Annual Report
Table of Contents

 

United States Securities and Exchange Commission

Washington, D.C. 20549

 


 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended March 31, 2005

 

Commission file number 1-14643

 

 

STERIS Corporation

(Exact name of registrant as specified in its charter)

 

 

Ohio   34-1482024

(State or other jurisdiction of

incorporation or organization)

  (IRS Employer Identification No.)
5960 Heisley Road   440-354-2600

Mentor, Ohio 44060-1834

(Address of principal

executive offices)

 

(Registrant’s telephone number

including area code)

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

 

Title of each class   Name of Exchange on Which Registered
Common Shares, without par value   New York Stock Exchange

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

None

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of such stock as of September 30, 2004: $1,507,864,127

 

The number of common shares outstanding as of May 31, 2005: 69,165,165

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the 2005 Annual Meeting – Part III


Table of Contents

 

TABLE OF CONTENTS

 

          Page
     PART I     
Item 1   

Business

   1
    

General Development of Business

   1
    

Information Related to Business Segments

   2
    

Information with Respect to STERIS’s Business in General

   5
Item 2   

Properties

   9
Item 3   

Legal Proceedings

   10
Item 4   

Submission of Matters to a Vote of Security Holders

   10
     PART II     
Item 5   

Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities

   13
Item 6   

Selected Financial Data

   14
Item 7   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   15
    

Financial Measures

   15
    

Revenues-Defined

   16
    

General Company Overview and Outlook

   16
    

Matters Affecting Comparability

   17
    

Results of Operations

   17
    

Liquidity and Capital Resources

   28
    

Capital Expenditures

   31
    

Contractual and Commercial Commitments

   32
    

Critical Accounting Policies, Estimates, and Assumptions

   33
    

Recently Issued Accounting Standards Impacting the Company

   38
    

Inflation

   38
    

Forward-Looking Statements

   38
Item 7A   

Quantitative and Qualitative Disclosures About Market Risk

   39
    

Interest Rate Risk

   39
    

Foreign Currency Risk

   39
    

Commodity Risk

   39
Item 8   

Financial Statements and Supplementary Data

   40
Item 9   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   76
Item 9A   

Controls and Procedures

   77
Item 9B   

Other Information

   78
     PART III     
Item 10   

Directors and Executive Officers of the Registrant

   79
Item 11   

Executive Compensation

   79
Item 12   

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

   79
Item 13   

Certain Relationships and Related Transactions

   79
Item 14   

Principal Accountant Fees and Services

   79
     PART IV     
Item 15   

Exhibits and Financial Statement Schedule

   80
    

Signatures

    


Table of Contents

 

PART I

 

Item 1. Business

 

GENERAL DEVELOPMENT OF BUSINESS

 

Throughout this document, references to “STERIS Corporation,” “STERIS,” or the “Company,” are references to STERIS Corporation and its subsidiaries, except where the context makes it clear the reference is to STERIS Corporation itself and not its subsidiaries. The Company’s fiscal year ends on March 31. References to a particular “year” or “year-end” refer to the Company’s fiscal year.

 

DESCRIPTION OF BUSINESS

 

STERIS Corporation, an Ohio corporation organized in 1987, develops, manufactures, and markets infection prevention, contamination control, microbial reduction, and surgical and critical care support products and services for healthcare, pharmaceutical, scientific, research, industrial, and governmental customers throughout the world. The Company operates in three business segments: Healthcare, Life Sciences, and STERIS Isomedix Services (“Isomedix”).

 

RECENT EVENTS

 

Fiscal 2005 Acquisitions.  During fiscal 2005, the Company completed three strategic acquisitions that expanded its breadth of product and service offerings and global reach.

 

During the fourth quarter of fiscal 2005, the Company completed the acquisition of FHSurgical; a privately-held manufacturer of surgical tables with manufacturing facilities located in Orleans, France. The acquisition expanded the Company’s European distribution channel and enhanced the Company’s offerings of surgical tables. The acquired business is being integrated into the Company’s Healthcare segment.

 

During the fourth quarter of fiscal 2005, the Company completed the acquisition of certain assets of Cosmed Group, Inc. (“Cosmed”); a privately-held contract sterilization service provider with corporate offices located in Jamestown, Rhode Island. As a result of this transaction, five additional Ethylene Oxide processing facilities were added to the Company’s existing network of locations. The acquired Cosmed assets have been integrated into the Company’s Isomedix Services segment.

 

During the second quarter of fiscal 2005, the Company completed the acquisition of Albert Browne Limited and its subsidiaries (“Browne”); a privately-held manufacturer of chemical indicators, headquartered in Leicester, England. This acquisition provided the Company with an established European distribution channel and expanded the Company’s offerings of consumable products which are used with its broad line of infection control, sterilization, and decontamination capital equipment. The acquired business has been integrated into the Company’s Healthcare segment.

 

Fiscal 2004 Acquisitions.  During the first quarter of fiscal 2004, the Company completed the acquisition of Hamo Holding AG (“Hamo”); a privately-held manufacturer of washing/decontamination systems, with corporate offices located in Pieterlen, Switzerland. The acquisition provided the Company with a stronger European presence and the ability to offer a wider range of sterile processing solutions to customers worldwide. Hamo has been integrated into the Company’s Life Sciences and Healthcare segments.

 

During the first quarter of fiscal 2004, the Company completed the acquisition of certain assets related to the sterilization container business from Sterion Incorporated (“Sterion”). This acquisition complemented the Company’s existing sterile processing, storage, and related business. The acquired Sterion assets have been integrated into the Company’s Healthcare segment.

 

Results of operations for acquisitions for both years are included in the Consolidated Statements of Income from the date of acquisition. Further information regarding recent acquisitions is included in Note 2 to the Company’s consolidated financial statements, “Business Acquisitions.”

 

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Life Sciences Renewed Strategic Focus.  During the fourth quarter of fiscal 2005, the Company announced that it had completed a detailed analysis of its customers’ needs in the Life Sciences segment and identified several steps to reshape the segment’s product portfolio and improve profitability. As a first step of this strategy, the Company announced the sale of its Detach business (automated cleaning systems for comparative medicine). The sale of this business did not have a material impact on the Company’s financial position, results of operations, or cash flows. In addition, during the fourth quarter of fiscal 2005, the Company announced that it is exploring the sale of its lyophilizer (freeze dryer), pure steam generator, and water still product lines, which account for approximately 30% of Life Sciences segment revenues. These strategic steps will enable the Company to dedicate more management resources to further develop its core sterilization, washing, and decontamination product offerings to the pharmaceutical, biopharmaceutical, governmental, and research markets.

 

INFORMATION RELATED TO BUSINESS SEGMENTS

 

GENERAL SEGMENT INFORMATION

 

Effective April 1, 2003, the Company realigned operations into three business segments: Healthcare, Life Sciences, and STERIS Isomedix Services. Segment information for years prior to April 1, 2003 has been reclassified to conform to the current segment structure. In the sections that follow, the Company has presented detailed information regarding these business segments.

 

Additional information regarding segment performance for each of the three years in the period ending March 31, 2005 is presented in Note 11 to the Company’s consolidated financial statements, “Business Segment Information,” and in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”).

 

HEALTHCARE SEGMENT

 

Description of Business.  The Company’s Healthcare segment offers capital equipment and accessories utilized within surgical environments, critical care environments, emergency departments, gastrointestinal environments, and sterile processing environments, and in infection control processes. The Healthcare segment also offers consumable products and services to the same customer base.

 

Products Offered.  The Healthcare segment offers a range of technologies for sterilizing medical devices and instruments, including low temperature liquid, steam, and Ethylene Oxide. These technologies, which meet rigorous sterility assurance standards and regulations, allow safe and effective re-use of medical equipment and devices in healthcare facilities throughout the world. The Healthcare segment also offers a variety of automated washer/disinfector systems used as a processing step before sterilization. These systems clean and disinfect a wide range of items from rolling instrument carts and other large healthcare equipment to small surgical instruments. These washing and sterilization products are offered through various brand names that include, but are not limited to: STERIS SYSTEM 1®, Amsco®, Hamo, and Reliance®.

 

The segment’s capital equipment offerings also include general and specialty surgical tables, surgical and examination lights, equipment management systems, operating room storage cabinets, warming cabinets, scrub sinks, and other complementary products and accessories for use in hospitals and other healthcare facilities. This broad range of equipment is designed to be used in a wide variety of locations where diagnostic and therapeutic procedures are performed, including emergency rooms, general surgery suites, OB/GYN suites, ICU/CCU suites, and ambulatory surgery sites. These products are offered through various brand names that include, but are not limited to: Harmony, Amsco®, SurgiGraphic, ASC 2000, Hamo, CMAX®, and Hausted®.

 

The Healthcare segment also offers infection prevention consumables and supplies that are used to help prevent the spread of infectious diseases and to monitor sterilization and decontamination processes. The segment’s consumables offer quality choices for infection and contamination prevention, including products used in instrument cleaning and decontamination systems and hard surface disinfectants. The segment also offers skin care and hand hygiene solutions for use by care-givers and patients in high risk and routine applications. Consumables are offered through various brand names that include, but are not limited to: Kindest Kare®, Alcare®, Verify®, and Cal Stat®.

 

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Services Offered.  The Healthcare segment offers various capital equipment preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime. The segment also offers comprehensive sterilization management services to allow healthcare facilities to meet their instrument reprocessing needs. STERIS field service personnel are available worldwide to install, maintain, upgrade, repair, and troubleshoot equipment. Additionally, STERIS offers other support services such as facility planning, engineering support, device testing, and customer education.

 

Customer Concentration.  The Company’s Healthcare segment operates in the United States and throughout the world offering capital equipment, consumables, and services to large and small customers. For the year ended March 31, 2005, revenues generated by the segment in the United States and internationally amounted to $677.7 million and $118.7 million, respectively. For the year ended March 31, 2005, none of the segment’s customers represented more than 10% of total segment revenues. A loss of any single customer is not expected to have a material impact on the segment’s results of operations or cash flows.

 

Competition.  The Company’s Healthcare segment operates in highly regulated environments where the most intense competition results from the search for technological innovations, product performance, convenience and ease of use, and overall cost-effectiveness. The Company competes with a number of large companies with significant product portfolios and global reach, as well as a number of small companies with very limited product offerings with operations in few or single countries. The segment’s primary competitors include Getinge, Belimed, Johnson & Johnson, 3M, Ecolab, Cardinal, Skytron, Berchtold, Kimberly-Clark, and Becton Dickinson.

 

LIFE SCIENCES SEGMENT

 

Description of Business.  The Company’s Life Sciences segment is a global provider of integrated and validated capital equipment, cleaning chemistries, and service solutions to three broad markets: Pharmaceutical and research, defense and aerospace, and industrial decontamination. Within the pharmaceutical and research market, the segment is focused on delivering capital equipment, consumables, and related services to global pharmaceutical companies and private and public research facilities. Within the defense and aerospace market, the segment is focused on the development of decontamination technologies for government, military, and aerospace customers. The segment’s offerings to this market focus on VHP® and modified VHP technologies for use in decontaminating military command centers, aircraft and vehicles, and spacecraft and spacecraft components. Within the industrial decontamination market, the segment is focused on developing decontamination solutions for first response, building decontamination, and food and beverage markets. Offerings to this customer base are similar to those offered to defense and aerospace customers; however, the markets are primarily non-military and typically require regulatory approval.

 

Products Offered.  The Life Sciences segment offers capital equipment and accessories to the target customer base described in the preceding paragraph. Washers offered by the segment provide efficient cleaning of various large and small materials and components utilized in manufacturing processes in the pharmaceutical and industrial markets, such as glassware, vessels, equipment parts, drums, and hoses. Sterilizers offered by the segment provide an efficient and effective way to sterilize and decontaminate medical devices and research tools used in the pharmaceutical and research environments, and assist in mitigating the risk of infectious diseases. VHP® technology offered by the segment is used to create safer environments within emergency vehicle interiors and exteriors, high-containment bio-safety labs, and other closed room environments. The segment’s products are offered through various brand names that include, but are not limited to: Amsco®, Hamo®, Reliance®, and Finn-Aqua®.

 

The Life Sciences segment also offers infection prevention consumables and supplies that are used to prevent the spread of infectious diseases and to monitor sterilization and decontamination processes. The segment’s consumables offer quality choices for infection and contamination prevention, including products used in instrument cleaning and decontamination systems and hard surface disinfectants. The segment also offers skin care and hand hygiene solutions for use in high risk and routine applications. Consumables are offered through various brand names that include, but are not limited to: Kindest Kare®, Alcare®, and Cal Stat®.

 

 

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Services Offered.  The Life Sciences segment offers various equipment preventive maintenance programs and repair services to support the effective operation of capital equipment over its lifetime. The segment also offers a variety of consulting services focused on biological and chemical contamination remediation and recovery solutions, risk/threat assessment, and biological contaminant mapping and assessment. STERIS field service personnel are available worldwide to install, maintain, upgrade, repair, and troubleshoot capital equipment. Additionally, STERIS offers general sterilization consulting services and other support services such as facility planning, engineering support, device testing, cleaning, evaluation, and customer education.

 

Customer Concentration.  The Company’s Life Sciences segment operates in the United States and throughout the world offering capital equipment, consumables, and services to large and small customers. For the year ended March 31, 2005, revenues generated by the segment in the United States and internationally amounted to $105.1 million and $113.5 million, respectively. For the year ended March 31, 2005, none of the segment’s customers represented more than 10% of total segment revenues, therefore a loss of any single customer is not expected to have a material impact on the segment’s results of operations or cash flows.

 

Competition.  The Company’s Life Sciences segment operates in highly regulated environments where the most intense competition results from the search for technological innovations, product performance, convenience and ease of use, and overall cost-effectiveness. Consolidations and reduced capital spending within the Company’s pharmaceutical customer base also results in intense competition. The Company competes with a number of large resourceful companies with significant product portfolios and global reach, as well as a number of small companies with very limited product offerings with operations in few or single countries, within the pharmaceutical and research and industrial markets. The Company competes with a small number of large companies within the defense and aerospace customer market. The Company’s performance within this market, which primarily includes governmental-type customers, is partially dependent on federal and state budgetary appropriations. The segment’s primary competitors include Getinge, Fidigari, Bioquel, MECO, and Scientek.

 

STERIS ISOMEDIX SERVICES SEGMENT

 

Description of Business.  Through a North American network of 21 facilities, the Company offers a comprehensive array of contract sterilization services using Gamma Irradiation (“Gamma”), Electron Beam Irradiation (“E-Beam”), and Ethylene Oxide (“EO”) technologies through its Isomedix Services segment. This segment offers sterilization, microbial reduction, and materials modification services to companies that supply products to the healthcare, industrial, and consumer product industries.

 

Services Offered.  Isomedix provides Gamma, E-Beam, and EO services to process approximately 50,000 truckloads of product per year. All three technologies can be effectively used to sterilize a wide range of products. Gamma, using cobalt-60 isotope, and E-Beam, using accelerated electrons, are irradiation processes. In addition to sterilization of medical products, E-Beam is used for material modification and cross-linking to improve product performance. EO is a gaseous process predominately used in the sterilization of surgical kits. Gamma and EO utilization account for greater than 90 percent of the overall industrial sterilization marketplace with E-Beam representing the remainder. The Isomedix locations are concentrated in major North American population centers and core distribution corridors, primarily in the Northeast, Midwest, Southwest, and southern California. Isomedix’s understanding of supply chain management enables it to adapt to increasing imports and changes in manufacturing points-of-origin. Isomedix’s growth is driven in part by demographics, mainly the aging baby boomer population and rising life expectancy. These events strengthen demand for medical procedures, driving increased consumption of single use devices and surgical kits. Isomedix’s technical services group provides support to customers in all phases of the sterilization design process, including product development, materials testing, and sterility validation.

 

Customer Concentration.  The Company’s Isomedix Services segment operates in North America. For the year ended March 31, 2005, revenues generated in the United States and Canada amounted to $98.1 million and $6.7 million, respectively. The segment’s comprehensive array of sterilization services are offered to large and small customers throughout the footprint of the Company’s strategically located facilities. For the year ended March 31, 2005, none of the segment’s customers represented more than 10% of total segment revenues. A loss of any single customer would not have a material impact on the segment’s results of operations or cash flows.

 

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Competition.  Isomedix operates in a highly regulated industry and competes in North America with Sterigenics International, Inc. and manufacturers that sterilize products in-house, among others.

 

INFORMATION WITH RESPECT TO STERIS’S BUSINESS IN GENERAL

 

Sources and Availability of Raw Materials.  The Company purchases in the ordinary course of business raw materials, sub-assemblies, components, and other supplies essential to the Company’s operations from numerous suppliers in the United States and abroad. The principal raw materials that the Company uses to conduct operations include stainless steel, organic chemicals, and plastic components. These raw materials are obtainable from several sources and are generally available within the lead times specified to vendors. Raw materials for which there are few sources, such as cobalt-60 radioisotope used within the Company’s Isomedix Services segment, generally have longer-term supply contracts as a basis to support supply reliability.

 

The Company has recently experienced increased prices for raw materials such as stainless steel, metals, and chemicals, which are important to the Company’s operations. The Company has not experienced, and does not foresee, extraordinary difficulty in obtaining the materials, sub-assemblies, components, or other supplies necessary for its business operations.

 

Intellectual Property.  The Company protects its technology and products by, among other means, filing United States and foreign patent applications. There can be no assurance, however, that any patent will provide adequate protection for the technology, system, product, service, or process it covers. In addition, the process of obtaining and protecting patents can be long and expensive. The Company also relies upon trade secrets, technical know-how, and continuing technological innovation to develop and maintain its competitive position.

 

As of March 31, 2005, the Company held 263 United States patents and 702 foreign patents and had 107 United States patents and 481 foreign patents pending. Patents for individual products extend for varying periods according to the date of patent filing or grant and legal term of patents in various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage, and the availability of legal remedies in the country.

 

The Company’s products are sold around the world under various brand names and trademarks. The Company considers its brand names and trademarks to be valuable in the marketing of its products. As of March 31, 2005, the Company had a total of 804 trademark registrations in the United States and in various foreign countries in which the Company conducts business.

 

Research and Development.  Research and development constitutes an important part of the Company’s activities. For the years ended March 31, 2005, 2004, and 2003, research and development expenses totaled $35.5 million, $28.5 million, and $25.5 million, respectively. The majority of these expenses relate to Company sponsored research and development activities associated with commercial products.

 

Quality Assurance.  The Company manufactures, assembles, and packages products in the United States and throughout the world. Each of the production facilities are dedicated facilities which focus on particular processes and products. The Company’s success depends upon customer confidence in the quality of the production process and the integrity of the data that supports the Company’s product safety and effectiveness. The Company has implemented quality assurance procedures related to the quality and integrity of scientific information and production processes. Throughout the world, manufacturing processes at all of the Company’s equipment manufacturing facilities are ISO 9001 certified.

 

Government Regulation.  The Company’s business is subject to varying degrees of governmental regulation in the countries in which operations are conducted. The general trend is toward regulation of increasing stringency. In the United States, the development, manufacture, sale, and distribution of the Company’s products and services are subject to regulation by the Food & Drug Administration (“FDA”), the United States Environmental Protection Agency (“EPA”), the United States Nuclear Regulatory Commission (“NRC”), and other governmental authorities. International operations are also subject to a significant degree of government regulation and country-specific rules

 

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and regulations. Government regulations include detailed inspection of, and controls over, research and development, clinical investigations, product approvals and manufacturing, marketing and promotion, sampling, distribution, record-keeping, storage, and disposal practices.

 

The cost of compliance with applicable regulations represents a significant expense to the Company, and such past, current, or future regulations or their interpretation or application could have a material adverse impact on the Company. Further, additional governmental regulation may be established that could prevent, delay, revoke, or result in the rejection of regulatory clearance of the Company’s products. The effect of governmental regulation or interpretation or application thereof, which may arise from current or future legislation or administration, cannot be predicted.

 

Failure to comply with any applicable regulatory requirements could result in sanctions being imposed on the Company, including warning letters, injunctions, monetary penalties, enforcement actions, investigations, cost recovery actions, civil litigation, failure of the FDA or comparable foreign agencies to grant pre-market clearance or pre-market approval of medical devices, product recalls, operating restrictions, and/or other administrative, civil, and criminal sanctions. The Company has previously received warning letters, paid civil penalties, conducted product recalls, and has been subject to other regulatory sanctions. The Company believes that no such sanctions that would have a material adverse effect on the Company’s consolidated financial condition are currently outstanding. The Company believes that it is currently in conformity in all material respects with applicable regulatory requirements. However, there can be no assurance that future or current regulatory, governmental, or private legal action will not be concluded in a manner adverse to the Company. Also, see Part I, Item 3, “Legal Proceedings.”

 

Environmental Matters.  The Company is subject to various laws and governmental regulations concerning environmental matters and employee safety and health in the United States and in other countries. The Company has made, and intends to continue to make, necessary expenditures for compliance with these laws and regulations. While the Company cannot predict with certainty future capital expenditures or operating costs associated with environmental law and regulation compliance, the Company does not believe they will have a material effect on the Company’s capital expenditures, results of operations, cash flows, or competitive position.

 

Competition.  The markets in which the Company’s business is conducted are highly competitive and often highly regulated. Competition is intense in all of the Company’s business segments and includes many large and small competitors. Important competitive factors include product design and quality, safety, ease of use, product serviceability, and price. The Company anticipates that it may face increased competition in the future as new infection prevention, sterile processing, contamination control, and surgical support products and services enter the market. Numerous organizations, including several smaller early-stage companies, are believed to be working with a variety of technologies and sterilizing agents, including microwave, ozone, plasma, chlorine dioxide, peracids, and formaldehyde. In addition, a number of companies have developed disposable medical instruments and other devices designed to address the risk of decontamination.

 

The Company believes that its long-term competitive position depends on its success in discovering, developing, and marketing innovative, cost-effective products and services. The Company focuses significant resources on research and development and management believes the Company is well positioned to compete globally in search of technological innovations. In addition to expenditures related to research and development, the Company continues to invest in high quality control, customer programs, distribution systems, and technical and other information services.

 

There can be no assurance that new products or services developed by the Company’s competitors will not be more commercially successful than those provided or developed by the Company in the future. In addition, some of the Company’s existing or potential competitors may have greater financial, technical, and human resources than the Company. Accordingly, the Company’s competitors may succeed in developing and commercializing products more rapidly than the Company.

 

The principal means of competition vary among product categories and business segments, and are discussed in more detail in the section above titled, “Information Related to Business Segments.”

 

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Employees.  As of March 31, 2005, the Company had approximately 5,250 employees throughout the world. Management considers its relations with employees, including employees covered under collective bargaining agreements, to be good.

 

Methods of Distribution.  As of March 31, 2005, the Company employed 1,132 and 288 direct field sales and service representatives in the United States and in international locations, respectively. Sales and service activities are supported by a staff of regionally based clinical specialists, system planners, corporate account managers, and in-house customer service and field support departments. The Company has also contracted with distributors in select markets.

 

Customer training is an important aspect of the Company’s business. In addition to training at customer locations, the Company provides a variety of courses for customers at the Company’s training and education centers throughout the world and over the internet. The programs enable customers to understand the science, technology, and operation of the Company’s products. Many of the operator training programs are approved by professional certifying organizations and offer continuing education credits to eligible course participants.

 

Seasonality.  The Company’s financial results have been, from time to time, subject to seasonal patterns. Historically, sales of certain of the Company’s product lines have been weighted toward the latter part of each year as a result of customer buying patterns. There can be no assurance that such patterns or trends will continue.

 

International Operations.  The Company has operations outside of the United States. These operations are conducted through the Company’s subsidiaries and involve the same business segments as the Company’s domestic operations. Revenues from operations outside of the United States amounted to $238.9 million, or 21.3%, of the Company’s total revenues for the year ended March 31, 2005. Revenues from Europe, Canada, and other international locations amounted to 60.0%, 19.9%, and 20.1%, respectively, of total international revenues for the year ended March 31, 2005.

