> 87
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the balance sheet date of the Company, and the reported amounts of net
revenues and expenses during its fiscal year. Actual results may differ from
those estimates.
Unaudited Interim Financial Statements
In the opinion of the Company's management the interim financial statements
as of June 30, 1998 and for the nine month periods ended June 30, 1997 and 1998
include all normal and recurring adjustments and eliminations that are necessary
for the fair presentation of the Company's financial position at June 30, 1998
and its results of operations, changes in stockholder's equity and cash flows
for the for the nine month periods ended June 30, 1997 and 1998. The results for
the nine months ended June 30, 1998 are not necessarily indicative of the
results expected for the entire year.
(2) SUMMARY OF SIGNIFICANT ALLOCATION POLICIES
Operating Costs and Selling and Administrative Expenses
During the fiscal years presented, the Company's Canadian subsidiary shared
an operating facility with a related company. Operating expenses for this shared
facility are allocated based upon the amount of space occupied by the Company.
All of the selling expenses and a significant amount of the administrative
expenses are incurred directly by the Company and its subsidiaries. Those
elements of operating costs and administration which are supplied by the Parent
and related companies are generally allocated based upon the estimated
percentage of personnel time devoted to Company matters. Management of the
Company and the Parent believe the operating cost and administrative expense
allocations are both reasonable and equitable.
Cash and Interest Allocation
The Company's domestic cash is pooled with the Parent's cash resources,
with separate records being maintained. Any negative cash balance would
represent an overdraft due to the Parent. Interest expense is allocated to the
Company based upon these overdraft balances and the applicable rates on the
Parent's short-term borrowings. Management of the Company and the Parent believe
the cash and interest allocations are both reasonable and equitable.
(3) OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
For purposes of management decision making and performance evaluation the
Company's operations are organized into two distinct geographic groups, North
America and Europe. Within each of these groups, the Company's principle source
of revenue is derived from the provision of sterilization management services to
manufacturers of single-use medical devices, and to a much lesser extent
pharmaceuticals, cosmetics and food products and to hospitals. In addition, the
Company also provides related laboratory testing, consulting and logistics
management services to its customers. Of its fiscal 1997 revenue total,
approximately 92% was derived from providing sterilization management services.
The Company's operating groups in North America and Europe are considered
operating segments for purposes of satisfying the disclosure requirements of
Statement of Financial Accounting Standards No. 131,
F-10
<PAGE> 88
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Disclosures about Segments of an Enterprise and Related Information." Presented
below are disclosures for the Company's operating segments for 1995, 1996 and
1997:
<TABLE>
<CAPTION>
NORTH CORPORATE/
AMERICA EUROPE ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------
<S> <C> <C> <C> <C>
1995:
Net revenues............................ $28,412 $21,705 $ -- $50,117
Operating profit (loss)................. 918 2,799 (805) 2,912
Interest expense, net................... 788 917 -- 1,705
Depreciation and amortization expense... 3,396 1,984 -- 5,380
Income tax expense (benefit)............ (595) 634 -- 39
Total assets............................ 34,430 28,166 35 62,631
Capital expenditures.................... 4,889 3,644 -- 8,533
1996:
Net revenues............................ $31,036 $23,735 $ -- $54,771
Operating profit (loss)................. 1,553 3,016 (769) 3,800
Interest expense, net................... 630 699 26 1,355
Depreciation and amortization expense... 3,674 2,210 -- 5,884
Income tax expense (benefit)............ (177) 1,127 27 977
Total assets............................ 31,647 26,542 105 58,294
Capital expenditures.................... 2,278 1,665 -- 3,943
1997:
Net revenues............................ $36,925 $23,322 $ -- $60,247
Operating profit (loss)................. 2,828 3,124 (1,100) 4,852
Interest expense, net................... 453 422 -- 875
Depreciation and amortization expense... 3,985 2,123 -- 6,108
Income tax expense (benefit)............ 582 497 (106) 973
Total assets............................ 34,299 32,558 (138) 66,719
Capital expenditures.................... 3,720 2,580 -- 6,300
</TABLE>
The Company maintains general purpose financial statements for each of the
countries in which it operates. Revenues and assets are recorded in the separate
company financial statements of the unit which provides the related
sterilization management services and owns the underlying assets. There were no
intersegment revenues during 1995, 1996 or 1997.
