ITEM 1. BUSINESS
OVERVIEW
SteriGenics International, Inc. ("SteriGenics" or the "Company") is a provider of high-quality contract sterilization and radiation processing services, with more than 20 years of experience in the operation, design and development of Gamma irradiation ("Gamma") systems and facilities. The Company maintains a worldwide network of facilities comprised of 13 Gamma facilities and one electron beam radiation ("E-Beam") facility operating in the United States and three new facilities under construction - two in the United States and one in Thailand. Serving more than 1,000 customer, SteriGenics has expanded its presence in the medical products sterilization market through the opening of new facilities, acquisitions, addition of new customers, and conversion of products belonging to new and existing customers from ethylene oxide gas ("EtO") sterilization to Gamma sterilization. In recent years, the Company has expanded into various advanced applications and materials processing markets and has expanded its technology base to include E-Beam radiation. The Company's objective is to be the leading provider of high-quality contract sterilization and radiation processing services for manufacturers of medical and advanced applications products and industrial materials.
RECENT DEVELOPMENTS
On June 10, 1999, SteriGenics entered into a Merger Agreement (the "Merger Agreement") with Ion Beam Applications, s.a. ("IBA"), a Belgian corporation, Ion Beam Applications GP, and IBA Acquisition Corp. ("Purchaser"). Under the terms of the Merger Agreement, Purchaser has commenced a tender offer (the "Offer") for all outstanding shares of the Company's Common Stock (and the associated Preferred Share Purchase Rights) (the "Shares") for $27.00 per share in cash. The Offer is currently scheduled to expire at 12:00 Midnight, New York City time, on Thursday, July 15, 1999. Subject to the terms of the Merger Agreement, following completion of the Offer, Purchaser will be merged into SteriGenics and all Shares not purchased in the Offer will be converted into the right to receive $27.00 per Share in cash, without interest. For additional information with respect to the Offer, see the Company's Schedule 14D-9 Solicitation/Recommendation Statement filed with the Securities and Exchange Commission on June 24, 1999.
THE STERILIZATION AND RADIATION PROCESSING MARKETS
SteriGenics provides contract sterilization and radiation processing services to three distinct markets: the Medical Products Market, Advanced Applications Market and the Materials Processing Market, each comprised of a number of product groupings.
MEDICAL PRODUCTS MARKET
The medical products sterilization market consists of independent suppliers of sterilization services and certain large manufacturers that have in-house sterilization capabilities. Although there are no published industry statistics and precise numbers are difficult to determine, the Company estimates that the current U.S. market for medical product sterilization services (including Gamma, EtO and E-Beam) is approximately $300 million. Of the U.S. contract sterilization market, the Company estimates that approximately 40% to 45% is Gamma, 50% to 55% is EtO and 5% to 10% is E-Beam. There is also a significant market for the sterilization of medical products outside of the U.S. However, EtO maintains a significantly larger share of the market than Gamma.
In determining the total cost of various sterilization services, medical product manufacturers must consider not only the cost of the actual sterilization services, but also the cost of transportation and cost of processing time or product turnaround. As a result,
manufacturers typically do not send product for sterilization beyond a 300-mile radius since the cost of transportation would likely exceed the cost of sterilization, which typically ranges from 0.1% to 3.0% of unit manufacturing cost for medical products. Because of these limitations, contract sterilizers have needed to strategically locate their facilities in close proximity to their customer base.
The Company believes there are a number of manufacturing trends that may have a significant impact on contract providers of Gamma sterilization services. The first trend is closer coordination between manufacturers and their suppliers in order to reduce inventory exposure, improve the manufacturer's level of service to its customers and to facilitate new product launches. By closely coordinating the sterilization process with the manufacturing process, the planning of production is simplified and the number of days of raw materials and finished goods inventory can be reduced. As a result, manufacturers are increasingly demanding shorter turn-around times for sterilization services. The second of such trends is the "outsourcing" of non-core elements of the manufacturing process where services can be obtained from third party providers on a more cost-effective basis. While several large corporations continue to perform either all or a portion of their sterilization in-house, the trend has been away from building in-house sterilization capacity due to cost, safety, flexibility and regulatory issues associated with maintaining an in-house irradiator or EtO chamber. Finally, an emerging trend is the contracting of additional services relating to the sterilization of medical products. Manufacturers have begun to seek outside assistance with the validation and testing of their products. This emerging trend has the potential to provide core-business focus, while providing benefits such as reduction in labor costs and expenses relating to sterilization management.
The medical products portion of the sterilization market includes manufacturers of single-use medical products. The types of products sterilized include items such as syringes, needles, scalpels, dental implants, cardiovascular devices, gloves, gowns, bandages, , cotton swabs, cotton gauze, surgical towels, surgical drapes, surgical kits, suture staples, specimen bottles, intravenous tubes and bottles, blood collection devices, drug packaging materials, orthopedic implants, petri dishes, contact lenses, and eyecare solutions. Based upon industry sources, the Company estimates that current the U.S. market for the sterilization of these types of medical products is approximately $300 million.
ADVANCED APPLICATIONS MARKET
The market for microbial reduction, purification or irradiation processing of advanced application products includes a multitude of markets. Growth in these markets is primarily being driven by concerns over health risks and potential product liability, as well as economic considerations such as losses due to infestation and spoilage. Concerns over foodborne illnesses have contributed to an increased awareness of the need for irradiation processing. While the vast majority of the processing of advanced application products is currently done with EtO, the percentage being processed using Gamma or E-Beam radiation has increased in recent years. A number of manufacturers have converted to Gamma processing for their products since Gamma does not leave any chemical residues and is better able to penetrate products such as spices and cosmetics, which are often processed in bulk. In determining the total cost of various microorganism reduction or purification services, manufacturers must consider not only the cost of processing, but also the cost of transportation and cost of processing time or product turnaround. As a result, manufacturers typically do not send product for processing beyond a 300-mile radius since the cost of transportation would likely exceed the cost of processing. Because of these limitations, contract service providers have needed to strategically locate their facilities in close proximity to their customer base.
The following are the primary advanced application products being processed using all of the various methods of microbial reduction or purification (Gamma, EtO, E-Beam):
Spices and Herbs. Spices and herbs for culinary uses constitute the largest portion of the current advanced applications market. According to The American Spice Trade Association, of the approximately 850 million pounds of spices sold in the U.S. in 1995, approximately 300 million pounds were processed using Gamma or EtO to extend shelf-life and/or reduce microorganisms. Examples include black pepper, garlic, nutmeg, mustard seed, paprika and cinnamon.
Botanicals and Nutraceuticals. The use of herbs and botanicals for the production of dietary supplements is a growing market in the U.S. According to industry sources, the total U.S. market for nutraceuticals is in excess of $75 billion, with the vitamin, mineral and herbal category accounting for approximately $6 billion. The type of products processed using Gamma radiation to eliminate pathogens and reduce contaminating microorganisms include ginseng, garlic, aloe vera, ginkgo biloba, bee pollen and St. John's wort.
Cosmetics. Cosmetics often require processing to reduce microorganisms in either finished goods or certain cosmetic ingredients that have naturally high microbial content. Examples include shampoo, eye make-up remover, mascara and compounds used in lipstick.
Food Packaging Products. As the market for prepackaged foods has grown, increasing the shelf-life of these products has become a critical economic issue. By reducing the microbial count in the packaging material, producers are able to reduce the risk that microorganisms contained in the packaging material will come into contact with the food product and reduce its shelf-life. Examples include milk cartons and meat packaging materials.
MATERIALS PROCESSING MARKET
The materials processing market is comprised of a large number of distinct segments that can be addressed using E-Beam or Gamma technology. Due to the fragmented nature of the market, and the large number of existing and potential applications, market size is difficult to estimate. Current markets include the processing of various industrial compounds, cross-linking of polymers and the breakdown of resin material such as PTFE. In addition, E-Beam radiation is used to process certain semiconductor devices and to enhance the color of various gemstones. Unlike that of the medical products and advanced applications markets, manufacturers of industrial compounds, semiconductors and gemstones are often willing to ship products to be processed beyond a 300-mile radius since the cost of transportation and processing account for a smaller percentage of the unit manufacturing cost.
POTENTIAL MARKETS
In recent years, there has been increased interest in evaluating food irradiation in light of the heightened public concern over outbreaks of E. coli, salmonella and other foodborne pathogens. As a consequence, the Company believes that there are a number of large potential markets for the irradiation of food products. The United States Food and Drug Administration ("FDA") has approved radiation as a safe and effective means of processing a variety of foods including pork, poultry, fresh fruits and vegetables. In addition, the FDA has recently approved the radiation of red meat, meat byproducts and meat food products in order to eliminate E. coli and other harmful pathogens. However, before irradiated red meat, meat byproducts and meat food products can be sold commercially, the United States Department of Agriculture (the "USDA") must amend its regulations to authorize the use of irradiation and subsequently establish the applicable manufacturing practices that must be followed when using such irradiation. In February 1999, the USDA announced its approval of irradiation for the treatment of fresh or frozen red meat and some meat products and issued a draft guideline for use, which was open to a sixty-day public comment period. Following the such comment period, it was expected that the USDA and FDA would issue a final ruling to be published in the Federal Register by the end of calendar 1999. At the time of this Report, the USDA had extended the initial comment period for an additional thirty (30) days, and while the USDA still expects to issue regulatory standards by the end of calendar 1999, there is no assurance that it will do so. Current FDA regulations also require any retail foods that have been irradiated to be labeled.
While the Company is closely monitoring developments related to the potential market for irradiated red meat, the development of this potential market is subject to consumer acceptance of irradiated foods and the willingness of consumers to pay the higher prices likely to be charged for such products. In addition, if these markets do develop, facilities will have to be built or modified to address the specific requirements of the red meat market. These modifications would include the addition of refrigeration facilities, changes in material handling equipment and alterations in processing techniques to accommodate higher volumes of low dosage products. In addition, new facilities would have to be constructed in close proximity to customers' facilities to accommodate the perishable nature of red meat.
SERVICES
SteriGenics offers a number of services to its customers including its standard processing services, time-based services and value-added services such as validation, testing, and sterilization management services.
STANDARD GAMMA SERVICE
SteriGenics' standard Gamma service is a five working day turn-around time on the product, which is an industry standard. The processing time of any particular product is dependent upon several factors, including the dose required, the density of the product and the number of curies of Cobalt 60 present in the cell. In general, a higher dose requirement or density of material has the effect of increasing the amount of time the product needs to be exposed to Gamma radiation. Once these elements are determined, the Company determines the processing time for the specified product. It is the responsibility of the Company's customers to determine the level of microorganisms or other contamination that exists in their respective products, as well as the dose of Gamma radiation that will reduce such microorganisms or contamination to the required levels. After performing sterilization services, dosimeter readings are taken and documented to verify that the customer's dose requirements were attained. The Company then issues a
certification that the product received the specified dosage. The fee charged for this service is dependent primarily upon the required dose of Gamma radiation, density of the product, permissible dose range and the volume of product to be processed.
GAMMASTAT(R) I AND II SERVICES
GammaSTAT I and II are premium gamma sterilization services that guarantee a turn-around time of 23 or 48 hours, respectively. The Company does not limit the volume or type of product to be processed. Pricing for both GammaSTAT services is at a premium to standard service and is based upon the time (23 or 48 hours) in which the customer requires the product to be processed and available for shipment. GammaSTAT was introduced in fiscal 1996 and revenues resulting from GammaSTAT increased significantly in fiscal years 1997, 1998, and 1999
GAMMARESERVE(TM) SERVICES
GammaRESERVE is a premium gamma sterilization service that utilizes proprietary software to allow customers to reserve processing time on a specific day. The customer is then charged for the reserved processing time whether or not it is used. The Company began offering GammaRESERVE in April 1997.
EXCELL(TM) SERVICES
The ExCell is an automated precision dose irradiator. SteriGenics has an ExCell in operation in both Charlotte, North Carolina and Corona, California. The ExCell service can be used for several different purposes, including production services for finished goods that require a very limited dose range, dosage auditing to allow customers to verify their dosage requirements, validation work and materials testing. ExCell services are offered at a premium price based upon the nature of the service being provided.
STERIPRO(TM)
SteriPro is a premium gamma sterilization service offering medical product manufacturers the ability to contract additional services through SteriGenics as they relate to the validation and ongoing sterilization of their products. These services include, but are not limited to, material compatibility testing, bioburden analysis, establishment of the sterilization dose, and routine verification of the sterilization dose. The Company introduced its SteriPro program in August 1998.
STANDARD E-BEAM SERVICE
SteriGenics' standard E-Beam service for conveyer processing is a one to two working day turn-around time on the product, which is an industry standard. Turn-around times for gemstones are typically two to three weeks. The processing time of any particular product is dependent upon several factors, including the density of the product, the dose requirement and the energy level of the E-Beam. In general, a higher dose requirement or density of material has the effect of increasing the amount of time the product needs to be exposed to E-Beam radiation. Based upon these factors, the Company determines the processing time for the specified product. It is the responsibility of the Company's customers to determine the dose of E-Beam radiation that will achieve the desired results. The Company uses a calorimeter dosimeter to verify that the customer's dosage requirements were attained. The Company then issues a certification that the product received the specified dosage. The fee charged for this service is dependent primarily upon the dose of E-Beam radiation, density of the product, packaging compatibility with the Company's size specifications and the volume of the product to be processed.
ELECTROSTAT(TM) SERVICES
ElectroSTAT I and II are premium electron beam sterilization services that guarantee a turn-around time of 12 or 23 hours, respectively. The Company does not limit the volume or type of product to be processed. Pricing for both ElectroSTAT services is at a premium to standard service and is based upon the time (12 hours or 23 hours) in which the customer requires the product to be processed and available for shipment. ElectroSTAT was introduced in fiscal 1999.
MARKETS AND CUSTOMERS
MEDICAL PRODUCTS MARKET
The medical products market is comprised of manufacturers of healthcare and single-use medical products. The medical sterilization division of the Company had more than 800 customers in fiscal 1999, including many of the largest manufacturers of single-use medical products. Sales to medical products customers accounted for the majority of the Company's revenues in fiscal 1999. No customer accounted for more than 10% of revenues during fiscal years 1997, 1998 or 1999.
ADVANCED APPLICATIONS MARKET
The advanced applications division of the Company provides services through both its Gamma and E-Beam facilities to more than 200 customers producing a variety of products, including spices and herbs, cosmetics, food ingredients, , , fruit and vegetable products, food packaging and consumer products, such as botanicals and nutraceuticals.. The Company expects that sales to advanced applications customers as a percentage of overall revenues will increase in the future. See "Risk Factors -- Uncertainty of Expansion in the Advanced Applications Market."
MATERIALS PROCESSING MARKET
The advanced applications division of the Company also provides services through its Gamma and E-Beam facilities to customers producing a variety of industrial and consumer products, including semiconductor devices, gemstones, polymer materials, wire and cable. Although the materials processing market accounted for less than 5% of the Company's revenues in fiscal 1999, the Company expects that sales to materials processing customers as a percentage of overall revenues will increase in the future. See "Risk Factors - Uncertainty of Expansion in the Materials Processing Market."
CUSTOMER AGREEMENTS
While the Company provides a standard form of agreement for customer contracts, the Company's agreements with its customers vary from purchase order arrangements to multiple year contracts. Certain of these contracts provide pricing terms based upon volume or product line commitments from its customers. In addition, the Company enters into contracts providing for guaranteed turnaround times and special services.
SALES AND MARKETING
SteriGenics maintains a corporate marketing department that is responsible for all marketing, advertising and promotional activities for the Company, while it has separate sales and marketing groups servicing the medical products, advanced applications and materials processing markets. In addition, the Company maintains a separate sales and business development group for its E-Beam business. The Company's services are sold primarily by its direct sales force, based throughout the country. Facilities managers and other personnel at the Company's facilities also take an active role. SteriGenics maintains a customer service and support operation within each of its facilities.