 

For a geographic presentation of revenues for the three years ended March 31, 2005, see Note 11 to the Company’s consolidated financial statements, “Business Segment Information,” and Item 7, “MD&A.”

 

The Company’s operations are subject, in varying degrees, to a number of inherent risks. These include, among other things, foreign currency exchange rate fluctuations, exchange controls and currency restrictions, changes in local economic conditions, unsettled political, regulatory or business conditions, and government-sponsored boycotts and tariffs on the Company’s products or services.

 

Depending on the direction of change relative to the U.S. dollar, foreign currency exchange rate fluctuations can increase or reduce the reported dollar amounts of the Company’s net assets and results of operations. Revenues were favorably impacted by $13.5 million, or 1.2%, and net income was negatively impacted by $3.7 million, or 4.1%, during fiscal 2005 as a result of foreign currency movements relative to the U.S. dollar. The Company cannot predict with certainty future changes in foreign currency exchange rates or the effect they will have on the Company’s operations.

 

Backlog.  Backlog is defined by the Company as the amount of unfilled capital purchase orders at a point in time. At March 31, 2005, the Company’s backlog amounted to $131.4 million, of which $65.4 million and $66.0 million related to the Company’s Healthcare and Life Sciences segments, respectively. At March 31, 2004, the Company’s backlog orders amounted to $129.6 million, of which $57.0 million and $72.6 million related to the Company’s Healthcare and Life Sciences segments, respectively. The majority of backlog orders in both years were expected to ship in the subsequent fiscal year.

 

Availability of Securities and Exchange Commission Filings.  The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other information with the Securities and Exchange Commission (“SEC”). Copies of these materials can be obtained by visiting the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549 or by accessing the SEC’s website at http://www.sec.gov. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, the Company makes copies available to the public, free of charge, on or through the investor relations section of its website at http://www.steris-ir.com. Also available on the Company’s website are the Company’s Corporate

 

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Governance Guidelines, Director Code of Ethics, and Code of Business Conduct, as well as Charters of the Audit and Financial Policy Committee, Compensation and Corporate Governance Committee, and the Compliance Committee of the Company’s Board of Directors. Information on the Company’s website is not incorporated into this report.

 

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Item 2. Properties

 

The following table sets forth the principal plants and other materially important properties of the Company and its subsidiaries as of March 31, 2005. The Company believes that its facilities are adequate for operations and are maintained in good condition. The Company is confident that, if needed, it will be able to acquire additional facilities at commercially reasonable rates.

 

In the table below, “Contract Sterilization” refers to locations of the STERIS Isomedix Services segment, “Sterilization Services” refers to locations of the Healthcare segment and “Manufacturing/Warehousing/Operations” and “Sales Offices” refer to locations serving both the Healthcare and Life Sciences segments.

 

U.S. LOCATIONS (Including Puerto Rico)

 

Owned Locations    Leased Locations

Montgomery, AL

   Manufacturing    Montgomery, AL    Warehousing

Nogales, AZ

   Contract Sterilization    Aliso Viejo, CA    Sales Office

Ontario, CA

   Contract Sterilization    San Diego, CA    Contract Sterilization

Temecula, CA

   Contract Sterilization    Miami, FL    Sales Office

Libertyville, IL

   Contract Sterilization    Morton Grove, IL    Contract Sterilization

Northborough, MA

   Contract Sterilization    Waukegan, IL    Contract Sterilization

St. Louis, MO

   Manufacturing    Bel Air, MD    Sales Office

Groveport, OH

   Contract Sterilization    St. Louis, MO    Warehousing/Distribution

South Plainfield, NJ

   Contract Sterilization    Minneapolis, MN    Contract Sterilization

Whippany, NJ

Chester, NY

Mentor, OH (7 locations)

  

Contract Sterilization

Contract Sterilization

Corporate Headquarters

Sales/Marketing Offices

Administration Offices

Manufacturing/Warehousing

Manufacturing/Operations

   Mentor, OH (2 locations)    Corporate Headquarters Manufacturing/Warehousing
      Reno, NV    Warehousing
      Erie, PA    Warehousing
        Nashville, TN    Sterilization Services
        Grand Prairie, TX    Contract Sterilization
              

Erie, PA

   Manufacturing/Operations          

Vega Alta, PR

   Contract Sterilization          

Coventry, RI

   Contract Sterilization          

Spartanburg, SC

   Contract Sterilization          

El Paso, TX

   Contract Sterilization          

Sandy, UT

   Contract Sterilization          

 

INTERNATIONAL LOCATIONS

 

Owned Locations    Leased Locations

Whitby, Canada

   Contract Sterilization    Brussels, Belgium    Sales Office

Quebec City, Canada

Leicester, England (2 locations)

Helsinki, Finland

Pieterlen, Switzerland

  

Manufacturing

Manufacturing

Manufacturing/Sales Office

Manufacturing/Sales Office

   Sao Palo, Brazil    Sales Office
      Mississauga, Canada    Warehousing/Sales Office
      Quebec City, Canada (2 locations)    Warehousing
      St. Laurent, Canada    Sales Office
      San Jose, Costa Rica    Sales Office
      Basingstoke, England    European Corporate Headquarters
      Nanterre, France    Sales Office
          Saran, France    Manufacturing
          Cologne, Germany    Manufacturing/Sales Office
          Segrate, Italy    Sales Office
          Kobe, Japan    Sales Office
          Tokyo, Japan    Sales Office
          Selangor, Malaysia    Sales Office
          Singapore    Sales Office
          Madrid, Spain    Sales Office
          Strangnas, Sweden    Sales Office
          Bruegg, Switzerland    Sales Office

 

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Item 3. Legal Proceedings

 

The Company is involved in a number of legal proceedings and claims, which the Company believes arise from the ordinary course of its business, given its size, history, complexity, nature of its business, and industries in which it participates. These legal proceedings and claims generally involve a variety of legal theories and allegations, including without limitation, personal injury (e.g., slip and falls, automobile accidents), product liability (e.g., based on the operation or claimed malfunction of products), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants), property damage (e.g., claimed damage due to leaking equipment, fire), economic loss (e.g., breach of contract, other commercial claims), employment (e.g., wrongful termination), and other claims for damage and relief.

 

The FDA and the U.S. Department of Justice are conducting an investigation believed to involve the Company’s SYSTEM 1® sterile processing system. In January 2005, the Company received a subpoena for documents in connection with the investigation. The Company is currently responding to this subpoena and has offered and intends to cooperate with the government agencies regarding this matter.

 

The Company believes it has adequately reserved for its current litigation and that the ultimate outcome of its pending lawsuits and claims will not have a material adverse effect on the Company’s consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome of current or future litigation, proceedings, investigations, or claims or their effect. The Company presently maintains product liability insurance coverage, and other liability coverage in amounts and with deductibles that it believes are prudent.

 

From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by the Company. Gains, if any, from these proceedings are recognized when they are realized.

 

Additional information regarding the Company’s commitments and contingencies is included in Item 7, “MD&A,” and in Note 10 to the Company’s consolidated financial statements, “Commitments and Contingencies.”

 

Item 4. Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of security holders during the fourth quarter of the Company’s 2005 fiscal year.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

The following table sets forth certain information regarding the executive officers of the Company:

 

Name    Age    Position

Les C. Vinney

   56    President and Chief Executive Officer

William L. Aamoth

   51    Vice President and Corporate Treasurer

Laurie Brlas

   47    Senior Vice President and Chief Financial Officer

Dr. Peter A. Burke

   56    Senior Vice President and Chief Technology Officer

Charles L. Immel

   43    Senior Vice President and Group President, Healthcare

Dr. Patrick J. McCullagh

   49    Vice President, Global Quality Systems Engineering and Regulatory Affairs

Mark D. McGinley

   48    Senior Vice President, General Counsel, and Secretary

Robert E. Moss

   60    Senior Vice President and Group President, STERIS Isomedix Services

Gerard J. Reis

   53    Senior Vice President and Group President, Life Sciences

Michael J. Tokich

   36    Vice President and Corporate Controller

 

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The following is a brief account of the recent business experience of each such executive officer:

 

Les C. Vinney serves as President and Chief Executive Officer. He assumed this role in July 2000. Mr. Vinney joined the Company’s Board of Directors in March 2000 at the same time as he was appointed to his previous role as the Company’s President and Chief Operating Officer. Mr. Vinney joined STERIS as Senior Vice President and Chief Financial Officer in August 1999. He became Senior Vice President Finance and Operations in October 1999. Immediately before his employment with STERIS, Mr. Vinney served as Senior Vice President and Chief Financial Officer at The BF Goodrich Company, a manufacturer of advanced aerospace systems, performance materials, and engineered industrial products. During his eight-year career with BF Goodrich, Mr. Vinney held a variety of senior operating and financial management positions, including Vice President and Treasurer, President and CEO of the former Tremco subsidiary, and Senior Vice President, Finance and Administration of BF Goodrich Specialty Chemicals. Mr. Vinney is a director of Campbell Soup Company

 

William L. Aamoth serves as Vice President and Corporate Treasurer. He joined the Company in March 2001. Prior to joining the Company, Mr. Aamoth was employed by Hayes Lemmerz International, a manufacturer of automotive wheels, brakes, and related systems, from January 2000 through January 2001, serving as Treasurer. From May 1992 to December 1999, Mr. Aamoth was employed by TRW, Inc., a manufacturer and service provider of automotive, aerospace, and information technology products, serving most recently as Assistant Treasurer, International.

 

Laurie Brlas serves as Senior Vice President and Chief Financial Officer. She joined the Company in April 2000. Prior to joining STERIS, Ms. Brlas was employed by OfficeMax, Inc., a retailer of goods and services to business customers and consumers, from September 1995 through April 2000, serving most recently as Senior Vice President and Corporate Controller. Ms. Brlas is a director of Perrigo Company.

 

Dr. Peter A. Burke serves as Senior Vice President and Chief Technology Officer. He became Senior Vice President in March 2002. Dr. Burke joined the Company in March 2001 as Vice President and Chief Technology Officer. Prior to joining STERIS, Dr. Burke was employed by Carter-Wallace, Inc., a manufacturer and distributor of consumer and pharmaceutical products, from January 1996 to March 2001, serving most recently as Vice President, Research and Development.

 

Charles L. Immel serves as Senior Vice President and Group President, Healthcare. He joined the Company in May 2001 and served as Senior Vice President, Sales and Marketing and President, Commercial Products until April 2003. Prior to joining STERIS, Mr. Immel was employed by Baxter Healthcare Corporation, a medical products and services company specializing in critical care applications, from July 1983 to May 2001, serving most recently as Vice President and General Manager of Baxter’s Therapeutic Commercial Business.

 

Dr. Patrick J. McCullagh serves as Vice President, Global Quality Systems Engineering and Regulatory Affairs. He joined the Company in July 2002 and served as Vice President, Engineering Research, until February 2005. Prior to joining STERIS, Dr. McCullagh most recently served as a self-employed technical consultant respecting medical devices, product development, and product submissions from May 2001 to June 2002. Prior to that, he served from May 2000 to May 2001 as Sr. Director, Marketing and Sales International with Orquest, a medical company specialty in orthobiological products.

 

Mark D. McGinley serves as Senior Vice President, General Counsel, and Secretary. He became Senior Vice President in March 2005. He joined the Company in March 2002 as Vice President, General Counsel, and Secretary. Prior to joining STERIS, Mr. McGinley was employed by Noveon, Inc., an international specialty chemicals manufacturer. Mr. McGinley also served as Associate General Counsel of The Glidden Company, a producer of specialty products and paints, and was employed by the BF Goodrich Company from 1990 to 2000 in various legal capacities, including General Counsel of the BF Goodrich Sealants, Coatings and Adhesives Group.

 

Robert E. Moss serves as Senior Vice President and Group President, STERIS Isomedix Services. He became Senior Vice President in March 2005. He served as Vice President and General Manager of Isomedix Services from

 

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1999 until April 2003 and as Vice President and Group President of Isomedix Services from April 2003 until March 2005. Mr. Moss joined the Company in 1990 serving as Vice President Operations until 1999. Prior to joining the Company, Mr. Moss held senior leadership positions with Cardinal Health and divisions of American Hospital Supply Corporation, both medical products and services companies.

 

Gerard J. Reis serves as Senior Vice President and Group President, Life Sciences. He previously served as Senior Vice President and Group President, Defense and Industrial. He joined the Company in July 1994 as Vice President, Administration. He served as Senior Vice President, Administration from October 1999 until April 2003.

 

Michael J. Tokich serves as Vice President and Corporate Controller. He joined the Company in May 2000 as Assistant Corporate Controller. He became Corporate Controller in December 2000. Prior to joining the Company, Mr. Tokich was employed by OfficeMax, Inc., a retailer of goods and services to business customers and consumers, from July 1994 to May 2000, serving most recently as Divisional Vice President, Assistant Controller.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities

 

Market Information and Dividends.  The Company’s common shares are traded on the New York Stock Exchange under the symbol “STE.” The following table sets forth, for the periods indicated, the high and low sales prices for the Company’s common shares.

 

     Quarters Ended
     March 31    December 31    September 30    June 30

Fiscal 2005:

                           

High

   $   25.51    $   24.39    $   24.04    $   27.04

Low

     22.19      19.80      19.96      21.43

Fiscal 2004:

                           

High

   $ 26.44    $ 23.46    $ 24.49    $ 28.24

Low

     21.98      19.50      21.60      19.40

 

The Company has not paid any cash dividends on its common shares since its inception. Subsequent to March 31, 2005, on May 17, 2005, the Company announced that its Board of Directors had declared a quarterly cash dividend in the amount of $0.04 per common share, payable on June 28, 2005, to shareholders of record as of the close of the stock transfer books on May 31, 2005. Payment of dividends, if any, in the future is subject to the discretion of the Company’s Board of Directors. At June 3, 2005, there were approximately 1,600 shareholders of record of the Company’s common shares.

 

Issuer Purchases of Equity Securities.  No repurchases of common shares were made by or on behalf of the Company during the fourth quarter of fiscal 2005. As of March 31, 2005, 2,726,000 shares remained authorized for repurchase under the share repurchase program that was approved by the Company’s Board of Directors and announced on July 28, 2004. This common share repurchase authorization does not have a stated maturity date.

 

Information related to common share repurchases made subsequent to March 31, 2005 is included in Note 16 to the Company’s consolidated financial statements, “Subsequent Events.”

 

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Item 6. Selected Financial Data

 

    Years Ended March 31,
    2005(1)   2004(1)(4)    2003(1)(4)    2002(3)    2001(2)(3)
(in thousands, except per share data)                       

Consolidated Statements of Income Data:

                                

Revenues

  $   1,119,745   $   1,087,012    $   972,087    $   866,697    $   800,087

Gross profit

    471,651     457,899      408,821      355,201      311,458

Income from operations

    144,993     140,356      125,769      80,613      24,174

Net income

  $ 85,980   $ 94,243    $ 79,436    $ 46,202    $ 1,317

Net income per common share-basic

  $ 1.24   $ 1.36    $ 1.14    $ 0.67    $ 0.02

Shares used in computing net income per common share-basic

    69,254     69,521      69,434      69,163      67,946

Net income per common share-diluted

  $ 1.23   $ 1.33    $ 1.12    $ 0.65    $ 0.02

Shares used in computing net income per common share-diluted

    70,022     70,742      70,870      70,607      68,981

Consolidated Balance Sheets Data:

                                

Working capital

  $ 198,317   $ 272,250    $ 163,381    $ 146,534    $ 180,286

Total assets

    1,185,722     1,068,170      894,954      841,572      844,980

Long-term indebtedness

    104,274     109,090      59,704      115,228      205,825

Total liabilities

    430,084     387,471      325,424      354,427      420,596

Total shareholders’ equity

    755,638     680,699      569,530      487,145      424,384
(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(2) Net income for fiscal 2001 includes a charge of $41,476, primarily related to manufacturing consolidations, productivity improvements, and associated workforce reductions. Of the $41,476 charge, $21,510 was charged to cost of products sold and $19,966 was charged to Selling, General, and Administrative expenses in the Consolidated Statements of Income.
(3) Beginning in fiscal 2003, the Company ceased amortizing goodwill in accordance with SFAS No. 142. Goodwill amortization, net of tax, for fiscal 2002 and 2001 was $5,227 and $4,974, respectively.
(4) Certain balance sheet reclassifications have been made to conform to the fiscal 2005 presentation.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with information contained in Item 1, “Business,” Item 6, “Selected Financial Data,” and information contained in the Company’s consolidated financial statements, included in Item 8, “Financial Statements and Supplementary Data.”

 

Financial Measures.  In the following sections of MD&A and in Item 1, “Business,” the Company, at times, may refer to financial measures that are not required to be presented in the consolidated financial statements under U.S. generally accepted accounting principles. The Company has used the following financial measures that are not required to be presented under U.S. generally accepted accounting principles in the context of this report: Backlog, debt to capital, and days sales outstanding. The Company defines these financial measures as follows:

 

  Ÿ   Backlog - is defined by the Company as the amount of unfilled capital purchase orders at a point in time. The Company uses this figure as a measure to assist in the projection of short-term financial results and inventory requirements.

 

  Ÿ   Debt-to-capital - is defined by the Company as total long-term debt divided by the sum of long-term debt and shareholders’ equity. The Company uses this figure as a financial liquidity measure to gauge the Company’s ability to borrow, provide strength/protection against creditors, fund growth, develop outside of current business operations, and measure the risk of the Company’s financial structure.

 

  Ÿ   Days sales outstanding - is defined by the Company as the average collection period for sales revenues. It is calculated as net accounts receivable divided by the trailing four quarter’s revenues, multiplied by 365. The Company uses this figure to help gauge the quality of accounts receivable and expected time to collect.

 

In the following sections of MD&A and in Item 1, “Business,” the Company, at times, may also refer to financial measures which are considered to be “non-GAAP financial measures” under Securities and Exchange Commission rules. Non-GAAP financial measures used by the Company are as follows:

 

  Ÿ   Free cash flow - is defined by the Company as cash flows from operating activities as presented in the Consolidated Statements of Cash Flows, which are presented in Item 8, “Financial Statements and Supplementary Data,” less non-business acquisition related capital spending, which is also presented in the Consolidated Statements of Cash Flows. The Company uses this measure to gauge its ability to fund future growth outside of core operations, repurchase common shares, and pay cash dividends. The following table summarizes the calculations of the Company’s free cash flow for the years ended March 31, 2005 and 2004:

 

     Years Ended March 31,
     2005    2004
(dollars in millions)          

Cash flows from operating activities

   $   151.4    $   123.3

Non-business acquisition related capital spending

     56.2      67.6
    
  

Free cash flow

   $ 95.2    $ 55.7
    
  

 

  Ÿ   The Company, at times, may refer to its results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results, in order to provide meaningful comparative analysis between the years presented. For example, when discussing changes in revenues, the Company may, at times, exclude the impact of current or prior year acquisitions.

 

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The Company has presented these financial measures because it believes that meaningful analysis of the Company’s financial performance is enhanced by an understanding of certain additional factors underlying that performance. These financial measures should not be considered an alternative to measures required by U.S. generally accepted accounting principles. The Company’s calculations of these measures may differ from calculations of similar measures used by other companies and investors should be careful when comparing these financial measures to those of other companies.

 

Revenues - Defined.  As required by Regulation S-X, the Company has presented separately on its Consolidated Statements of Income for each year presented, revenues generated as either product revenues or service revenues. In discussing revenues, the Company, at times, may refer to revenues in differing detail than that which is required by Regulation S-X. The terminology, definitions, and applications of terms that the Company uses to describe revenues may differ from terms used by other companies. The Company uses the following terms to describe revenues:

 

  Ÿ   Revenues - The Company’s revenues are presented net of sales returns and allowances.

 

  Ÿ   Product Revenues - Product revenues are defined by the Company as revenues generated from sales of capital equipment, which includes steam and low temperature liquid sterilizers, washing systems, freeze dryers, VHP® technology, water stills, and pure steam generators; surgical lights and tables; and the consumable family of products, which includes STERIS SYSTEM 1® consumables, sterility assurance products, skin care products, and cleaning consumables.

 

  Ÿ   Service Revenues - Service revenues are defined by the Company as revenues generated from parts and labor associated with the maintenance, repair, and installation of the Company’s capital equipment, as well as revenues generated from contract sterilization offered through the Company’s Isomedix Services segment.

 

  Ÿ   Capital Revenues - Capital revenues are defined by the Company as revenues generated from sales of capital equipment, which includes steam and low temperature liquid sterilizers, washing systems, freeze dryers, VHP® technology, water stills, and pure steam generators; and surgical lights and tables.

 

  Ÿ   Consumable Revenues - Consumable revenues are defined by the Company as revenues generated from sales of the consumable family of products which includes STERIS SYSTEM 1® consumables, sterility assurance products, skin care products, and cleaning consumables.

 

  Ÿ   Recurring Revenues - Recurring revenues are defined by the Company as revenues generated from sales of consumable products and service revenues.

 

General Company Overview and Outlook.  The mission of STERIS Corporation is to provide a healthier today and safer tomorrow through knowledgeable people and innovative infection prevention, decontamination and health science technologies, products, and services. The Company’s dedicated employees around the world work together to supply a broad range of solutions by offering a combination of equipment, consumables, and services to healthcare, pharmaceutical, industrial, and governmental customers.

 

STERIS participates in industries that currently benefit from strong underlying demand, with the bulk of the Company’s revenues derived from the healthcare and pharmaceutical industries. As such, much of the growth in its markets is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years. In addition, each of STERIS’s core industries also are benefiting from specific trends that drive growth. Within the healthcare market, there is increased concern regarding the level of hospital-acquired infections around the world. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. In the contract sterilization industry, where Isomedix competes, an increasing trend toward the outsourcing of sterilization services continues to drive growth.

 

Beyond STERIS’s core markets, infection-control issues are becoming a global concern, and emerging threats have gained prominence in the news. Through STERIS’s Life Sciences segment, the Company is actively pursuing new opportunities to adapt its proven technologies to meet the needs of emerging markets such as defense, aerospace, and industrial decontamination.

 

 

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Fiscal 2005 marked the second consecutive year that revenues exceeded $1.0 billion. Strong demand and expanded processing capacity within the Company’s Isomedix Services segment led to record revenues within the segment, which exceeded $100.0 million. Within the Healthcare segment, increased recurring revenues and strong demand for capital equipment from hospitals, primarily within the United States, led to record revenues of $796.4 million. Fiscal 2005 Life Sciences revenues were negatively impacted as a result of a decrease in new capital construction projects within the pharmaceutical industry.

 

During fiscal 2005, the Company completed three strategic acquisitions that expanded its breadth of product offerings and global reach. Within the Healthcare segment, the acquisitions of Browne and FHSurgical expanded the Company’s offerings of chemical indicators and surgical tables, respectively, within the European marketplace. Within the Isomedix Services segment, five EO processing facilities acquired from Cosmed expanded the Company’s processing capacity within its North American footprint of strategically located facilities. Fiscal 2005 acquisitions contributed $15.2 million to total fiscal 2005 revenues.

 

The Company’s financial position and cash flows remain strong. Improved working capital management and reduced capital spending levels resulted in record cash flows from operations of $151.4 million and record free cash flow of $95.2 million. The Company continues to maintain low debt levels with its debt to capital ratio approximating 12.1% at March 31, 2005. The Company’s strong financial position and cash flows currently afford it the financial flexibility to return value to shareholders. The value to shareholders may be in the form of strategic acquisitions that strengthen the Company’s long-term competitive position and potential common share repurchases and cash dividends.

 

A detailed discussion of the Company’s fiscal 2005 performance is included in the subsection of MD&A titled “Results of Operations.”