The Company's North American operations are located in the United States,
Canada and Mexico. For fiscal 1997 the net revenues and total assets of the
operations located in Canada and Mexico, combined, accounted for approximately
13%, and 9%, respectively, of the totals for the North American group.
The Company's European group operations are located in Belgium, France,
Germany, the Netherlands and the United Kingdom.
F-11
<PAGE> 89
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVENTORIES
Inventories at September 30, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Raw materials............................................... $125 $143
Finished goods.............................................. 692 594
---- ----
$817 $737
==== ====
</TABLE>
The Company's operations primarily consist of providing sterilization
management services. Raw materials consist of ethylene oxide, nitrogen and
supplies used in the sterilization process. Finished goods are comprised
primarily of sterilization packaging materials, disinfection products and
related items purchased mainly for resale to manufacturers of medical devices
and hospitals.
(5) INTANGIBLE AND OTHER ASSETS
The components of intangible and other assets at September 30, 1996 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Goodwill, net of accumulated amortization of $368 in 1996
and
$475 in 1997.............................................. $6,617 $6,776
Debt issuance costs, net of accumulated amortization of $18
in
1996 and $28 in 1997...................................... 317 307
Long-term receivables....................................... 55 58
Long-term deposits.......................................... 146 130
Advanced Corporation Tax -- United Kingdom.................. -- 202
Other, net.................................................. 70 76
------ ------
$7,205 $7,549
====== ======
</TABLE>
(6) SHORT-TERM CREDIT FACILITIES
At September 30, 1997 the Company had $8,522 of unused lines of credit
available for short-term financing. The weighted average interest rate on the
Company's outstanding short-term borrowings was 4.83% and 4.94% at September 30,
1996 and 1997, respectively. At September 30, 1997 the Company had outstanding
letters of credit in the amount of $5,000 and $4,500 which carry an annual fee
of 0.875% and 0.75%, respectively. These letters of credit support the Company's
borrowings under Industrial Revenue Bonds in the United States. At June 30, 1998
the Company had $5,506 (unaudited) of unused lines of credit available and a
weighted average interest rate of 6.15% (unaudited) on outstanding short-term
borrowings at June 30, 1998.
F-12
<PAGE> 90
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM LIABILITIES
Long-term notes payable at September 30, 1996 and 1997, net of current
maturities, are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Notes payable in the United States:
Griffith Micro Science, Inc. Industrial Revenue Bonds,
floating rates (4.15% and 4.1% at September 30, 1997),
due on November 1, 2007 and December 1, 2014........... $ 9,500 $ 9,500
------- -------
Notes payable outside the United States:
GMS S.A.S. (France):
Note at floating rate (3.7% at September 30, 1997),
semi-annual payments due 1998-2002.................... -- 2,124
Term loan at floating rate............................. 2,421 --
Griffith Micro Science S.A. (France):
Note at floating rate (3.7% at September 30, 1997),
semi-annual payments due 1998-2002.................... -- 1,989
Notes payable at floating rates........................ 1,220 --
N.V. Griffith Micro Science S.A. (Belgium):
Notes at floating rates (3.7% at September 30, 1997),
semi-annual payments due 1998-2003.................... -- 3,248
Term loan at 6.54%..................................... 620 --
Griffith Micro Science G.m.b.H. (Germany) term loans at
5.75% and 6%, due 1998-2005............................ 778 589
Griffith Micro Science, Limited (U.K.):
Note at 11%, semi-annual payments due 1998-1999........ 391 202
Note at floating rate (7.6% at September 30, 1997),
semi-annual payments due 1998-2002.................... -- 712
Note at 8.5%........................................... 391 --
Griffith Mediris S.A. (Belgium) note at floating rate
(3.7% at September 30, 1997) due 1999-2003............. -- 823
Other..................................................... 70 21
------- -------
5,891 9,708
------- -------
$15,391 $19,208
======= =======
</TABLE>
At September 30, 1997 the Company's outstanding Industrial Revenue Bonds in
the United States and notes in the United Kingdom are guaranteed by the Parent
and Holding Company, respectively. Most of the Company's shares in Griffith
Mediris S.A. are pledged as collateral for approximately $2,633 of the floating
rate notes payable outstanding at September 30, 1997 in Belgium.