The Company's marketing of its Gamma services emphasizes technical assistance to customers in all aspects of the sterilization process, including product conversion from other sterilization methods and material compatibility studies and participation by facility and corporate staff members on technical committees responsible for the implementation of industry standards pertaining to the sterilization of products and materials. The Company's salespersons and senior management draw upon their backgrounds in radiation, engineering, microbiology, packaging, material compatibility and regulatory compliance to provide customers a full range of services. SteriGenics' promotional activities consist of printed media advertising (primarily trade journals), participation in trade shows, mailing campaigns to selected territories, addressing industry organizations and sponsoring promotional events. In addition, as part of its efforts to expand its potential markets, the Company has sponsored and supported FDA petitions related to the sterilization or radiation processing of various products and product labeling.
In 1996, the Company introduced a program to further encourage the conversion of medical products from EtO to Gamma. Through this program the Company provides technical assistance to customers and potential customers who are interested in converting their products to Gamma. These technical assistance services are provided at no charge to the customer. The conversion program has been successful both with customers who have in-house EtO sterilization facilities and with those using an EtO contract
sterilizer. During fiscal 1997, the first year of the program, SteriGenics converted slightly over 2 million cubic feet of product to Gamma sterilization
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company believes its future competitive position will depend, in part, on its ability to develop and introduce process and design innovations in its radiation systems. The Company intends to continue to make significant investments in research, development and engineering for the foreseeable future. Although the Company maintains an active research, development and engineering program to improve its process and design technology, there can be no assurance such efforts will be successful or the Company's process and design innovations will enable it to offer new services that will achieve customer acceptance. Failure to develop, or introduce on a timely basis, such new process and design technology could adversely affect the Company's business, financial condition and results of operations. Research development and engineering expenditures were $1.4 million, $1.2 million and $1.3 million for fiscal 1997, 1998 and 1999, respectively. See "Risk Factors -- Increased Competition."
QUALITY ASSURANCE AND SAFETY
The Company has quality assurance departments at both the corporate and facility levels. The corporate quality assurance group has the primary responsibility for structuring the Company's quality system, developing quality assurance policies, operating procedures and work instructions and ensuring that such policies, procedures and work instructions are in compliance with national and international standards, federal, state and local regulations, as well as customer requirements. The department is also responsible for monitoring quality-related activities at all locations, changes in the federal, state and local regulatory environment, each facility's compliance with the quality system, national standards working groups and technical assistance to customers. At the facility level, quality assurance personnel are given the authority and responsibility to ensure compliance within that facility with SteriGenics' quality policies, procedures, work instructions and customer specifications.
Ten of SteriGenics' facilities are certified to International Standards Organization ("ISO") 9002, Quality System -- Model for Quality Assurance in Production, Installation and Servicing. Certification to the ISO 9002 standard demonstrates that the Company has implemented the essential elements necessary for an effective quality control system. The Company received its initial certification in 1993 from Det Norske Veritas ("DNV"), an approved Notified Body, and is subject to quality system surveillance audits every six months by DNV. Additionally, ten of the Company's facilities have recently received EN46002/EN552 certification from the DNV. This certification expedites the ability of certain of the Company's medical device customers to obtain the CE Mark, which is required to sell their products in Europe. The Company has scheduled ISO 9002 and EN46002/EN552 certification audits for the Rockaway facility during 1999. See "Properties"
The Company has implemented a number of safety procedures for its workers. Each Gamma and E-Beam cell has a separate safety system designed to ensure that no individual is exposed to the radiation. The Company believes it has redundant safety precautions that meet or exceed all applicable safety regulations imposed by federal regulations. Safety backup precautions also exist in the event of power outages and natural disasters. In the event of a failure of electric power in a Gamma facility, the Cobalt 60 source racks are automatically lowered into the pool on a gravity feed basis. There can be no assurance that such safety precautions will prove effective under normal operating conditions or in the event of a power outage or natural disaster. A failure in safety precautions would have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Risks of Operating Facilities Using Radioactive Material."
COMPETITION
The market for sterilization and radiation processing services is intensely competitive and is characterized by significant price competition. The Company's market is fragmented as a result of geographical limitations on the transportation of products for sterilization, multiple technologies and the mix of captive and contract facilities. In particular, the Company currently faces competition from other providers of contract Gamma sterilization services, the most significant of which is Isomedix, Inc., a subsidiary of Steris Corporation ("Isomedix"), and other providers of contract E-Beam sterilization services including The Titan Corporation, E-Beam Services Inc. and Iotron Industries Canada Inc. In addition, many products that can be sterilized using Gamma or E-Beam can also be sterilized using EtO. As a result, the Company also competes with companies that process products using EtO technology including Cosmed Group, Inc., Griffith Micro Science, Inc. and Isomedix. Certain of the Company's competitors and potential competitors have substantially greater financial, marketing, distribution, technical and other resources than the Company or offer a broader range of sterilization technologies, which may enable them to address more of the sterilization requirements of individual customers. In addition, the Company competes with manufacturers that have or are considering establishing in-house
sterilization capabilities. The Company may also, in the future, face competition from suppliers of Cobalt 60 radioisotope, particularly MDS Nordion, Inc. ("Nordion"), as well as foreign providers of sterilization services. In addition, Isomedix has announced its intention to enter the California market for sterilization services, which would increase competition in that market. To the extent that the Company expands into international markets it will also be faced with competition from existing providers of sterilization in those markets.
In recent years, price competition in the sterilization services industry has intensified. The Company may, in the future, face increased competition from companies that employ new or improved technologies or that offer sterilization services that are more effective or less costly than those developed and marketed by the Company. To the extent such increased competition were to occur the Company may explore alternative sterilization technologies as necessary to enhance its competitive position. Such competition could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to continue to compete effectively or that the competitive pressures faced by the Company will not have a material adverse effect on the Company's business, financial condition and results of operations.
The Company believes that price, processing time, quality of services and sterilization method are the primary factors upon which it competes. The Company believes that it compares favorably on all of these factors. In order to be successful in the future, the Company must continue to respond promptly and effectively to the challenges of technical change and competitors' innovations. Performance in these areas will, in turn, depend upon the Company's ability to attract and retain highly qualified technical and sales personnel. See "Risk Factors -- Increased Competition."
REGULATORY AND ENVIRONMENTAL MATTERS
The design, construction, use and operation of commercial Gamma facilities such as those operated by the Company, and byproduct materials used in such facilities, are extensively regulated by the United States Nuclear Regulatory Commission (the "NRC"), or in some cases by various state regulatory agencies and authorities that undertake a comparable regulatory function from the NRC (the "Agreement States"). While E-Beam is not regulated by the NRC, the Company's E-Beam facility is subject to regulation by the California Department of Health Services (the "CDHS"). The Company is also subject to various local zoning and permit rules in the construction of its facilities. The Company's facilities are subject to regulation by additional regulatory bodies at the federal, state and local levels, depending upon the type of product that is being irradiated. The Company's facilities are subject to the requirements of the FDA when irradiating medical devices, foods, cosmetics or food and drug packaging materials. In addition, if the Company were to begin processing meat or poultry products, it would become subject to the requirements of the Food Safety and Inspection Service of the USDA, which would require pre-approval of the irradiation process for meat and poultry. The Company is also subject to the requirements of other federal agencies, such as the United States Occupational Safety and Health Administration and the United States Environmental Protection Agency (the "EPA"). In addition, the Company is subject to the regulatory requirements of the state and local agencies in the jurisdictions where the various irradiation facilities are located.
In addition to extensive regulation by various governmental bodies and agencies, the Company is subject to standards, guidelines and requirements established by industry organizations and other non-governmental bodies, such as ISO and the Association for the Advancement of Medical Instrumentation.
Changes in, or reinterpretations of, existing requirements or adoption of new requirements beyond those described below or the failure at any time to comply with any applicable material regulations and standards could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will not incur significant costs to comply with laws, regulations and other requirements in the future or that such laws, regulations and other requirements will not have a material adverse effect upon the Company's business, financial condition and results of operations.
NRC REGULATION OF IRRADIATION FACILITIES
The receipt, acquisition, ownership, transfer, possession, use, transportation and disposal of nuclear byproduct material, as well as the construction, operation, transfer, closure and decommissioning of commercial Gamma irradiation facilities such as those operated by the Company, are subject to extensive and rigorous government regulation by the NRC or, in some cases, by the Agreement States.
The Company believes it has received all licenses and permits necessary for the conduct of its business. Commercial irradiation facilities, such as those owned or operated by the Company are subject to both regularly scheduled and unannounced inspections by the NRC or the Agreement States, with regard to all aspects of their operation, recordkeeping, compliance with health and safety regulations and all aspects of the utilization, storage, transfer, possession and transportation of regulated byproduct materials.
Noncompliance with the health and safety regulations of the NRC and most Agreement States are generally ranked according to levels of severity. Since 1993, the Company has received notices of violation from the NRC and the Agreement States concerning items of noncompliance at five of its facilities, which were not in such categories considered to be of "significant regulatory concern." The Company believes that it has taken appropriate corrective actions in response to each such notice. In addition, the regulatory history of the former RTI facilities, as operated by RTI, involved very significant regulatory compliance problems, which involved among other things, the payment of civil and criminal penalties by RTI, as well as a facility license suspension for a period of approximately 80 days. As a consequence of this regulatory history, there can be no assurance that the former RTI facilities will not be subject to heightened regulatory scrutiny and inspections for an extended period of time. Such heightened regulatory scrutiny and a failure by the Company to address concerns raised from such scrutiny and inspection could result in civil penalties or the suspension or termination of operations at one or more of the Company's facilities or could otherwise have a material adverse effect on the Company's business, financial condition and results of operations. The Company has no knowledge of any circumstances, which would constitute a present significant violation of any applicable state or federal laws or regulations. However, there can be no assurance that the Company will not in the future be determined to be in violation of any such laws or regulations.
The terms and conditions of the Company's licenses may be amended, revised or modified by reason of changes in the applicable laws, rules, regulations, or agency orders. Any such action may have a material adverse effect on the Company's business, financial condition and results of operations.
Violations of or noncompliance with applicable governmental requirements may result in an enforcement action including, among other things, a notice of violation, imposition of civil penalties, suspension, modification or revocation of any applicable license, criminal prosecution, or withholding or recall of the nuclear byproduct material held by the Company. Any such action would have material adverse effect on the Company's business, financial condition and results of operations.
FDA REGULATION OF IRRADIATION FACILITIES
The Company's irradiation facilities are subject to the requirements of the FDA when irradiating medical devices, foods, cosmetics and food or drug packaging materials. The FDA implements the Federal Food, Drug, and Cosmetic Act ("FFDCA"), which establishes pre-market approval requirements for certain drugs and medical devices and for all food additives. In addition, the Company is subject to inspection by the FDA for compliance with the FDA's Good Manufacturing Practices ("GMP") and other applicable FDA requirements. The FFDCA also prohibits the introduction into interstate commerce of adulterated or misbranded drugs, medical devices, foods and cosmetics. Products are deemed adulterated if, for example, they are manufactured or processed in facilities that fail to comply with GMP requirements.
Failure by the Company at any time to comply with applicable FDA requirements could lead the FDA to institute materially adverse enforcement actions against the Company and/or its customers, including, among other things, warning letters, recall or seizure of products, fines, injunctions, civil penalties, total or partial suspension of sterilization operations and criminal prosecution. Such enforcement actions would also harm the Company's business reputation and could cause the Company to lose customers to competitors with better records of regulatory compliance.
Medical Device Regulation. The Company's contract sterilization of medical devices is subject to pervasive and continuing regulation by the FDA. The FFDCA defines a medical device, in part, as including an instrument, apparatus, implement, machine, contrivance, implant or other similar or related article that is intended for use in the mitigation, treatment, or prevention of disease in man or other animals. The Company sterilizes finished devices made by other manufacturers, who commercially distribute them.
The Company's contract sterilization activities render it a device manufacturer for purposes of the FDA's Quality System Regulation ("QSR"), which sets forth detailed GMP requirements. As a result, the Company is required to adhere to the requirements of the QSR that apply to its contract sterilization activities. The QSR revises the previous GMP regulation (which also applied to the Company's activities) and imposes certain enhanced requirements that are likely to increase the cost of compliance. There can be no assurance that the FDA would find that the Company is in compliance with applicable GMP requirements or that the Company will be found in compliance at all times in the future. The Company may also be subject to other FDA requirements such as the medical device reporting requirements.
Drug Regulation. Contract sterilizers used by manufacturers of aseptic filled drug products are subject to applicable provisions of the FDA's drug GMPs. There can be no assurance that the FDA would find that a contract sterilizer is in compliance with applicable GMP requirements now or at any time in the future.
Food Regulation. The FFDCA requires premarket approval for food additives. Irradiation is regulated by the FDA and is considered to be a food additive. Irradiation may only be used on foods and food packaging materials in accordance with the requirements established in the food additive regulations. The existing food additive regulations only approve the use of irradiation for a limited variety of foods and food packaging materials that are used during the irradiation of foods. Food packaging materials that are irradiated prior to filling are exempt from the pre-market approval requirements, provided that the irradiated food packaging material is still suitable for use and complies with the applicable indirect food additive regulations. Before the Company could expand its sterilization services to certain foods or food packaging materials, the food additive regulations would have to be amended to include the irradiation of foods or food packaging materials not covered by the existing regulations. There can be no assurance that the FDA would amend the food additive regulations or that such regulations would be amended in a timely manner. Irradiation currently is approved for use on a limited number of foods and for disinfection of a variety of food packaging materials. Any use of food irradiation outside of that covered in an existing food additive regulation is prohibited.
The irradiation of foods must be conducted in accordance with the general GMP requirements for foods. In addition, special labeling is required to appear on foods that have been irradiated. The label and labeling of retail packages of the irradiated food must bear an irradiated logo and a statement such as "treated with radiation." No special labeling is required, however, on the label of foods that contain irradiated food ingredients. For example, if a spice is being irradiated, the irradiation logo and statement would need to appear on the label of the spice when it is sold directly to the consumer, but no special labeling would be required on the label of a pasta sauce that uses the irradiated spice ingredient.
The Food Safety and Inspection Service (the "FSIS") of the USDA is responsible for establishing additional requirements for the irradiation of meat and poultry products. In addition to issuing a regulation that specifically authorizes the use of irradiation, FSIS has established manufacturing practices that must be followed when irradiating products. Although FDA recently approved the use of irradiation for purposes of controlling foodborne pathogens and extending shelf life of red meat, meat byproducts and meat food products, FSIS has not yet amended its regulations to authorize this use of irradiation or established the applicable manufacturing practices that must be followed when using such irradiation. FSIS is in the process of issuing proposed rules and final rules are anticipated before the end of 1999.
Cosmetics Regulation. Cosmetics are defined under the FFDCA as including articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body or part thereof for cleansing, beautifying, promoting attractiveness, or altering the appearance. There currently are no statutory or regulatory provisions, other than the general adulteration and misbranding provisions, that limit the use of radiation in the processing or labeling of cosmetics.
ENVIRONMENTAL AND RELATED MATTERS
The Company's operations are subject to regulation by the EPA as well as state and local governmental agencies. Although there can be no assurance, the Company believes it currently maintains all licenses and permits necessary to conduct its current business and that it is in material compliance with applicable environmental, health and safety laws and regulations. The loss of any of the Company's licenses or permits could force the Company to suspend or terminate operations at one or more of its facilities or could otherwise have a material adverse effect on the Company's business, financial condition and results of operations.
Pursuant to an Asset Acquisition Agreement effective August 8, 1996 (the "Asset Agreement"), the Company purchased certain assets of RTI, including property located in Haw River, North Carolina and leasehold interests in property located in Salem, New Jersey and Rockaway, New Jersey (the "Rockaway Property"). The Rockaway Property was previously owned and operated by Thiokol Chemical Corporation ("Thiokol"), and is listed on the Superfund National Priorities List ("NPL"). In 1992, RTI and Thiokol entered into an Administrative Consent Order ("ACO") with the New Jersey Department of Environmental Protection (the "NJDEP") requiring, among other things, implementation of a groundwater remedy estimated to exceed $2.0 million in costs.