 

Matters Affecting Comparability.  The Company’s operating results for fiscal 2005 include the impact of acquisitions completed during the fiscal year from the date of acquisition. During fiscal 2005, the Company acquired Browne and FHSurgical and certain assets of Cosmed. The addition of Browne to the Company’s operations contributed $9.3 million, or 1.2%, to the Healthcare segment’s revenues for fiscal 2005. The addition of five EO facilities acquired from Cosmed contributed $5.9 million, or 5.6%, to the Isomedix Services segment’s revenues for fiscal 2005. The addition of Browne and Cosmed to the Company’s Healthcare and Isomedix Services segments contributed 1.6% and 4.5%, respectively, to the segments’ gross margin dollars for the year ended March 31, 2005. The acquisition of FHSurgical was completed on March 24, 2005 and, therefore, did not have a material impact on the Company’s fiscal 2005 operating results.

 

Because the Company conducts operations outside of the United States using various foreign currencies, its operating results are impacted by foreign currency movements relative to the U.S. dollar. During fiscal 2005, the Company’s revenues were favorably impacted by $13.5 million, or 1.2%, and net income was negatively impacted by $3.7 million, or 4.1%, as a result of foreign currency movements relative to the U.S. dollar.

 

Results of Operations.  The following subsections provide commentary regarding the results of operations of the Company for fiscal 2005 as compared to fiscal 2004 and for fiscal 2004 as compared to fiscal 2003.

 

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Fiscal 2005 as Compared to Fiscal 2004

 

Revenues.  The following table illustrates the changes in the Company’s revenues for the year ended March 31, 2005 as compared to the year ended March 31, 2004:

 

    Years Ended March 31,         Percent
Change
    Percentage of Total Revenues  
    2005   2004   Change       2005(1)     2004(1)  
   
(dollars in thousands)                                

Capital Revenues

  $ 518,114   $   534,142   $ (16,028 )   -3.0 %   46.3 %   49.1 %

Consumable Revenues

    234,952     220,379     14,573     6.6 %   21.0 %   20.3 %
   

 


 

 

Product Revenues

    753,066     754,521     (1,455 )   -0.2 %   67.3 %   69.4 %

Service Revenues

    366,679     332,491     34,188     10.3 %   32.7 %   30.6 %
   

 


 

 

Total Revenues

  $   1,119,745   $   1,087,012   $   32,733     3.0 %   100.0 %   100.0 %
   

 


 

 

Service Revenues

  $ 366,679   $ 332,491   $ 34,188     10.3 %   32.7 %   30.6 %

Consumable Revenues

    234,952     220,379     14,573     6.6 %   21.0 %   20.3 %
   

 


 

 

Recurring Revenues

    601,631     552,870     48,761     8.8 %   53.7 %   50.9 %

Capital Revenues

    518,114     534,142     (16,028 )   -3.0 %   46.3 %   49.1 %
   

 


 

 

Total Revenues

  $   1,119,745   $   1,087,012   $ 32,733     3.0 %   100.0 %   100.0 %
   

 


 

 

United States

  $ 880,858   $ 842,512   $ 38,346     4.6 %   78.7 %   77.5 %

International

    238,887     244,500     (5,613 )   -2.3 %   21.3 %   22.5 %
   

 


 

 

Total Revenues

  $ 1,119,745   $ 1,087,012   $ 32,733     3.0 %   100.0 %   100.0 %
   

 


 

 

(1) Certain percentages may not calculate precisely due to rounding.

 

Revenues increased $32.7 million, or 3.0%, to $1,119.7 million for the year ended March 31, 2005, as compared to $1,087.0 million for fiscal 2004. For fiscal 2005, recurring revenues increased 8.8% as compared to fiscal 2004. The recurring revenues increase was generated from a 6.6% increase in consumable revenues and a 10.3% increase in service revenues as compared to fiscal 2004. Service revenues, which increased in all segments, were driven by a $16.8 million, or 19.1%, increase in the Isomedix Services segment. Within the Company’s Healthcare and Life Sciences segments, service revenues for fiscal 2005 increased 4.5% and 25.7%, respectively, as compared to fiscal 2004. Capital revenues declined $16.0 million, or 3.0%, during fiscal 2005, as compared to fiscal 2004. Within the Healthcare segment, strong demand for small order replacement equipment and for larger orders associated with new construction projects by hospital customers primarily in the United States resulted in an increase in capital revenues of 6.9% as compared to fiscal 2004. This strong performance was offset by a 22.2% decrease in Life Sciences capital revenues, year-over-year, as a result of reduced capital spending within the pharmaceutical industry in the European and United States marketplaces.

 

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International revenues for fiscal 2005 amounted to $238.9 million, a decrease of $5.6 million, or 2.3%, as compared to fiscal 2004. The decline in year-over-year international revenues was attributable to a 15.9% decrease in capital revenues primarily within the European marketplace. Within Europe, fiscal 2005 capital revenues from the Company’s Healthcare and Life Sciences segments decreased 4.5% and 39.3%, respectively, as compared to fiscal 2004. The decline in international capital revenues was partially offset by a 29.0% increase in recurring revenue streams year over year.

 

United States revenues for fiscal 2005 amounted to $880.9 million, an increase of $38.3 million, or 4.6%, as compared to fiscal 2004. United States revenues were positively impacted by a 5.7% increase in recurring revenues, which were driven by an increase in the Isomedix Services segment’s revenues of 19.3%. Recurring revenues were also positively impacted by service revenue increases of 4.1% and 102.6% in the Healthcare and Life Sciences segments, respectively, and a slight increase in consumable revenues of 0.5%. Year over year, United States capital revenues increased 3.0% as a result of strong demand from hospital customers during the second half of the fiscal year. The increase in capital revenues was driven by an 8.4% increase in capital revenues within the Company’s Healthcare segment. This increase was partially offset by a 17.1% decline in Life Sciences capital revenues, which resulted from reduced capital spending within the pharmaceutical industry.

 

Revenues are further discussed on a segment basis in the section of MD&A titled “Business Segment Results of Operations.”

 

Gross Profit.  The following table illustrates the changes in the Company’s gross profit for the year ended March 31, 2005 as compared to the year ended March 31, 2004:

 

     Years Ended March 31,          Percent
Change
 
     2005      2004     Change   
(dollars in thousands)                         

Gross Profit:

                              

Product

   $   315,948      $   314,606     $     1,342    0.4 %

Service

     155,703        143,293       12,410    8.7 %
    


  


 

  

Total Gross Profit

   $ 471,651      $ 457,899     $ 13,752    3.0 %
    


  


 

  

Gross Profit Percentage:

                              

Product

     42.0 %      41.7 %             

Service

     42.5 %      43.1 %             
    


  


            

Total Gross Profit Percentage

     42.1 %      42.1 %             
    


  


            

 

Gross profit (margin) is impacted by the volume, pricing, and mix of sales of the Company’s products and services, as well as the costs associated with the products and services that are sold. Year-over-year, the Company’s gross profit percentage remained flat at 42.1%. Strong margin growth, resulting from higher volumes, within the Company’s Isomedix Services segment offset continued margin erosion within the Company’s Life Sciences segment. Margins within the Healthcare segment were favorably impacted by the introduction of the Browne consumable offerings. Overall, fiscal 2005 margins were negatively impacted by increased raw material prices, particularly related to stainless steel, a core material used in the manufacturing of capital equipment, and certain petroleum-based chemicals used in consumables formulations.

 

Gross margins are further discussed on a segment basis in the section of MD&A titled “Business Segment Results of Operations.”

 

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Operating Expenses.  The following table illustrates the changes in the Company’s operating expenses for the year ended March 31, 2005 as compared to the year ended March 31, 2004:

 

    Years Ended March 31,       Percent
Change
 
    2005   2004   Change  
(dollars in thousands)                  

Operating Expenses:

                       

Selling, General, and Administrative

  $   291,111   $   289,089   $     2,022   0.7 %

Research and Development

    35,547     28,454     7,093   24.9 %
   

 

 

 

Total Operating Expenses

  $ 326,658   $ 317,543   $ 9,115   2.9 %
   

 

 

 

 

Significant components of total Selling, General, and Administrative expenses (“SG&A”) are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. As a percentage of total revenues, SG&A decreased 60 basis points to 26.0% for fiscal 2005 as compared to fiscal 2004. As a result of efforts to leverage costs of operations, the Company was able to deliver higher revenue levels without increasing operating expense levels at a commensurate rate.

 

As a percentage of total revenues, research and development expenses were 3.2% and 2.6% for fiscal 2005 and 2004, respectively. As compared to fiscal 2004, research and development expenses increased $7.1 million, or 24.9%, during fiscal 2005. The increase in research and development expenses is attributable to an increased emphasis on new product development, product improvements, and the development of new technological innovations. During fiscal 2005, the Company’s investments in research and development focused on, but were not limited to, enhancing capabilities of delivery systems in the defense and industrial areas, sterile processing combination technologies, and the area of prions.

 

Interest Expense, Net.  The following table illustrates the changes in the Company’s interest expense, net for the year ended March 31, 2005 as compared to the year ended March 31, 2004:

 

    Years Ended March 31,        
    2005     2004     Change  
(dollars in thousands)                  

Interest Expense, Net:

                       

Interest Expense

  $    4,234     $   2,474     $   1,760  

Interest and Miscellaneous Income

    (1,182 )     (202 )     (980 )
   


Interest Expense, Net

  $    3,052     $ 2,272     $ 780  
   
   
   
 

 

Interest expense, net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous income. Interest expense increased year-over-year as a result of higher average debt levels and higher interest rates on outstanding debt during fiscal 2005 as compared to fiscal 2004. A detailed discussion of the Company’s outstanding debt is included in Note 6 to the Company’s consolidated financial statements, “Debt,” and in the subsection of MD&A titled, “Liquidity and Capital Resources.”

 

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Income Tax Expense.  The following table illustrates the changes in the Company’s income tax expense for the year ended March 31, 2005 as compared to the year ended March 31, 2004 and provides a comparison of the effective income tax rates for the aforementioned periods:

 

    Years Ended March 31,         Percent
Change
 
    2005     2004     Change  
(dollars in thousands)                      

Income Tax Expense

  $     55,961     $   43,841     $   12,120   27.6 %

Effective Income Tax Rate

    39.4 %     31.7 %            

 

The effective income tax rate for fiscal 2005 was 39.4% as compared to 31.7% for fiscal 2004. The effective income tax rate for fiscal 2005 was negatively impacted as a result of a reduction of operating profits generated in international tax jurisdictions and the resulting inability of the Company to utilize a portion of foreign tax credits against foreign profits taxed in the United States, as well as certain non-cash adjustments. The effective income tax rate for fiscal 2004 benefited from the Company’s ability to use foreign tax credits and net operating loss carryforwards.

 

Business Segment Results of Operations.  The Company operates and reports in three business segments: Healthcare, Life Sciences, and STERIS Isomedix Services. Note 11 to the Company’s consolidated financial statements, “Business Segment Information,” and Item 1, “Business,” provide detailed information regarding each business segment. The following table illustrates the changes in business segment revenues for the year ended March 31, 2005 as compared to the year ended March 31, 2004:

 

    Years Ended March 31,        

Percent

Change

 
    2005   2004   Change    
(dollars in thousands)                    

Revenues:

                         

Healthcare

  $ 796,356   $ 752,881   $   43,475     5.8 %

Life Sciences

    218,597     246,116     (27,519 )   -11.2 %

STERIS Isomedix Services

    104,792     88,015     16,777     19.1 %
   


Total Revenues

  $   1,119,745   $   1,087,012   $ 32,733     3.0 %
   
 
 
   
 

 

Healthcare segment revenues represented 71.1% of total revenues for the year ended March 31, 2005 as compared to 69.3% for the year ended March 31, 2004. Healthcare segment revenues increased $43.5 million, or 5.8%, to $796.4 million for the year ended March 31, 2005, as compared to $752.9 million for the prior fiscal year. The increase in Healthcare revenues was primarily driven by a 6.9% increase in capital revenues, which resulted from strong demand for small order replacement equipment and for larger orders associated with new construction projects by hospital customers primarily in the United States. At March 31, 2005, the Healthcare segment’s backlog amounted to $65.4 million, as compared to $57.0 million at March 31, 2004. The Healthcare segment’s fiscal 2005 revenues were also positively impacted by a 4.8% increase in recurring revenue streams driven by strong service revenues within the United States hospital market and increased consumable revenues resulting from the business integration of Browne.

 

Life Sciences segment revenues represented 19.5% of total revenues for the year ended March 31, 2005 as compared to 22.6% for the year ended March 31, 2004. Life Sciences segment revenues decreased $27.5 million, or 11.2%, to $218.6 million for the year ended March 31, 2005, as compared to $246.1 million for the prior fiscal year. The decrease in Life Sciences revenues was driven by a 22.2% decrease in capital revenues. Fiscal 2005 Life Sciences revenues were negatively impacted as a result of a fewer number of new capital construction projects within the pharmaceutical industry. At March 31, 2005, the Life Sciences segment’s backlog amounted to $66.0 million, as compared to $72.6 million at March 31, 2004. An increase of 19.7% in recurring revenue streams partially offset the segment’s year-over-year decline in capital revenues.

 

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STERIS Isomedix Services segment revenues represented 9.4% of total revenues for the year ended March 31, 2005, as compared to 8.1% for the year ended March 31, 2004. The segment experienced revenue growth of $16.8 million, or 19.1%, during fiscal 2005, as compared to fiscal 2004. The year-over-year growth in revenues is the result of increased demand and higher utilization of expanded facilities capacity within the segment. A temporary reduction in industry processing capacity and the integration of Cosmed also benefited the segment’s revenues during fiscal 2005.

 

The following table illustrates the changes in business segment operating results for the year ended March 31, 2005 as compared to the year ended March 31, 2004:

 

    Years Ended March 31,         Percent
Change
 
    2005     2004   Change    
(dollars in thousands)                      

Operating Income (Loss):

                           

Healthcare

  $ 138,646     $ 121,748   $ 16,898     13.9 %

Life Sciences

    (14,513 )     4,977     (19,490 )   NM  

STERIS Isomedix Services

    20,860       13,631     7,229     53.0 %
   


 

 


 

Total Operating Income

  $ 144,993     $ 140,356   $ 4,637     3.3 %
   


 

 


 

NM - Not meaningful

 

To determine segment operating income (loss), the Company reduces the respective segment’s gross profit by direct expenses and indirect cost allocations, which reflect the full allocation of all distribution, corporate, and research and development expenses. Corporate cost allocations are based on each segment’s portion of revenues, headcount, or other variables in relation to the total Company.

 

Healthcare segment operating income increased $16.9 million, or 13.9%, to $138.6 million for the year ended March 31, 2005 as compared to $121.7 million during the prior fiscal year. Healthcare segment operating margins were 17.4% and 16.2%, respectively, for the years ended March 31, 2005 and March 31, 2004. Healthcare segment gross margins were 47.4% for the year ended March 31, 2005 as compared to 47.6% for the year ended March 31, 2004. Gross margins were negatively impacted by a continued shift in revenue mix toward capital equipment, which typically carries lower margins. Gross margins were also negatively impacted by increased raw material prices, particularly in the second half of fiscal 2005. The addition of Browne products to the Healthcare segment’s consumable offerings partially offset the negative margin impact of increased raw material prices and revenue shift.

 

Life Sciences segment operating loss was $14.5 million for the year ended March 31, 2005, as compared to operating income of $5.0 million during the prior fiscal year. Life Sciences segment gross margins were 29.8% for the year ended March 31, 2005 as compared to 32.2% for the year ended March 31, 2004. Operating results in the segment were negatively impacted by reduced volumes and the resulting lower fixed cost absorption along with increased raw material prices.

 

STERIS Isomedix Services segment operating income increased $7.2 million, or 53.0%, to $20.9 million for the year ended March 31, 2005 as compared to $13.6 million during the prior fiscal year. The segment’s operating margins were 19.9% and 15.5%, respectively, for the years ended March 31, 2005 and March 31, 2004, and gross margins were 37.9% and 34.8%, respectively, for fiscal 2005 and 2004. Operating performance in the segment benefited from increased volumes and improvements in processing utilization as a result of capital investments made during the past year. The integration of Cosmed also resulted in a benefit to the segment’s operating performance.

 

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Table of Contents

 

Fiscal 2004 as Compared to Fiscal 2003

 

Revenues.  The following table illustrates the changes in the Company’s revenues for the year ended March 31, 2004 as compared to the year ended March 31, 2003:

 

     Years Ended March 31,        

Percent
Change

    Percentage of Total Revenues  
     2004    2003    Change      2004(1)     2003(1)  
(dollars in thousands)                                  

Capital Revenues

   $ 534,142    $ 467,627    $ 66,515    14.2 %   49.1 %   48.1 %

Consumable Revenues

     220,379      219,397      982    0.4 %   20.3 %   22.6 %
    


Product Revenues

     754,521      687,024      67,497    9.8 %   69.4 %   70.7 %

Service Revenues

     332,491      285,063      47,428    16.6 %   30.6 %   29.3 %
    


Total Revenues

   $ 1,087,012    $ 972,087    $ 114,925    11.8 %   100.0 %   100.0 %
    


Service Revenues

   $ 332,491    $ 285,063    $ 47,428    16.6 %   30.6 %   29.3 %

Consumable Revenues

     220,379      219,397      982    0.4 %   20.3 %   22.6 %
    


Recurring Revenues

     552,870      504,460      48,410    9.6 %   50.9 %   51.9 %

Capital Revenues

     534,142      467,627      66,515    14.2 %   49.1 %   48.1 %
    


Total Revenues

   $ 1,087,012    $ 972,087    $ 114,925    11.8 %   100.0 %   100.0 %
    


United States

   $ 842,512    $ 786,239    $ 56,273    7.2 %   77.5 %   80.9 %

International

     244,500      185,848      58,652    31.6 %   22.5 %   19.1 %
    


Total Revenues

   $   1,087,012    $   972,087    $   114,925    11.8 %   100.0 %   100.0 %
    


(1) Certain percentages may not calculate precisely due to rounding.

 

Revenues increased 11.8% to $1,087.0 million for the year ended March 31, 2004 as compared to $972.1 million for the prior fiscal year. The year-over-year revenue growth was a result of the Company’s marketing programs, pricing strategies, the introduction of new products and services developed internally and through strategic alliances, the continued penetration of new international markets, and tactical acquisitions. Fiscal 2004 revenues were favorably impacted by approximately 2.3% as a result of foreign currency movements in relation to the U.S. dollar. Of the $114.9 million year-over-year change in revenues, $41.5 million can be attributed to the integration of Hamo and Sterion into the Company’s fiscal 2004 operations. Excluding the impact of the Hamo business acquisition and the Sterion asset purchase, organic revenue growth was 7.6% ($114.9 million year-over-year change in total revenues minus $41.5 million fiscal 2004 revenues associated with Hamo and Sterion, divided by $972.1 million fiscal 2003 total revenues) during fiscal 2004.

 

For the year ended March 31, 2004, revenues generated from the sale of capital equipment were $534.1 million, or 49.1% of total revenues, as compared to $467.6 million, or 48.1%, of total revenues, for the year ended March 31, 2003, representing an increase of $66.5 million, or 14.2%, year over year.

 

For the year ended March 31, 2004, revenues generated from recurring revenue streams were $552.9 million, or 50.9% of total revenues, as compared to $504.5 million, or 51.9% of total revenues, for the year ended March 31, 2003, representing an increase of $48.4 million, or 9.6%, year over year.

 

For the year ended March 31, 2004, international revenues represented 22.5% of total revenues as compared to 19.1% for the year ended March 31, 2003. As compared to the year ended March 31, 2003, international revenues increased 31.6%. Of the $58.7 million year-over-year change in international revenues, $32.7 million can be attributed to the integration of the Hamo product and service offerings. Excluding the impact of the Hamo business acquisition,

 

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Table of Contents

 

organic international revenue growth was $26.0 million ($58.7 million year-over-year change in international revenues minus $32.7 million fiscal 2004 international revenues associated with Hamo), or 14.0% ($26.0 million international organic revenue growth divided by $185.8 million fiscal 2003 international revenues).

 

Further discussion regarding the Company’s fiscal 2004 segment revenues and a detailed analysis of the change in fiscal 2004 segment revenues as compared to fiscal 2003 is included in the section below titled “Business Segment Results of Operations.”

 

Gross Profit.  The following table illustrates the changes in the Company’s gross profit for the year ended March 31, 2004 as compared to the year ended March 31, 2003:

 

     Years Ended March 31,         

Percent

Change

 
     2004     2003     Change   
(dollars in thousands)                        

Gross Profit:

                             

Product

   $   314,606     $   294,060     $   20,546    7.0 %

Service

     143,293       114,761       28,532    24.9 %
    


Total Gross Profit

   $   457,899     $   408,821     $   49,078    12.0 %
    


Gross Profit Percentage:

                             

Product

     41.7 %     42.8 %             

Service

     43.1 %     40.3 %             
    


            

Total Gross Profit Percentage

     42.1 %     42.1 %             
    


            

 

The cost of revenues as a percentage of total revenues remained flat at 57.9% in both fiscal 2004 and fiscal 2003, with the corresponding gross profit percentage remaining flat at 42.1%. The Company’s gross profit percentage remained flat in fiscal 2004 as compared to fiscal 2003 due to the shift in product mix during 2004, which included higher sales volumes of lower margin capital equipment relative to the prior fiscal year, offset by higher service margins. In absolute dollars, the cost of revenues increased 11.7% in fiscal 2004 to $629.1 million from $563.3 million during fiscal 2003.

 

Operating Expenses.    The following table illustrates the changes in the Company’s operating expenses for the year ended March 31, 2004 as compared to the year ended March 31, 2003:

 

     Years Ended March 31,         Percent
Change
 
     2004    2003    Change   
(dollars in thousands)                      

Operating Expenses:

                           

Selling, General, and Administrative

   $   289,089    $   257,527    $   31,562    12.3 %

Research and Development

     28,454      25,525      2,929    11.5 %
    


Total Operating Expenses

   $   317,543    $   283,052    $   34,491    12.2 %
    


 

Significant components of total SG&A are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. As a percentage of total revenues, SG&A was 26.6% for the year ended March 31, 2004 as compared to 26.5% for the year ended March 31, 2003. For the year ended March 31, 2004, professional service fees increased $6.9 million, or 33.0%, as compared to the year ended March 31, 2003. The increased fees for professional services are primarily a result of the Company’s ongoing efforts to fully implement and integrate an enterprise resource planning (“ERP”) system. Travel and

 

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Table of Contents

 

entertainment expenses for fiscal 2004 amounted to $18.8 million, representing an increase of 7.9% over the prior year ended March 31, 2003. Travel and entertainment expenses increased during fiscal 2004 as a result of additional travel resulting from the Company’s business acquisitions and integration thereof, additional travel costs related to marketing and promotion of the Company’s products and services, as well as travel expenses related to sales force activities. General and administrative expenses increased by approximately $11.9 million for the year ended March 31, 2004, as compared to the year ended March 31, 2003. The most significant component of the change in general and administrative expenses was insurance expense, which increased $1.9 million, or 16.0%, from the prior fiscal year. Increased insurance expense for fiscal 2004 was primarily a result of increased coverage and premium expense across all of the Company’s operations, foreign and domestic.

 

As a percentage of total revenues, research and development expenses were 2.6% for the years ended March 31, 2004 and 2003. As compared to the year ended March 31, 2003, research and development expenses increased by $2.9 million, or 11.5%, during fiscal 2004. The increase in research in development expenses, year-over-year, is attributable to an increased emphasis on new product development, existing product improvement, and research and development facility enhancement projects.