The aggregate maturities for long-term debt at September 30, 1997 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- -------
<S> <C>
1998....................................................... $ 2,020
1999....................................................... 2,417
2000....................................................... 2,205
2001....................................................... 2,203
2002....................................................... 2,202
Later years................................................ 10,181
-------
$21,228
=======
</TABLE>
F-13
<PAGE> 91
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notes described above contain certain restrictive covenants, including
restrictions as to payment of dividends and requirements that specified minimum
levels of working capital and tangible net worth be maintained. In 1995, 1996
and 1997 the Company was in compliance with these covenants.
The carrying values of the Company's floating rate long-term notes payable
approximate fair value because the interest rates on these debt instruments
change with market rates of interest. There are no quoted market prices for the
Company's fixed rate notes payable. Using discounted cash flow analysis and the
Company's current incremental borrowing rate, the estimated fair values of its
fixed rate long-term notes payable approximate the carrying values at September
30, 1996 and 1997.
(8) BENEFIT PLANS
The Company participates in the qualified profit sharing and employee stock
ownership plans maintained by the Parent, in which substantially all full-time
U.S. employees are eligible to participate after one year of employment.
Contributions are discretionary amounts set by the Board of Directors of the
Parent. The Company's proportionate share of contributions charged to earnings
amounted to approximately $269 in 1995, $362 in 1996 and $455 in 1997.
Retirement plan assets, obligations and expenses of the Company's non-U.S.
subsidiaries are not material.
(9) ACCRUED LIABILITIES
Accrued liabilities at September 30, 1996 and 1997 and June 30, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll............................................... $ 856 $ 877 $ 874
Employee incentives................................... 995 1,387 1,403
Customer incentives................................... -- 1,324 1,556
Retirement plan contributions......................... 403 596 502
Professional fees and insurance....................... 355 573 819
Warranty costs........................................ 71 282 264
Provision for plant closing costs..................... -- -- 316
All others............................................ 1,181 1,729 2,102
------ ------ ------
$3,861 $6,768 $7,836
====== ====== ======
</TABLE>
F-14
<PAGE> 92
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) INCOME TAXES
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
1995:
Federal................................................. $(1,120) $ 677 $ (443)
State................................................... (282) 128 (154)
Foreign................................................. 392 244 636
------- ------ ------
$(1,010) $1,049 $ 39
======= ====== ======
1996:
Federal................................................. $ (287) $ 39 $ (248)
State................................................... (187) 6 (181)
Foreign................................................. 1,081 325 1,406
------- ------ ------
$ 607 $ 370 $ 977
======= ====== ======
1997:
Federal................................................. $ 624 $ (461) $ 163
State................................................... 122 (93) 29
Foreign................................................. 1,022 (241) 781
------- ------ ------
$ 1,768 $ (795) $ 973
======= ====== ======
</TABLE>
The provisions for income taxes for the nine month periods ended June 30,
1997 and 1998 are based upon the Company's estimate of annual effective tax
rates for full fiscal years.