Under the Asset Agreement, RTI retained ownership of the Rockaway Property and all associated environmental liabilities as of the closing date. RTI agreed to indemnify and hold the Company harmless from and against any and all claims which may arise directly or indirectly from any use or release of hazardous substances on or under the leased premises as of the closing date. In addition, the Company obtained a letter from the NJDEP stating that the NJDEP will not institute either judicial or administrative civil proceedings against the Company for any discharge, deposit, release or disposal of hazardous substances or pollutants existing at the Rockaway Property, emanating therefrom, or occurring before the closing. However, the Company is required by the NJDEP to maintain a standby letter of credit in the amount of $500,000, contingent upon the continued clean up efforts required of RTI. The required amount of the letter of credit may be subject to certain lease terms over the life of the leasehold interest, and/or as the NJDEP requires. The Company believes, based on present information available to it, including the indemnification from RTI, the ACO
among RTI, Thiokol and the NJDEP, and the NJDEP's letter stating that it will not seek recovery or remediation costs from the Company for contamination that predates the purchase of RTI's assets, that it does not face any significant environmental liability with respect to the Rockaway Property. However, there can be no assurance that the Company will not be subject to environmental liability relating to the remediation of the Rockaway Property or liability for losses suffered by adjacent property owners or other third parties, and such liability could have a material adverse effect on its business, financial condition and results of operations.
EMPLOYEES
At March 31, 1999, the Company had 322 employees. The Company considers its relations with its employees to be good. See "Risk Factors -- Dependence on Key Personnel."
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Report, the following risk factors should be considered carefully in evaluating the Company and its business.
UNPREDICTABILITY OF FUTURE OPERATING RESULTS; LIKELY FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience, significant fluctuations in revenues and operating results from quarter to quarter. As a result, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. In addition, there can be no assurance that the Company's revenues will grow or be sustained in future periods or that the Company will maintain its current profitability in the future. A significant component of such quarterly fluctuations results from fluctuations in the demand by the Company's customers for sterilization and radiation processing services due to varying manufacturing cycles, changes in demand for customers' products and seasonality related to growth cycles for spices and herbs and decreased demand during the third fiscal quarter and the first part of the fourth fiscal quarter due to the holiday season. Other factors that could cause the Company's operating results to vary significantly from period to period include volatility in the market for medical devices; the ability of the Company to deliver services in a timely and cost effective manner; the ability of the Company to expand successfully in the advanced applications sterilization and radiation processing market; the ability to effectively integrate and successfully expand its recently acquired E-Beam business; the timing and size of orders from the Company's customer base; the ability of the Company to obtain supplies of Cobalt 60 on a timely basis and at a reasonable cost; fluctuations in currency exchange rates because payments under certain of the Company's Cobalt 60 operating leases are payable in Canadian dollars; fluctuations in the costs of electricity for the Company's E-Beam business; loss of processing time due to maintenance; the costs associated with customer product being damaged as a consequence of overdosing and other factors; changes in interest rates; regulatory matters; and litigation, acquisitions and other extraordinary events.
The Company's results of operations are also influenced by competitive factors, including the pricing and availability of the Company's and competing sterilization and radiation processing services; the acceptance of Gamma and E-Beam radiation as a means of sterilizing and processing products as opposed to other technologies; the ability of the Company's competitors to obtain orders from the Company's customers; the establishment of in-house sterilization capabilities by the Company's customers; the acquisition of the Company's customers by entities that do not use the Company's services; the timing of new service or technology announcements and releases by the Company and its competitors; and the entry of new competitors into the market for sterilization and radiation processing services. A large portion of the Company's expenses are fixed and difficult to reduce in a short period of time. If revenues do not meet the Company's expectations, the Company's fixed expenses would exacerbate the adverse effect of such a shortfall on net income.
Additional factors that have a significant impact on the Company's results of operations are the timing of construction and commencement of operations of new facilities. Building new facilities requires significant capital investments in construction and equipment and, for Gamma facilities, in Cobalt 60. In addition to incurring costs associated with building and equipping such facilities, the Company also incurs costs related to Cobalt 60 and higher personnel costs in the months preceding initial operation. As a result of their own internal procedures, customers often delay qualification and use of new facilities until they have been operational for a specified period of time of up to 12 months. As a result, in the past, the Company has failed to realize a portion of anticipated revenues for the facility pending such qualification, while incurring significant start-up costs, both of which adversely affected the Company's results of operations.
Due to these factors, as well as other unanticipated factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts or investors. In such event, the price of the Company's Common Stock would be materially adversely affected.
DEPENDENCE ON MEDICAL PRODUCTS CUSTOMERS
The Company derives a substantial portion of its revenues from the sale of sterilization services to manufacturers of medical devices, labware and eyecare products ("medical products"), and the Company expects that the sterilization of medical products will continue to account for a significant portion of the Company's revenues for the foreseeable future. The Company thus depends to a considerable extent upon the continued growth of the market for medical products. In particular, a significant aspect of the Company's medical products business is the sterilization of single-use medical devices. As a result, the Company is dependent in part on continued growth in the market for single-use medical devices. There has recently been an increasing focus on reusable medical devices and, therefore, there can be no assurance that use of reusable medical devices will not increase. Any significant increase in the use of reusable medical devices would decrease the use of single use devices of the type sterilized by the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that continued growth in the use of medical products depends on a number of factors, including the impact of health reform proposals. The Company believes that government and private insurance company efforts to contain or reduce health care costs are likely to continue. These trends may lead to fewer medical procedures being performed or the increased use of reusable medical devices, either of which could negatively impact the demand for the Company's services. In addition, the Company is dependent on the ongoing conversion of products from EtO to Gamma or E-Beam sterilization and there can be no assurance that such conversion will continue at the rate currently anticipated by the Company. Loss of significant business from medical products manufacturers, including reductions caused by large customers establishing captive facilities, changes in such customers' competitive position or a decision to purchase contract sterilization services from other suppliers, a downturn in the medical products market, or a failure of the conversion of products from EtO to Gamma at the anticipated rate could have a material adverse effect on the Company's business, financial condition and results of operations.
INCREASED COMPETITION
The market for sterilization and radiation processing services is intensely competitive and is characterized by significant price competition. The Company's market is fragmented as a result of geographical limitations on the transportation of products for sterilization, multiple technologies and the mix of captive and contract facilities. In particular, the Company currently faces competition from other providers of contract Gamma sterilization services, the most significant of which is Isomedix, Inc., a subsidiary of Steris Corporation ("Isomedix"), and other providers of contract E-Beam sterilization services including The Titan Corporation, E-Beam Services Inc. and Iotron Industries Canada Inc. In addition, many products that can be sterilized using Gamma or E-Beam can also be sterilized using EtO. As a result, the Company also competes with companies that process products using EtO technology, including Cosmed Group, Inc., Griffith Micro Science, Inc. and Isomedix. Certain of the Company's competitors and potential competitors have substantially greater financial, marketing, distribution, technical and other resources than the Company or offer a broader range of sterilization technologies, which may enable them to address more of the sterilization requirements of individual customers. In addition, the Company competes with manufacturers that have or are considering establishing in-house sterilization capabilities. The Company may also in the future face competition from suppliers of Cobalt 60 radioisotope, particularly Nordion, as well as foreign providers of sterilization services. In addition, Isomedix has announced its intention to enter the California market for sterilization services, which would increase competition in that market. To the extent that the Company expands into international markets it will also be faced with competition from existing providers of sterilization and radiation processing services in those markets.
In recent years, price competition in the sterilization and radiation processing services industry has intensified. The Company may in the future face increased competition from companies that employ new or improved technologies or that offer sterilization services that are more effective or less costly than those developed and marketed by the Company. To the extent such increase in competition were to occur, the Company may explore alternative sterilization technologies as necessary to enhance its competitive position. Such competition could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to continue to compete effectively or that the competitive pressures faced by the Company will not have a material adverse effect on the Company's business, financial condition and results of operations.
UNCERTAINTY OF EXPANSION IN THE ADVANCED APPLICATIONS MARKET
While the Company has traditionally focused primarily on the medical products market, it continues to increase its efforts in the advanced applications market. The Company currently irradiates a wide range of food ingredients and consumer products, including spices, herbs, cosmetics, nutraceuticals, and fresh foods. Many of the advanced application markets for irradiation processing are new and emerging, and there can be no assurance that any of these markets will develop at the anticipated rate, if at all.
Approval for the irradiation of certain food products is regulated by the FDA and the USDA. While the FDA has approved radiation for the processing of a variety of foods, including pork, poultry and fresh fruits and vegetables, only limited commercial sales of irradiated food have taken place. In December 1997, the FDA approved radiation for the processing of red meat, and some meat products in order to eliminate E. coli and other harmful food-borne pathogens. However, before irradiated red meat can be sold commercially, the USDA must set certain minimum standards for processors to follow. On February 12, 1999, the USDA announced its approval of irradiation for red meat and some meat products as well as its plans to publish draft standards in the Federal Register following a sixty-day public comment period. The USDA and FDA intend to issue a final ruling with regard to the irradiation processing of red meat and certain meat products. However, the initial comment period has been extended, and it is unclear as to when the FDA and USDA expect to complete the review process. In addition, current FDA rules and regulations require the labeling of any retail food product that is irradiated to be identified as such, and to date, there has been moderate consumer resistance to irradiated food. The irradiation of red meat could also result in an increase in the cost of such products to a level which may be unacceptable to most consumers. As a result, there can be no assurance that irradiation of fresh food products will gain public acceptance or will ultimately prove commercially feasible in the United States or that the Company would undertake to expand its irradiation activities to include red meat. To the extent that the Company seeks to take advantage of future opportunities in this market, such activities would require significant changes in the Company's processing techniques, including the redesign of facilities and the addition of refrigeration capabilities. Furthermore, to accommodate the perishable nature of red meat and the high processing volume that may result from the commercial irradiation of red meat, the Company could be required to expend significant capital to build specially equipped processing facilities near customer facilities.
UNCERTAINTY OF EXPANSION IN THE MATERIALS PROCESSING MARKET
Although the sterilization of medical products and irradiation of advanced application products currently represents the Company's largest markets, SteriGenics has continued to increase its efforts to expand its share of the materials processing market. The Company currently processes a variety of industrial materials and consumer products using both Gamma and E-Beam technologies, including semiconductors, gemstones and certain polymer materials, such as PTFE. Many of the materials markets for E-Beam processing are new and emerging, and there can be no assurance that any of these markets will develop at the anticipated rate, if at all.
RISKS RELATED TO GEOGRAPHIC EXPANSION USING THE MINICELL
The Company completed its newest MiniCell facility in Somerset, New Jersey in March, 1999. A key element of the Company's strategy is to expand geographically into smaller regional markets and internationally using the MiniCell. As well, the Company currently plans to install its MiniCell in two additional locations, West Memphis, Arkansas and Thailand. There can be no assurance that manufacturers in these markets, or any other markets will use the Company's facilities, that such manufacturers will pay higher sterilization prices in exchange for lower transportation costs and a decrease in turnaround time or that the Company will receive enough volume of product to operate such facilities on a profitable basis. In addition, many manufacturers in some of these smaller markets currently use EtO to sterilize their products and would need to convert their products to Gamma. Failure of the Company to successfully introduce and operate MiniCells in these new markets could materially adversely affect the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
In fiscal 1999, SteriGenics announced its international expansion with the development of an irradiation complex in Thailand featuring both Gamma and E-Beam technologies. If commencement of the operation is successful, the Company will be subject to a number of risks related to foreign operations, including fluctuations in currency exchange rates, political and economic conditions in various jurisdictions, unexpected changes in regulatory requirements, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, longer accounts receivable payment cycles and potentially adverse tax consequences. Currency exchange fluctuations in countries in which the Company conducted operations historically have had, and in the future could have, a material adverse effect on the Company's business, operating results or financial condition by resulting in pricing levels that are not competitive or expense levels that adversely impact profitability. There can be no assurance that the Company will be able to sustain or increase revenue derived from international service or that the foregoing factors will not have a material adverse effect on the
Company's future international service and other revenue, and consequently, on the Company's business, operating results or financial condition.
DEPENDENCE ON GAMMA TECHNOLOGY
Historically, the Company has performed all of its sterilization and radiation processing services using Gamma radiation. Because of its reliance on Gamma technology, a decline in the demand for, or the pricing of, Gamma services would have a material adverse effect on the Company's business, financial condition and results of operations. To remain competitive, the Company may also need to respond quickly to technological changes and innovations in the sterilization and radiation processing market, including changes in the technologies used to perform sterilization or radiation processing services that could render Gamma obsolete or noncompetitive. The Company is also dependent upon continued consumer acceptance of the Gamma sterilization of medical products and the ongoing conversion of products from EtO to Gamma sterilization. There can be no assurance that such conversion will occur at the rate anticipated by the Company. Failure by the Company to quickly and effectively respond to changes in the sterilization and radiation processing market, including the development of new technologies or addition of existing technologies to its service offerings, or a significant increase in consumer resistance to products sterilized by Gamma or the other technologies offered by the Company, could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Competition."
RISKS ASSOCIATED WITH EXPANSION IN E-BEAM TECHNOLOGY
From time to time the Company may expand its E-Beam business through acquisition or by building new facilities. There can be no assurance that the Company will be able to effectively expand the operations of the E-Beam business. The failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any significant diversion of management resources required in connection with the expansion of the E-Beam business could have a material adverse effect upon the Company's business, financial condition and results of operations.
UNCERTAINTIES RELATED TO EXPANSION IN X-RAY TECHNOLOGY
In May 1999, the Company announced its purchase of a Rhodotron(R), a high-powered particle accelerator that the Company intends to use in order to provide X-ray capabilities. There can be no assurance that the Company will be able to secure the regulatory approvals necessary to provide X-ray processing, nor can there be assurance that the Company will be able to effectively expand the operations of the X-ray business. The failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any significant diversion of management resources required in connection with the expansion of its X-ray business could have a material adverse effect upon the Company's business, financial condition and results of operations. See "--Subsequent Events" -- Notes to Financial Statements.
SUBSTANTIAL DEBT
As of March 31, 1999, the Company's total consolidated liabilities were $55.1 million, of which $36.6 million represent long-term debt (including current portion), its total consolidated assets were $136.1 million and its total stockholders' equity was $81.0 million. The Company's substantial level of debt presents the risk that the Company might not generate sufficient cash to service the Company's indebtedness, including its IRBs, or that its debt level could limit its ability to finance an acquisition and develop additional projects, to compete effectively or to operate successfully under adverse economic conditions. As of March 31, 1999, the Company had $36.0 million of tax-free IRBs outstanding with variable interest rates as of March 31, 1999 of either 3.2% or 3.0%. Under federal regulations, the maximum aggregate amount of tax-free IRBs that the Company may issue is $40.0 million. Once the Company has issued the maximum amount of tax-free IRBs, it will be required to obtain any additional financing through higher cost funding sources. Each of the Company's IRBs is collateralized by certain assets of the Company. The Company is also required, under certain IRB agreements, to maintain cash reserves in the amount of the bond interest payments due within one year. As a result, such cash is not available to the Company for working capital or other purposes.
RISKS RELATED TO GOVERNMENT REGULATION AND STANDARDS COMPLIANCE
The Company's business is subject to various federal, state and local laws, regulations, agency actions and court decisions. Although the Company believes it has received all licenses and permits necessary to conduct its current sterilization business, there can be no assurance that the Company will not be found in violation of applicable requirements or that governmental bodies will not seek to impose regulatory requirements not now anticipated on the Company and its business. In addition, the long-term course of
regulatory policy cannot be predicted and, there can be no assurance that laws and regulations will not be applied in a manner that adversely affects the Company. The imposition of such regulatory requirements could force the Company to alter or cease operations of its facilities and could otherwise have a material adverse effect on the Company's business, financial condition and results of operations.
The design, construction, use and operation of commercial Gamma facilities such as those operated by the Company, and byproduct materials used in such facilities, are extensively regulated by the United States Nuclear Regulatory Commission (the "NRC"), or in some cases by various state regulatory agencies and authorities that undertake comparable regulatory functions from the NRC (the "Agreement States"). While E-Beam is not regulated by the NRC, the Company's E-Beam facility is subject to regulation by the California Department of Health Services. The Company is currently operating its E-Beam facility under a California Department of Health Services license held by ThermoSpectra Corporation pending the approval of its application for a new radioactive material license. The Company is also subject to various local zoning and permit rules in the construction of its facilities. The Company's facilities are subject to regulation by additional regulatory bodies at the federal, state and local levels, depending upon the type of product that is being irradiated. The Company's facilities are subject to the requirements of the FDA when irradiating medical devices, foods, cosmetics or food or drug packaging materials. In addition, if the Company were to begin processing meat or poultry products, it would become subject to the requirements of the Food Safety and Inspection Service of the USDA, which would require the amendment of its regulations to authorize this use of irradiation as well as the establishment of the applicable manufacturing practices that must be followed when using such irradiation. The Company is also subject to the requirements of other federal agencies, such as the United States Occupational Safety and Health Administration and the United States Environmental Protection Agency (the "EPA"). In addition, the Company is subject to the regulatory requirements of the state and local agencies in the jurisdictions where the various irradiation facilities are located.