 

Interest Expense, Net.  The following table illustrates the changes in the Company’s interest expense, net for the year ended March 31, 2004 as compared to the year ended March 31, 2003:

 

     Years Ended March 31,       
     2004      2003      Change
(dollars in thousands)                   

Interest Expense, Net:

                        

Interest Expense

   $   2,474      $   1,872      $   602

Interest and Miscellaneous Income

     (202 )      (221 )          19
    

Interest Expense, Net

   $ 2,272      $ 1,651      $   621
    

 

Interest expense, net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous income. Interest expense increased year-over-year as a result of higher average debt levels, a majority of which related to additional debt from the $100.0 million Private Placement completed during December 2003. A detailed discussion of the Company’s outstanding debt is included in Note 6 to the Company’s consolidated financial statements, “Debt,” and in the subsection of MD&A titled “Liquidity and Capital Resources.”

 

Income Tax Expense.  The following table illustrates the changes in the Company’s income tax expense for the year ended March 31, 2004 as compared to the year ended March 31, 2003 and provides a comparison of the effective income tax rates for the aforementioned periods:

 

     Years Ended March 31,           

Percent
Change

 
     2004      2003      Change    
(dollars in thousands)                           

Income Tax Expense

   $   43,841      $   44,682      $   (841 )   -1.9 %

Effective Income Tax Rate

     31.7 %      36.0 %               

 

For fiscal 2004, the Company realized a lower effective income tax rate as compared to fiscal 2003. The effective income tax rates for both years are different from the U.S. federal statutory income tax rate. The effective income tax rate variance from the U.S. federal statutory income tax rate in fiscal 2004 is due primarily to tax planning initiatives which have resulted in the Company’s ability to recognize foreign tax benefits in the U.S. related to earnings of foreign operations. The fiscal 2003 variance is due to state and local income taxes and a favorable change in the method in which research and development credits are calculated.

 

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Table of Contents

 

Business Segment Results of Operations.  The Company operates and reports in three business segments: Healthcare, Life Sciences, and STERIS Isomedix Services. Note 11 to the Company’s consolidated financial statements, “Business Segment Information,” and Item 1, “Business,” provide detailed information regarding each business segment. The following table illustrates the changes in business segment revenues for the year ended March 31, 2004 as compared to the year ended March 31, 2003. Fiscal 2003 financial information has been reclassified based upon the fiscal 2004 segment reporting structure.

 

     Years Ended March 31,        

Percent
Change

 
     2004    2003    Change   
(dollars in thousands)                      

Revenues:

                           

Healthcare

   $ 752,881    $ 697,451    $ 55,430    7.9 %

Life Sciences

     246,116      195,302      50,814    26.0 %

STERIS Isomedix Services

     88,015      79,334      8,681    10.9 %
    


Total Revenues

   $   1,087,012    $   972,087    $   114,925    11.8 %
    


 

Healthcare segment revenues represented 69.3% of total revenues for the year ended March 31, 2004 as compared to 71.7% for the year ended March 31, 2003. The increase in Healthcare segment revenues for fiscal 2004 of 7.9% is primarily a result of revenues realized from acquired businesses and strong service revenues growth. During 2004, the integration of the operations of Hamo resulted in Healthcare segment product revenues of $23.1 million. These revenues represented 41.7% of the $55.4 million year-over-year change in Healthcare segment revenues. Excluding the impact of the Hamo business acquisition, Healthcare segment revenues increased 4.6% ($55.4 million year-over-year change in Healthcare revenues minus $23.1 million fiscal 2004 Healthcare revenues associated with Hamo, divided by $697.5 million fiscal 2003 Healthcare revenues) during fiscal 2004 as compared to fiscal 2003. Demand for smaller order capital goods from hospitals decreased during fiscal 2004. Many hospitals spent their limited capital budgets on larger facility construction projects which led to a slow down in replacement equipment purchases. The slowdown in hospital expenditures for replacement equipment was partially offset by an increased focus on service offerings, as hospital customers attempted to extend the life of existing equipment. During fiscal 2004, the Company improved its service offerings by introducing five new levels of service provisions to better meet customer needs. These new service offerings in fiscal 2004 also served to drive an increase in Healthcare segment service revenues.

 

Life Sciences segment revenues represented 22.6% of total revenues for the year ended March 31, 2004 as compared to 20.1% for the year ended March 31, 2003. The increase in Life Sciences segment revenues for fiscal 2004 of 26.0% is primarily a result of revenues realized from acquired businesses, strong demand from the pharmaceutical industry, and increased revenues from the Defense and Industrial business, where the Company is collaborating with the United States Department of Defense regarding certain chemical and biological decontamination products. During fiscal 2004, the integration of the operations of Hamo resulted in Life Sciences segment product revenues of $15.2 million. These revenues represent 29.9% of the $50.8 million year-over-year change in Life Sciences segment product revenues. Excluding the impact of the Hamo business acquisition, Life Sciences segment revenues increased 18.2% ($50.8 million year-over-year change in Life Sciences revenues minus $15.2 million fiscal 2004 Life Sciences revenues associated with Hamo, divided by $195.3 million fiscal 2003 Life Sciences revenues) during fiscal 2004 as compared to fiscal 2003.

 

STERIS Isomedix Services segment revenues represented 8.1% of total revenues for the year ended March 31, 2004 as compared to 8.2% for the year ended March 31, 2003. The increase in STERIS Isomedix Services segment revenues for fiscal 2004 of 10.9% is primarily a result of increased demand from medical device manufacturers for Ethylene Oxide sterilization. During fiscal 2004, the Company began to fill recently expanded Gamma Irradiation capacity in several locations which is expected to satisfy foreseeable demand requirements.

 

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Table of Contents

 

The following table illustrates the changes in business segment operating result for fiscal 2004 as compared to fiscal 2003. Fiscal 2003 financial information has been reclassified based upon the fiscal 2004 segment reporting structure.

 

     Years Ended March 31,        

Percent
Change

 
     2004    2003    Change   
(dollars in thousands)                      

Operating Income:

                           

Healthcare

   $   121,748    $   114,232    $ 7,516    6.6 %

Life Sciences

     4,977      795      4,182    526.0 %

STERIS Isomedix Services

     13,631      10,742      2,889    26.9 %
    


Total Operating Income

   $ 140,356    $ 125,769    $   14,587    11.6 %
    


 

To calculate segment operating income, the Company reduces the respective segment’s gross profit by direct expenses and indirect cost allocations, which reflect the full allocation of all distribution, corporate, and research and development expenses. Corporate cost allocations are based on each segment’s portion of revenues, headcount, or other variables in relation to the total Company.

 

The Company’s consolidated operating income increased $14.6 million, or 11.6%, to $140.4 million during fiscal 2004 as compared to $125.8 million during fiscal 2003.

 

The Healthcare segment’s operating income increased 6.6%, or $7.5 million, compared to fiscal 2003, attributable to a 7.9% increase in revenues generated by certain general product and service pricing initiatives and a favorable mix shift from lower margin capital goods to higher margin consumable products and services, which were complemented with the acquisitions of Hamo and the Sterion product line. The impact of these increases was partially offset by increased direct and indirect operating expenses, as discussed above in the section titled “Operating Expenses.”

 

The Life Sciences segment’s operating income increased significantly year-over-year to $5.0 million, compared to $0.8 million in the prior fiscal year. The increase in Life Sciences segment’s operating income was attributable to increased revenues of 26.0% during fiscal 2004 resulting from increased customer demand, the favorable impact of foreign currency exchange rates during fiscal 2004, and the incremental impact of the Hamo acquisition. In addition, the continued initiatives focused on improvements of manufacturing processes resulted in additional operational efficiencies, which also contributed to the year–over- year increase in operating income. The impact of these increases was partially offset by increased direct and indirect operating expenses as discussed above in the section titled “Operating Expenses.”

 

STERIS Isomedix Services segment year-over-year operating income increased 26.9% during fiscal 2004 to $13.6 million compared to $10.7 million during fiscal 2003. STERIS Isomedix Services segment’s operating income increase was attributable to revenue growth of 10.9% during fiscal 2004 versus fiscal 2003 and increased customer demand for higher margin services. The impact of these increases was partially offset by increased direct and indirect operating expenses as discussed in the section above titled “Operating Expenses.”

 

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Table of Contents

 

Liquidity and Capital Resources.  The following table summarizes significant components of the Company’s cash flow for the years ended March 31, 2005 and 2004:

 

CASH FLOWS

 

    Years Ended March 31,          

Percent
Change

 
    2005      2004     Change    
(dollars in thousands)                         

Operating activities:

                              

Net income

  $   85,980      $   94,243     $ (8,263 )   -8.8 %

Non-cash items

    65,642        61,173       4,469     7.3 %

Changes in operating assets and liabilities, excluding the effects of business acquisitions

    (233 )      (32,114 )     31,881     -99.3 %
   


  


 


 

Net cash provided by operating activities

  $   151,389      $   123,302     $   28,087     22.8 %
   


  


 


 

Investing activities:

                              

Purchases of property, plant, equipment, and intangibles, net

  $ (56,167 )    $ (67,560 )   $   11,393     -16.9 %

Investments in businesses, net of cash acquired

    (131,106 )      (37,599 )     (93,507 )   248.7 %

Purchase of business related assets

    —          (2,900 )     2,900     -100.0 %
   


  


 


 

Net cash used in investing activities

  $ (187,273 )    $ (108,059 )   $ (79,214 )   73.3 %
   


  


 


 

Financing activities:

                              

Proceeds from Private Placement

  $ —        $   100,000     $ (100,000 )   -100.0 %

Payments on long-term obligations, capital leases,

                              

and credit facility, net

    (6,872 )      (57,199 )     50,327     -88.0 %

Repurchases of common shares

    (33,868 )      (16,609 )     (17,259 )   103.9 %

Stock option and other equity transactions, net

    21,587        11,845       9,742     82.2 %
   


  


 


 

Net cash (used in) provided by financing activities

  $ (19,153 )    $   38,037     $ (57,190 )   -150.4 %
   


  


 


 

Debt-to-capital ratio

    12.1 %      13.8 %              

Free cash flow

  $   95,222      $   55,742                

 

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Net Cash Provided by Operating Activities.   Net cash provided by operating activities was $151.4 million for the year ended March 31, 2005 compared to $123.3 million for the year ended March 31, 2004. Non-cash items include depreciation, depletion and amortization, fluctuations in deferred income taxes, and other items. The Company’s net deferred income tax liability increased during the year ended March 31, 2005 as a result of the set-up of initial net deferred tax liabilities related to the Browne acquisition and an increase in the book versus tax basis difference of property, plant, equipment, and intangibles, primarily as a result of fiscal 2005 acquisitions. Inventory and related items also contributed to the increase in the Company’s net deferred tax liability. Depreciation, depletion and amortization increased year-over-year as a result of increased levels of depreciable assets and intangibles, driven primarily by fiscal 2005 business acquisitions. An analysis of changes to the Company’s working capital for the year ended March 31, 2005 as compared to the prior fiscal year is as follows:

 

  Ÿ   Accounts receivable, net- Excluding the impact of foreign currency translation adjustments and balances acquired from business acquisitions, accounts receivable, net increased $20.4 million and $33.5 million during fiscal 2005 and 2004, respectively. Accounts receivable balances are influenced by the timing of revenues, customer payments, and progress billings for contracts that are accounted for under the percentage of completion method of accounting for construction-type contracts. Contributing to the higher change in accounts receivable year-over-year was an increase in days sales outstanding from 85 days at March 31, 2004 to 92 days at March 31, 2005 and an increase in revenues of $19.7 million during the fourth quarter of fiscal 2005 as compared to the fourth quarter of fiscal 2004. The increase in days sales outstanding during fiscal 2005 relates primarily to increases within Europe.

 

  Ÿ   Inventories, net- Excluding the impact of foreign currency translation adjustments and balances acquired from business acquisitions, inventories, net decreased $7.8 million and $12.5 million during fiscal 2005 and 2004, respectively. The Company has established targeted inventory production levels at manufacturing facilities in a process called modified level-loading, whereby a relatively constant stream of inventory production occurs, which may result in varying inventory levels during the year as a result of customer demand fluctuations.

 

  Ÿ   Accounts payable- Excluding the impact of foreign currency translation adjustments and balances acquired from business acquisitions, accounts payable, net decreased $4.6 million and $15.6 million during fiscal 2005 and 2004, respectively. Based upon varying payment due dates of accounts payable obligations and the Company’s cash management strategies, accounts payable balances may fluctuate from period to period.

 

  Ÿ   Accruals and other, net- Excluding the impact of foreign currency translation adjustments and balances acquired from business acquisitions, accruals and other, net increased $16.2 million and $0.9 million during fiscal 2005 and 2004, respectively. Contributing to the higher change in accruals and other, net year-over-year was an increase in deferred revenue and self-insured risk retention.

 

Net Cash Used in Investing Activities.   Fiscal 2005 net cash used in investing activities amounted to $187.3 million as compared to $108.1 million during fiscal 2004. The following discussion summarizes the significant components of the Company’s investing cash flows for the years ended March 31, 2005 and 2004:

 

  Ÿ   Purchases of property, plant, equipment, and intangibles, net- During fiscal 2005, capital expenditures amounted to $56.2 million as compared to $67.6 million during fiscal 2004. The decrease in capital spending year-over-year resulted from a reduction of in process facilities expansion projects during fiscal 2005 as compared to the prior year. In addition, certain information technology initiatives were completed during the first half of fiscal 2005, thus reducing the level of capital expenditures during the current year. Additionally, during fiscal 2004, as a result of Isomedix Services facilities expansions, incremental cobalt-60 radioisotope requirements were funded by capital expenditures.

 

  Ÿ  

Investments in businesses, net of cash acquired- During fiscal 2005, the Company acquired Browne, FHSurgical, and certain assets of Cosmed. Cash amounts paid during fiscal 2005 related to these

 

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acquisitions totaled $131.1 million. Net cash flows used in investing activities for fiscal 2004 reflect the acquisition of Hamo for $37.6 million. The Company completed this acquisition during the first quarter of fiscal 2004. Further discussion of recent acquisitions is included in Note 2 to the Company’s consolidated financial statements, “Business Acquisitions.”

 

  Ÿ   Purchases of business related assets- During the first quarter of fiscal 2004, the Company acquired certain assets related to the sterilization container business from Sterion Incorporated for $2.9 million. The purchase of these assets is presented as net cash used in investing activities during fiscal 2004. Further discussion of recent acquisitions is included in Note 2 to the Company’s consolidated financial statements, “Business Acquisitions.”

 

Net Cash (Used in) Provided by Financing Activities.  For the year ended March 31, 2005, net cash used in financing activities amounted to $19.2 million as compared to net cash provided by financing activities of $38.0 million for the prior fiscal year. The following discussion summarizes the significant components of the Company’s financing cash flows for the years ended March 31, 2005 and 2004:

 

  Ÿ   Proceeds from Private Placement - In December 2003, the Company issued $100.0 million of notes in a Private Placement to certain institutional investors in an offering exempt from the registration requirements of the Securities Act of 1933. Additional information regarding the Company’s debt structure is further discussed in Note 6 to the Company’s consolidated financial statements, “Debt,” and in the subsection of “Liquidity and Capital Resources” titled “Sources of Credit.”

 

  Ÿ   Payments on long-term obligations, capital leases, and credit facility, net- For the years ended March 31, 2005 and 2004, net payments on long-term obligations, capital leases, and credit facility amounted to $6.9 million and $57.2 million, respectively. Fiscal 2005 net payments primarily relate to periodic payments made under capital leasing arrangements, industrial revenue bonds, and other miscellaneous obligations. During fiscal 2004, proceeds from the $100.0 million Private Placement were used to pay down outstanding balances of the Company’s then existing $325.0 million unsecured revolving line of credit facility. Additional information regarding the Company’s debt structure is further discussed in Note 6 to the Company’s consolidated financial statements, “Debt,” and in the subsection of “Liquidity and Capital Resources” titled “Sources of Credit.”

 

  Ÿ   Repurchases of Common Shares - As discussed in Note 14 to the Company’s consolidated financial statements, “Repurchases of Common Shares,” the Company’s Board of Directors has authorized the periodic repurchase of the Company’s common shares. During fiscal 2005, the Company repurchased 1,539,100 common shares at an average purchase price of $22.01 per common share, as compared to 761,200 of its common shares at an average purchase price of $21.82 per common share during fiscal 2004.

 

  Ÿ   Stock option and other equity transactions, net - Cash flows from stock option and other equity transactions, net are primarily derived from the issuance of the Company’s common shares under various employee stock compensation programs. During fiscal 2005 and fiscal 2004, cash proceeds from the issuance of common shares under these programs totaled $15.6 million and $11.8 million, respectively.

 

Cash Requirements.  The Company currently intends to fund short and long-term capital expenditures, as well as liquidity needs, with existing cash and cash equivalent balances and existing credit facilities as well as cash generated by operations. The Company believes that these sources will be sufficient to meet working capital needs, capital requirements, and commitments for at least the next twelve months. However, the Company’s capital requirements will depend on many factors, including the Company’s rate of sales growth, market acceptance of the Company’s products and services, costs of securing access to adequate manufacturing capacities, the timing and extent of research and development projects, and changes in operating expenses, all of which are subject to uncertainty. To the extent that the Company’s existing sources of cash are insufficient to fund the Company’s future activities, the Company may need to raise additional funds through public or private debt or equity financing. Additional funds may not be available on favorable terms to the Company, or at all.

 

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Sources of Credit.  The following table summarizes the Company’s sources of credit as of March 31, 2005:

 

     Maximum
Amounts
Available
   Reductions in
Available Credit
Facility for Other
Financial Instruments
   Amounts
Outstanding
   Amounts
Available
(dollars in thousands)                    

Credit Sources:

                           

Private Placement

   $   100,000    $ –      $   100,000    $ –  

Credit Facility(1)

     275,000      35,406      1,200      238,394

Other Debt

     16,992      –        7,963      9,029
    

Total Credit Sources

   $ 391,992    $   35,406    $ 109,163    $   247,423
    
(1) Credit Facility availability is reduced by letters of credit issued under a sub-limit within the Credit Facility.

 

The Company’s sources of credit were as follows:

 

  Ÿ   In December 2003, the Company issued $100.0 million of notes in a Private Placement to certain institutional investors in an offering exempt from the registration requirements of the Securities Act of 1933. The proceeds of this offering were used to pay off the outstanding balance of the Company’s then existing $325.0 million credit facility with the remaining balance being invested in short-term marketable securities. The outstanding notes have varying maturity dates through the next eleven years and accrue interest at varying fixed interest rates ranging from 4.20% to 5.38%. The agreement governing the outstanding notes contains financial covenants, including limitations on debt and a minimum consolidated net worth requirement.

 

  Ÿ   At March 31, 2005, the Company had $238.4 million of funding available from a $275.0 million revolving credit facility. The revolving credit facility matures on March 29, 2009 and provides a multi-currency borrowing option. At the Company’s option, borrowings under the credit facility bear interest at a rate equal to (1) LIBOR, or (2) the greater of the Prime Rate established by KeyBank National Association, Cleveland, Ohio, or the Federal Funds effective rate plus 0.50%; plus, in each case, applicable margins based upon the Company’s leverage ratio. The credit facility requires the maintenance of certain financial covenants, including a maximum leverage ratio and a minimum interest coverage ratio.

 

  Ÿ   At March 31, 2005, other debt includes industrial development revenue bonds that bear interest at a variable rate based on the bank/marketing agent’s demand note index. Reimbursement agreements related to letters of credit that support the industrial development revenue bonds follow the same financial covenants as the revolving credit facility. At March 31, 2005, outstanding obligations under the industrial development revenue bonds were $2.9 million and had an interest rate of 2.45%. Other debt also includes capital lease obligations of $1.5 million and other miscellaneous obligations totaling $3.6 million.

 

Additional information regarding the Company’s debt structure and a stratification of payment obligations are further discussed in Note 6 to the Company’s consolidated financial statements, “Debt,” and in the subsection of “Liquidity and Capital Resources” titled “Contractual and Commercial Commitments.”

 

Capital Expenditures.  A component of the Company’s long-term strategy is its capital expenditure program. This program includes, among other things, investments in new and existing facilities, business expansion projects, and information technology enhancements. During fiscal 2005, the Company’s capital expenditures amounted to $56.2 million. Capital expenditures are funded through cash provided by operating activities, as well as available cash and cash equivalents. At March 31, 2005, the Company anticipates that future capital expenditures will be in line with historical trends. The Company’s current expectations about future capital expenditures are inherently uncertain as future events can occur which could cause anticipated capital expenditure levels to change.

 

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Contractual and Commercial Commitments.  The Company has no material commitments for capital expenditures as of March 31, 2005. At March 31, 2005, the Company had commitments under non-cancelable operating leases aggregating $49.4 million.

 

The following tables reflect certain contractual and commercial commitments of the Company as of March 31, 2005. Commercial commitments include standby letters of credit, letters of credit required as security under the Company’s self-insured risk retention policies, and other potential cash outflows resulting from an event that requires performance by the Company.

 

CONTRACTUAL COMMITMENTS

 

     Payments due by March 31,   

Total

     2006    2007    2008    2009    2010 and
thereafter
  
(in thousands)                              

Contractual Commitments:

                                         

Debt

   $ 3,888    $ 1,076    $ 700    $ 41,900    $ 60,100    $ 107,664

Capital lease obligations

     1,001      498      –        –        –        1,499

Operating leases

     14,230      10,959      7,882      5,127      11,205      49,403

Purchase obligations

     15,249      16,248      11,849      –        –        43,346

Other obligations

     10,219      2,714      2,736      2,066      1,226      18,961
    

Total Contractual Commitments

   $ 44,587    $  31,495    $ 23,167    $ 49,093    $ 72,531    $ 220,873
    

 

For the purposes of the table above, debt includes only the principal maturities as required by Statement of Financial Accounting Standards No. 47, “Disclosure of Long-Term Obligations.” Information regarding the interest component of the Company’s long-term debt is included in the subsection of MD&A titled, “Liquidity and Capital Resources,” and in Note 6 to the Company’s consolidated financial statements, “Debt.”

 

In the table above, purchase obligations pertain to minimum purchase commitments with suppliers for the purchase of raw materials.

 

In the table above, fiscal 2006 other obligations include a holdback amount of $7.3 million related to the Cosmed asset acquisition. Additional information regarding the Cosmed holdback amount is included in Note 2 to the Company’s consolidated financial statements, “Business Acquisitions.”

 

For the purposes of the table above, the disclosed contractual commitments exclude benefit payments to plan participants of the Company’s defined benefit pension plans and other post-retirement medical benefit plan. The table also excludes Company contributions to funded defined benefit pension plans and the defined contribution plan. Additional information regarding the Company’s defined benefit pension plans, defined contribution plan, and other post-retirement medical benefit plan is included in Note 9 to the Company’s consolidated financial statements, “Benefit Plans.”

 

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COMMERCIAL COMMITMENTS

 

     Amount of Commitment
Expiring March 31,
   Totals
     2006    2007    2008    2009 &
Beyond
  
(in thousands)                         

Commercial Commitments:

                                  

Performance and surety bonds

   $ 54,196    $ 733    $ 1,719    $ 5,684    $ 62,332

Letters of credit as security for self-insured risk retention policies

     7,381      3,754      –        –        11,135
    

Total Commercial Commitments

   $   61,577    $   4,487    $   1,719    $   5,684    $   73,467
    

 

Critical Accounting Policies, Estimates, and Assumptions.  In the following subsections, the Company has presented its most critical accounting policies, estimates, and assumptions. These require management’s most subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management periodically reviews these critical accounting policies, estimates, assumptions, and the related disclosures with the Audit and Financial Policy Committee of the Company’s Board of Directors. Accounting policies in addition to the critical accounting policies referenced below are presented in Note 1 to the Company’s consolidated financial statements, “Nature of Operations and Summary of Significant Accounting Policies.”

 

Estimates and Assumptions.  In preparing the consolidated financial statements, the Company uses certain estimates and assumptions that may affect reported amounts and disclosures. The Company believes that the estimates and assumptions made in preparing the consolidated financial statements are reasonable, but are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate and unanticipated events may occur. The Company is subject to risks and uncertainties that may cause actual results to differ from estimated results.