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities. The types of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities and
the effect on deferred tax expense of changes in those temporary differences are
presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------ ---- -----
<S> <C> <C> <C>
Excess of tax over book depreciation........................ $ 287 $123 $ 344
Inflation indexing.......................................... 559 -- (105)
Deferred compensation and accrued severance................. 102 -- (527)
Goodwill amortization....................................... 112 114 (160)
Loss carryforwards.......................................... -- 140 (238)
Other, net.................................................. (11) (7) (109)
------ ---- -----
$1,049 $370 $(795)
====== ==== =====
</TABLE>
F-15
<PAGE> 93
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities consists of the
following at September 30, 1996 and 1997:
<TABLE>
<CAPTION>
ASSETS LIABILITIES
1996: ------ -----------
<S> <C> <C>
Depreciation.............................................. $ -- $2,495
Goodwill.................................................. -- 221
Inflation indexing........................................ 132 --
Deferred state income tax expense......................... 99 --
Deferred compensation and accrued severance............... 52 --
Other..................................................... 60 --
------ ------
$ 343 $2,716
====== ======
1997:
Depreciation.............................................. $ -- $2,980
Goodwill.................................................. -- 85
Net operating loss carryforwards.......................... 227 --
Inflation indexing........................................ 235 --
Deferred state income tax expense......................... 62 --
Deferred compensation and accrued severance............... 568 --
Other..................................................... 202 --
------ ------
$1,294 $3,065
====== ======
</TABLE>
No valuation allowance has been recorded against the deferred tax assets as
of September 30, 1996 or 1997, as management believes it is more likely than not
that the results of future operations will generate sufficient taxable income to
realize the deferred tax assets.
In conjunction with the acquisition of Sorex Medical, Inc. (see footnote
15), $2,489 (unaudited) of deferred tax assets were recorded and are included in
the consolidated balance sheet of the Company at June 30, 1998. These deferred
tax assets pertain principally to $6,749 (unaudited) of net operating loss
carryforwards generated by Sorex Medical, Inc. prior to its acquisition by the
Company. These losses will be available to offset future taxable income of the
acquired company subject to an annual limitation of $821 (unaudited). These
losses begin to expire in 2005 (unaudited) through 2018 (unaudited). No
valuation allowance has been recorded against these deferred tax assets as
management believes it is more likely than not that future taxable income of the
acquired company will be sufficient to realize the deferred tax assets.
The effective tax rate is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
United States federal tax rate.............................. 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Foreign tax rate differential............................. (12.8) 5.3 (8.8)
State income taxes, net of federal income tax benefit..... (9.6) (4.3) (1.2)
Other, net................................................ (7.9) 0.4 2.3
----- ---- ----
Effective tax rate.......................................... 3.7% 35.4% 26.3%
===== ==== ====
</TABLE>
The consolidated federal income tax returns of the Holding Company, which
include the results of operations of the Company, have been accepted by the
Internal Revenue Service through September 30, 1995.
F-16
<PAGE> 94
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) LEASE COMMITMENTS
The Company is liable under noncancelable long-term leases (operating
leases that are principally for real property and equipment) providing for the
following approximate aggregate minimum rentals:
<TABLE>
<CAPTION>
AGGREGATE
MINIMUM
FISCAL YEAR RENTALS
- ----------- ---------
<S> <C>
1998....................................................... $2,433
1999....................................................... 2,187
2000....................................................... 1,534
2001....................................................... 1,034
2002....................................................... 713
Later years................................................ 1,968
------
Total minimum lease payments..................... $9,869
======
</TABLE>
Most of the Company's real property leases provide that the Company pay
taxes, maintenance, and certain other operating expenses applicable to the
leased premises. The Company expects that leases that expire and are renewable
will be renewed or replaced by other leases in the normal course of business.
Total rental expense (including other than noncancelable leases) aggregated
approximately $2,817 in 1995, $3,088 in 1996 and $3,174 in 1997.