In addition to extensive regulation by various governmental bodies and agencies, the Company is subject to standards, guidelines and requirements established by industry organizations and other non-governmental bodies, such as the International Standards Organization ("ISO") and the Association for the Advancement of Medical Instrumentation ("AAMI"). The ISO 9002 Standard is an international quality standard that requires the Company to implement and document an effective quality assurance program which is subject to quality systems surveillance audits every six months.
Changes in, or reinterpretations of, existing requirements and standards or adoption of new requirements beyond those described below or the failure at any time to comply with any applicable material regulations and standards could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will not incur significant costs to comply with laws, regulations and other requirements in the future or that such laws, regulations and other requirements will not have a material adverse effect upon the Company's business, financial condition and results of operations.
Violations of or noncompliance with applicable governmental requirements may result in an enforcement action including, among other things, a notice of violation, imposition of civil penalties, suspension, modification or revocation of any applicable license, criminal prosecution, or withholding or recall of the nuclear byproduct material held by the Company. Any such action would have a material adverse effect on the Company's business, financial condition and results of operations.
RISKS OF OPERATING FACILITIES USING RADIOACTIVE MATERIAL
The operation of the Company's Gamma and E-Beam facilities involves special safety risks, potential liabilities related to exposure to radioactive material, and specific regulatory, radiological health and safety and environmental requirements and may raise concerns with respect to both worker safety and community reaction. Should an incident involving exposure of workers or others beyond regulatory limits to radioactive materials occur at any of the Company's facilities, the resultant liability could be substantial. Such an incident would also result in adverse community reaction, which could impact the Company's ability to continue to operate any facility involved in such an incident, as well as similar facilities. In the event any losses or liabilities related to such an incident are underinsured or exceed accumulated funds, or adequate recovery is not possible, the Company's business, financial condition and results of operations would be materially adversely affected.
In addition, the Company may encounter resistance from those in the communities where it seeks to build additional facilities or be subject to protests or other actions in areas where it has facilities based on perceived risk of exposure to radiation on the part of those living in the communities surrounding the Company's facilities. Any actual or perceived exposure to radiation as a result of the Company's activities or a failure related to the Company's safety procedures could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Environmental and Related Risks."
The Cobalt 60 stored in water shielding pools at each of the Company's facilities is double encapsulated in stainless steel. There can be no assurance that these stainless steel capsules will not corrode. In 1995, the Company encountered minor corrosion in the outer encapsulation of certain of its Cobalt 60 rods, requiring their replacement. Since the quantity of Cobalt 60 in a facility is the key determinant of the amount of product that can be processed, any significant delay in the replacement of such Cobalt 60 could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, if the Company is determined to be responsible for the corrosion, it could be required to bear the costs of transportation and re-encapsulation of the Cobalt 60. Furthermore, such corrosion, if undetected, could result in radioactive material being released into the water shielding pool, which could cause contamination of the pool and potentially the related facility. Any contamination resulting from such release and the related decontamination process would have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Risks Related to Government Regulation and Standards Compliance."
Due to the high energy levels emitted from the electron accelerator in the Company's E-Beam facility, some residual radiation remains in the cell after the accelerator is turned off and items that are in the direct path of the beam, such as equipment and portions of the concrete, may become radioactive for some period of time. Therefore, although the Company complies with federal and state regulations with regard to worker safety, workers who enter the E-Beam cell are exposed to low levels of radiation. Furthermore, the Company may be required to incur costs in connection with disposal of radioactive material in connection with the replacement of equipment or upgrading or decommissioning of its E-Beam facility.
ENVIRONMENTAL AND RELATED RISKS
The Company's operations are subject to regulation by the EPA as well as state and local governmental agencies. Although there can be no assurance, the Company believes it currently maintains all licenses and permits necessary to conduct its current business and that it is in material compliance with applicable environmental, health and safety laws and regulations. The loss of any of the Company's licenses or permits could force the Company to suspend or terminate operations at one or more of its facilities or could otherwise have a material adverse effect on the Company's business, financial condition and results of operations.
Pursuant to an Asset Acquisition Agreement effective August 8, 1996 (the "Asset Agreement"), the Company purchased certain assets of RTI, Inc. ("RTI"), including property located in Haw River, North Carolina and leasehold interests in property located in Salem, New Jersey and Rockaway, New Jersey (the "Rockaway Property"). The Rockaway Property was previously owned and operated by Thiokol Chemical Corporation ("Thiokol"), and is listed on the Superfund National Priorities List ("NPL"). In 1992, RTI and Thiokol entered into an Administrative Consent Order ("ACO") with the New Jersey Department of Environmental Protection (the "NJDEP") requiring, among other things, implementation of a groundwater remedy estimated to exceed $2.0 million in costs.
Under the Asset Agreement, RTI retained ownership of the Rockaway Property and all associated environmental liabilities as of the closing date. RTI agreed to indemnify and hold the Company harmless from and against any and all claims which may arise directly or indirectly from any use or release of hazardous substances on or under the leased premises as of the closing date. In addition, the Company obtained a letter from the NJDEP stating that the NJDEP will not institute either judicial or administrative civil proceedings against the Company for any discharge, deposit, release or disposal of hazardous substances or pollutants existing at the Rockaway Property, emanating therefrom, or occurring before the closing. However, the Company is required by the NJDEP to maintain a standby letter of credit in the amount of $500,000, contingent upon the continued clean up efforts required of RTI. The Company believes, based on present information available to it, including the indemnification from RTI, the ACO among RTI, Thiokol and the NJDEP, and the NJDEP's letter stating that it will not seek recovery or remediation costs from the Company for contamination that predates the purchase of RTI's assets, that it does not face any significant environmental liability with respect to the Rockaway Property. However, there can be no assurance that the Company will not be subject to environmental liability relating to the remediation of the Rockaway Property or liability for losses suffered by adjacent property owners or other third parties, and such liability could have a material adverse effect on its business, financial condition or results of operations.
In the spring of 1985, the Company leased over 400 stainless steel capsules of radioactive Cesium from the United States Department of Energy (the "DOE") for use at the Company's Decatur, Georgia and Westerville, Ohio irradiation facilities. On June 6, 1988, the Company discovered one or more of DOE's Cesium capsules had leaked radioactive Cesium, which is water soluble, contaminating the Company's Decatur, Georgia facility. As a result of the contamination, the Company's Decatur irradiation facility was completely shut down from June 6, 1988 until July 1996, when the Company leased the facility to a third party for a different purpose. The decontamination activities were conducted by the DOE and its contractors, and the Company filed an administrative claim with the DOE for damages the Company incurred as a result of the Cesium contamination. The DOE did not pay or deny the Company's claim within the required six month period. As a result, the Company filed suit against the U.S. government in June 1991. Although the DOE had orally offered to fund the costs of the cleanup, the government subsequently asserted a substantial
counterclaim against the Company alleging that the Company had been negligent in its handling and use of the Cesium capsules. A settlement was reached between the parties to this litigation on April 9, 1997, following a trial and notice of appeals filed by both SteriGenics, the U.S. government and two of its contractors. The presiding court entered a stipulation of dismissal effective May 9, 1997. While the litigation resulted in significant expenses and was a significant diversion of management attention, the Company is not aware of any ongoing environmental or other legal liabilities associated with the Cesium incident. However, there can be no assurance that unspecified third parties, including former employees or persons owning or occupying nearby properties, would not, in the future, assert claims against the Company in connection with the contamination of the Decatur facility. In January 1993, after the decontamination activities were completed, final survey reports were prepared by both a contractor for DOE and by a third party consultant on behalf of the Georgia Department of Human Resources, which regulates such matters in Georgia, to allow for the unrestricted use of the Decatur facility consistent with the requirements of the Georgia Department of Human Resources. The documentation and data prepared by such third party indicated that any residual radioactivity at the Decatur facility was beneath that of regulatory concern to the applicable regulatory authority. While the Company no longer uses Cesium in any of its facilities, there can be no assurance that it will not experience any incidents of radioactive contamination resulting from its use of Cobalt 60. Incidents involving radioactive contamination from use of Cobalt 60 would likely differ from incidents involving Cesium contamination in a number of respects. Cesium is a salt and water soluble, in contrast to Cobalt 60, which is a metal and not water soluble. As a result, when Cesium contamination occurs, the evaporation of contaminated water can result in Cesium being spread to a greater extent than would be the case with substances that are not water soluble, such as Cobalt 60. However, since Cobalt 60 is a metal and therefore any released amount would remain in a more concentrated form, direct exposure could potentially be more dangerous. See "-- Risks of Operating Facilities Using Radioactive Material."
RISKS RELATED TO COBALT 60 SUPPLY
To date, the Company has obtained its supply of the Cobalt 60 radioactive isotope from three sources. The Company's primary sources of Cobalt 60 are MDS Nordion ("Nordion"), a Canadian company and the world's principal source of Cobalt 60, and REVISS Services (UK) Limited ("REVISS"), a United Kingdom company and formerly a division of Amersham International plc. In addition, the Company has purchased smaller amounts of its Cobalt 60 requirements from Neutron Products Inc., a Maryland corporation. While the Company has not experienced any shortages in Cobalt 60 supply since the mid-1980s and has various supply contracts in place, there can be no assurance that it will be able to obtain sufficient supplies of Cobalt 60 from Nordion, REVISS or other suppliers on acceptable terms or that it will be able to identify and qualify alternative sources. In addition, there is no assurance that Nordion will not in the future become a competitor of the Company in the delivery of sterilization services, which could result in a decrease in the availability of Cobalt 60 from Nordion. In July 1997, Nordion announced a joint venture with Griffith Micro Science, Inc. to provide sterilization services in Mexico. If interruptions in the supply or increases in the price of Cobalt 60 were to occur for any reason, including a decision by any of the Company's suppliers to decrease or discontinue supplies of Cobalt 60 to the Company, trade restrictions with Canada or the United Kingdom, political unrest, labor disputes or other factors, the Company's business, financial condition and results of operations would be materially adversely affected. Since the Company pays for Cobalt 60 primarily in Canadian dollars, and the Canadian dollar is currently trading at levels significantly lower than it has in recent years, the Company's results of operations may be adversely affected by fluctuations in currency exchange rates. In addition, the availability and price of Cobalt 60 to the Company and its suppliers is dependent in part on the political situation in countries with large deposits of Cobalt 59 (the material that is processed into Cobalt 60), such as the Democratic Republic of Congo and the republics of the former Soviet Union. Such countries have recently experienced political unrest. In addition, since mined Cobalt 59 must be converted into Cobalt 60 in nuclear reactors, the supply of Cobalt 60 to the Company's suppliers is dependent upon the availability of nuclear reactors to convert Cobalt 59 to Cobalt 60. An interruption in the Company's supply of Cobalt 60 or significant increase in the price the Company is required to pay for Cobalt 60 would have a material adverse effect on the Company's business, financial condition and results of operations.
RISKS OF BUSINESS INTERRUPTION
Any prolonged disruption in the operations at any of the Company's facilities, whether due to technical or labor difficulties, equipment malfunction, regulatory action, destruction of or damage to any facility or other reasons, would have a material adverse effect on the Company's business, financial condition and results of operations. This risk is increased since customers generally seek to have their products sterilized within a 300 mile radius of their production or distribution facilities and, therefore, it is often not feasible to transfer products to other facilities in the event of a prolonged disruption in any facility. The Company is also susceptible to natural disasters, including earthquakes, hurricanes and tornadoes, as well as other catastrophic events such as fire. Furthermore, if additional capacity is required as a result of unplanned increases in demand for the Company's services, the Company may suffer delays and increased costs in establishing other facilities or increasing production at existing facilities that could adversely affect customer relationships, cause a loss of market opportunities and have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the failure to effectively implement any design or process changes could disrupt the sterilization process, which could also adversely affect customer relationships, cause a loss of market opportunities and have a material adverse effect on the Company's business, financial condition and results of operations.
MANAGING GROWTH; RECENT AND POTENTIAL ACQUISITIONS
The Company continues to experience periods of revenue growth and an expansion in the number of its employees, the scope of its operating and financial systems and the geographic area of its operations. This growth and expansion has resulted in and may continue to result in new and increased responsibilities for management personnel and has placed additional demands upon the Company's management, operating and financial systems and resources. In order to successfully integrate its expanded operations and to manage future growth, if any, the Company will be required to implement new and expanded business and financial systems, procedures and controls, and to upgrade its other internal management systems. There can be no assurance that the Company's systems, procedures, controls and staffing will be successfully managed or will be adequate to successfully support the Company's operations. Failure to manage any future growth properly would have a material adverse effect on the Company's business, financial condition and results of operations.
The Company may in the future undertake acquisitions that could present challenges to the Company's management, such as integrating and incorporating new operations, technologies and personnel. If the Company's management is unable to effectively manage these challenges, the Company's business, financial condition and results of operations could be materially adversely affected. Furthermore, there can be no assurance that any acquisitions will result in increased revenue or positively impact the Company's profitability. Moreover, any new acquisition, depending on its size, could result in the use of a significant portion of the Company's available cash or the acquisition of additional debt or, if such acquisition is made utilizing the Company's securities, could result in significant dilution to the Company's stockholders. While it is an element of the Company's strategy to pursue strategic acquisitions, the Company believes that the number of potential acquisition candidates in the domestic market is limited. Therefore, there can be no assurance that the Company will successfully complete any such transaction.
DEPENDENCE ON KEY PERSONNEL
The Company's progress to date has been highly dependent upon the skills of its key technical and management personnel, many of whom would be difficult to replace. To reach its future business objectives, the Company will need to hire additional qualified personnel in the areas of sales, engineering and management. There can be no assurance that the Company will be able to hire such personnel, as the Company must compete with other companies, academic institutions, government entities and other agencies. The number of persons with experience in Gamma sterilization, E-Beam technology is limited, and as a result, competition for such personnel is intense. There can be no assurance that the Company can retain such personnel or that it can attract or retain other highly qualified personnel in the future. The loss of any of the Company's senior management, facilities managers or other key research, regulatory, technical or sales and marketing personnel, particularly if lost to competitors, or the failure of any key employee to perform well in his or her current position, could have a material adverse effect on the Company's business, financial condition and results of operations. In particular, the loss of James F. Clouser, CEO & President, could have a material adverse effect on the Company's business, financial condition and results of operations.
FINANCIAL EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company faces the risk of financial exposure to product liability claims alleging that the Company's failure to adequately perform its services resulted in adverse effects. While the Company's customers are responsible for determining the appropriate dosage of radiation their products should receive, the Company is required to certify that such dose level was achieved. There can be no assurance that the Company will not be held liable for damages that are alleged to result from improper dosing or incorrect dosage instructions received from a customer. The Company currently maintains product liability insurance with a claims limit of $5.0 million per claim and $5.0 million in the aggregate. However, there can be no assurance that the Company will avoid significant product liability claims and attendant adverse publicity. Furthermore, there can be no assurance that the Company's product liability insurance is adequate or that such insurance coverage will remain available at acceptable costs. A successful claim brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, adverse product liability actions could negatively affect market acceptance of the Company's services and the Company's ability to obtain and maintain regulatory approval for its products.
NEED FOR ADDITIONAL CAPITAL
The Company requires substantial working capital to fund its business, particularly for capital expenditures, including the construction of its facilities and acquisition of Cobalt 60. There can be no assurance that as a result of acquisitions, lower than anticipated cash flows or other unforeseen events the Company will not require additional debt or equity financing. Further, there can be no assurance that additional financing, if required, will be available to the Company on acceptable terms, if at all. If adequate funds are not available, the Company may be required to delay, scale back or eliminate its planned expansion, acquisitions or research, development and engineering programs. Accordingly, the inability to obtain or difficulty in obtaining such financing could have a material adverse effect on the Company's business, financial condition and results of operations.