 

Revenue Recognition.  The Company recognizes revenues for products at the point of passage of title, which is based on shipping terms, and for services when the service is rendered. Depending on the specific terms of individual customer contracts, revenue arrangements may exist in the normal course of business whereby contract terms may be extended and discounts may be offered.

 

In multiple element arrangements, such as when products, maintenance, or other services are combined, the Company recognizes revenues for each element based on their relative fair values in accordance with EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” The elements do not change the total revenues of a transaction, but may impact the timing of revenue recognition.

 

The Company recognizes revenues on long-term construction contracts based upon proportional performance in accordance with AICPA Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” In these circumstances, the Company recognizes revenues in proportion to costs incurred on the construction of the capital project. Accounting for long-term construction contracts requires judgments relative to estimating and tracking contract costs and determining the stage in the production process.

 

The Company offers preventative maintenance agreements to its customers that are accounted for in accordance with FASB Technical Bulletin No. 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.” Such contracts range in terms from one to five years and require the Company to maintain and repair its products over the maintenance contract term. Amounts due from customers under these contracts are initially recorded as deferred service revenues. These amounts are then amortized over the contract term and recognized as service revenues.

 

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Amounts billed to customers in sales transactions related to shipping and handling are classified as revenues in accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs.”

 

Allowance for Doubtful Accounts Receivable.  The Company maintains an allowance for doubtful accounts receivable for estimated losses in the collection of accounts receivable. In estimating the general allowance, the Company analyzes a number of factors, including historical credit experiences (e.g., historical charge-offs), customer payment practices, and general macroeconomic conditions. The Company also regularly analyzes significant customer accounts and when the Company becomes aware of a specific customer’s inability to meet its financial obligations, the Company records a specific reserve for bad debt to reduce the related accounts receivable to an amount that the Company reasonably believes is collectible. A considerable amount of judgment is required when the Company assesses the ultimate realization of accounts receivable. If the financial condition of the Company’s customers were to worsen, or macroeconomic conditions were to change, changes to the Company’s allowance for doubtful accounts receivable may be required.

 

Allowance for Sales Returns.  The Company estimates the allowance for sales returns based upon known returns and estimated returns of both capital equipment and consumables. The estimated returns of capital equipment and consumables are based upon recent historical experience and include estimates for the recoverability of the inventory value of the returned goods.

 

Inventories and Reserves.  Inventories are stated at the lower of cost or market. The Company uses the last-in, first-out (LIFO) and first-in, first-out (FIFO) cost methods. The valuation of LIFO inventories is made at the end of the year based on inventory levels and costs at that time. Inventories utilizing LIFO represented approximately 60.3% and 62.7% of total inventories at March 31, 2005 and 2004, respectively. Inventory costs include material, labor, and overhead. If the FIFO method of inventory costing had been used exclusively, inventories would have been $12.8 million and $12.2 million higher than those reported at March 31, 2005 and 2004, respectively.

 

The Company reviews the net realizable value of inventory on an ongoing basis, with consideration given to deterioration, obsolescence, and other factors. In addition, discrete provisions are made when facts and circumstances indicate that particular inventories will not be utilized. If future market conditions differ from those projected by management, and the Company’s estimates prove to be inaccurate, write-downs of inventory values and adjustments to cost of revenues may be required.

 

Asset Impairment Losses.  The Company reviews the carrying amount of property, plant, equipment, and finite-lived intangible assets subject to amortization when events and circumstances indicate that such assets may be impaired, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived assets, or the appropriate grouping of assets, is compared to the carrying amount to determine whether impairment exists. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying amount and the fair value. Evaluating assets for impairment involves certain judgments and estimates, including the interpretation of current economic indicators and market valuations, the Company’s strategic plans with regards to operations, historical and anticipated performance of operations, and other factors. If the Company incorrectly anticipates these factors or unexpected events occur, results of operations could be materially affected.

 

Purchase Accounting and Goodwill.  Business acquisitions are accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” Under the purchase method of accounting, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of the acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Valuation specialists with expertise in performing appraisals assist in determining the fair values of assets acquired and liabilities assumed. Such valuations require the Company to make estimates and assumptions, especially with respect to intangible assets. Generally, intangible assets are amortized over their useful lives. Goodwill is not amortized, but is annually assessed for impairment. Therefore, the allocation of acquisition costs to intangible assets and goodwill has a significant impact on future operating results.

 

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The Company evaluates the recoverability of recorded goodwill amounts annually, or when evidence of potential impairment exists, in accordance with Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets.” The evaluation of goodwill under SFAS No. 142 requires a valuation of the underlying business. The valuation can be significantly affected by estimates of future performance and discount rates over a relatively long period of time, market price valuation multiples, allocation of assets, and other factors. Different assumptions used by the Company could result in significantly different estimates of the fair value of the reporting units, which could result in the impairment of goodwill.

 

The Company performed its annual goodwill impairment evaluation as of October 31, 2004. This evaluation resulted in no impairment of the recorded goodwill amounts.

 

Deferred Tax Asset Valuation.  The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, and the implementation of tax planning strategies. If the Company is unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the effective income tax rates or time period within which the underlying temporary differences become taxable or deductible, the Company could be required to increase its valuation allowance against its deferred tax assets resulting in an increase to its effective income tax rate causing an adverse impact on operating results.

 

Self-Insurance Liabilities.  The Company records a liability for self-insured risk retention for general and product liabilities, workers’ compensation, and automobile liabilities. The Company maintains a captive insurance company, Global Risk Insurance Company (“GRIC”), to fund such losses. The Company engages a third-party actuary that utilizes GRIC’s historical loss experience and actuarial methods to determine the estimated liability. Such liability includes estimated provisions for both loss reserves and incurred but not reported claims. Annually, the Company reviews the assumptions and the valuations provided by third-party actuaries to determine the adequacy of the self-insurance liability. Losses greater than limits established by GRIC are covered by third-party insurance policies, which are subject to the terms and conditions of those policies. The Company’s accrual for the GRIC self-insured risk retention as of March 31, 2005 and 2004 was $16.3 million and $14.1 million, respectively.

 

The Company is also self-insured for employee medical claims. The Company estimates a liability for incurred but not reported claims based upon recent claims experience and an analysis of the average period of time between the occurrence of a claim and the time it is reported to and paid by the Company.

 

The Company’s self-insured liabilities contain uncertainties because management and the third-party actuaries must make assumptions and apply judgments to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. If actual results are not consistent with these assumptions and judgments, the Company could be exposed to additional costs in subsequent periods.

 

Warranty Reserves.  The Company generally offers a limited one-year parts and labor warranty on its capital equipment. The specific terms and conditions of warranties vary depending on the product sold and the country where the Company conducts business. The Company provides for the estimated cost of product warranties at the time product revenues are recognized. Estimates of warranty expenses are based primarily on historical warranty claim experience, certain identified circumstances, and the terms of specific customer contracts. While the Company engages in extensive quality programs and processes, including actively monitoring and evaluating the quality of suppliers, warranty experience could differ from management’s estimates. If actual product failure rates, material usage, or service costs differ from management’s estimates, revisions to the estimated warranty liability could be required. As of March 31, 2005 and 2004, the Company had accrued $6.2 million and $5.3 million, respectively, for warranty exposures.

 

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Contingencies.  The Company is involved in various patent, product liability, consumer, commercial, environmental, tax proceedings and claims, governmental investigations, and other legal and regulatory proceedings that arise from time to time in the ordinary course of business. In accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” the Company records accruals for such contingencies to the extent that the Company concludes that their occurrence is both probable and estimable. The Company considers many factors in making these assessments, including the professional judgment of experienced members of management and the Company’s legal counsel. The Company has made estimates as to the likelihood of unfavorable outcomes and the amounts of such potential losses. In the opinion of management, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. Litigation is inherently unpredictable and actual results could materially differ from the Company’s estimates. The Company records anticipated recoveries under applicable insurance contracts when assured of recovery.

 

To the extent that management of the Company believes that it is probable that a taxing authority will take sustainable position on a matter contrary to the position taken by the Company, the Company provides tax accruals. The Internal Revenue Service (“IRS”) routinely conducts audits of the Company’s federal income tax returns. As of March 31, 2005, the IRS was in the process of auditing federal income tax returns for the fiscal years 1999 through 2001, federal income tax returns for the fiscal years 1997 through 1998 were in appeals, and federal income tax returns for the fiscal year 2002 through present were open for review. If the Company were to prevail in matters for which accruals have been established, or is required to pay amounts in excess of established accruals, the Company’s effective income tax rate in a given financial statement period could be materially impacted.

 

Benefit Plans.  The Company provides defined benefit pension plans for certain manufacturing and plant administrative personnel throughout the world as determined by collective bargaining agreements or employee benefit standards set at the time of acquisition of certain businesses. As of March 31, 2005, the Company sponsored defined benefit pension plans for eligible participants in the U.S., Switzerland, and Germany. In addition, as of March 31, 2005, the Company sponsored an unfunded post-retirement medical benefit plan for two groups of U.S. employees comprised substantially of the same employees who receive pension benefits under the U.S. defined benefit pension plans. Benefits under this plan include retiree life insurance and retiree medical insurance, including prescription drug coverage and Medicare supplemental coverage.

 

Employee pension and post-retirement medical benefit plans are a significant cost of conducting business and represent obligations that will be settled far in the future and therefore are subject to estimates. The Company’s pension and post-retirement benefit obligations and costs are actuarially determined in accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions,” and Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.”

 

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The calculations of net periodic benefit costs and projected benefit obligations require the use of a number of assumptions. Changes to these assumptions can result in different expense and liability amounts, and future actual experience may differ significantly from current expectations. The Company believes that the most critical assumptions used to determine net periodic benefit costs and projected benefit obligations are the expected long-term rate of return on plan assets and the discount rate. A summary of significant assumptions used to determine the March 31, 2005 projected benefit obligations and the fiscal 2005 net periodic benefit costs is as follows:

 

     Defined Benefit Pension Plans     Other Post-
Retirement Plan
 
     U.S.     Switzerland     Germany    

Funding Status

   Funded     Funded     Unfunded     Unfunded  

Assumptions used to determine March 31, 2005 projected benefit obligations:

                        

Discount rate

   6.00 %   3.50 %   5.00 %   6.00 %

Expected long-term rate of return on plan assets

   8.00 %   5.00 %   NA     NA  

Assumptions used to determine fiscal 2005 net periodic benefit costs:

                        

Discount rate

   6.25 %   3.75 %   5.25 %   6.25 %

Expected long-term rate of return on plan assets

   8.00 %   5.00 %   NA     NA  

 

The Company develops its expected long-term rate of return on plan assets assumptions by evaluating input from third-party professional advisors, taking into consideration the asset allocation of the portfolios and the long-term asset class return expectations. Generally, net periodic benefit costs and projected benefit obligations both increase as the expected long-term rate of return on plan assets assumption decreases. Holding all other assumptions constant, lowering the expected long-term rate of return on plan assets assumption for the Company’s funded defined benefit pension plans by 50 basis points would have increased the fiscal 2005 benefit costs by $0.2 million and would have increased the projected benefit obligations by $0.2 million at March 31, 2005.

 

The Company develops its discount rate assumptions by evaluating input from third-party professional advisors, taking into consideration the current yield on country specific investment grade long-term bonds which provide for similar cash flow streams as the Company’s projected benefit obligations. Generally, the projected benefit obligations and the net periodic benefit costs both increase as the discount rate assumption decreases. Holding all other assumptions constant, lowering the discount rate assumption for the Company’s defined benefit pension plans and for the other post-retirement plan by 50 basis points would have increased the fiscal 2005 net periodic benefit costs by approximately $0.7 million and would have increased the projected benefit obligations by approximately $7.1 million at March 31, 2005.

 

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The Company has made assumptions regarding healthcare costs in computing its other post-retirement benefit obligation. The assumed rates of increase generally decline ratably over a five year-period from the assumed current year healthcare cost trend rate to the assumed long-term healthcare cost trend rate. A 100 basis point change in the assumed healthcare cost trend rate (including medical, prescription drug and long-term rates) would have had the following effect at March 31, 2005:

 

     100 Basis Point  
     Increase    Decrease  
(dollars in thousands)            

Effect on total service and interest cost components

   $     692    $ (619 )

Effect on post-retirement benefit obligation

     8,999      (8,464 )

 

Recently Issued Accounting Standards Impacting the Company.    Recently issued accounting standards that are relevant to the Company are presented in Note 1 to the Company’s consolidated financial statements, “Nature of Operations and Summary of Significant Accounting Policies.”

 

Inflation.  The overall effects of inflation on the Company’s business during the periods presented have not been significant. The Company monitors the prices it charges for its products and services on an ongoing basis and believes that it will be able to adjust those prices to take into account future changes in the rate of inflation.

 

Forward-Looking Statements.  This document may contain statements concerning certain trends, expectations, forecasts, estimates, or other forward-looking information affecting or relating to the Company or its industry that are intended to qualify for the protections afforded “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and other laws and regulations. Forward-looking statements speak only as to the date of this report, and may be identified by the use of forward-looking terms such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” and “seeks,” or the negative of such terms or other variations on such terms or comparable terminology. Many important factors could cause actual results to differ materially from those in the forward-looking statements including, without limitation, disruption of production or supplies, changes in market conditions, political events, pending or future claims or litigation, competitive factors, technology advances, and changes in government regulations or the application or interpretation thereof. Many of these important factors are outside STERIS’s control. No assurances can be provided as to any future financial results. Unless legally required, the Company does not undertake to update or revise any forward-looking statements even if events make clear that any projected results, express or implied, will not be realized. Other potential risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, (a) the potential for increased pressure on pricing or raw material cost that leads to erosion of profit margins, (b) the possibility that market demand will not develop for new technologies, products or applications, or the Company’s business initiatives will take longer, cost more or produce lower benefits than anticipated, (c) the possibility that application of or compliance with laws, court rulings, regulations, certifications or other requirements or standards may delay or prevent new product introductions, affect the production and marketing of existing products, or otherwise affect Company performance, results, or value, (d) the potential of international unrest or effects of fluctuations in foreign currencies of countries where the Company does a sizeable amount of business, and (e) the possibility of reduced demand, or reductions in the rate of growth in demand, for the Company’s products and services.

 

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

In the ordinary course of business, the Company is subject to interest rate, foreign currency, and commodity risks. These risks are described in the sections that follow.

 

Interest Rate Risk.  The Company is exposed to market risks through various fixed and floating rate debt instruments. As of March 31, 2005 the Company had $100.0 million in fixed rate Private Placement notes outstanding, $1.2 million outstanding under its revolving credit facility, and $8.0 million outstanding under other debt arrangements. Based on March 31, 2005 floating rate debt levels, a 100 basis point change in interest rates would have a minimal impact to interest expense annually. The Company monitors its interest rate risk, but does not engage in any hedging activities using derivative financial instruments.

 

Foreign Currency Risk.  For most international operations, local currencies have been determined to be the functional currencies. The financial statements of international subsidiaries are translated to their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities and at average currency exchange rates for revenues and expenses. Translation adjustments for international subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the Consolidated Statements of Income. Since the Company operates internationally and approximately 21.3% of its fiscal 2005 revenues were generated outside the United States, foreign currency exchange rate fluctuations can significantly impact the Company’s financial position, results of operations, and competitive position.

 

The Company enters into foreign currency forward contracts to hedge assets and liabilities denominated in foreign currencies, including inter-company transactions. The Company does not use derivative financial instruments for speculative purposes. At March 31, 2005, the Company held no foreign currency forward contracts. Subsequent to March 31, 2005, the Company entered into foreign currency forward contracts to sell euro and British pounds sterling with notional amounts of 17.7 million and 2.4 million, respectively. In addition, subsequent to March 31, 2005, the Company entered into foreign currency forward contracts to buy Canadian dollars with a notional amount of 21.4 million.

 

Commodity Risk.  The Company is dependent on basic raw materials, sub-assemblies, components, and other supplies used in its operations. The Company’s financial results could be affected by the availability and changes in prices of these materials. Certain of these materials are sourced from a limited number of suppliers. These materials are also key source materials for other companies in the Company’s industry. As such, in periods of rising demand for these materials, the Company may experience increased costs and/or limited supply. These conditions can potentially result in the Company’s inability to acquire key production materials on a timely basis, which could impact the Company’s ability to produce products and satisfy incoming sales orders on a timely basis. In addition, the costs of these materials can rise suddenly and result in significantly higher costs of production. The Company believes that it has adequate primary and secondary sources of supply in each of its key materials and energy sources. Where appropriate, the Company locks into longer-term supply contracts as a basis to support supply reliability.

 

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Item 8. Financial Statements and Supplementary Data

 

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

 

     Page

Report of Management

   41

Report of Independent Registered Public Accounting Firm

   42

Consolidated Financial Statements:

    

Consolidated Balance Sheets

   43

Consolidated Statements of Income

   44

Consolidated Statements of Cash Flows

   45

Consolidated Statements of Shareholders’ Equity

   46

Notes to Consolidated Financial Statements

   47

Financial Statement Schedule:

    

Schedule II - Valuation and Qualifying Accounts

   76

 

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REPORT OF MANAGEMENT

 

Board of Directors and Shareholders

STERIS Corporation

 

Management of STERIS Corporation (the “Company”) is responsible for the preparation of the consolidated financial statements and disclosures included in this annual report. Management believes that the consolidated financial statements and disclosures have been prepared in accordance with accounting principles generally accepted in the United States and that any amounts included herein which are based on estimates of the expected effects of events and transactions have been made with sound judgment and approved by qualified personnel. The opinion of Ernst & Young LLP, an independent registered public accounting firm, on the financial statements is included herein.

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

 

Management has used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”) to evaluate the effectiveness of internal control over financial reporting as of March 31, 2005. Management’s assessment of and conclusion on the effectiveness of internal controls over financial reporting did not include an assessment of certain elements of the internal control over financial reporting of Albert Browne Limited and its subsidiaries, FHSurgical, and the assets acquired from Cosmed Group, Inc., all of which were acquired in the year ended March 31, 2005, and which are included in the consolidated financial statements of the Company for the year ended March 31, 2005. The excluded elements constituted, in the aggregate, approximately $159.7 million and $143.6 million of the Company’s total and net assets, respectively, as of March 31, 2005 and approximately $15.2 million and $2.9 million of the Company’s revenues and income before income taxes, respectively, for the year ended March 31, 2005.

 

Based on this evaluation under the COSO criteria, management has concluded that the Company’s internal control over financial reporting was effective as of March 31, 2005. There were no material weaknesses in internal control over financial reporting identified by management.

 

Management’s assessment of the effectiveness of internal control over financial reporting as of March 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report dated June 9, 2005, which is included herein.

 

The Audit and Financial Policy Committee is composed of directors who are not officers of the Company. It meets regularly with members of management, internal auditors, and the representatives of the independent registered public accounting firm to discuss the adequacy of the Company’s internal controls over financial reporting, financial statements, and the nature, extent, and results of the audit effort. Management reviews with the Audit and Financial Policy Committee all of the Company’s significant accounting policies and assumptions affecting the results of operations. Both the independent registered public accounting firm and the internal auditors have direct access to the Audit and Financial Policy Committee without the presence of management.

 

LES C. VINNEY

Les C. Vinney

President and Chief Executive Officer

(Principal Executive Officer), Director

LAURIE BRLAS

Laurie Brlas

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

STERIS Corporation

 

We have audited the accompanying consolidated balance sheets of STERIS Corporation and subsidiaries (collectively “the Company”) as of March 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of STERIS Corporation and subsidiaries at March 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of March 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated June 9, 2005 expressed an unqualified opinion thereon.

 

/s/ ERNST & YOUNG LLP

 

Cleveland, Ohio

June 9, 2005

 

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STERIS CORPORATION AND SUBSIDIARIES

 

Consolidated Balance Sheets

(in thousands)

 

     March 31,  
     2005      2004  

Assets

                 

Current assets:

                 

Cash and cash equivalents

   $ 26,179      $ 80,408  

Accounts receivable (net of allowances of $9,882 and $8,623, respectively)

     281,401        253,797  

Inventories, net

     96,197        98,249  

Current portion of deferred income taxes, net

     6,426        18,246  

Prepaid expenses and other current assets

     9,929        10,338  
    


  


Total current assets

     420,132        461,038  

Property, plant, and equipment, net

     413,578        374,102  

Goodwill and intangibles, net

     350,156        230,993  

Other assets

     1,856        2,037  
    


  


Total assets

   $ 1,185,722      $ 1,068,170  
    


  


Liabilities and shareholders’ equity

                 

Current liabilities:

                 

Current portion of long-term indebtedness

   $ 4,889      $ 4,049  

Accounts payable

     67,550        67,988  

Accrued income taxes

     13,474        2,277  

Accrued payroll and other related liabilities

     41,716        41,972  

Accrued expenses and other

     94,186        72,502  
    


  


Total current liabilities

     221,815        188,788  

Long-term indebtedness

     104,274        109,090  

Deferred income taxes, net

     38,862        29,568  

Other liabilities

     65,133        60,025  
    


  


Total liabilities

     430,084        387,471  

Serial preferred shares, without par value, 3,000 shares authorized; no shares issued or outstanding

     –          –    

Common shares, without par value, 300,000 shares authorized; issued and outstanding shares of 69,627 and 69,946, respectively

     211,657        224,999  

Retained earnings

     537,526        451,546  

Accumulated other comprehensive income (loss):

                 

Minimum pension liability

     (5,974 )      (4,582 )

Cumulative foreign currency translation adjustment

     12,429        8,736  
    


  


Total shareholders’ equity

     755,638        680,699  
    


  


Total liabilities and shareholders’ equity

   $ 1,185,722      $ 1,068,170  
    


  


 

See notes to the consolidated financial statements.

 

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STERIS CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Income

(in thousands, except per share amounts)

 

     Years Ended March 31,
     2005    2004    2003

Revenues:

                    

Product

   $ 753,066    $ 754,521    $   687,024

Service

     366,679      332,491      285,063
    

  

  

Total revenues

     1,119,745      1,087,012      972,087

Cost of revenues:

                    

Product

     437,118      439,915      392,964

Service

     210,976      189,198      170,302
    

  

  

Total cost of revenues

     648,094      629,113      563,266
    

  

  

Gross profit

     471,651      457,899      408,821

Operating expenses:

                    

Selling, general, and administrative

     291,111      289,089      257,527

Research and development

     35,547      28,454      25,525
    

  

  

Total operating expenses

     326,658      317,543      283,052
    

  

  

Income from operations

     144,993      140,356      125,769

Interest expense, net

     3,052      2,272      1,651
    

  

  

Income before income tax expense

     141,941      138,084      124,118

Income tax expense

     55,961      43,841      44,682
    

  

  

Net Income

   $ 85,980    $ 94,243    $ 79,436
    

  

  

Net income per common share–basic

   $ 1.24    $ 1.36    $ 1.14
    

  

  

Net income per common share–diluted

   $ 1.23    $ 1.33    $ 1.12
    

  

  

 

See notes to the consolidated financial statements.