(12) TRANSACTIONS WITH THE PARENT AND RELATED COMPANIES
The following summarizes the income and expenses reflected in the
accompanying consolidated statements of earnings that were paid to the Parent or
related companies:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Cost of revenues -- rent and related expenses.............. $ 211 $ 212 $ 219
Administrative expenses.................................... 445 327 313
Royalty paid to Parent..................................... 2,275 2,481 2,747
Other (income) expenses:
Interest expense......................................... 362 340 36
Interest income.......................................... -- (14) (9)
------ ------ ------
Total expenses, net.............................. $3,293 $3,346 $3,306
====== ====== ======
</TABLE>
Net revenues from related companies amounted to $208, $281 and $371 in
fiscal 1995, 1996 and 1997, respectively.
On June 1, 1998 the Company paid a $12,000 (unaudited) dividend to the
Parent in the form of a promissory note. The promissory note is due on demand
and bears interest at a rate of 6% per annum which is payable at maturity.
(13) NET REVENUES FROM SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Net revenues from the Company's five largest customers accounted for
approximately 32%, 33% and 38% of the consolidated fiscal 1995, 1996 and 1997
totals, respectively. The Company's largest individual customer accounted for
approximately 20%, 18% and 20% of consolidated fiscal 1995, 1996 and 1997 net
revenues, respectively. For the (unaudited) nine months ended June 30, 1997 and
1998 this customer accounted for approximately 18% and 21%, respectively, of
consolidated net revenues. No other individual customer
F-17
<PAGE> 95
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounted for more than 10% of consolidated net revenues during 1995, 1996 and
1997 or the (unaudited) nine month periods ended June 30, 1997 and 1998.
The Company's trade receivables consist primarily of balances due from its
customers for the performance of sterilization management services. Amounts due
from the Company's largest individual customer accounted for 12% and 11%
(unaudited) of total trade receivables at September 30, 1997 and June 30, 1998,
respectively. Concentrations of credit risk with respect to trade receivables
are limited due to the large number of entities which comprise the Company's
customer base and their geographic dispersion. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
Management also believes that any concentration of credit risk is substantially
reduced by its collection practices. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. Actual bad debt experience
has been insignificant.
(14) CONTINGENCIES
The Company is party to various suits and claims which arise in the normal
course of business. Although the ultimate disposition of these suits and claims
is not presently determinable, management does not believe that the outcome of
these matters will have a material adverse effect on the business, financial
position or results of operations of the Company.
(15) ACQUISITIONS
On August 29, 1997, the Company's wholly owned subsidiary, N.V. Griffith
Micro Science S.A. acquired an 80.1% interest in Caric Mediris S.A. ("Mediris").
Mediris is located in Belgium and is engaged in providing gamma irradiation
processing and sterilization services for a variety of products including food,
single-use medical devices and others. The cost of the acquisition was $2,869
and has been accounted for as a purchase. Accordingly, the net assets and
results of operations of Mediris are included in the consolidated financial
statements from the date of acquisition. The purchase price resulted in an
excess of consideration paid over the fair value of net assets acquired of
$1,120. This excess is recorded as goodwill and is being amortized on a
straight-line basis over 20 years. Concurrent with the acquisition, the Company
made an additional $439 capital investment in Mediris stock which raised the
Company's ownership interest to 82.8% and changed the name of Mediris to
Griffith Mediris S.A.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company and Mediris as if the
acquisition had occurred at the beginning of fiscal 1996, with pro forma
adjustments to give effect to amortization of goodwill, interest expense on
acquisition debt and certain other adjustments, together with the related income
tax effects.
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Net revenues................................................ $58,731 $63,473
Net earnings................................................ 1,741 2,876
Net earnings per share:
Basic..................................................... $ 1.83 $ 3.03
Diluted................................................... $ 1.83 $ 3.02
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had Mediris been acquired as of
October 1, 1995, or of the future results of the consolidated companies.
On April 28, 1998 the Company acquired all of the outstanding capital stock
of Sorex Medical, Inc. ("Sorex") for approximately $9,750 (unaudited). The
acquisition has been accounted for as a purchase and
F-18
<PAGE> 96
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordingly the net assets and results of operations of Sorex are included in
the consolidated financial statements from the date of acquisition. The fair
value of the net assets acquired exceeded the purchase price paid for Sorex.