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company relies on a combination of copyright and trade secret protection and nondisclosure agreements to protect its proprietary rights. In addition, the Company has a U.S. patent application pending on its MiniCell. There can be no assurance, however, that patent and copyright law and trade secret protection will be adequate to deter misappropriation of its technology, that any patents issued to the Company will not be challenged, invalidated or circumvented, that the rights granted thereunder will provide competitive advantages to the Company, or that the claims under any patent application will be allowed.
Furthermore, there can be no assurance that others will not independently develop similar processes or designs, duplicate the Company's processes or design around any patents issued to the Company. The Company may be subject to or may initiate interference proceedings in the United States Patent and Trademark Office, which can demand significant financial and management resources. The process of seeking patent protection can be time consuming and expensive and there can be no assurance that patents will be issued from currently pending or future applications or that any new patents that may be issued will be sufficient in scope or strength to provide meaningful protection or any commercial advantage to the Company.
At the end of fiscal year 1998, the Company received an inquiry from the Software Publishers Association (the "SPA") regarding an alleged failure to obtain proper licenses for certain third party software. The Company has concluded its discussions with the SPA and has settled the inquiry to the satisfaction of both parties.
The Company may in the future receive communications from third parties asserting that the Company is infringing certain patents and other intellectual property rights of others or seeking indemnification against such alleged infringement. No assurance can be given that any of these claims will not result in protracted and costly litigation, that damages for infringement will not be assessed or that should it be necessary or desirable to obtain a license relating to one or more of the Company's services or current or future technologies, the Company will be able to do so on commercially reasonable terms or at all.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated and may continue to be subject to significant fluctuations in the future. Factors such as variations in the Company's financial results, comments by securities analysts, changes in earnings estimates by securities analysts, fluctuations in the stock prices of the Company's competitors, the Company's ability to successfully sell its services in the U.S. and overseas, any loss of key management, adverse regulatory actions or decisions, evidence regarding the safety or efficacy of Gamma or E-Beam sterilization activities, announcements of extraordinary events such as litigation or acquisitions, announcements of technical innovations or changes in pricing policies by the Company or its competitors, the development of in-house sterilization capabilities by manufacturers, changing government regulations or industry standards and developments with respect to FDA, NRC or other government regulations, developments with respect to patents or other proprietary rights or public concern as to the safety of sterilization services performed by the Company, as well as changes in the market for medical products and general economic, political and market conditions, may have a significant effect on the market price of the Company's Common Stock. In addition, stock markets have experienced extreme price and volume trading volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many companies for reasons frequently unrelated or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the Company's Certificate of Incorporation may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire control of the Company. The Company's Certificate of Incorporation allows the Board of Directors to issue and determine the rights, powers and preferences of Preferred Stock without any vote or further action by the stockholders, and certain provisions of the Company's Certificate of Incorporation and Bylaws eliminate the right of stockholders to act by written consent without a meeting, and specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings. Certain provisions of Delaware law could also delay or make more difficult a merger, tender offer or proxy contest involving the Company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless certain conditions are met. The possible issuance of Preferred Stock, the procedures required for director nominations and stockholder proposals and Delaware law could have the effect of delaying, deferring or preventing a change in control of the Company, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of the Company's Common Stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock.
ITEM 2.
ITEM 2. PROPERTIES
The Company has a network of 13 Gamma facilities and one E-Beam facility currently in operation in the United States, with three new facilities under development - two in the United States and one in Thailand. Of the plants currently operating, nine of the Gamma facilities perform sterilization services primarily for the medical products market. The remaining four Gamma facilities provide services primarily to advanced applications customers. The Company processes its advanced applications products primarily in its advanced application facilities since certain medical product customers prefer that their products be segregated from advanced application products such as herbs and spices. The 13 Gamma facilities have an aggregate design capacity of 104 million curies of Cobalt 60. The Company's E-Beam facility performs sterilization and radiation processing services for the medical products market, as well as the advanced applications and materials processing markets.
The following table sets forth information regarding the Company's facilities as of March 31, 1999:
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(1) Financed through the issuance of Industrial Revenue Bonds. See-- "Risk Factors-- Substantial Debt" and Note 3 of Notes to the Consolidated Financial Statements.
(2) ISO-9002 Certified and EN46002/EN552 Certified facilities.
(3) ISO-9002 Certified and EN46002 Certified facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed for trading on the Nasdaq National Market under the symbol "STER". On March 31, 1999, there were approximately 64 holders of record of the Common Stock.
The table below sets forth the high and low sales prices per share as reported on the NASDAQ National Market System since the Company's initial public offering on August 14, 1997. The Company's initial public offering price was $12.00 per share.
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(1) Trading of the Company's Common Stock commenced on August 14, 1997.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
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(1) See Note 1 of Notes to Consolidated Financial Statements included herein for a description of the computation of pro forma basic and diluted net income per share.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception, SteriGenics International, Inc. (the "Company") has engaged primarily in the business of operating, designing and developing Gamma facilities to provide contract sterilization and radiation processing services to manufacturers of medical and advanced applications product. The Company currently operates thirteen Gamma facilities nationwide and one electron beam facilities.
On September 21, 1998, the Company announced a new MiniCell(TM) facility located in Somerset, New Jersey. While the new location represents the Company's third irradiation processing facility located in the northeast, it is the Company's first facility designed to service the region's medical device community. The facility began operations in March 1999. On October 13, 1998, the Company announced plans to construct a gamma irradiation facility in Gilroy, California. The Gilroy facility will be dedicated to servicing the Company's advanced applications market and will feature a customized material handling system and it's new (OMEGA)megaCell(TM) irradiation processing system. The (OMEGA)megaCell(TM), a continuous pallet-type irradiator, is the Company's newest irradiation design. The Company expects operations to commence by the end of the third calendar quarter of 1999. On October 30, 1998 the Company purchased land and a building in West Memphis, Arkansas. The former irradiation facility was purchased from Stericycle, Inc. (Nasdaq: SRCL). The Company is renovating the existing structure and will install the Company's MiniCell irradiation system. This facility will service the medical applications market and is expected to begin operations by the end of the fourth calendar quarter of 1999. In December 1998, the Company purchased land and a building near Laem Chabang, Thailand. The Company is building an irradiation complex that will offer both gamma and electron beam technologies. The Company expects operations to commence by the end of the second calendar quarter of 1999. While the Company expects each of these facilities to be operational as noted, there can be no assurance that there will be no unforeseen delays.
As the Company builds or expands existing facilities, the cost of construction of a facility is reflected as construction-in-progress until start-up of the facility, at which time depreciation commences. Building new facilities requires significant capital investments in building construction, equipment and, for Gamma facilities, in Cobalt 60. In addition to incurring costs associated with Cobalt 60, the Company also incurs incremental personnel costs in the months preceding initial operation, and typically incurs substantial personnel and other operating expenses during the first several months of operation. These costs have historically exceeded revenues during the initial months of operation.
As a result of their own internal procedures, customers often delay qualification and use of a new facility until it has been operational for periods of up to 12 months. As a result, historically, the Company failed to realize a portion of anticipated revenues for the facility pending such qualification. Qualification generally requires the completion of various audit procedures by a customer's quality assurance personnel. Customers' decisions on timing of qualification of new facilities are based on various issues including internal policies and procedures, work load of internal quality assurance audit personnel and the need for amendments of certain FDA approvals. Certain customers will qualify a new facility shortly after opening, while others may delay for three, six, nine or twelve months depending on various internal issues. The Company generally does not have the ability to expedite this qualification process as the decisions are made independently by the individual customers.
The Company has divided its operations into two divisions: medical and advanced applications, which includes materials processing. While the Company's primary market continues to be the sterilization of medical products, the Company continues to increase its focus on the irradiation and processing of advanced applications product and industrial materials. The Company has
dedicated four of its Gamma facilities to processing primarily advanced applications product and industrial materials. In addition, a significant portion of the Company's revenues from its E-Beam facility are generated from the processing of advanced applications product and industrial materials.
In addition to standard contract sterilization and radiation processing services, the Company continues to generate incremental revenues by offering its customers premium services such as ExCell(TM), precision dosing and validation services, and GammaSTAT(R), a guaranteed variable time-based service. Recently, the Company introduced two additional premium services, ElectroSTAT(TM), a guaranteed variable time-based service using E-Beam and SteriPro(TM), a consultative and technical assistance program created to assist medical device manufacturers with the development, validation and routine sterilization management of a sterile health care product. Revenues are recognized upon completion of the sterilization, processing or consultative services.
The Company's cost of revenues is comprised primarily of: the depreciation of Cobalt 60; facilities and equipment; direct labor costs; facilities rental; and costs associated with facility quality assurance personnel. Since Cobalt 60 represents a significant portion of the Company's cost of revenues, Cobalt 60 efficiency and utilization are key determinants of the Company's gross margin. Cobalt 60 is amortized using an accelerated method (approximately 12.3% of net book value per year), which corresponds to its natural decay rate. As the Company periodically increases its installed capacity of Cobalt 60 in existing facilities, or when it opens a new facility, it typically has excess capacity for some period of time, which can adversely affect gross margin. Correspondingly, once a facility reaches its break-even point for a given amount of Cobalt 60, there are relatively low costs associated with incremental revenues until such time as the amount of Cobalt 60 is increased. The Company's gross margin is also affected by the mix of standard services and higher margin premium services such as ExCell, GammaSTAT, ElectroSTAT and SteriPro.
RESULTS OF OPERATIONS
The following table provides a breakdown of the Company's consolidated statements of operations on a percentage of revenues basis for the periods indicated:
FISCAL YEARS ENDED MARCH 31, 1997, 1998 AND 1999
REVENUES
Revenues increased 24.7% from $37.7 million in fiscal 1997 to $47.0 million in fiscal 1998, and 16.1% to $54.5 million in fiscal 1999. The increase in revenues in fiscal 1998 is primarily due to a full year of operations for the Company's facilities in Gurnee, Illinois; Hayward, California; Salem, New Jersey; Haw River, North Carolina; and Rockaway, New Jersey, and the addition of a second Fort Worth, Texas facility during the fiscal year, as well as the addition of the Company's first E-Beam facility in San Diego, California. Salem, Haw River and Rockaway are the former RTI, Inc. facilities acquired by the Company in August 1996. The increase from fiscal 1998 to fiscal 1999 is primarily attributable to increased sales from existing facilities, resulting from a combination of increased quantity of product processed, price increases, and an increase in the sale of premium services including the Company's latest premium service offering SteriPro. In addition, the increase in fiscal 1999 is attributable to the acquisition of the San Diego E-Beam facility which contributed revenue for only the last quarter of fiscal 1998 and a full year in fiscal 1999. See -- "Business - SteriPro" and "Note to Consolidated Financial Statements - Acquisitions".
COST OF REVENUES
Cost of revenues increased from $20.4 million in fiscal 1997 to $24.2 million in fiscal 1998 and $27.5 million in fiscal 1999. Gross margin increased from 45.8% in fiscal 1997 to 48.4% in fiscal 1998 and 49.5% in fiscal 1999. The increase in gross margin in fiscal 1998 was primarily attributable to greater utilization of the Company's existing facilities which enabled the Company to leverage the fixed costs associated with such facilities, a higher percentage of revenue attributable to premium services, and the acquisition of the San Diego E-Beam facility, offset, in part, by the impact of the opening of the Hayward and Fort Worth II facilities. The increase in gross margin in fiscal 1999 was primarily attributable to greater utilization of the Company's existing facilities offset, in part, by the increase in installed Cobalt 60. The Company expects gross margin to fluctuate in future periods, and that it may be negatively impacted to the extent the Company adds facilities and continues to expand its installed capacity of Cobalt 60.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 23.7% from $6.3 million in fiscal 1997 to $7.8 million in fiscal 1998, and 11.1% to $8.7 million in fiscal 1999. The increase in absolute dollars in fiscal 1998 was attributable to increases in corporate overhead, including the additional costs of becoming a public company, as well as increased headcount at the facility level attributable to the addition of three new facilities (including the acquisition of the San Diego E-Beam facility) during the fiscal year. The increase in absolute dollars in fiscal 1999 was primarily attributable to the increase in corporate overhead, including the cost of automation and maintenance of information systems, and the addition of personnel at both the facility and corporate level. As a percentage of revenues, these expenses decreased from 16.8% to 16.7% and 16.0% in fiscal 1997, 1998 and 1999, respectively. The decrease in general and administrative expenses as a percentage of revenue from fiscal 1997 to fiscal 1998 and fiscal 1999 was primarily due to economies of scale achieved as the Company's revenues increased. The Company expects general and administrative expenses will continue to increase in absolute dollars as the Company adds facilities and corresponding plant and corporate administration.
MARKETING AND SELLING
Marketing and selling expenses increased 40.9% from $2.5 million in fiscal 1997 to $3.5 million in fiscal 1998, and 17.7% to $4.1 million in fiscal 1999. As a percentage of revenues, these expenses increased from 6.6% to 7.5% and 7.6% in fiscal 1997, 1998 and 1999, respectively. The increase in fiscal 1998 was primarily attributable to the addition of sales and marketing personnel at the corporate level in the newly organized Advanced Applications Division and, to a lesser extent, increased sales and marketing personnel at the facility level, and higher travel and advertising expenses. The increase in fiscal 1999 was primarily attributable to increased sales and marketing personnel at the facility and corporate level as well as increased travel, professional and advertising expenses. The Company expects marketing and selling expenses will continue to increase in absolute dollars and as a percentage of revenue as the Company continues to focus on revenue growth, expanding premium service offerings, and increasing market share.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses decreased 11.0% from $1.4 million in fiscal 1997 to $1.2 million in fiscal 1998, and slightly increased 4.3% to $1.3 million in fiscal 1999. The slight fluctuations in absolute dollars in fiscal years 1998 and 1999 are primarily attributable to short-term fluctuations in headcount and travel related expenditures. As a percentage of revenues, these expenses decreased from 3.7% in fiscal 1997 to 2.6% in fiscal 1998 and decreased to 2.3% in fiscal 1999. The decreases year over year are attributable to economies of scale gained as the Company's revenue increased. The Company expects research, development and engineering expenses to increase in absolute dollars as it intends to design and develop new facilities and systems, as well as increasing personnel resources in fiscal year 2000.
INTEREST INCOME
Interest income increased 143.8% from $343,000 in fiscal 1997 to $835,000 in fiscal 1998 and 122.6% to $1.9 million in fiscal 1999. The increase in fiscal 1998 is attributable to the earnings on invested proceeds from the Company's initial public offering in August 1997 and to a lesser extent, earnings on invested proceeds from the issuance of a tax-free Industrial Revenue Bond ("IRB") in July 1997. The increase in fiscal 1999 is attributable to earnings on the invested proceeds from the Company's initial and follow-on public offerings of stock, in August 1997 and February 1998. As a percentage of revenues, interest income increased from 0.9% to 1.8% and 3.4% in fiscal 1997, 1998 and 1999, respectively. The Company expects interest income to decline in both absolute dollars and as a percentage of revenue, as the funds are used for capital expenditures. See "Liquidity and Capital Resources."
INTEREST EXPENSE
Interest expense increased 6.3% from $2.2 million in fiscal 1997 to $2.3 million in fiscal 1998, and decreased 13.0% to $2.0 million in fiscal 1999. In fiscal 1998 interest expense increases were primarily due to higher levels of borrowings of tax-free IRB financing, offset by a reduction in bank financing, which was repaid during the year with a portion of the proceeds from the Company's initial public offering, and the reduction in the Company's outstanding capital lease debt. The decrease in fiscal 1999 is attributable to lower tax-free IRB financing expenses, primarily as a result of lower average interest expense and to a lesser extent to lower administration fees. As a percentage of revenue, interest expense decreased from 5.8% in fiscal 1997 to 4.9% and 3.7% in fiscal 1998 and 1999, respectively. Taxfree IRB debt carries variable interest rates, 3.0% and 3.2% at fiscal year end March 31, 1999. See "Risk Factors - Substantial Debt."