 

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STERIS CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

(in thousands)

 

    Years Ended March 31,  
    2005     2004     2003  

Operating activities:

                       

Net income

  $ 85,980     $ 94,243     $ 79,436  

Adjustments to reconcile net income to net cash provided by operating activities:

                       

Depreciation, depletion, and amortization

    51,192       48,683       46,515  

Deferred income taxes

    14,265       8,010       3,982  

Other items

    185       4,480       12,932  

Changes in operating assets and liabilities, excluding the effects of business acquisitions:

                       

Accounts receivable, net

    (20,401 )     (33,511 )     (14,115 )

Inventories, net

    7,848       12,488       (12,213 )

Other current assets

    706       3,555       (2,044 )

Accounts payable

    (4,614 )     (15,566 )     15,620  

Accruals and other, net

    16,228       920       3,178  
   


 


 


Net cash provided by operating activities

    151,389       123,302       133,291  

Investing activities:

                       

Purchases of property, plant, equipment, and intangibles, net

    (56,167 )     (67,560 )     (58,592 )

Investments in businesses, net of cash acquired

    (131,106 )     (37,599 )     (140 )

Purchase of business related assets

    –         (2,900 )     –    
   


 


 


Net cash used in investing activities

    (187,273 )     (108,059 )     (58,732 )

Financing activities:

                       

Proceeds from Private Placement

    –         100,000       –    

Payments under credit facility, net

    (3,198 )     (53,200 )     (55,800 )

Payments on long-term obligations and capital leases

    (3,674 )     (3,999 )     (2,300 )

Repurchases of common shares

    (33,868 )     (16,609 )     (16,070 )

Stock option and other equity transactions, net

    21,587       13,187       11,344  

Deferred financing fees and debt issuance costs

    –         (1,342 )     –    
   


 


 


Net cash (used in) provided by financing activities

    (19,153 )     38,037       (62,826 )

Effect of exchange rate changes on cash and cash equivalents

    808       1,187       1,784  
   


 


 


(Decrease) increase in cash and cash equivalents

    (54,229 )     54,467       13,517  

Cash and cash equivalents at beginning of year

    80,408       25,941       12,424  
   


 


 


Cash and cash equivalents at end of year

  $ 26,179     $ 80,408     $ 25,941  
   


 


 


 

See notes to the consolidated financial statements.

 

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STERIS CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Shareholders’ Equity

(in thousands)

 

     Common Shares     Retained
Earnings
   Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 
     Number     Amount         

Balance at March 31, 2002

   69,466     $   223,244     $   277,867    $   (13,966)     $   487,145  

Net income

   –         –         79,436      –         79,436  

Minimum pension liability

   –         –         –        (6,243 )     (6,243 )

Foreign currency translation adjustment

   –         –         –        8,081       8,081  
                         


Comprehensive income

   –         –         –        –         81,274  

Repurchases of common shares

   (900 )     (16,070 )                    (16,070 )

Stock options exercised

   1,170       10,993       –        –         10,993  

Tax benefit of stock options exercised

   –         5,837       –        –         5,837  

Other equity transactions

   5       351       –        –         351  
    

Balance at March 31, 2003

   69,741       224,355       357,303      (12,128 )     569,530  

Net income

   –         –         94,243      –         94,243  

Minimum pension liability

   –         –         –        2,699       2,699  

Foreign currency translation adjustment

   –         –         –        13,583       13,583  
                         


Comprehensive income

   –         –         –        –         110,525  

Repurchases of common shares

   (761 )     (16,609 )     –        –         (16,609 )

Stock options exercised

   961       11,759       –        –         11,759  

Tax benefit of stock options exercised

   –         4,066       –        –         4,066  

Other equity transactions

   5       1,428       –        –         1,428  
    

Balance at March 31, 2004

   69,946       224,999       451,546      4,154       680,699  

Net income

   –         –         85,980      –         85,980  

Minimum pension liability

   –         –         –        (1,392 )     (1,392 )

Foreign currency translation adjustment

   –         –         –        3,693       3,693  
                         


Comprehensive income

   –         –         –        –         88,281  

Repurchases of common shares

   (1,539 )     (33,868 )     –        –         (33,868 )

Stock options exercised

   1,215       15,611       –        –         15,611  

Tax benefit of stock options exercised

   –         5,015       –        –         5,015  

Other equity transactions

   5       (100 )     –        –         (100 )
    

Balance at March 31, 2005

   69,627     $ 211,657     $ 537,526    $ 6,455     $ 755,638  
    

 

 

See notes to the consolidated financial statements.

 

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STERIS CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Throughout this document, references to “STERIS Corporation,” “STERIS,” or the “Company,” are references to STERIS Corporation and its subsidiaries. The Company’s fiscal year ends on March 31. References to a particular “year” or “year-end” refer to the Company’s fiscal year.

 

Nature of Operations.  The Company develops, manufactures, and markets a combination of equipment, consumables, and services for healthcare, pharmaceutical, scientific, research, industrial, and governmental customers throughout the world. The Company operates in three business segments: Healthcare, Life Sciences, and STERIS Isomedix Services.

 

Principles of Consolidation.  The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated upon consolidation.

 

Use of Estimates.  The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

 

Reclassifications.  Certain prior period amounts have been reclassified to conform to the current period’s presentation.

 

Cash Equivalents and Supplemental Cash Flow Information.  The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

Supplemental disclosure of cash flow information follows:

 

     Years Ended March 31,
     2005    2004    2003

Cash paid during the year for:

                    

Interest

   $     5,094    $     1,848    $     2,583

Income taxes

     29,835      46,762      37,800

Cash received during the year for income tax refunds

     3,296      1,445      787

 

Revenue Recognition.  The Company recognizes revenues for products at the point of passage of title, which is based on shipping terms, and for services when the service is rendered. Depending on the specific terms of individual customer contracts, revenue arrangements may exist in the normal course of business whereby contract terms may be extended and discounts may be offered.

 

In multiple element arrangements, such as when products, maintenance, or other services are combined, the Company recognizes revenues for each element based on their relative fair values in accordance with EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” The elements do not change the total revenues of a transaction, but may impact the timing of revenue recognition.

 

The Company recognizes revenues on long-term construction contracts based upon proportional performance in accordance with AICPA Statement of Position No. 81-1, “Accounting for Performance of

 

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STERIS CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

Construction-Type and Certain Production-Type Contracts.” In these circumstances, the Company recognizes revenues in proportion to costs incurred on the construction of the capital project. Accounting for long-term construction contracts requires judgments relative to estimating and tracking contract costs and determining the stage in the production process.

 

The Company offers preventative maintenance agreements to its customers that are accounted for in accordance with FASB Technical Bulletin No. 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.” Such contracts range in terms from one to five years and require the Company to maintain and repair its products over the maintenance contract term. Amounts due from customers under these contracts are initially recorded as deferred service revenues. These amounts are then amortized over the contract term and recognized as service revenues.

 

Accounts Receivable.  Accounts receivable are presented at their face amount, less allowances for sales returns and doubtful accounts, on the accompanying Consolidated Balance Sheets. Accounts receivable consist of amounts billed and currently due from customers and amounts currently due but unbilled (primarily related to contracts accounted for under the percentage-of-completion method of accounting). The Company generally does not require collateral on sales.

 

The Company maintains an allowance for doubtful accounts receivable for estimated losses in the collection of accounts receivable. In estimating the general allowance, the Company analyzes a number of factors, including historical credit experiences (e.g., historical charge-offs), customer payment practices, and general macroeconomic conditions. The Company also regularly analyzes significant customer accounts and when the Company becomes aware of a specific customer’s inability to meet its financial obligations, the Company records a specific reserve for bad debt to reduce the related accounts receivable to an amount that the Company reasonably believes is collectible.

 

The Company estimates the allowance for sales returns based upon known returns and estimated returns for both capital equipment and consumables. The estimated returns of capital equipment and consumables are based upon recent historical experience and include estimates for the recoverability of the inventory value of the returned goods.

 

Inventories, Net.  Inventories are stated at the lower of cost or market. The Company uses the last-in, first-out (LIFO) and first-in, first-out (FIFO) cost methods. The valuation of LIFO inventories is made at the end of the year based upon inventory levels and costs at that time. Inventories utilizing LIFO represented approximately 60.3% and 62.7% of total inventories at March 31, 2005 and 2004, respectively. Inventory costs include material, labor, and overhead. If the FIFO method of inventory costing had been used exclusively, inventories would have been $12,815 and $12,233 higher than those reported at March 31, 2005 and 2004, respectively.

 

Depreciable Assets.  Depreciable assets consist of land improvements, buildings and leasehold improvements, machinery and equipment, information systems, and radioisotope (cobalt-60), and are generally referred to throughout this document as property, plant, and equipment. Net property, plant, and equipment is stated at historical cost, less accumulated depreciation and depletion. Additions and improvements are capitalized. Expenditures for maintenance and repair are charged to expense as incurred.

 

The Company provides for depreciation of the net carrying cost, less anticipated salvage value, over the estimated remaining useful lives of property, plant, and equipment principally by using the straight-line method. Depletion of radioisotope is determined by use of the annual decay factor inherent in the material, which is similar to the sum-of-the-years-digits method.

 

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STERIS CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

The Company generally depreciates (depletes) property, plant, and equipment over the useful lives presented in the following table:

 

Asset Type    Useful Life
(years)

Land improvements

   10

Buildings and leasehold improvements

   7-40

Machinery and equipment

   3-15

Information systems

   3-8

Radioisotope

   20

 

Interest.  The Company capitalizes interest costs incurred during the construction of long-lived assets in accordance with Statement of Financial Accounting Standards No. 34, “Capitalization of Interest Cost.” For the years ended March 31, 2005 and 2004, $1,156 and $820, respectively, of interest costs were capitalized.

 

Total interest expense for the years ended March 31, 2005, 2004, and 2003 was $4,234, $2,474, and $1,872, respectively.

 

Identifiable Intangible Assets.  Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Examples of identifiable intangible assets include product technology rights, trademarks, licenses, and customer relationships. The Company generally amortizes identifiable intangible assets over periods ranging from 3 to 17 years using the straight-line method.

 

Asset Impairment Losses.  The Company reviews the carrying amount of property, plant, equipment, and finite-lived intangible assets subject to amortization when events and circumstances indicate that such assets may be impaired, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived assets, or the appropriate grouping of assets, is compared to the carrying amount to determine whether impairment exists. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying amount and the fair value.

 

Business Acquisitions.  Business acquisitions are accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141 (“SFAS No. 141”), “Business Combinations.” Under the purchase method of accounting, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of the acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. In determining the total cost of an acquisition, certain transaction costs are included. Results of operations for acquired businesses are included in the Consolidated Statements of Income from the date of acquisition.

 

Goodwill.  Goodwill represents the excess of the purchase price of an acquired enterprise or assets over the fair value of the identifiable net assets acquired. Under Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived intangible assets must be reviewed at least annually for impairment. The impairment test for goodwill is a two-step process. The first step is to identify if goodwill impairment has occurred by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

considered impaired. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. In this second step, the implied fair value of the reporting unit’s goodwill is compared with the carrying amount of the goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for an amount equal to that excess, not to exceed the carrying amount of the goodwill.

 

Self-Insurance Liabilities.  The Company records a liability for self-insured risk retention for general and product liabilities, workers’ compensation, and automobile liabilities. The Company engages a third-party actuary that utilizes the Company’s historical loss experience and actuarial methods to assist in determining the estimated liability. Such liability includes estimated provisions for both loss reserves and incurred but not reported claims.

 

The Company is also self-insured for employee medical claims. The Company estimates a liability for incurred but not reported claims based upon recent claims experience and an analysis of the average period of time between the occurrence of a claim and the time it is reported to and paid by the Company.

 

Benefit Plans.  Defined benefit pension and other post-retirement benefit costs and obligations are actuarially determined and are affected by assumptions including the discount rate, expected long-term rate of return on plan assets, the annual rate of change in compensation for plan-eligible employees, estimated changes in costs of healthcare benefits, and other factors. The Company evaluates assumptions used on an annual basis. Pension and other post-retirement benefit costs and obligations are determined in accordance with Statement of Financial Accounting Standards No. 87 (“SFAS No. 87”), “Employers’ Accounting for Pensions,” and Statement of Financial Accounting Standards No. 106 (“SFAS No. 106”), “Employers’ Accounting for Postretirement Benefits Other Than Pensions.”

 

Litigation and Contingencies.  In accordance with Statement of Financial Accounting Standards No. 5 (“SFAS No. 5”), “Accounting for Contingencies,” amounts associated with litigation and contingencies are recorded as charges to earnings when the Company, after taking into consideration the facts and circumstances associated with each matter, including any settlement offers, has determined that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated.

 

Fair Value of Financial Instruments.  The recorded value of the Company’s financial instruments, which includes cash, cash equivalents, accounts receivable, accounts payable, and long-term debt, approximates fair value. Financial instruments potentially subject the Company to concentration of credit risk. The Company invests its excess cash in high-quality securities placed with major banks and financial institutions and short-term U.S. government securities. The Company has established guidelines relative to diversification and maturities to maintain safety and liquidity.

 

Foreign Currency Translation.  For most international operations, local currencies have been determined to be the functional currencies. The financial statements of international subsidiaries are translated to their U.S. dollar equivalents at end-of-period currency exchange rates for assets and liabilities and at average currency exchange rates for revenues and expenses. Translation adjustments for international subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized as incurred in the accompanying Consolidated Statements of Income, except for certain inter-company balances designated as long-term investments.

 

Foreign Currency Forward Contracts.  The Company enters into foreign currency forward contracts to hedge assets and liabilities denominated in foreign currencies, including inter-company transactions. The Company does not use derivative financial instruments for speculative purposes. These contracts are marked to market, with gains and losses

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

recognized within Selling, General, and Administrative expenses in the Consolidated Statements of Income. At March 31, 2005 and 2004, the Company held no foreign currency forward contracts.

 

Warranty.  Estimated product warranty expenses are accrued at the time the related sale is recognized. Estimates of warranty expenses are based primarily on historical warranty claim experience, certain identified circumstances, and the terms of specific customer contracts.

 

Shipping and Handling.  Shipping and handling costs are included in costs of revenues for all periods presented. Shipping and handling costs charged to customers are recorded as revenues in the period the product revenues are recognized in accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs.”

 

Advertising Expenses.  The costs of advertising are expensed as incurred in accordance with AICPA Statement of Position No. 93-7, “Reporting for Advertising Costs.” The Company incurred $14,294, $14,647, and $12,667, of advertising costs during the years ended March 31, 2005, 2004, and 2003, respectively.

 

Research and Development.  Company sponsored research and development costs associated with commercial products are expensed as incurred. Customer sponsored research and development costs are charged directly to the related contracts.

 

Income Taxes.  Income tax expense includes U.S. federal, state and local, and foreign income taxes, and is based on reported pre-tax income. Deferred income taxes reflect the effects of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. Valuation allowances are recognized to reduce deferred tax assets to an amount that is more likely than not to be realized.

 

Share-Based Compensation.  The Company accounts for share-based compensation under the provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” as permitted by Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” as amended by Statement of Financial Accounting Standards No. 148 (“SFAS No. 148”), “Accounting for Stock-Based Compensation-Transition and Disclosure,” and accordingly recognizes no compensation expense when the exercise price equals the market price of the stock on the date of the grant.

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

The following table illustrates the effect on the Company’s net income, earnings per basic common share, and earnings per diluted common share, had compensation cost for all options been determined based upon the fair market value provisions of SFAS No. 123:

 

     Years Ended March 31,
     2005    2004    2003
(in thousands, except per share amounts)               

Net income:

                    

As reported

   $   85,980    $   94,243    $   79,436

Less: Stock-based compensation expense, net of income taxes, assuming the fair value method

     6,079      5,669      5,388
    

  

  

Pro forma

   $ 79,901    $ 88,574    $ 74,048
    

  

  

Earnings per common share:

                    

Basic:

                    

As reported

   $ 1.24    $ 1.36    $ 1.14

Pro forma

     1.15      1.27      1.06

Diluted:

                    

As reported

     1.23      1.33      1.12

Pro forma

     1.14      1.25      1.04

 

For the purposes of computing pro forma net income, the fair value of option grants was estimated at their grant date using the Black-Scholes option pricing model and the following assumptions: Risk free interest rates of 3.54% to 6.90%, dividend yield of 0%, expected common share price volatility of 45%, and an expected option life of 5 years.

 

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in the Company’s option grants. If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different.

 

Recently Issued Accounting Standards Impacting the Company.  In December 2004, the Financial Accounting Standards Board finalized Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), “Share-Based Payment,” which is a revision of SFAS No. 123. This revised standard supersedes APB No. 25 and amends Statement of Financial Accounting Standards No. 95 (“SFAS No. 95”), “Statement of Cash Flows.” This revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments. Under the revised standard, companies will no longer be able to account for such transactions using the intrinsic value method in accordance with APB No. 25. Instead, companies will be required to account for such transactions using a fair value method and recognize expense in the consolidated statements of income. SFAS No. 123R is effective for annual reporting periods beginning after June 15, 2005. The Company will adopt SFAS No. 123R on April 1, 2006. The Company has not yet determined which fair value model and transitional provision it will follow. The subsection of Note 1, “Nature of Operations and Summary of Significant Accounting Policies,” titled,

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

“Share-Based Compensation,” contains pro forma disclosures regarding the effect on the Company’s net income, earnings per basic common share, and earnings per diluted common share, had the Company applied a fair value method of accounting for share-based compensation in accordance with SFAS No. 123. Depending on the model used to calculate share-based compensation expense in the future and other requirements of SFAS No. 123R, the pro forma disclosures currently used by the Company may not be indicative of the share-based compensation expense that will be recognized in the Company’s future financial statements. Further, the structure and timing of future grants may also have differing impacts on future results.

 

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act expands Medicare benefits, primarily adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006 as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In May 2004, the Financial Accounting Standards Board issued FASB Staff Position No. 106-2 (“FSP No. 106-2”), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” which provides guidance on the accounting for the effects of the Act. On January 21, 2005, the Centers for Medicare and Medicaid Services released final regulations implementing the Act. The Company adopted the provisions of FSP No. 106-2 on March 31, 2005. The effects of the adoption are presented in Note 9, “Benefit Plans.”

 

In October 2004, the American Jobs Creation Act of 2004 (the “Jobs Creation Act”) was signed into law. The Jobs Creation Act contains a number of provisions that might affect the Company’s future effective income tax rate. The most significant provisions would allow the Company to elect to deduct from its taxable income 85% of certain eligible dividends received by the Company from non-U.S. subsidiaries before the end of 2005 if those dividends are reinvested in the U.S. for eligible purposes. In December 2004, the Financial Accounting Standards Board issued FASB Staff Position No. 109-2 (“FSP No. 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP No. 109-2 provides accounting and disclosure guidance for the repatriation provision and became effective upon issuance. The Company is currently evaluating the amount, if any, of such eligible dividends that its non-U.S. subsidiaries will remit, as well as the effects the Jobs Creation Act will have on its effective income tax rate and deferred tax assets and liabilities.

 

2. BUSINESS ACQUISITIONS

 

The following summarizes recent business acquisitions, which are accounted for under the purchase method of accounting as required by SFAS No. 141. The Company’s consolidated financial statements include the results of operations for acquired businesses from the date of the respective acquisition.

 

FHSurgical.  On March 24, 2005, the Company completed the acquisition of FHSurgical; a privately-held manufacturer of surgical tables with manufacturing facilities located in Orleans, France, for 8.8 million euros (approximately $11.6 million at the acquisition date) in cash and assumed debt. The acquired business is being integrated into the Company’s Healthcare segment. The acquisition expanded the Company’s European distribution channel and enhanced the Company’s offering of surgical tables.

 

The purchase price is subject to the final settlement of certain working capital adjustments. Because the business acquisition was completed near the end of the Company’s fiscal year, the Company has not completed the valuation of the net assets acquired. The purchase price of $11,971, which includes direct acquisition costs of $544, has been preliminarily allocated to certain tangible assets based upon their carrying amounts at the acquisition date. The residual balance of $11,085 has been preliminarily allocated to goodwill at March 31, 2005.

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

In accordance with the Share Purchase Agreement, the purchase price consisted of assumed debt of $2,788. This amount is included in “Current portion of long-term indebtedness” on the accompanying Consolidated Balance Sheets, and has been excluded from the Company’s Consolidated Statements of Cash Flows, as required by SFAS No. 95. The purchase price is also subject to certain earn-out provisions, as provided in the Share Purchase Agreement. Earn-out amounts have not been accrued at March 31, 2005. Future earn-out amounts, if any, will be accounted for as an adjustment to goodwill.

 

Cosmed Group, Inc.  On January 7, 2005, the Company completed the acquisition of certain assets of Cosmed Group, Inc. (“Cosmed”); a privately-held contract sterilization service provider with corporate offices located in Jamestown, Rhode Island, for $73,000. The acquired business has been integrated into the Company’s Isomedix Services segment. As a result of the acquisition, five additional Ethylene Oxide processing facilities were added to the Company’s existing network of locations.

 

The purchase price is subject to the final settlement of certain working capital adjustments. The purchase price of $75,030, which includes direct acquisition costs of $2,030, has been preliminarily allocated to net assets and goodwill and is subject to further adjustment as the Company finalizes costs associated with the acquisition and the valuation of net assets acquired. At March 31, 2005, $39,913 has been preliminarily allocated to goodwill within the Company’s Isomedix Services segment and $10,080 has been preliminarily allocated to identifiable intangible assets, such as trademarks, intellectual property, and non-competition agreements. Based upon the preliminary allocation, these amounts are expected to be amortized over periods ranging from 5 to 17 years, with annual amortization amounts expected to be approximately $1,600 through fiscal 2010 and approximately $300 thereafter through the end of the amortization period.

 

In accordance with the terms of the Asset Purchase Agreement (the “Agreement”), the purchase price is to be paid in multiple installments with $65,700 being paid in fiscal 2005 and the remaining $7,300 to be paid approximately one year from the closing date. The holdback amount of $7,300 is subject to further adjustments as per the terms of the Agreement. The holdback amount is included in “Accrued expenses and other” on the accompanying Consolidated Balance Sheets, and has been excluded from the Company’s Consolidated Statements of Cash Flows, as required by SFAS No. 95.

 

Albert Browne Limited.  On September 15, 2004, the Company completed the acquisition of Albert Browne Limited and its subsidiaries (“Browne”); a privately-held manufacturer of chemical indicators, headquartered in Leicester, England, for 28.9 million British pounds sterling (approximately $52.1 million at the acquisition date), net of 3.2 million British pounds sterling (approximately $5.8 million at the acquisition date) of cash acquired. In accordance with the terms of the Share Purchase Agreement, STERIS paid 27.2 million British pounds sterling to the seller on the closing date. In addition, the Company funded 4.8 million British pounds sterling to an interest bearing deposit account which was opened jointly with the seller’s representatives. These amounts will be distributed in accordance with the terms and conditions of a Joint Account Agreement entered into between STERIS and the seller. The acquired business has been integrated into the Company’s Healthcare segment. The acquisition provided the Company with an established European distribution channel and expanded the Company’s offering of consumable products, which are used with its broad line of infection control, sterilization, and decontamination capital equipment.

 

The purchase price is subject to the final settlement of certain working capital adjustments. The purchase price of $60,004, which includes direct acquisition costs of $1,263, has been preliminarily allocated to net assets and goodwill and is subject to further adjustment as the Company finalizes costs associated with the acquisition and the valuation of net assets. At March 31, 2005, $26,965 has been preliminarily allocated to goodwill within the Company’s Healthcare segment and $30,014 has been preliminarily allocated to identifiable intangible assets, such as

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

trademarks, intellectual property, customer relationships, and non-competition agreements. Based upon the preliminary allocation, these amounts are expected to be amortized over periods ranging from 3 to 17 years, with annual amortization amounts expected to be approximately $3,200 through fiscal 2012, $1,500 for fiscal 2013 through fiscal 2015, and $500 thereafter through the end of the amortization period. Estimated amortization amounts have been calculated based upon March 31, 2005 foreign currency exchange rates.

 

Hamo Holding AG.  On April 8, 2003, the Company completed the acquisition of Hamo Holding AG (“Hamo”); a privately-owned manufacturer of washing/decontamination systems, with corporate offices located in Pieterlen, Switzerland, for approximately $49.7 million, which consisted of cash paid and debt assumed. The determination of the final purchase price is subject to the final settlement of certain working capital adjustments and satisfaction of certain seller representations and warranties pursuant to the terms of the Share Purchase Agreement. The acquisition provided the Company a stronger European presence and the ability to offer a wider range of sterile processing solutions to customers worldwide.