Accordingly, the values assigned to noncurrent assets, primarily property, plant
and equipment, have been reduced by a proportionate share of the excess. Sorex
operates an ethylene oxide sterilization facility in Salt Lake City, Utah which
provides sterilization services to single-use medical device and disposable
products manufacturers. Substantially all of the cost of the acquisition was
funded through borrowings under the Company's existing lines of credit in the
United States.
The following unaudited pro forma information presents a summary of the
consolidated results of the Company and Sorex as if the acquisition occurred at
the beginning of fiscal 1997, with pro forma adjustments to give effect to
interest on acquisition debt and certain other adjustments, with the related
income tax effects:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
1997 JUNE 30, 1998
---- -------------
<S> <C> <C>
Net revenues................................................ $62,997 $56,654
Net earnings................................................ 2,596 2,186
Net earnings per share:
Basic..................................................... $ 2.73 $ 2.30
Diluted................................................... $ 2.72 $ 2.27
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had Sorex been acquired as of October
1, 1996, or of future results of the consolidated Companies.
(16) STOCKHOLDER'S EQUITY
At September 30, 1995 there were 1,000 shares of the Company's $1.00 par
value common stock authorized, issued, and outstanding. All of these shares were
held by the Parent.
On June 6, 1996 the Company's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock from 1,000 to 1,000,000
and reduce the par value of the Company's common stock from $1.00 per share to
$.01 per share. As a result of the reduction in par value, the common stock
account was reduced by $1 and the additional paid-in capital account increased
by the same amount.
On June 7, 1996 the Company split its common stock 950-for-1 in the form of
a stock dividend to the Parent. As a result of the split, 949,000 additional
shares of the Company's $.01 par value common stock were issued to the Parent on
June 10, 1996 and retained earnings were reduced by $10.
On January 29, 1998 the Company's Certificate of Incorporation was amended
to increase the number of authorized shares of common stock from 1,000,000 to
1,050,000 (unaudited).
(17) STOCK OPTIONS
On June 14, 1996 the Company adopted the 1996 Key Employee Stock Option
Plan ("1996 KESOP"). Under the terms of the 1996 KESOP, 50,000 shares of the
Company's authorized but unissued $.01 par value common stock are reserved for
grant under the plan. On February 28, 1998 the Board of Directors of the Company
approved an amendment to the 1996 KESOP which increased from 50,000 to 100,000
(unaudited) the number of shares which are reserved for grant under the terms of
the plan.
F-19
<PAGE> 97
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the Company's 1996 KESOP is summarized in the table below:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding at September 30, 1995........................... -- $ --
Options granted............................................. 25,173 21.60
------ ------------
Outstanding at September 30, 1996........................... 25,173 21.60
Options granted............................................. 15,945 24.80
Forfeited................................................... (126) 21.60
------ ------------
Outstanding at September 30, 1997........................... 40,992 $21.60-24.80
Options granted (unaudited)................................. 50,951 55.50
Forfeited (unaudited)....................................... (251) 21.60-24.80
------ ------------
Outstanding at June 30, 1998 (unaudited).................... 91,692 $21.60-55.50
====== ============
</TABLE>
The exercise price of the options granted in 1996, 1997 and 1998 was equal
to the fair market value of the Company's stock at the date of the grant.
The following table summarizes information about the Company's outstanding
stock options at September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
DATE OF GRANT OUTSTANDING OF OPTION IN YEARS PRICE EXERCISABLE PRICE
------------- ----------- ------------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
June 14, 1996................ 25,047 8.7 $21.60 11,314 $21.60
June 23, 1997................ 15,945 9.8 24.80 -- --
------ --- ------ ------ ------
40,992 9.1 $22.84 11,314 $21.60
====== === ====== ====== ======
</TABLE>
Unexercised stock options at September 30, 1997 vest and become exercisable
as follows:
<TABLE>
<CAPTION>
YEAR VESTING SHARES VESTING
------------ --------------
<S> <C>
1998.................................................... 11,627
1999.................................................... 9,551
2000.................................................... 8,500
------
29,678
======
</TABLE>
The shares under the 1998 option grants vest and become exercisable as
follows: 32,986 (unaudited) shares in 1999, 8,986 (unaudited) shares in 2000 and
8,979 (unaudited) shares in 2001.