PROVISION FOR INCOME TAXES
The annual effective tax rates for 1997, 1998 and 1999 were 39.5%, 39.1% and 39.4%, respectively. The decrease in the tax rate from 1997 to 1998 is attributable to the fact that the nondeductible expenses, which remained the same year to year, had a lower impact on increased 1998 pretax income. The increase in the tax rate from 1998 to 1999 relates primarily to an increase in the federal statutory rate from 34% to 35%.
The recorded tax rates differ from the federal statutory rate primarily due to state income taxes. The Company's net deferred tax liabilities relate primarily to tax depreciation taken in excess of book depreciation. As a result of the facility in Thailand, the Company's effective tax rate could increase in future years if the Thailand operation experienced significant losses. See "Risk Factors - Risks Associated with International Expansion."
LIQUIDITY AND CAPITAL RESOURCES
In August 1997, the Company completed its initial public offering of Common Stock, raising approximately $21.4 million, net of expenses. Additionally, the Company completed a follow-on offering of Common Stock in February 1998, raising approximately $8.8 million, net of expenses. Prior to the initial and follow-on public offerings, the Company had financed its operations with cash from operations, capital leases, IRB and bank financing, and the private placement of equity securities. At March 1999, the Company had $22.8 million in cash and cash equivalents and $28.3 million in working capital.
Net cash provided by operating activities was $12.2 million, $13.3 million and $18.2 million in fiscal 1997, 1998 and 1999, respectively. Net cash provided by operating activities in fiscal 1997, fiscal 1998 and fiscal 1999 was primarily attributable to net income and depreciation.
Net cash used in investing activities was $19.1 million, $33.5 million and $5.5 million in fiscal 1997, 1998 and 1999, respectively. For fiscal years 1997 and 1998 this was primarily attributable to the purchase of property, plant and equipment (including Cobalt 60) and, for fiscal 1998, the assets acquired in the acquisition of the San Diego E-Beam facility, as well as the purchase of short term investments. For fiscal 1999, net cash used in investing activities was attributed to the purchase of property plant and equipment and to a lesser extent, the purchase of short term investments, offset to a large extent by the maturities of short term investments.
Net cash (used in) provided by financing activities was $(1.0) million, $30.8 million and $(2.6) million in fiscal 1997, 1998 and 1999, respectively. Net cash used in financing activities in fiscal 1997 was primarily attributable to repayment of a term loan and Cobalt 60 financing, offset, in part, primarily by increases in IRB financing. Net cash provided by financing activities in fiscal 1998 was primarily attributable to net proceeds of $21.4 million from the Company's initial public offering in August 1997, the net proceeds of $8.8 million from the Company's follow-on public offering in February 1998, and an increase in IRB financing, offset in part by the repayment of bank, IRB and Cobalt 60 financing, and to a lesser extent, the redemption of Preferred Stock. Net cash provided by financing activities in fiscal 1999 was primarily attributable to the early retirement of capital lease debt associated with Cobalt 60 financing, partially offset by the issuance of Common Stock under the Company's equity incentive and employee stock purchase plans.
Noncash financing activities included the acquisition of Cobalt 60 through capital leases totaling $2.5 million in fiscal year 1997 and the issuance of Common Stock, totaling $2.1 million, in connection with the acquisition of the San Diego facility in fiscal year 1998. Additionally, in 1998, noncash financing included $93,000 from income tax benefits on stock options, which also accounted for $1.4 million of noncash financing in fiscal 1999.
The Company has a $3.5 million revolving line of credit with a bank that carries a fixed interest rate (8.5% at March 31, 1999), collateralized by certain assets of the Company. The line of credit is payable on demand, and at March 31, 1998 and March 31, 1999, no amount was outstanding under this line of credit. The payment of cash dividends on the Company's Common Stock is limited by the terms of the Company's revolving line of credit.
At March 31, 1999, the Company had $36.0 million in IRB financing, which bears interest at market rates (either 3.2% or 3.0% at March 31, 1999). The IRBs are collateralized by certain assets of the Company at March 31, 1999 and by letters of credit with a bank. The Company is able to issue only $4.0 million of additional tax-free IRBs until it reaches the maximum aggregate tax-free IRB limit of $40.0 million. Thereafter, the Company will be required to obtain any additional financing through higher cost funding sources. See "Risk Factors - Substantial Debt."
The Company had capital expenditures of $18.6 million, $7.3 million and $22.6 million in fiscal 1997, 1998 and 1999, respectively. The Company currently expects to make capital expenditures of approximately $48.6 million during fiscal 2000. These expenditures will include, but are not limited to, the purchase of additional Cobalt 60, new facilities and renovations to existing facilities.
SteriGenics believes that existing cash balances, including the net proceeds of its two public offerings of Common Stock, cash expected to be generated from operations and available credit facilities will be sufficient to fund the Company's anticipated capital expenditures, operations and repayment of debt, at least through the end of the second quarter of fiscal 2000. Thereafter, the Company will utilize existing and future credit facilities. There can be no assurance that adequate sources of capital will be available in the future or, if available, will be on terms acceptable to the Company.
The Company believes that success in its industry requires substantial capital in order to maintain the flexibility to take advantage of opportunities as they may arise. The Company may, from time to time, invest in or acquire complementary businesses, products or technologies. The Company may attempt to utilize additional equity or debt financing to fund such activities. The sale of additional equity or convertible debt could result in additional dilution to the Company's stockholders.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems, and other electronic systems such as telephone and security systems, will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail.
Management has formed a committee, led by an outside Information Systems Consultant, to quantify, evaluate, recommend, and implement procedures to assess the Company's year 2000 readiness. Members of the committee are continuing the process of working with the Company's employees, as well as software and hardware vendors in order for the Company to achieve year 2000 readiness. Also, included in the committee's scope is the compliance of customers and level one suppliers. This includes written certification that these customers and suppliers and/or their products are year 2000 compliant. Level one suppliers are defined as those critical to the Company's sterilization and irradiation processes. In the third quarter of fiscal 1999, the committee increased its scope to include other significant third parties, such as telephone and security suppliers. The Committee has also initiated contingency plans for implementation in the event that the Company, its level one suppliers or significant third parties, fails to adequately address the year 2000 issue.
During the fourth quarter of fiscal 1999, the Company implemented a test plan and specification for its year 2000 readiness program ("Y2K Program"). The Y2K Program allowed the Committee to review an inventory of all of the Company's hardware and software, its level of business impact on the operations of the Company, and to implement its repair or replacement. Included in the Y2K program, the Company has completed its review of its financial reporting systems. As of March 31, 1999, it has installed or upgraded all software necessary to be year 2000 compliant. The cost to bring the financial reporting systems up to year 2000 compliance was expensed as incurred and was not material. With respect to the Company's other internal systems, and all Company hardware, a review is progressing. In addition, certain systems have been either year 2000 certified or upgraded to attain year 2000 readiness. Costs for these upgrades have been expensed as incurred and have not been material to date. Management does not anticipate that the Company will incur additional, significant operating expenses or be required to invest heavily in computer systems improvements to complete year 2000 readiness. Significant uncertainty exists concerning the potential costs and effects associated
with any year 2000 compliance. Any year 2000 compliance problem of either the Company or its suppliers or customers could materially adversely affect the Company's business, results of operations and financial condition.
ADOPTION OF NEW ACCOUNTING STANDARDS
In fiscal 1999, the Company adopted Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") and No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("FAS 131"). FAS 130 establishes rules for reporting and displaying comprehensive income. FAS 131 requires the Company to use the "management approach" in disclosing segment information. The adoption of FAS 130 or FAS 131 did not have an impact on the Company's results of operations or financial position.
In April 1999, AcSEC issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." This SOP provides guidance on the financial reporting of start-up costs and organization costs. It requires the costs of start-up activities and organization costs to be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company does not expect that the adoption of SOP No. 98-5 will have a material impact on its financial statements.
In June 1998, the Financial Accounting Standards Board issued statement No. 133 "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. Management does not anticipate that the adoption of the new Statement will have a significant effect on results of operations or the financial position of the Company.
RECENT DEVELOPMENTS
On June 10, 1999, SteriGenics entered into a Merger Agreement (the "Merger Agreement") with Ion Beam Applications, s.a. ("IBA"), a Belgian corporation, Ion Beam Applications GP, and IBA Acquisition Corp. ("Purchaser"). Under the terms of the Merger Agreement, Purchaser has commenced a tender offer (the "Offer") for all outstanding shares of the Company's Common Stock (and associated Preferred Share Purchase Rights) (the "Shares") for $27.00 per share in cash. The Offer is currently scheduled to expire at 12:00 Midnight, New York City time, on Thursday, July 15, 1999. Subject to the term of the Merger Agreement, following completion of the Offer, Purchaser will be merged into SteriGenics and all Shares not purchased in the Offer will be converted to the right to receive $27.00 per Share in cash, without interest. For additional information with respect to the Offer, see the Company's Schedule 14D-9 Solicitation/Recommendation Statement filed with the Securities and Exchange Commission on June 24, 1999.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes to interest rates and foreign currency exchange rates. A discussion of the Company's accounting policies for financial instruments and further disclosures relating to financial instruments is included in the Organization and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.
The Company monitors the risks associated with interest rates and foreign currency exchange rate risks and has established policies and business practices to protect against these and other exposures. The Company places its investments in instruments that meet high credit quality standards, as specified in the Company's investment policy guidelines; the policy also limits the amount of credit exposure to any one issue, issuer, or type of instrument and does not permit derivative financial instruments in its investment portfolio. As the result, the Company does not expect any material loss with respect to its investment portfolio.
At March 31, 1999, the Company held $22.8 million in cash and cash equivalents, $2.6 million in short-term investments, and $36.0 million in tax-free IRB debt, all of which are subject to interest rate fluctuations. Based on the amount and terms of these financial instruments, the Company believes fluctuations in interest rates would not result in a material adverse effect.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL SECTION
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
See accompanying notes.
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
See accompanying notes.
STERIGENICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
STERIGENICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
SteriGenics International, Inc. (the "Company") was incorporated in the state of California in 1978. In July 1997, the Company was reincorporated in the state of Delaware. The Company performs contract sterilization and radiation processing services using gamma radiation ("Gamma") and electron beam radiation ("E-Beam"). The Company operates 13 Gamma facilities in several states and one E-Beam facility in San Diego, California. During fiscal 1999, the Company announced plans for two additional gamma facilities in the United States and one irradiation complex in Thailand featuring Gamma and E-Beam. All three facilities are expected to commence operation by the end of calendar 1999.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, SteriGenics East Corporation, SteriGenics International Holding Corporation and RSI Leasing, Inc. SteriGenics East Corporation includes three facilities located along the eastern seaboard of the United States. SteriGenics International Holding Corporation holds investments in the Company's joint venture in Taiwan (see Note 9). In addition, SteriGenics International Holding Corporation owns SteriGenics Cayman, which owns SteriGenics Thailand Ltd. (see Note 10). RSI Leasing, Inc. leases Cobalt 60 to the Company and includes a facility located in San Diego, California. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements.
Revenue Recognition
Revenue from manufacturers is recognized upon the completion of sterilization, irradiation processing or consultative services. No customer accounted for more than 10% of revenues during fiscal years 1997, 1998 or 1999.
Advertising Costs
Advertising costs are recorded as an expense when incurred. Advertising costs were approximately $289,000, $348,000 and $227,000 for the years ended March 31, 1997, 1998 and 1999, respectively. The Company does not incur any direct response advertising costs.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value. The Company is exposed to credit risk in the event of default by the financial institutions or issuers of the investments to the extent of the amounts recorded on the balance sheet.
Short-Term Investments
The Company invests its excess cash in high-quality commercial paper with maturity less than one year. At March 31, 1999, all short-term investments are designated as available for sale. Interest and dividends on the investments are included in interest income. There were no realized gains or losses on the Company's investments during fiscal 1997, 1998 and 1999 as all investments were held to maturity during the year. At March 31, 1999, the fair value of short-term investments approximates cost.
Financial Instruments
The estimated fair values of financial instruments approximate the carrying values at March 31, 1999 and 1998 using available market information and appropriate valuation methodologies. The fair value of long-term debt is estimated using discounted cash flow analysis and the Company's current incremental borrowing rate.
Risks, Uncertainties, and Significant Concentrations
The Company's trade receivables consist principally of amounts due from its customers in the sterilization industry. The Company's trade customers are primarily in the United States. Management believes any concentration of credit risk is substantially alleviated by the Company's credit evaluation and collection practices. The Company generally requires no collateral. Bad debt experience and expenses have been insignificant.
The Company's operations are dependent on its ability to obtain Cobalt 60 isotope or an equivalent radioactive material. Cobalt 60 isotope is a controlled substance, supplied only by a limited number of vendors. If the Company is unable to obtain adequate supplies of Cobalt 60 isotope at commercially reasonable terms, its operations may be materially adversely affected.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments in cash equivalents and short-term investments. The Company uses local banks and various investment firms to invest its excess cash. The Company is exposed to credit risk in the event of default by these institutions or issuers of the investments to the extent of the amount recorded on the balance sheet.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Cobalt 60 isotope is amortized using an accelerated method (approximately 12.3% of net book value per year) which relates to the natural decay of the isotope. For all other property, plant and equipment, depreciation is computed using the straight-line method over estimated useful lives of three to thirty years. Amortization of Cobalt 60 is included with depreciation expense in the accompanying consolidated financial statements.
Construction-in-Progress
From time to time, the Company builds or expands facilities. The cost of construction of these facilities is reflected as construction-in-progress until start-up of the facility, at which time the costs are reclassified to the appropriate fixed asset category.
Goodwill
Goodwill represents the excess of the purchase price paid over the estimated fair values of tangible and intangible net assets acquired. Goodwill is amortized on a straight-line basis over the estimated useful life of the assets acquired.
Stock-Based Compensation
As permitted under Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), the Company accounts for its employee stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and will provide pro forma disclosures of net income and earnings per share as if the fair value basis method prescribed by FAS 123 had been applied in measuring employee compensation expense (see Note 4.)
Net Income Per Share
In accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), all prior period net income per share amounts have been restated to reflect basic and diluted per share amounts.
Except as noted below, basic net income per share is computed using the weighted average number of shares of Common Stock outstanding. Pro forma basic net income per share is calculated as for basic net income per share, but assumes conversion of all convertible Preferred Stock which converted automatically in the initial public offering, even if antidilutive. Diluted net income per
share includes potential common shares, when dilutive, from stock options (using the treasury stock method) and from convertible Preferred Stock (using the if-converted method).
The following table sets forth the computation of pro forma basic, basic and diluted net income per share (in thousands, except per share amounts):
Options to purchase 88,250 and 305,995 shares of Common Stock were outstanding in the years ended March 31, 1998 and 1999 respectively, but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.
Effective April 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. The Company has elected to disclose its comprehensive earnings in its statement of stockholders' equity.
The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," in fiscal 1999. Statement No. 131 supersedes Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," and establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in deciding how to allocate resources and in assessing performance. The Company has determined that under Statement No. 131, it operates in one segment of contract sterilization. The Company's customers and operations are primarily in the United States.
New Accounting Pronouncements
In April 1999, AcSEC issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." This SOP provides guidance on the financial reporting of start-up costs and organization costs. It requires the costs of start-up activities and organization costs to be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company does not expect that the adoption of SOP No.98-5 will have a material impact on its financial statements.
In June 1998, the Financial Accounting Standards Board issued statement No. 133 "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. Management does not anticipate that the adoption of the new Statement will have a significant effect on results of operations or the financial position of the Company.
2. BALANCE SHEET COMPONENTS
Property, Plant and Equipment
Property, plant and equipment consist of the following:
Other Assets
Other assets consist of the following:
Accrued Liabilities
Accrued liabilities consist of the following:
3. BORROWING ARRANGEMENTS
Long-term debt consists of:
Industrial revenue bonds are collateralized by certain assets of the Company and by letter of credit agreements with a bank. The Company is required under certain industrial revenue bond agreements to maintain cash reserves in the amount of the bond interest payments due within one year. At March 31, 1998 and 1999, there were approximately $969,000 and $1.0 million recorded, respectively, as restricted cash associated with the outstanding industrial revenue bonds.