 

As a result of the acquisition, goodwill in the amount of $30,726 was created and has been allocated to the Company’s Life Sciences and Healthcare segments and $4,846 was allocated to identifiable intangible assets, such as customer relationships, trademarks, and intellectual property. These amounts are expected to be amortized over periods ranging from 5 to 10 years with annual amortization amounts expected to be approximately $388 through fiscal 2009 and $309 thereafter through the end of the amortization period. Estimated amortization amounts have been calculated based upon March 31, 2005 foreign currency exchange rates.

 

Sterion Incorporated.  In the first quarter of fiscal 2004, the Company acquired certain assets related to the sterilization container business from Sterion Incorporated (“Sterion”) for $2,900 in cash. This acquisition complemented the Company’s existing sterile processing, storage, and related business. The acquired Sterion assets did not have a material impact to the Company’s consolidated financial position, results of operations, or cash flows. The acquired Sterion assets have been integrated into the Company’s Healthcare segment.

 

3. GOODWILL AND INTANGIBLE ASSETS

 

In June 2001, the FASB issued SFAS No. 142. Under this standard, goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing. Other finite-lived intangible assets are amortized over their estimated useful lives. The Company performed its annual goodwill impairment evaluation during the third quarter of fiscal 2005. This evaluation resulted in no impairment of the recorded goodwill amounts.

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

Changes to the carrying amount of goodwill for the years ended March 31, 2005 and 2004 were as follows:

 

     Healthcare
Segment
   Life Sciences
Segment
   STERIS
Isomedix Services
Segment
   Total

Balance at March 31, 2003

   $ 116,393    $ 14,813    $ 51,924    $ 183,130

Goodwill acquired

     15,363      16,020      –        31,383

Foreign currency translation adjustments and other items

     694      746      –        1,440
    
  
  
  

Balance at March 31, 2004

     132,450      31,579      51,924      215,953

Goodwill acquired

     38,050      –        39,913      77,963

Foreign currency translation adjustments and other items

     4,947      2,133      –        7,080
    
  
  
  

Balance at March 31, 2005

   $ 175,447    $ 33,712    $ 91,837    $ 300,996
    
  
  
  

 

The increase in goodwill during fiscal 2005 resulted primarily from the acquisitions of Browne, FHSurgical, and certain assets of Cosmed. The increase in goodwill during fiscal 2004 resulted primarily from the acquisition of Hamo. Goodwill amounts created as a result of the fiscal 2005 acquisitions are subject to further adjustment as the Company finalizes the allocation of purchase price to the net assets acquired. Further information regarding business acquisitions is presented in Note 2, “Business Acquisitions.”

 

Information regarding the Company’s intangible assets is as follows:

 

     March 31, 2005
Gross Carrying
Amount
   March 31, 2005
Accumulated
Amortization
   March 31, 2004
Gross Carrying
Amount
   March 31, 2004
Accumulated
Amortization

Finite-lived intangible assets

   $ 69,086    $ 19,926    $ 30,502    $ 15,462

Indefinite-lived intangible assets

     1,268      –        1,549      –  

 

The increase in intangible assets during fiscal 2005 resulted primarily from the acquisition of Browne and certain assets of Cosmed. Amounts allocated to intangible assets as a result of fiscal 2005 acquisitions are subject to further adjustment as the Company finalizes the allocation of purchase price to the net assets acquired. Further information regarding acquisitions is presented in Note 2, “Business Acquisitions.” Indefinite-lived intangible assets relate to the Company’s defined benefit pension plans.

 

Total amortization expense for finite-lived intangible assets was $4,008, $1,629, and $1,271 for the years ended March 31, 2005, 2004, and 2003, respectively. Based upon the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the five succeeding fiscal years is estimated to be as follows:

 

     2006    2007    2008    2009    2010

Estimated amortization expense

   $ 6,434    $ 6,263    $ 6,022    $ 5,947    $ 5,503

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

The estimated annual amortization expense presented in the preceding table has been calculated based upon March 31, 2005 foreign currency exchange rates. In addition, the amounts presented in the preceding table are subject to further adjustment as the Company finalizes the allocation of purchase price for fiscal 2005 acquisitions.

 

4. INVENTORIES,  NET

 

Inventories, net consisted of the following:

 

     March 31,
     2005    2004

Raw materials

   $   26,769    $   27,916

Work in process

     23,533      24,420

Finished goods

     45,895      45,913
    
  

Inventories, net

   $   96,197    $   98,249
    

  

 

5. DEPRECIABLE  ASSETS

 

Information related to the major categories of the Company’s depreciable assets is as follows:

 

     March 31,  
     2005     2004  

Land and land improvements(1)

   $   23,518     $   23,123  

Buildings and leasehold improvements

     195,727       176,734  

Machinery and equipment

     242,009       212,415  

Information systems

     97,665       75,892  

Radioisotope

     108,519       95,222  

Construction in progress(1)

     36,973       38,364  
    


 


Total property, plant, and equipment

     704,411       621,750  

Less: accumulated depreciation and depletion

     (290,833 )     (247,648 )
    


 


Property, plant, and equipment, net

   $   413,578     $   374,102  
    


 


(1) Land is not depreciated. Construction in progress is not depreciated until placed in service.

 

Depreciation and depletion expense was $47,184, $47,054, and $45,244 for the years ended March 31, 2005, 2004 and 2003, respectively. Rental expense for leases was $15,813, $12,595, and $10,996 for the years ended March 31, 2005, 2004 and 2003, respectively. Operating leases relate principally to warehouse and office space, service facilities, vehicles, equipment, and communication systems. Certain lease agreements grant varying renewal and purchase options to the Company.

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

Estimated future minimum annual rentals payable under noncancelable operating lease agreements at March 31, 2005 were as follows:

 

     Operating
Leases

2006

   $   14,230

2007

     10,959

2008

     7,882

2009

     5,127

2010

     3,869

Thereafter

     7,336
    

Estimated future minimum operating lease payments

   $   49,403
    

 

In the preceding table, the future minimum annual rentals payable under noncancelable operating leases denominated in foreign currencies have been calculated based upon March 31, 2005 foreign currency exchange rates.

 

6. DEBT

 

Indebtedness was as follows:

 

    March 31,
    2005   2004

Private Placement

  $   100,000   $   100,000

Credit facility

    1,200     –  

Other debt

    7,963     13,139
   

 

Total

    109,163     113,139

Less: current portion

    4,889     4,049
   

 

Long-term portion

  $ 104,274   $ 109,090
   

 

 

In December 2003, the Company issued $100,000 of notes in a Private Placement (the “December 2003 Private Placement”) to certain institutional investors in an offering exempt from the registration requirements of the Securities Act of 1933. The proceeds of the December 2003 Private Placement were used to pay down the outstanding balance of the Company’s then existing Revolving Credit Facility (“Facility”) with the remaining balance being invested in short-term marketable securities. Of the $100,000 of notes, $40,000 had an original maturity of five years at an annual interest rate of 4.20%, an additional $40,000 had an original maturity of ten years at an annual interest rate of 5.25%, and the remaining $20,000 had an original maturity of twelve years at an annual interest rate of 5.38%. Upon closing the December 2003 Private Placement, the Company’s then existing unsecured $325,000 Facility was reduced to $275,000, as required by the Facility loan agreement. The December 2003 Private Placement contains financial covenants, including limitations on debt and a minimum consolidated net worth requirement.

 

In March 2004, STERIS amended and restated the existing $275,000 Facility. The Facility matures on March 29, 2009 and provides a multi-currency borrowing option. The Facility may be used for general corporate purposes. At

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

the Company’s option, the borrowings under the Facility bear interest at a rate equal to (1) LIBOR or (2) the greater of the Prime rate established by KeyBank National Association, Cleveland, Ohio, or the Federal Funds effective rate plus 0.50%, plus, in each case, applicable margins based upon the Company’s leverage ratio. The Facility also requires the payment of a Facility fee ranging from 0.125% to 0.325% of the total Facility commitment amount. The interest rate and the Facility fee are determined based on the Company’s leverage ratio. The Facility requires the maintenance of certain financial covenants, including a maximum leverage ratio and a minimum interest coverage ratio.

 

Other debt includes industrial development revenue bonds that bear interest at a variable rate based on the bank/marketing agent’s demand note index. Reimbursement agreements related to letters of credit that support the industrial development revenue bonds follow the same financial covenants as the revolving credit facility. At March 31, 2005 and 2004, outstanding obligations under the industrial development revenue bonds were $2,900 and $3,600, respectively, with an interest rate of 2.45% and 1.25%, respectively. Other debt also includes capital lease obligations of $1,499 and $2,383 at March 31, 2005 and 2004, respectively, and other miscellaneous obligations totaling $3,564 and $7,156 at March 31, 2005 and 2004, respectively. March 31, 2005 other miscellaneous obligations include assumed debt of $2,788 from the FHSurgical acquisition, which is discussed further in Note 2, “Business Acquisitions.”

 

At March 31, 2005, the Company was in compliance with all financial covenants associated with its credit facilities.

 

The combined annual aggregate amount of maturities of the Company’s outstanding debt is as follows:

 

2006

   $   4,889

2007

     1,574

2008

     700

2009

     41,900

2010 and thereafter

     60,100
    

Total

   $   109,163
    

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

7. ADDITIONAL BALANCE SHEET INFORMATION

 

Additional information related to the Company’s Consolidated Balance Sheets is as follows:

 

     March 31,
     2005    2004

Accrued payroll and other related liabilities:

             

Compensation and related items

   $   12,435    $   15,128

Accrued vacation

     12,967      11,614

Accrued bonuses

     7,697      7,865

Accrued employee commissions

     8,617      7,365
    

  

Total accrued payroll and other related liabilities

   $   41,716    $   41,972
    

  

Accrued expenses and other:

             

Deferred revenues

   $   34,376    $   16,029

Self-insured risk retention-GRIC

     16,315      14,115

Other self-insured risks

     1,265      746

Other post-retirement benefit obligation–current portion

     5,567      5,042

Defined benefit pension plans’ obligations–current portion

     3,384      2,987

Other employee benefit plans’ obligations–current portion

     391      29

Accrued dealer commissions

     4,589      5,606

Accrued warranty

     6,230      5,342

Other

     22,069      22,606
    

  

Total accrued expenses and other

   $   94,186    $   72,502
    

  

Other liabilities:

             

Other post-retirement benefit obligation–long-term portion

   $   52,536    $   50,657

Defined benefit pension plans’ obligations–long-term portion

     12,257      8,256

Other employee benefit plans’ obligations–long-term portion

     340      1,112
    

  

Total other liabilities

   $   65,133    $   60,025
    

  

 

8. INCOME TAXES

 

Income from continuing operations before income taxes was as follows:

 

     Years Ended March 31,
     2005    2004    2003

United States operations

   $   132,222    $   109,279    $   106,856

Non-United States operations

     9,719      28,805      17,262
    

  

  

     $   141,941    $   138,084    $   124,118
    

  

  

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

The components of the provision for income taxes consisted of the following:

 

     Years Ended March 31,
     2005    2004    2003

Current provision:

                    

United States federal

   $   33,610    $   25,447    $   26,060

United States state and local

     3,717      3,770      3,110

Non-United States

     4,369      4,781      7,440
    

  

  

Total current provision

     41,696      33,998      36,610

Deferred expense

     14,265      9,843      8,072
    

  

  

Total provision for income taxes

   $   55,961    $   43,841    $   44,682
    

  

  

 

The total provision for income taxes can be reconciled to the tax computed at the United States federal statutory rate as follows:

 

     Years Ended March 31,  
     2005      2004      2003  

Tax computed at the United States federal statutory tax rate

   $   49,679      $   48,329      $   43,441  

(Reduction) increase of income tax accruals

     (2,074 )      1,856        (1,101 )

State and local taxes, net of federal income tax benefit

     2,044        2,211        2,680  

Foreign income tax credit

     933        (5,304 )      (1,418 )

Difference in non-United States tax rates

     4,700        (4,021 )      1,896  

All other, net

     679        770        (816 )
    


  


  


Total provision for income taxes

   $ 55,961      $ 43,841      $ 44,682  
    


  


  


 

The significant components of the deferred tax assets and liabilities recorded in the accompanying Consolidated Balance Sheets at March 31, 2005 and 2004 were as follows:

 

     March 31,
     2005    2004

Deferred tax assets:

             

Post-retirement benefit accrual

   $   19,884    $   18,982

Accrued expenses and other

     20,425      22,336

Net operating loss carryforwards

     8,563      7,825
    

  

Deferred tax assets

     48,872      49,143

Less: Valuation allowance

     1,999      2,028
    

  

Total deferred tax assets

     46,873      47,115

Deferred tax liabilities:

             

Depreciation and depletion

     54,014      49,753

Intangibles

     16,581      6,015

Inventory and other

     8,714      2,669
    

  

Total deferred tax liabilities

     79,309      58,437
    

  

Net deferred tax liabilities

   $ 32,436    $ 11,322
    

  

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

The Company periodically reviews the need for a valuation allowance against deferred tax assets. A valuation allowance has been applied to a portion of the net operating loss carryforwards as the Company anticipates that it may not receive future benefit for all carryforwards. The valuation allowance decreased during fiscal 2005 by $29.

 

For tax return purposes, at March 31, 2005, the Company had federal net operating loss carryforwards of $2,630 which expire in years 2011 through 2017 and state net operating loss carryforwards of $82,028 which expire in years 2006 through 2024. Additionally, the Company had foreign net operating loss carryforwards of $9,852 which expire in years 2007 through 2017, and $8,188 that have an indefinite carryforward period.

 

At March 31, 2005, cumulative undistributed earnings of international subsidiaries included in consolidated retained earnings amounted to $84,135. These earnings are indefinitely reinvested in international operations. Accordingly, no provision has been made for deferred taxes related to the future repatriation of such earnings, nor is it practicable to determine the amount of this liability.

 

9. BENEFIT PLANS

 

The Company provides defined benefit pension plans for certain manufacturing and plant administrative personnel throughout the world as determined by collective bargaining agreements or employee benefit standards set at the time of acquisition of certain businesses. In addition to providing pension benefits to certain employees, the Company sponsors an unfunded post-retirement medical benefit plan for two groups of U.S. employees comprised substantially of the same employees who receive pension benefits under the U.S. defined benefit pension plans. Benefits under this plan include retiree life insurance and retiree medical insurance, including prescription drug coverage and Medicare supplemental coverage.

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

Obligations and Funded Status.  The following table reconciles the funded status of the defined benefit pension plans and the other post-retirement medical benefit plan to the amounts recorded on the Company’s Consolidated Balance Sheets at March 31, 2005 and 2004, respectively. Benefit obligation balances presented in the following table reflect the projected benefit obligations for the Company’s defined benefit pension plans and the accumulated other post-retirement benefit obligation for the Company’s other post-retirement medical benefit plan. The measurement date of the Company’s defined benefit pension plans and the other post-retirement medical benefit plan is March 31 for both periods presented.

 

    Pension Plans     Other Post-
retirement Plan
 
    U.S. Qualified     International    
    2005     2004     2005     2004     2005     2004  

Change in Benefit Obligations:

                                               

Benefit obligations at beginning of year

  $   42,995     $   41,940     $   13,931     $     3,718     $     77,743     $     73,765  

Benefit obligation associated with acquired business

    –         –         –         8,081       –         –    

Service cost

    822       790       729       705       939       940  

Interest cost

    2,602       2,594       628       509       4,688       4,630  

Impact of Medicare Prescription Drug, Improvement and Modernization Act of 2003

    –         –         –         –         (10,500 )     –    

Actuarial loss (gain)

    912       559       (143 )     (78 )     10,850       3,036  

Benefits paid

    (2,785 )     (2,888 )     (1,205 )     (496 )     (5,127 )     (4,628 )

Employee contributions

    –         –         478       410       –         –    

Impact of foreign currency exchange rate changes

    –         –         877       1,082       –         –    
   


 


 


 


 


 


Benefit obligations at end of year

    44,546       42,995       15,295       13,931       78,593       77,743  

Change in Plan Assets:

                                               

Fair value of plan assets at beginning of year

    38,031       34,240       6,920       –         –         –    

Fair value of plan assets associated with acquired business

    –         –         –         5,589       –         –    

Actual return (loss) on plan assets

    1,198       6,794       (234 )     529       –         –    

Employer contributions

    –         –         487       475       5,127       4,628  

Employee contributions

    –         –         478       410       –         –    

Benefits and expenses paid

    (2,946 )     (3,003 )     (1,095 )     (496 )     (5,127 )     (4,628 )

(table continued on following page)

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

    Pension Plans     Other Post-
retirement Plan
 
    U.S. Qualified     International    
    2005     2004     2005     2004     2005     2004  

Impact of foreign currency exchange rate changes

    –         –         474       413       –         –    
   


 


 


 


 


 


Fair value of plan assets at end of year

    36,283       38,031       7,030       6,920       –         –    

Funded Status of the Plans

    (8,263 )     (4,964 )     (8,265 )     (7,011 )     (78,593 )     (77,743 )

Unamortized transition amount

    (509 )     (620 )     –         –         –         –    

Unamortized prior service cost

    1,298       1,585       –         –         –         –    

Unamortized loss

    10,334       7,941       667       179       20,490       22,044  
   


 


 


 


 


 


Net prepaid (accrued) benefit obligations

  $ 2,860     $ 3,942     $   (7,598 )   $ (6,832 )   $   (58,103 )   $   (55,699 )
   


 


 


 


 


 


Amounts Recognized in Consolidated Balance Sheets(1):

                                               

Accrued benefit obligation

  $ (8,043 )   $ (4,411 )   $ (7,598 )   $ (6,832 )   $ (58,103 )   $ (55,699 )

Intangible pension asset

    1,268       1,549       –         –         –         –    

Accumulated other comprehensive loss

    9,635       6,804       –         –         –         –    
   


 


 


 


 


 


Net amount recognized

  $ 2,860     $ 3,942     $ (7,598 )   $ (6,832 )   $ (58,103 )   $ (55,699 )
   


 


 


 


 


 


(1) The current and long-term portions of the accrued benefit obligations are included in “Accrued expenses and other” and “Other liabilities,” respectively, on the accompanying Consolidated Balance Sheets. Intangible pension asset is included in “Other assets” on the accompanying Consolidated Balance Sheets. Accumulated other comprehensive loss, net of deferred income tax benefit of $3,661 and $2,222 at March 31, 2005 and 2004, respectively, is included in shareholders’ equity.

 

Defined benefit plans with an accumulated benefit obligation exceeding the fair value of plan assets had the following obligations and plan assets at March 31, 2005 and 2004:

 

    U.S. Qualified   International   Total
    2005   2004   2005   2004   2005   2004

Aggregate fair value of plan assets

  $   35,136   $   36,826   $ 7,030   $ 6,920   $   42,166   $   43,746

Aggregate accumulated benefit obligations

    43,324     41,393     12,815     12,624     56,139     54,017

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

Defined benefit plans with a projected benefit obligation exceeding the fair value of plan assets had the following obligations and plan assets at March 31, 2005 and 2004:

 

    U.S. Qualified   International   Total
    2005   2004   2005   2004   2005   2004

Aggregate fair value of plan assets

  $   35,136   $   36,826   $     7,030   $     6,920   $   42,166   $   43,746

Aggregate projected benefit obligations

    43,416     41,910     15,295     13,931     58,711     55,841

 

Components of Net Periodic Benefit Cost.  Components of the annual net periodic benefit cost of the Company’s defined benefit pension plans and other post-retirement medical benefit plan were as follows:

 

    Pension Plans    
    U.S. Qualified     International   Other Post-retirement Plan
    2005     2004     2003     2005     2004     2003   2005   2004   2003

Service cost

  $   822     $ 790     $ 754     $ 729     $ 705     $ 94   $ 939   $ 940   $ 623

Interest cost

    2,602       2,594       2,794       628       509       163     4,688     4,630     4,595

Expected return on plan assets

    (2,924 )     (2,580 )     (2,652 )     (404 )     (298 )     –       –       –       –  

Effect of settlement

    –         –         1,047       –         –         –       –       –       –  

Net amortization and deferral

    581       1,017       195       –         5       8     1,904     1,688     876
   


 


 


 


 


 

 

 

 

Net periodic benefit cost

  $   1,081     $   1,821     $   2,138     $     953     $     921     $     265   $   7,531   $   7,258   $   6,094
   


 


 


 


 


 

 

 

 

 

Assumptions Used in Calculating Benefit Obligations and Net Periodic Benefit Cost.  The following table provides the applicable actuarial assumptions used to determine the benefit obligations recorded on the Company’s Consolidated Balance Sheets at March 31:

 

     2005      2004  

Discount rate:

             

U.S. qualified pension plans

   6.00 %    6.25 %

Switzerland pension plan

   3.50 %    3.75 %

Germany pension plan

   5.00 %    5.25 %

Other post-retirement plan

   6.00 %    6.25 %

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

     2005      2004  

Expected long-term rate of return on plan assets:

             

U.S. qualified pension plans

   8.00 %    8.00 %

Switzerland pension plan

   5.00 %    5.00 %

Rate of compensation increase:

             

Switzerland pension plan

   3.00 %    3.00 %

Germany pension plan

   3.00 %    3.00 %

 

The following table provides the applicable actuarial assumptions used to determine the net periodic benefit cost recorded on the Company’s Consolidated Statements of Income for the years ended March 31:

 

     2005      2004      2003  

Discount rate:

                    

U.S. qualified pension plans

   6.25 %    6.50 %    7.50 %

Switzerland pension plan

   3.75 %    3.75 %    NA  

Germany pension plan

   5.25 %    5.50 %    6.00 %

Other post-retirement plan

   6.25 %    6.50 %    7.50 %

Expected long-term rate of return on plan assets:

                    

U.S. qualified pension plans

   8.00 %    8.00 %    8.00 %

Switzerland pension plan

   5.00 %    5.00 %    NA  

Rate of compensation increase:

                    

Switzerland pension plan

   3.00 %    3.00 %    NA  

Germany pension plan

   3.00 %    3.00 %    3.00 %

 

The net periodic benefit cost and the actuarial present value of projected benefit obligations are based upon assumptions that are reviewed on an annual basis. These assumptions may be revised annually based upon an evaluation of long-term trends, as well as market conditions that may have an impact on the cost of providing benefits.

 

The Company develops its expected long-term rate of return on plan assets assumptions by evaluating input from third-party professional advisors, taking into consideration the asset allocation of the portfolios and the long-term asset class return expectations.

 

The Company develops its discount rate assumptions by evaluating input from third-party professional advisors, taking into consideration the current yield on country specific investment grade long-term bonds which provide for similar cash flow streams as the Company’s projected obligations.

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

The Company has made assumptions regarding healthcare costs in computing its other post-retirement benefit obligation. The assumed rates of increase generally decline ratably over a five-year period from the assumed current year healthcare cost trend rate to the assumed long-term healthcare cost trend rate noted below.

 

     2005      2004      2003  

Healthcare cost trend rate - medical

   10.0 %    12.0 %    12.0 %

Healthcare cost trend rate - prescription drug

   15.0 %    15.0 %    15.0 %

Long-term healthcare cost trend rate

   5.0 %    5.0 %    5.0 %

 

To determine the healthcare cost trend rates, the Company evaluates a combination of information, including ongoing claims cost monitoring, annual statistical analyses of claims data, reconciliation of forecasted claims against actual claims, review of trend assumptions of other plan sponsors and national health trends, and adjustments for plan design changes, workforce changes, and changes in plan participant behavior.