The Company has elected to follow APB 25 and its related interpretations in
accounting for its employee stock option plan. Under APB 25, no compensation
expense is recognized in the financial statements when the exercise price of the
option is equal to the fair value of the underlying stock at the date of the
grant. Accordingly, no compensation expense has been recognized for the
Company's stock option plan in fiscal 1996 or 1997. Had compensation cost for
the Company's stock option plan been determined consistent with the fair value
method provided by Statement 123, consolidated net earnings would have decreased
to $1,775 in 1996 and $2,691 in 1997.
The fair value of each option is estimated on the date of the grant using
the Black-Scholes option pricing model. The following assumptions were used in
estimating the fair values for the options: a risk free interest rate of 6.49%
in 1996 and 6.04% in 1997; an expected option life of 2.7 years in 1996 and 2.4
years in 1997; and
F-20
<PAGE> 98
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
no dividend yield for both 1996 and 1997. Since the Company is a nonpublic
entity, with no trading history for its common stock, no volatility was assumed
for 1996 or 1997. The weighted average fair value of the options granted in
fiscal 1996 and 1997 was $3.42 and $3.30, respectively.
Option valuation models require the use of subjective assumptions,
including the expected option life. Changes in the input assumptions used in the
option pricing model can have a significant impact on the estimated fair value
of the Company's stock options.
On September 3, 1998 the Company adopted and the Parent as sole stockholder
approved the 1998 Employee Stock Option Plan (the "1998 Plan") and the 1998
Director Stock Option Plan ("1998 DSOP"). Under these plans options may be
granted to purchase shares of the Company's Class A common stock which will be
issued in conjunction with an anticipated initial public offering and upon
completion of a recapitalization of the Company. Under the proposed
recapitalization the authorized capital stock of the Company will be increased
to 100,000,000 (unaudited) shares, consisting of 50,000,000 (unaudited) shares
of Class A common stock, 40,000,000 (unaudited) shares of Class B common stock
and 10,000,000 (unaudited) shares of preferred stock. Under the 1998 Plan,
initially options to purchase up to 300,000 (unaudited) shares of the Company's
Class A common stock may be granted to employees of the Company and its
subsidiaries. An additional 150,000 (unaudited) shares of the Company's Class A
common stock will be reserved for options to be granted under the 1998 Plan on
October 1 of each of the years 1999 through 2001. No options may be granted
under the 1998 Plan after August 31, 2008. A total of 50,000 (unaudited) shares
of the Company's Class A common stock will be reserved for option grants to
eligible directors under the 1998 DSOP. Under the terms of the 1998 DSOP each
eligible director will receive an option to purchase 3,000 (unaudited) shares of
Class A common stock on the date that they are first elected, and then will
receive an option to purchase an additional 1,000 (unaudited) shares of Class A
common stock on each annual reelection date. The exercise price for options
granted under both the 1998 Plan and the 1998 DSOP is equal to the fair market
value of the Company's Class A common stock at the date of grant.
(18) FINANCIAL INSTRUMENTS
At September 30, 1997, the Company had interest rate collars and swap
contracts in place to manage interest costs and risk associated with movements
in interest rates on its floating rate debt. Debt denominated in Belgian Francs
and French Francs with an aggregate notional principal amount of $8,917 was
covered by interest rate collars. The collar agreements in place are zero cost
collars which require no up-front cash payment to put in place and do not result
in income or expense unless the interest rates on the applicable debt move
outside of agreement rate collar. The interest rate collars in place provide a
lender floor at rates of 3.15% through 4% and the Company a cap at rates of 3.9%
through 5.8%. At September 30, 1997, interest rates on all of the covered
floating rate debt were within the lender and borrower contract rates. The
interest collars expire beginning January 31, 1998 through June 30, 2002.