The Company has a $3.5 million revolving line of credit with a bank, payable on demand, with a fixed interest rate of 8.5% at March 31, 1998 and 1999, collateralized by certain assets of the Company. At March 31, 1998 and 1999, no amount was outstanding under this line of credit.
Payments of principal due on long-term debt for the five-year period from March 31, 1999 and thereafter are:
Cash payments for interest in fiscal 1997, 1998 and 1999 were approximately $1,875,000, $1,664,000 and $1,444,000, respectively.
4. STOCKHOLDERS' EQUITY
Stock Option Plans
Under the 1985 Incentive Stock Option Plan and the Second Amended and Restated 1986 Stock Option Plans, the Board of Directors were able to grant options to key employees to purchase up to 1,210,000 shares of Common Stock at not less than fair value on the date of grant, as determined by the Board of Directors. The options generally vest with respect to 24% of the shares one year after the options' grant date and with respect to 2% of the shares on a monthly basis for the next 38 months. The option term is ten years, and options expire at the end of the term.
In July 1997, the stockholders approved the adoption of the 1997 Equity Incentive Plan, as amended, and the 1997 Stock Plan, under which a total of 1,025,000 shares and 175,000 shares, respectively, of the Company's authorized but unissued Common Stock have been reserved for issuance thereunder. Subsequently, the remaining available shares under the 1986 Stock Plan and the 1997 Stock Plan became available for issuance under the 1997 Equity Incentive Plan.
Activity under the option plans was as follows:
During fiscal 1996, the Company offered all optionees the right to amend the terms of their outstanding options to lower the exercise price to the then fair value of $4.90 per share, and to reset the vesting schedule. Included above are options to purchase 172,564 shares of Common Stock canceled and regranted during fiscal 1996 with the amended terms.
At March 31, 1999, options outstanding under the stock option plans were as follows:
At March 31, 1997, options to purchase 487,014 shares of Common Stock were exercisable at an average exercise price of $5.01 per share. At March 31, 1998, options to purchase 431,290 shares of Common Stock were exercisable at an average exercise price of $5.00 per share. At March 31, 1999, 543,054 shares were available for future grant under the plans.
The Company has elected to follow APB Opinion No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, when the exercise price of the Company's employee stock options equals the fair value of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by FAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of FAS 123. For options granted prior to the initial public offering, the fair value for these options was estimated at the date of grant using the minimum value option pricing method. For options granted subsequent to the initial public offering, the fair value for these options was estimated at the date of grant using the Black- Scholes option pricing model. The following weighted average assumptions were used for the years ended March 31:
The minimum value option valuation method may be used by non-public companies to value an award. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected option life. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with a method prescribed in FAS 123, the Company's net income and net income per share would have been decreased to the pro forma amounts indicated below:
The weighted average fair value of options granted in fiscal 1997, 1998 and 1999 was $1.10, $5.97 and $10.84 per share, respectively.
Because FAS 123 is applicable only to options granted subsequent to March 31, 1995, its pro forma effect will not be fully reflected until the year ending March 31, 2000. The effects of applying FAS 123 pro forma disclosures are not likely to be representative of the effects on net income for future years.
Employee Stock Purchase Plan
In June 1997, the Company adopted the 1997 Employee Stock Purchase Plan ("the Purchase Plan"). The Company has reserved 400,000 shares of Common Stock for issuance thereunder. Under the Purchase Plan, qualified employees are entitled to purchase shares through payroll deductions at 85% of the fair market value at the beginning or end of the offering period, whichever is lower. As of March 31, 1999, shares issued under the Purchase Plan totaled 120,653.
Notes Receivable from Sale of Common Stock to Employees
At March 31, 1998, the Company had notes receivable in the amount of $49,000 arising from the sale of Common Stock to employees. Such notes bear interest at 7% to 9%, are collateralized by the related stock of the Company and are due between April 1998 and August 2000. During the first quarter of fiscal 1999, repayments of $49,000 were received by the Company. At March 31, 1999, no amounts were outstanding.
5. TAXES ON INCOME
The provision for income taxes for the years ended March 31 consists of the following:
The tax benefits associated with stock options reduce taxes currently payable as shown by $93,000 and 1.4 million for 1998 and 1999, respectively. Such benefits were credited to additional paid in capital.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate (34% for 1997 and 1998, and 35% for 1999) to income before taxes as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and liabilities at March 31, 1998 and 1999 are as follows:
At March 31, 1999, the Company had federal alternative minimum tax credit carryforwards of approximately $1.1 million, which do not expire. Utilization of the carryforwards may be subject to an annual limitation due to the ownership change limitations provided the by the Internal Revenue Code of 1986 and similar state provisions.
Cash payments made for income taxes, net of refunds received, were $805,000, $1.7 million and $1.8 million during fiscal 1997, 1998 and 1999, respectively.
6. EMPLOYEE BENEFIT PLAN
Effective February 1, 1990, the Company established a defined contribution retirement plan, the SteriGenics 401(k) plan, which covers all employees, age 21 or older, with at least six months of service. Employees may make contributions by a percentage reduction in their salaries of up to a statutory limit of $10,000 for calendar year 1999. Company contributions consist of matching funds equal to 50% of the first 5% of employee eligible earnings contributed, as well as discretionary profit sharing amounts. Effective April 1, 1996, the Company increased the matching contribution percentage from 25% to 50%. Company contributions were $122,000, $176,000 and $204,000 for fiscal 1997, 1998 and 1999, respectively. Administrative expenses related to the plan are not significant.
7. COMMITMENTS AND CONTINGENCIES
The Company leases a portion of its Cobalt 60 isotope under capital leases having terms of 15 years. The Company paid off substantially all of its capital lease debt in the third fiscal quarter of fiscal 1999. Assets acquired by the Company under such lease arrangements are included on the consolidated balance sheet as follows:
The Company leases certain facilities and a portion of its Cobalt 60 isotope under noncancelable operating leases. At March 31, 1999, future minimum lease payments under operating leases and capital leases are as follows (including approximately $487,000 under operating leases, at then current exchange rates, payable in Canadian dollars):
In conjunction with the RTI, Inc. ("RTI") Asset Acquisition Agreement (See Note 10) the Company leases a facility in Rockaway, New Jersey and is required by the New Jersey Department of Environmental Protection ("NJDEP") to maintain a standby letter of credit in the amount of $500,000, contingent upon the continued environmental clean up efforts required of the property owners, RTI. The required amount of the letter of credit decreases over the life of the building lease, and/or as the NJDEP deems required.
Additionally, RTI has the option to require the Company to purchase the Rockaway land and buildings on the sixth anniversary of the lease commencement date for a purchase price equal to $138,376. RTI may only exercise the option upon receipt of proof that environmental remediation of the property was complete to the extent that the Company would not have any material liability for further environmental remediation and the property has been removed from the national priorities list.
In the normal course of the Company's operations, it is subject to various claims and litigation, the outcomes of which, in the opinion of management, will not have a material adverse effect on the Company's financial position or results of operations.
Total rent expense for fiscal 1997, 1998 and 1999 was $1.3 million, $1.2 million and $1.2 million, respectively.
8. TRANSACTIONS WITH RELATED PARTIES AND MINORITY STOCKHOLDERS
In June 1997, the Company entered into operating leases with one of its Directors on the two sterilization facilities previously rented on a month to month basis. The leases have 60 month terms, which expire in June 2002 with annual rent expense of approximately $419,000.
Rent expense attributable to these related party leases was approximately $472,000 in the fiscal year ended March 31, 1997, and $407,000 in fiscal 1998 and $653,000 in fiscal 1999. The Company also leases one facility and its corporate offices from a publicly traded real estate investment trust of which one of its Directors is a minority shareholder, but is neither a director nor an officer.
Included in costs and expenses are approximately $2.1 million, $1.2 million and $1.3 million for fiscal 1997, 1998 and 1999, respectively, relating to payments to a minority stockholder for administrative, maintenance and engineering services.
9. INVESTMENTS IN JOINT VENTURES
In January 1997, the Company sold the majority of its holdings in a joint venture in a sterilization facility in Taiwan for $1.3 million. This investment was accounted for under the equity method. No gain or loss was recorded related to this transaction. The carrying value of the remaining investment was $1,000 at March 31, 1998 and 1999.
10. ACQUISITIONS
On February 26, 1996, the Company, through its subsidiary SteriGenics East Corporation, entered into an agreement to acquire certain assets and liabilities of RTI, Inc., a New York corporation, and its subsidiaries that operated three irradiation facilities along the eastern seaboard of the United States. At March 31, 1996, the Company had an initial investment of $236,000 in RTI. The acquisition was finalized in August 1996 with a net purchase price of approximately $4,872,000, and was accounted for as a purchase. The initial investment was applied toward the purchase price upon completion of the acquisition. The consolidated statements of operations include the results of operations of RTI subsequent to the acquisition date. The Company recorded approximately $580,000 of goodwill which is being amortized over a fifteen-year period. Accumulated amortization of goodwill, related to this acquisition, was approximately $58,000 at March 31, 1998.
On December 31, 1997, the Company acquired certain assets of the Nicolet Electron Services Division of ThermoSpectra Corporation ("Nicolet") for a net purchase price of approximately $7 million, $5 million in cash and 109,307 shares of the Company's Common Stock valued at approximately $2 million. The consolidated statements of operations include the results of operations of Nicolet from the date of acquisition. The Company recorded approximately $3.8 million of goodwill in connection with the acquisition, which is being amortized over a twenty-year period. Accumulated amortization of goodwill, related to this acquisition, was approximately $47,000 and $186,000 at March 31, 1998 and March 31, 1999, respectively. Under the asset acquisition agreement, ThermoSpectra Corporation may under certain circumstances be entitled to receive up to an additional 21,861 shares of Common Stock of the Company.
The following unaudited pro forma summary represents the Company's consolidated results of operations for the periods presented on the following basis: (i) as if the acquisition of RTI had occurred on April 1, 1995 and is therefore included in all periods presented and (ii) as if the acquisition of Nicolet had occurred on April 1, 1996 and is therefore included in the year ended March 31, 1998 and 1997. Such pro forma results do not purport to be indicative of what would have occurred had the acquisitions been made as of those dates or the results which may occur in the future.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's quarterly results of operations for the years ended March 31, 1998 and 1999 (in thousands, except per share amounts).
12. SUBSEQUENT EVENTS (UNAUDITED)
The following events occurred subsequent to March 31, 1999.
On May 5, 1999, the Company announced the expansion of its electron beam processing network through the addition of the Gaithersburg, Maryland facility of Irradiation Industries, Inc., a privately held company. In conjunction with this transaction, SteriGenics has purchased a Rhodotron(R) - the high powered electron beam accelerator designed and developed by Ion Beam Applications s.a. ("IBA")- and plans to futher expand its electron beam operation to include the construction of a new facility.
On June 10, 1999, SteriGenics entered into a Merger Agreement (the "Merger Agreement") with IBA, a Belgian corporation, Ion Beam Applications GP, and IBA Acquisition Corp. ("Purchaser"). Under the terms of the Merger Agreement, Purchaser has commenced a tender offer (the "Offer") for all outstanding shares of the Company's Common Stock (and the associated Preferred Share Purchase Rights) (the "Shares") for $27.00 per share in cash. The Offer is currently scheduled to expire at 12:00 Midnight, New York City time, on Thursday, July 15, 1999. Subject to the terms of the Merger Agreement, following completion of the Offer, Purchaser will be merged into SteriGenics and all Shares not purchased in the Offer will be converted into the right to receive $27.00 per Share in cash, without interest. For additional information with respect to the Offer, see the Company's Schedule 14D-9 Solicitation/Recommendation Statement filed with the Securities and Exchange Commission on June 24, 1999.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders SteriGenics International, Inc.
We have audited the accompanying consolidated balance sheets of SteriGenics International, Inc. as of March 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1999. Our audits also included the financial statement schedule listed in index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SteriGenics International, Inc. at March 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements take as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California April 30, 1999
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of June 30, 1999 are as follows:
- ----------
(1) Member of Audit Committee and Compensation Committee.
All directors hold office until the next annual meeting of the stockholders and until their successors have been duly elected and qualified. Officers are elected by and serve at the direction of the Board of Directors. There are no family relationships among the directors or officers of the Company.
James F. Clouser joined SteriGenics in June 1988 as President and Chief Executive Officer. In June 1999, Mr. Clouser was appointed Chairman of the Board by the Company's Board of Directors. Previously, from 1984 to 1988 he served as Chief Operating Officer of Attain, Inc., a high technology start-up manufacturer of automatic test equipment for semiconductor devices. Mr. Clouser has a Bachelor of Science degree in Electrical Engineering from Pennsylvania State University, a Masters of Business Administration degree in Finance from Wayne State University, and a Masters of Science degree in Accounting from Rochester Institute of Technology.
David E. Meyer joined SteriGenics in November 1989 as General Manager of the Schaumburg facility and in May 1991 was promoted to Senior Vice President of Operations. In July 1997, Mr. Meyer was promoted to President of Medical Sterilization Division. From 1976 to 1989, Mr. Meyer held various positions with the Barber-Greene Company, a producer of road construction equipment, most recently that of Manufacturing Manager. Mr. Meyer has a Bachelor of Science degree in Business Administration from Valparaiso University and a Masters of Science degree in Management from Aurora University.
D. Patterson Adams joined SteriGenics in January 1998 as Vice President and General Manager of the Advanced Applications Division, and in July 1998 was promoted to division President. Prior to joining SteriGenics, Mr. Adams served as a consultant to health care providers and medical manufacturers as President of VestCorp, an investment holding company, from July 1995 to January 1998. Mr. Adams served as Chief Operating Officer of Progressive Capital Investment Corporation from July 1993 to June 1995. From June 1988 to June 1993, Mr. Adams was Vice President of EtO Operations for Isomedix, Inc. Mr. Adams earned his Bachelor of Science Degree in Biology from the University of Memphis.
Eric W. Beers joined SteriGenics in February 1994 as Senior Vice President of Engineering. Prior to joining SteriGenics and since 1980, Mr. Beers held several engineering and managerial positions with Nordion, a supplier of Cobalt 60 and irradiation equipment, the most recent of which was as Manager of the Industrial Irradiation Engineering Department. Mr. Beers has a degree in
Mechanical/Aeronautical Engineering from Carleton University in Canada and is a Member of the Association of Professional Engineers of Ontario, Canada.
Carole-Lynn S. Glass joined SteriGenics in February 1996 as Company Controller. In July 1997, Ms. Glass was promoted to Director of Finance and in July 1998, and was appointed Assistant Secretary by the Board of Directors. In June 1999, Ms. Glass was promoted to Vice President of Finance and Administration and Chief Financial Officer. From 1994 to 1996, Ms. Glass was the Corporate Controller of 3Soft Corporation, an intellectual properties company servicing the semiconductor industry. Ms. Glass also held various positions from 1985 to 1994, at Esprit/ADI Systems, Inc., a computer peripheral manufacturer, the most recent being Corporate Controller. Ms. Glass has a Bachelor of Science degree in Accounting from State University of New York at Fredonia.
Donald A. Currie joined SteriGenics in March 1991 as General Manager of the Westerville facility. In August 1994, Mr. Currie became Director of Operations overseeing the Westerville and Schaumburg facilities and was promoted to Vice President of Operations, Advanced Applications in November 1996. In January 1998, Mr. Currie became Vice President of Operations, Eastern Region for the Company's Medical Sterilization Division. Mr. Currie has a Bachelor of Arts degree in Materials and Operations Management from Michigan State University.
Eugene C. Davis joined SteriGenics in April 1994 as Vice President of Quality Assurance and Regulatory Affairs. In January 1996, he became Vice President of Sales and Marketing, and in July 1997, he became the Vice President of Operations, Western Region for the Company's Medical Sterilization Division. From 1979 to 1993 Mr. Davis held various positions with the Opthalmic Surgical Products Division of Optical Radiation Corporation, an opthalmic surgical products company, the most recent of which was Vice President of Quality Assurance. Mr. Davis has a Bachelor of Arts degree from California State Polytechnic University at Pomona.