Interest rate swaps with a notional principal value of $809 covering floating
rate debt in British Pounds Sterling were outstanding at September 30, 1997.
These swaps effectively fix the rate on this debt at 7.45% to 7.57% through
December 31, 1998. At September 30, 1997 the carrying values and fair values of
the interest rate collars and swaps are not material.
In entering into these contracts, the Company has assumed the risk which
might arise from the possible inability of the counterparties to meet the terms
of their contracts. Counterparties to the interest rate contracts are major
financial institutions. Management does not anticipate any losses as a result of
counterparty defaults.
(19) EARNINGS PER SHARE
The Company follows Statement 128 in computing earnings per common share.
For purposes of determining diluted earnings per share the only potential common
shares are in the form of outstanding stock
F-21
<PAGE> 99
GRIFFITH MICRO SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options. The Company does not have outstanding any convertible securities or
other contracts to issue common stock nor has there been any payment of
dividends on preferred stock for any period presented.
For fiscal 1995 and 1996 there were no dilutive potential common shares nor
adjustments to net earnings available for common stockholders. Accordingly,
basic and diluted earnings per share for fiscal 1996 and 1997 are the same.
During fiscal 1995, 1996 and 1997 the total weighted average common shares
outstanding were 950,000. Below is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for fiscal
1997:
<TABLE>
<CAPTION>
NUMERATOR DENOMINATOR PER SHARE
(EARNINGS) (SHARES) AMOUNT
---------- ----------- ---------
<S> <C> <C> <C>
Net earnings........................................ $2,726
Basic earnings per share............................ -- 950,000 $2.87
=====
Effect of dilutive stock options.................... -- 3,233
------ -------
Diluted earnings per share.......................... $2,726 953,233 $2.86
====== ======= =====
</TABLE>
Options to purchase an additional 15,945 shares of common stock at $24.80
were outstanding during fiscal 1997 but were not included in the computation of
diluted earnings per share because the exercise price of the options were equal
to the fair market price of the Company's stock.
F-22
<PAGE> 100
[GRIFFITH LOGO]
<PAGE> 101
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. UNDER NO
CIRCUMSTANCES SHALL THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE PURSUANT TO
THIS PROSPECTUS CREATE ANY IMPLICATION THAT INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 21
Dividend Policy....................... 21
Capitalization........................ 22
Dilution.............................. 23
Selected Financial Data............... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 39
Management............................ 58
Security Ownership of Certain
Beneficial Owners and Management.... 66
Relationship With Parent Company...... 68
Description of Capital Stock.......... 71
Shares Eligible for Future Sale....... 73
Underwriting.......................... 74
Legal Matters......................... 76
Experts............................... 76
Additional Information................ 76
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
THROUGH , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,500,000 SHARES
[GRIFFITH MICRO SCIENCE LOGO]
CLASS A COMMON STOCK
PROSPECTUS
ABN AMRO INCORPORATED
ROBERT W. BAIRD & CO.
INCORPORATED
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Not Applicable
II-1
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago,
State of Illinois, on November 10, 1998.
GRIFFITH MICRO SCIENCE
INTERNATIONAL, INC.
By: /s/ KEVIN M. SWAN
----------------------------------
Kevin M. Swan
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities indicated on November 10, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ KEVIN M. SWAN President and Chief Executive Officer
- -----------------------------------------------------
Kevin M. Swan
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ JOHN P. SABALASKEY Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
John P. Sabalaskey
A MAJORITY OF THE DIRECTORS:
/s/ DEAN L. GRIFFITH Chairman of the Board and a Director
- -----------------------------------------------------
Dean L. Griffith
/s/ JOSEPH R. MASLICK Director
- -----------------------------------------------------
Joseph R. Maslick
/s/ KEVIN M. SWAN Director
- -----------------------------------------------------
Kevin M. Swan
</TABLE>
II-2