Lisa C. Foster joined SteriGenics in January 1989 as Quality Assurance Manager at the Decatur facility. In February 1990, Ms. Foster transferred to the Schaumburg facility as Quality Assurance Manager. Later that year she joined the Corporate staff, assuming the responsibility of Corporate Quality Assurance Manager. In April 1992, Ms. Foster was promoted to Director of Corporate Quality Assurance and in June 1997 was promoted to Vice President of Quality Assurance. Ms. Foster has a Bachelor of Science degree in Food and Nutrition from Mississippi University for Women and a Masters of Science degree in Food Chemistry from Mississippi State University.
Charles W. King, Jr., a founder of the Company and Chairman of the Board of SteriGenics from its inception to June 1999, at which time he became a director of the Company. Mr. King is a private investor and real estate developer and has been a Managing Partner in Charles King & Associates since 1965.
Barrick L. Prince became a director of the Company in October 1998. Mr. Prince has owned and operated a multi-million dollar trucking company in Northern California since 1989. From 1979 to 1989 Mr. Prince held several Vice Presidential titles at the Matson Navigation Company, a major steamship company. Mr. Prince is a co-founder of The Leadership Network, an organization for business leaders, and currently serves as a member of the Board of Directors for Goodwill Industries of the Greater East Bay.
James R. Yarter became a director of the Company in January 1998. Mr. Yarter has been a consultant to medical device manufacturers since April 1996. From October 1995 to April 1996, Mr. Yarter served as President and Chief Executive Officer of U.S. Medical, a medical device company. From February 1994 to October 1995, Mr. Yarter was President and Chief Executive Officer of BLOCK Medical, a medical device company. Mr. Yarter provided private consulting services to medical device manufacturers from 1990 to February 1994. Previously, Mr. Yarter served as a corporate officer at C.R. Bard, a medical equipment and supplies manufacturer.
Frederick J. Ruegsegger became a director of the Company in July 1998. Mr. Ruegsegger has been the Senior Vice President, Finance and Corporate Development and Chief Financial Officer of AXYS Pharmaceuticals, Inc. since January 1998. Prior to that he served as Vice President, Finance and Administration and Chief Financial Officer of Arris Pharmaceutical Corporation from December 1996 until January 1998. From 1993 to 1996, he was President and Chief Executive Officer of EyeSys Technologies, Inc., a medical instrument and software company. Mr. Ruegsegger received a B.S. degree in Economics from the University of Illinois and a Master of Management from Northwestern University's Kellogg Graduate School of Management.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") is incorporated herein by reference from the section entitled "Compliance with Section 16(a) of the Exchange Act" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act in connection with the registrant's Annual
Meeting of Stockholders to be held on September 15, 1999 (the "Proxy Statement"). The Proxy Statement is anticipated to be filed within 120 days after the end of the registrant's fiscal year ended March 31, 1999.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by reference from the section entitled "Executive Compensation and Related Information" of the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from the section entitled "Stock Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is incorporated herein by reference from the section entitled "Certain Relationships and Related Transactions" of the Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
2.1**** Merger Agreement dated as of June 10, 1999, by and among Ion Beam Applications s.a., Ion Beam Applications GP, IBA Acquisition Corp. and the Registrant
3.1++ Certificate of Incorporation of the Registrant, as amended to date.
3.3++ Bylaws of the Registrant. 4.1++ Reference is made to Exhibits 3.1 and 3.3.
4.2++ Specimen Common Stock certificate.
4.3++ Investors' Rights Agreement, dated September 20, 1993 among the Registrant and the investors and the founders named therein.
4.4* Registration Rights Agreement, dated December 31, 1997 among the Registrant and ThermoSpectra Corporation.
4.5***** Stockholders' Agreement dated as of June 10, 1999 among Ion Beam Applications s.a., Ion Beam Applications GP, IBA Acquisition Corp. and certain stockholders of the Registrant listed on Schedule I thereto.
10.1++ Form of Indemnification Agreement.
10.2++ Second Amended and Restated 1986 Stock Option Plan.
10.3++ 1997 Equity Incentive Plan.
10.4++ 1997 Employee Stock Purchase Plan.
10.5++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Loan Agreement.
10.6++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Loan Agreement.
10.7++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Trust Indenture Agreement.
10.8++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Trust Indenture Agreement.
10.9++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond -- Bond Purchase Agreement.
10.10++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Reimbursement Agreement.
10.11++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Reimbursement Agreement.
10.12++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Letter of Credit.
10.13++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Letter of Credit.
10.14++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Intercreditor Agreement.
10.15++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Intercreditor Agreement.
10.16++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Pledge and Security Agreement.
10.17++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Pledge and Security Agreement.
10.18++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond -- General Continuing Guarantee.
10.19++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond -- Company Security Agreement.
10.20++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond -- Guaranty Security Agreement.
10.21++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- Loan Agreement.
10.22++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- Trust Agreement.
10.23++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- Letter of Credit Agreement.
10.24++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- General Continuing Guaranty.
10.25++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- Pledge and Security Agreement.
10.26++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- Bond Purchase Agreement.
10.27++ Mecklenburg County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Indenture of Trust.
10.28++ Mecklenburg County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Loan Agreement.
10.29++ Mecklenburg County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Reimbursement Agreement.
10.30++ Mecklenburg County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Letter of Credit Agreement.
10.31++ Mecklenburg County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Pledge and Security Agreement.
10.33++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Bond Purchase Agreement.
10.34++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Loan Agreement.
10.35++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Trust Indenture.
10.36++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Letter of Credit Agreement.
10.37++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Pledge and Security Agreement.
10.38++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Letter of Credit.
10.39++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Security Agreement.
10.40++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Agreement Re: Letter of Credit and Assignment of Collateral.
10.41++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Loan Agreement.
10.42++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Indenture of Trust.
10.43++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Reimbursement Agreement.
10.44++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Letter of Credit.
10.45++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Intercreditor Agreement.
10.46++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Pledge and Security Agreement.
10.47++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Placement and Remarketing Agreement.
10.48++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Bond Purchase Agreement.
10.50++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Letter of Credit Agreement.
10.51++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Pledge and Security Agreement.
10.53++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Trust Indenture.
10.54++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Sublease and Security Agreement.
10.55++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Irrevocable Letter of Credit.
10.56++ Facility lease dated February 8, 1993 between SCI Lt. Partnership and the Registrant for the Fremont corporate facility.
10.57++ Facility lease dated June 25, 1997 between Charles King & Associates and the Registrant for the Tustin facility.
10.58++ Facility lease dated June 25, 1997 between Charles King & Associates and the Registrant for the Schaumburg facility.
10.59++ Facility lease dated December 2, 1991 between Galloway Industrial Properties and the Registrant for the Westerville warehouse facility.
10.60++ Facility lease dated February 8, 1993 between Aetna Investment Group and the Registrant for the Corona facility.
10.61++ Facility lease dated August 16, 1996 between SCI Ltd. Partnership and the Registrant for the Hayward facility.
10.62++ Facility lease dated August 8, 1996 between RTI Inc. and the Registrant for the Rockaway facility.
10.63++ Asset Acquisition Agreement between RTI Inc. and the Registrant effective as of August 8, 1996.
10.64** Asset Acquisition Agreement between RSI Leasing, Inc., ThermoSpectra Corporation and the Registrant dated December 27, 1997.
10.65*** Facility lease dated June 4,1998 between Maurice M. Weill, Trustee Under Trust Indenture Dated December 1, 1972 and the Registrant for a building.
21.1++ Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors
27.1 Financial Data Schedule.
- ----------
++ Incorporated by reference from the exhibit of the same number in the Registrant's Registration Statement on Form S-1 (Registration No. 333-30047) as filed with the SEC on June 24, 1997.
* Incorporated by reference from Exhibit 4.1 of the Registrant's SEC Filing on Form 8-K as filed with the SEC on January 14, 1998.
** Incorporated by reference from Exhibit 2.1 of the Registrant's SEC filing on Form 8-K as filed with the SEC on January 14, 1998.
*** Incorporated by reference from the exhibit of the same number in the Registrant's SEC filing on Form 10-Q as filed with the SEC on August 7, 1998.
**** Incorporated by reference from Exhibit (c)(1) of the Registrant's SEC filing on Schedule 14D-9 as filed with the SEC on June 24, 1999.
***** Incorporated by reference from Exhibit (c)(2) of the Registrant's SEC filing on Schedule 14D-9 as filed with the SEC on June 24, 1999.
(b) Reports on Form 8-K
On April 7, 1999 the Company filed a Report on Form 8-K with the Securities and Exchange Commission relating to the March 31, 1999 declaration of a dividend of Preferred Share Purchase Rights. The Company did not file any financial statements in connection with such filing.
On June 16, 1999 the Company filed a Report on Form 8-K with the Securities and Exchange Commission relating to the June 10, 1999, difinitive Merger Agreement with Ion Beam Applications s.a., Ion Beam Applications GP, IBA Acquisition Corp. (collectively referred to as "IBA"). The Company has filed a Schedule 14D-9 in connection with such filing.
(c) Exhibits
See (a)(3) above.
(d) Valuation and Qualifying Accounts Years Ended March 31, 1997, 1998 and 1999. Schedule II.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STERIGENICS INTERNATIONAL, INC.
By: /s/ JAMES F. CLOUSER ---------------------------------------------- James F. Clouser President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
Date: June 29, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
Date: June 29, 1999 By: /s/ JAMES F. CLOUSER ---------------------------------------- James F. Clouser President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
Date: June 29, 1999 By: /s/ CAROLE-LYNN S. GLASS ------------------------------------------ Carole-Lynn S. Glass Vice President Finance and Administration and Chief Financial Officer (Principal Financial Officer)
Date: June 29, 1999 By: /s/ CHARLES W. KING ---------------------------------------- Charles W. King, Jr. Director
Date: June 29, 1999 By: /s/ BARRICK L. PRINCE ----------------------------------------- Barrick L. Prince Director
Date: June 29, 1999 By: ---------------------------------------- James R. Yarter Director
Date: June 29, 1999 By: /s/ FREDERICK J. RUEGSEGGER -------------------------------------------- Frederick J. Ruegsegger Director
STERIGENICS INTERNATIONAL, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS MARCH 31, 1999 (IN THOUSANDS)
- ----------
(1) Uncollectible accounts written off, net of recoveries.
INDEX TO EXHIBITS
Number Description - ------ ----------- 2.1**** Merger Agreement dated as of June 10, 1999, by and among Ion Beam Applications s.a., Ion Beam Applications GP, IBA Acquisition Corp. and the Registrant
3.1++ Certificate of Incorporation of the Registrant, as amended to date.
3.3++ Bylaws of the Registrant. 4.1++ Reference is made to Exhibits 3.1 and 3.3.
4.2++ Specimen Common Stock certificate.
4.3++ Investors' Rights Agreement, dated September 20, 1993 among the Registrant and the investors and the founders named therein.
4.4* Registration Rights Agreement, dated December 31, 1997 among the Registrant and ThermoSpectra Corporation.
4.5***** Stockholders' Agreement dated as of June 10, 1999 among Ion Beam Applications s.a., Ion Beam Applications GP, IBA Acquisition Corp. and certain stockholders of the Registrant listed on Schedule I thereto.
10.1++ Form of Indemnification Agreement.
10.2++ Second Amended and Restated 1986 Stock Option Plan.
10.3++ 1997 Equity Incentive Plan.
10.4++ 1997 Employee Stock Purchase Plan.
10.5++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Loan Agreement.
10.6++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Loan Agreement.
10.7++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Trust Indenture Agreement.
10.8++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Trust Indenture Agreement.
10.9++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond -- Bond Purchase Agreement.
10.10++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Reimbursement Agreement.
10.11++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Reimbursement Agreement.
10.12++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Letter of Credit.
10.13++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Letter of Credit.
10.14++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Intercreditor Agreement.
10.15++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Intercreditor Agreement.
10.16++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985A ($2,150,000) -- Pledge and Security Agreement.
10.17++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond Series 1985B ($2,450,000) -- Pledge and Security Agreement.
10.18++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond -- General Continuing Guarantee.
10.19++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond -- Company Security Agreement.
10.20++ Trinity River Industrial Development Authority Variable Rate Demand Industrial Development Revenue Bond -- Guaranty Security Agreement.
10.21++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- Loan Agreement.
10.22++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- Trust Agreement.
10.23++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- Letter of Credit Agreement.
10.24++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- General Continuing Guaranty.
10.25++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- Pledge and Security Agreement.
10.26++ County of Delaware, Ohio Variable Rate Demand Industrial Development Revenue Bonds ($4,900,000) -- Bond Purchase Agreement.
10.27++ Mecklenburg County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Indenture of Trust.
10.28++ Mecklenburg County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Loan Agreement.
10.29++ Mecklenburg County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Reimbursement Agreement.
10.30++ Mecklenburg County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Letter of Credit Agreement.
10.31++ Mecklenburg County Industrial Facilities and Pollution Control Financing Authority Industrial Development Revenue Bonds Series 1996 ($9,000,000) -- Pledge and Security Agreement.
10.33++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Bond Purchase Agreement.
10.34++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Loan Agreement.
10.35++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Trust Indenture.
10.36++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Letter of Credit Agreement.
10.37++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Pledge and Security Agreement.
10.38++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Letter of Credit.
10.39++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Security Agreement.
10.40++ Development Authority of DeKalb County Variable Rate Demand Industrial Development Revenue Bonds, Series 1985 ($5,250,000) -- Agreement Re: Letter of Credit and Assignment of Collateral.
10.41++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Loan Agreement.
10.42++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Indenture of Trust.
10.43++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Reimbursement Agreement.
10.44++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Letter of Credit.
10.45++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Intercreditor Agreement.
10.46++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Pledge and Security Agreement.
10.47++ Village of Gurnee, Illinois Industrial Development Revenue Bonds, Series 1996 ($7,750,000) -- Placement and Remarketing Agreement.
10.48++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Bond Purchase Agreement.
10.50++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Letter of Credit Agreement.
10.51++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Pledge and Security Agreement.
10.53++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Trust Indenture.
10.54++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Sublease and Security Agreement.
10.55++ City of Salem Municipal Port Authority, Port Development Revenue Bonds, Series of 1984 ($2,500,000) -- Irrevocable Letter of Credit.
10.56++ Facility lease dated February 8, 1993 between SCI Lt. Partnership and the Registrant for the Fremont corporate facility.
10.57++ Facility lease dated June 25, 1997 between Charles King & Associates and the Registrant for the Tustin facility.
10.58++ Facility lease dated June 25, 1997 between Charles King & Associates and the Registrant for the Schaumburg facility.
10.59++ Facility lease dated December 2, 1991 between Galloway Industrial Properties and the Registrant for the Westerville warehouse facility.
10.60++ Facility lease dated February 8, 1993 between Aetna Investment Group and the Registrant for the Corona facility.
10.61++ Facility lease dated August 16, 1996 between SCI Ltd. Partnership and the Registrant for the Hayward facility.
10.62++ Facility lease dated August 8, 1996 between RTI Inc. and the Registrant for the Rockaway facility.
10.63++ Asset Acquisition Agreement between RTI Inc. and the Registrant effective as of August 8, 1996.
10.64** Asset Acquisition Agreement between RSI Leasing, Inc., ThermoSpectra Corporation and the Registrant dated December 27, 1997.
10.65*** Facility lease dated June 4,1998 between Maurice M. Weill, Trustee Under Trust Indenture Dated December 1, 1972 and the Registrant for a building.
21.1++ Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors
27.1 Financial Data Schedule.
- ----------
++ Incorporated by reference from the exhibit of the same number in the Registrant's Registration Statement on Form S-1 (Registration No. 333-30047) as filed with the SEC on June 24, 1997.
* Incorporated by reference from Exhibit 4.1 of the Registrant's SEC Filing on Form 8-K as filed with the SEC on January 14, 1998.
** Incorporated by reference from Exhibit 2.1 of the Registrant's SEC filing on Form 8-K as filed with the SEC on January 14, 1998.
*** Incorporated by reference from the exhibit of the same number in the Registrant's SEC filing on Form 10-Q as filed with the SEC on August 7, 1998.
**** Incorporated by reference from Exhibit (c)(1) of the Registrant's SEC filing on Schedule 14D-9 as filed with the SEC on June 24, 1999.
***** Incorporated by reference from Exhibit (c)(2) of the Registrant's SEC filing on Schedule 14D-9 as filed with the SEC on June 24, 1999.