 

A 100 basis point point change in assumed healthcare cost trend rates (including medical, prescription drug and long-term rates) would have the following effect at March 31, 2005:

 

     100 Basis Point  
    


    


     Increase    Decrease  

Effect on total service and interest cost components

   $ 692    $ (619 )

Effect on other post-retirement benefit obligation

     8,999      (8,464 )

 

Plan Assets.  The United States and Switzerland defined benefit pension plans are funded. The following table presents the targeted asset allocation of plan assets at March 31, 2005 and the actual allocation of plan assets at March 31, 2005 and 2004 for these plans:

 

     Long-Term
Target Allocation
Percentage
     Percentage of Plan Assets  
        2005      2004  
   

U.S. qualified plans:

                    

Equity securities

   60 %    59.3 %    60.2 %

Debt securities

   40 %    40.7 %    39.8 %

Cash

   0 %    –        –    
    

  

  

Total

   100 %    100 %    100 %
    

  

  

Switzerland plan:

                    

Debt securities

   45%-85 %    61.3 %    58.0 %

Equity securities

   10%-40 %    25.8 %    30.0 %

Cash

   8%-12 %    12.9 %    12.0 %
    

  

  

Total

   100 %    100 %    100 %
    

  

  

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

The long-term target allocations in the preceding table reflect the Company’s asset class return expectations and tolerance for investment risk within the context of the pension plans’ long-term benefit obligations. Investment policies, strategies, and long-term target allocations are developed on a plan specific and country specific basis. The long-term target asset allocations are continually challenged and are supported by an analysis that incorporates historical and expected returns by asset class as well as volatilities across asset classes and the Company’s liability profile. Due to market conditions and other factors, actual asset allocations may vary from the long-term target allocations presented in the preceding table. Plan assets are managed by outside investment managers. If asset allocations move outside of tactical ranges, the portfolios are rebalanced. For the purpose of the above analysis, debt and equity securities include fixed income and equity security mutual funds, respectively. At March 31, 2005 and 2004, none of the plans’ assets included investments in STERIS common shares.

 

Cash Flows.  It is the Company’s practice to fund amounts for the defined benefit pension plans at least sufficiently to meet the minimum requirements set forth in applicable employee benefit laws and local tax laws. Liabilities for amounts in excess of these funding levels are included on the accompanying Consolidated Balance Sheets of the Company. As of March 31, 2005, the Company does not expect to make contributions to the defined benefit pension plans in fiscal 2006.

 

Based upon the actuarial assumptions utilized to develop the Company’s benefit obligations at March 31, 2005, the following benefit payments are expected to be made to plan participants:

 

     U.S. Qualified    International    Other Post-Retirement Plan    Total

2006

   $ 2,909    $ 399    $ 5,567    $ 8,875

2007

     3,005      446      5,833      9,284

2008

     3,174      490      5,858      9,522

2009

     3,326      555      5,850      9,731

2010

     3,439      630      5,801      9,870

2011-2015

     18,375      3,954      25,168      47,497

 

In the preceding table, projected benefit payments denominated in foreign currencies have been calculated based upon March 31, 2005 foreign currency exchange rates.

 

Defined Contribution Plan.  The Company maintains a defined contribution plan for eligible employees. The Company provides a match on a specified portion of an employee’s contribution as approved by the Company’s Board of Directors. The defined contribution plan assets are held in trust and invested as directed by the plan participants. At March 31, 2005, the plan held 1,244,835 shares of the Company’s common shares with a fair value of $31,432. The aggregate fair value of plan assets was $218,564 at March 31, 2005. The Company paid no dividends to the plan for the years ended March 31, 2005, 2004, and 2003. Expenses related to the defined contribution plan were $4,609, $5,852, and $4,595, for the years ended March 31, 2005, 2004, and 2003, respectively.

 

Impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.  In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act expands Medicare benefits, primarily adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. The law provides a federal subsidy to companies that sponsor qualified post-retirement healthcare plans that provide prescription drug coverage. FSP No. 106-2 provides guidance on the accounting for the effects of the Act. On January 21, 2005, the Centers for Medicare and Medicaid Services released final regulations implementing the Act. The Company adopted the provisions of FSP No. 106-2 on March 31, 2005. The effects of the adoption resulted in a

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

reduction of $10,500 to the Company’s accumulated other post-retirement benefit obligation at March 31, 2005, which will be amortized over approximately twelve years. The adoption of FSP No. 106-2 did not have an impact on the Company’s net periodic benefit cost for the year ended March 31, 2005.

 

10. COMMITMENTS AND CONTINGENCIES

 

The Company is involved in various patent, product liability, consumer, environmental, tax proceedings and claims, governmental investigations, and other legal and regulatory proceedings that arise from time to time in the ordinary course of business. In accordance with SFAS No. 5, the Company records accruals for such contingencies to the extent that the Company concludes that their occurrence is both probable and estimable. The Company considers many factors in making these assessments, including the professional judgment of experienced members of management and the Company’s legal counsel. The Company has made estimates as to the likelihood of unfavorable outcomes and the amounts of such potential losses. In the opinion of management, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. Litigation is inherently unpredictable and actual results could materially differ from the Company’s estimates. The Company records anticipated recoveries under applicable insurance contracts when assured of recovery.

 

To the extent that management of the Company believes it is probable that a taxing authority will take a sustainable position on a matter contrary to the position taken by the Company, the Company provides tax accruals. If the Company was to prevail in matters for which accruals have been established, or is required to pay amounts in excess of established accruals, the Company’s effective income tax rate in a given financial statement period could be materially impacted.

 

As of March 31, 2005 and 2004, the Company’s commercial commitments totaled $73,467 and $48,636, respectively. Commercial commitments include standby letters of credit, letters of credit required as security under the Company’s self-insured risk retention policies, and other potential cash outflows resulting from an event that requires performance by the Company. Approximately $11,135 and $10,001, respectively, of the totals at March 31, 2005 and 2004 relate to letters of credit required as security under the Company’s self-insured risk retention policies.

 

11. BUSINESS SEGMENT INFORMATION

 

Effective April 1, 2003, the Company realigned operations into three business segments: Healthcare, Life Sciences, and STERIS Isomedix Services. Segment information for years prior to April 1, 2003 has been reclassified to conform to the current segment structure.

 

The Healthcare segment is a global provider of integrated and validated capital equipment and accessories, cleaning chemistries, and service solutions to companies directly or indirectly involved in the medical marketplace. The segment’s products and services are generally utilized within surgical environments, critical care environments, emergency departments, gastrointestinal environments, sterile processing environments, and in infection control processes.

 

The Life Sciences segment is a global provider of integrated and validated capital equipment, cleaning chemistries, and service solutions to three broad markets: Pharmaceutical and research, defense and aerospace, and industrial decontamination. Within the pharmaceutical and research market, the segment is focused on delivering capital equipment, consumables, and related services to global pharmaceutical companies and private and public research facilities. Within the defense and aerospace market, the segment is focused on the development of decontamination technologies for government, military, and aerospace customers. Within the industrial decontamination market, the segment is focused on developing decontamination solutions for first response, building decontamination, and food and beverage markets.

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

The Isomedix Services segment offers a comprehensive array of contract sterilization services using Gamma Irradiation, Electron Beam Irradiation, and Ethylene Oxide technologies. The segment offers sterilization, microbial reduction, and materials modification services to companies that supply products to the healthcare, industrial, and consumer products industries.

 

Financial information for each of the Company’s reportable segments is presented in the following table. Operating income (loss) for each segment reflects the full allocation of all distribution, corporate, and research and development expenses to the reporting segments. The accounting policies for reporting segments are the same as those for the consolidated Company. For the year ended March 31, 2005, revenues from a single customer did not aggregate to ten percent or more of total revenues.

 

    Years Ended March 31,
    2005     2004   2003

Revenues:

                   

Healthcare

  $ 796,356     $ 752,881   $   697,451

Life Sciences

    218,597       246,116     195,302

STERIS Isomedix Services

    104,792       88,015     79,334
   
   
 

Total revenues

  $   1,119,745     $   1,087,012   $ 972,087
   
   
 

Operating income (loss):

                   

Healthcare

  $ 138,646     $ 121,748   $ 114,232

Life Sciences

    (14,513 )     4,977     795

STERIS Isomedix Services

    20,860       13,631     10,742
   
   
 

Total operating income

  $ 144,993     $ 140,356   $ 125,769
   
   
 

 

Financial information for each of the Company’s U.S. and international geographic areas is presented in the following table. Revenues are based on the location of these operations and their customers. Long-lived assets are those assets that are identified within the operations in each geographic area, including property, plant, equipment, goodwill, intangible assets, and other assets.

 

    Years Ended March 31,
    2005   2004   2003

Revenues:

                 

United States

  $ 880,858   $ 842,512   $   786,239

International

    238,887     244,500     185,848
   
 
 

Total revenues

  $   1,119,745   $   1,087,012   $   972,087
   
 
 

 

    March 31,
    2005   2004

Long-lived assets:

           

United States

  $ 607,548   $ 525,980

International

    158,042     81,152
   
 

Total long-lived assets

  $ 765,590   $ 607,132
   
 

 

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STERIS CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

12. COMMON SHARES

 

Basic earnings per common share is calculated based upon the weighted average number of common shares outstanding. Diluted earnings per share is calculated based upon the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method. The following is a summary of common shares and common share equivalents outstanding used in the calculations of basic and diluted earnings per share:

 

    Years Ended March 31,
    2005   2004   2003
(shares in thousands)            

Weighted average common shares outstanding – basic

  69,254   69,521   69,434

Dilutive effect of common share equivalents

  768   1,221   1,436
   
 
 

Weighted average common shares and equivalents – diluted

  70,022   70,742   70,870
   
 
 

 

Options to purchase the following number of common shares at the following weighted average exercise prices were outstanding but excluded from the computation of diluted earnings per share because the exercise prices were greater than the average market price for the common shares during the period:

 

    Years Ended March 31,
    2005   2004   2003
(shares in thousands)            

Number of common share options

    1,396     585     613

Weighted average exercise price

  $   28.60   $   30.65   $   30.61

 

13. SHARE-BASED COMPENSATION

 

The Company has granted nonqualified stock options to certain employees to purchase the Company’s common shares at the market price on the date of grant. Stock options granted generally become exercisable to the extent of one-fourth of the optioned shares for each full year of employment following the date of grant and generally expire 10 years after the date of grant, or earlier if an option holder ceases to be employed by the Company. Certain option agreements have provisions that provide for an adjustment to the normal vesting schedule, whereby, options vest on a prorated basis as defined by specific option agreements in the event of employment termination. The Company accounts for stock-based compensation under the provisions of APB No. 25, “Accounting for Stock Issued to Employees,” as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation- Transition and Disclosure,” and accordingly recognizes no compensation expense when the exercise price equals the market price of the stock on the date of grant. Note 1, “Nature of Operations and Summary of Significant Accounting Policies,” discusses the compensation cost for the stock options granted in fiscal 2005, 2004, and 2003, had it been determined based on the value at the grant date consistent with the fair value method.

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

The following is a summary of option share information:

 

    Shares     Weighted
Average
Price
  Fair
Value

March 31, 2002

  6,229,397     $   14.22      

Granted

  1,248,194       19.75   $   8.76

Exercised

  (1,169,655 )     9.40      

Canceled

  (248,678 )     20.51      
   

           

March 31, 2003

  6,059,258       16.03      

Granted

  1,216,800       22.60     9.93

Exercised

  (961,468 )     12.23      

Canceled

  (179,680 )     20.33      
   

           

March 31, 2004

  6,134,910       17.80      

Granted

  1,025,464       26.68     12.10

Exercised

  (1,214,500 )     12.87      

Canceled

  (206,861 )     25.26      
   

           

March 31, 2005

  5,739,013       20.16      
   

           

 

Shares available for future grants were 3,968,822 as of March 31, 2005. At March 31, 2005, the range and weighted average per share exercise prices of options outstanding and exercisable, and the weighted average remaining contract life, were as follows:

 

     Outstanding    Exercisable
Range of
Exercise Prices
   Option
Shares
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contract Life
(Years)
   Option
Shares
   Weighted
Average
Exercise
Price

  $9.00 - $14.50

   1,569,064    $   11.30    5.21    1,371,906    $   10.99

$14.51 - $19.60

   1,181,980      19.26    6.45    690,073      19.09

$19.61 - $30.66

   2,987,969      25.18    7.19    1,329,889      25.22
    
              
      
     5,739,013      20.16    6.50    3,391,868      18.22
    
              
      

 

At March 31, 2004, options with a weighted average exercise price of $17.06 were exercisable on 3,537,755 shares and at March 31, 2003, options with a weighted average exercise price of $16.69 were exercisable on 3,388,517 shares.

 

Under a Shareholder Rights Agreement, one common share purchase right (“Right”) is attached to each outstanding common share. Each Right is exercisable only if a person or group acquires 15% or more of the outstanding common shares. If the Rights become exercisable, each Right will entitle the holder (other than the

 

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STERIS CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

acquiring person or group) to acquire one common share for an exercise price of $.50 per share. The Rights will expire on November 7, 2006, unless redeemed earlier at one half cent per Right.

 

14. REPURCHASES OF COMMON SHARES

 

On July 28, 2004, the Company announced that its Board of Directors had authorized the repurchase of up to 3.0 million STERIS common shares. This common share repurchase authorization replaced the common share repurchase authorization of July 24, 2002. During fiscal 2005, the Company repurchased 1,539,100 of its common shares for $33,868, representing an average price of $22.01 per common share. At March 31, 2005, 2,726,000 common shares remained authorized for repurchase and 376,332 common shares were held in treasury.

 

Refer to Note 16, “Subsequent Events,” for information regarding common shares repurchased by the Company subsequent to March 31, 2005.

 

15. FINANCIAL  AND OTHER GUARANTEES

 

The Company generally offers a limited one-year parts and labor warranty on its capital equipment. The specific terms and conditions of those warranties vary depending on the product sold and the country where the Company conducts business. The Company provides for the estimated cost of product warranties at the time product revenues are recognized. Amounts due to customers for the Company’s future performance under these warranties are recorded as a current liability on the accompanying Consolidated Balance Sheets within “Accrued expenses and other”. Factors that affect the Company’s warranty liability include the number and type of installed units, historical and anticipated rates of product failures, and material and service costs per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the recorded amounts as necessary.

 

Changes in the Company’s warranty liability during the periods presented are as follows:

 

     Years Ended March 31,  
     2005      2004      2003  

Balance, beginning of year

   $     5,342      $   4,861      $     3,256  

Warranty obligation associated with acquired business

     –          1,253        –    

Warranties issued during the period

     10,750        9,056        8,590  

Settlements made during the period

     (9,862 )      (9,828 )      (6,985 )
    


  


  


Balance, end of year

   $ 6,230      $ 5,342      $ 4,861  
    


  


  


 

The Company also issues product maintenance contracts to its customers that are accounted for in accordance with the requirements of FASB Technical Bulletin No. 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.” Such contracts range in terms from 1 to 5 years and require the Company to maintain and repair the Company’s products over the maintenance contract term. Amounts due from customers under these contracts are initially recorded as a liability for deferred service contract revenue on the accompanying Consolidated Balance Sheets. The liability recorded for deferred service revenue was $13,081, $12,342, and $11,149 as of March 31, 2005, 2004, and 2003, respectively. Such deferred service revenues are then amortized on a straight-line basis over the contract term and recognized as service revenues on the accompanying Consolidated Statements of Income. The activity related to the liability for deferred service revenues has been excluded from the table presented above.

 

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Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

16. SUBSEQUENT EVENTS

 

Subsequent to March 31, 2005, the Company entered into foreign currency forward contracts to sell euro and British pounds sterling with notional amounts of 17.7 million and 2.4 million, respectively. In addition, subsequent to March 31, 2005, the Company entered into foreign currency forward contracts to buy Canadian dollars with a notional amount of 21.4 million.

 

On May 17, 2005, the Company announced that its Board of Directors had declared a quarterly cash dividend in the amount of $0.04 per common share, payable on June 28, 2005, to shareholders of record as of the closing of the stock transfer books on May 31, 2005.

 

As of June 10, 2005, the Company had repurchased 1,580,500 of its common shares during the first quarter of fiscal 2006, at an average price of $24.24 per common share, leaving 1,145,500 common shares authorized for repurchase under the existing Board authorization.

 

17. QUARTERLY RESULTS (UNAUDITED)

 

     Quarters Ended  
     March 31     December 31     September 30     June 30  
(dollars in thousands)                         

Fiscal 2005

                                

Revenues:

                                

Product

   $   214,918     $   193,111     $   176,612     $   168,425  

Service

     100,795       91,278       88,234       86,372  
    


 


 


 


Total Revenues

     315,713       284,389       264,846       254,797  

Cost of revenues:

                                

Product

     127,113       112,223       102,588       95,194  

Service

     57,891       52,604       50,770       49,711  
    


 


 


 


Total cost of revenues

     185,004       164,827       153,358       144,905  
    


 


 


 


Gross profit

     130,709       119,562       111,488       109,892  

Percentage of revenues

     41.4 %     42.0 %     42.1 %     43.1 %

Net income

   $ 25,013     $ 24,457     $ 18,893     $ 17,617  
    


 


 


 


Net income per share — basic

   $ 0.36     $ 0.35     $ 0.27     $ 0.25  
    


 


 


 


Net income per share — diluted

   $ 0.36     $ 0.35     $ 0.27     $ 0.25  
    


 


 


 


 

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STERIS CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, except per share amounts)

 

     Quarters Ended  
     March 31     December 31     September 30     June 30  
(dollars in thousands)                         

Fiscal 2004

                                

Revenues:

                                

Product

   $ 205,041     $ 191,362     $ 177,476     $ 180,642  

Service

     91,016       82,924       79,913       78,638  
    


Total revenues

     296,057       274,286       257,389       259,280  

Cost of revenues:

                                

Product

     119,908       112,120       101,924       105,963  

Service

     50,532       47,069       44,851       46,746  
    


Total cost of revenues

     170,440       159,189       146,775       152,709  
    


Gross profit

     125,617       115,097       110,614       106,571  

Percentage of revenues

     42.4 %     42.0 %     43.0 %     41.1 %

Net income

   $ 30,309     $ 27,093     $ 20,369     $ 16,472  
    


Net income per share — basic

   $ 0.43     $ 0.39     $ 0.29     $ 0.24  
    


Net income per share — diluted

   $ 0.43     $ 0.38     $ 0.29     $ 0.23  
    



(1) Per share amounts for the quarters and the full year have been computed separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average common shares outstanding during each quarter due to the effect of potentially dilutive common share equivalents only in the periods in which such effect would be dilutive and the effect of quarterly common share repurchases.

 

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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

 

COL. A    COL. B    COL. C     COL. D     COL. E     COL. F
          Additions            
Description    Balance at
Beginning
of Period
   Charges
to Costs
and
Expenses
    Charges
to Other
Accounts
(2)
    Deductions
(3)
    Balance at
End of
Period

Year ended March 31, 2005

                                     

Deducted from asset accounts:

                                     

Allowance for trade accounts receivable(1)

   $   8,623    $   4,212     $   (9 )   $   (2,962 )   $   9,882
    

Year ended March 31, 2004

                                     

Deducted from asset accounts:

                                     

Allowance for trade accounts receivable(1)

   $ 8,637    $ (224 )   $   26     $ (236 )   $ 8,623
    

Year ended March 31, 2003

                                     

Deducted from asset accounts:

                                     

Allowance for trade accounts receivable(1)

   $ 8,031    $ 3,478     $ –       $ 2,872     $ 8,637
    

(1) Net allowance for doubtful accounts and allowance for sales and returns.
(2) Change in foreign currency exchange, international subsidiaries.
(3) Uncollectible accounts written off, net of recoveries.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

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Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures: Management of the Company, including the Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2005, and based on this evaluation, has determined that the Company’s disclosure controls and procedures are effective.

 

Management’s Report on Internal Control Over Financial Reporting: Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such item is defined in the Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting as of March 31, 2005 based on the framework in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment of and conclusion on the effectiveness of internal controls over financial reporting did not include an assessment of certain elements of the internal control over financial reporting of Albert Browne Limited and its subsidiaries, FHSurgical, and the assets acquired from Cosmed Group, Inc., all of which were acquired in the year ended March 31, 2005, and which are included in the consolidated financial statements of the Company for the year ended March 31, 2005. The excluded elements constituted, in the aggregate, approximately $159.7 million and $143.6 million of the Company’s total and net assets, respectively, as of March 31, 2005 and approximately $15.2 million and $2.9 million of the Company’s revenues and income before income taxes, respectively, for the year ended March 31, 2005. Based on this evaluation under this framework, management concluded that the internal control over financial reporting was effective as of March 31, 2005.

 

Management’s assessment of the effectiveness of internal control over financial reporting as of March 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report dated June 9, 2005, which is included herein.

 

Changes in Internal Controls: During the fourth quarter of fiscal 2005, there were no changes in the Company’s internal control over financial reporting, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Board of Directors and Shareholders

STERIS Corporation

 

We have audited management’s assessment, included in “Management’s Report on Internal Control over Financial Reporting,” that STERIS Corporation and subsidiaries (collectively “the Company”) maintained effective internal control over financial reporting as of March 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

 

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As indicated in “Management’s Report on Internal Control over Financial Reporting,” management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Albert Browne Limited and its subsidiaries, FHSurgical, and the assets acquired from Cosmed Group, Inc., which are included in the consolidated financial statements of the Company and constitute approximately $159.7 million and $143.6 million of total and net assets, respectively, as of March 31, 2005 and approximately $15.2 million and $2.9 million of revenues and income before income taxes, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of these acquired entities.

 

In our opinion, management’s assessment that STERIS Corporation and subsidiaries maintained effective internal control over financial reporting as of March 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2005, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of STERIS Corporation and subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2005 and our report dated June 9, 2005 expressed an unqualified opinion thereon.

 

Cleveland, Ohio

   /s/     ERNST & YOUNG LLP

June 9, 2005

    

 

 

Item 9B. Other Information

 

None.

 

 

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PART III

 

Item 10. Directors and Executive Officers of the Registrant

 

The Company incorporates herein by reference the information appearing under the captions “Nominees for Terms Expiring at the Annual Meeting in 2006” and “Continuing Directors Whose Terms Expire at the Annual Meeting in 2006”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Board Meetings and Committees” of the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the Company’s 2005 Annual Meeting of Shareholders (the “Proxy Statement”).

 

Executive officers of the Company serve for a term of one year from the date of election to the next organizational meeting of the Board of Directors and until their respective successors are elected and qualified, except in the case of death, resignation, or removal. Information concerning executive officers of the Company is contained in Part I, Item 4 of this annual report. The Company has adopted a code of ethics, its Code of Business Conduct for Employees, that applies to its principal executive officer, principal financial officer, and controller, as well as all other employees of the Company. The Company also has adopted a code of ethics, its Director Code of Ethics, that applies to the members of the Company’s Board of Directors, including the Company’s principal executive officer. The Company’s Code of Business Conduct for Employees and the Director Code of Ethics can be found on the Company’s Investor Relations website at www.steris-ir.com.

 

Item 11. Executive Compensation

 

The Company incorporates herein by reference the information appearing beginning under the caption “Board Compensation” and continuing through the end of the section titled “Stock Performance Graph” of the Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

The Company incorporates herein by reference the information appearing under the captions “Ownership of Voting Securities” and “Summary of Equity Compensation Plans” of the Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions

 

The Company incorporates herein by reference the information appearing under Item 11 hereof.

 

Item 14. Principal Accountant Fees and Services

 

The information relating to principal accounting fees and services is set forth under the caption “Independent Registered Public Accounting Firm” of the Proxy Statement.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedule

 

LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND

FINANCIAL STATEMENT SCHEDULE

 

(a) (1) The following consolidated financial statements of STERIS Corporation and subsidiaries are included in Item 8:
    Consolidated Balance Sheets—March 31, 2005 and 2004.    
    Consolidated Statements of Income—Years ended March 31, 2005, 2004, and 2003.    
    Consolidated Statements of Cash Flows—Years ended March 31, 2005, 2004, and 2003.    
    Consolidated Statements of Shareholders’ Equity—Years ended March 31, 2005, 2004, and 2003.    
    Notes to Consolidated Financial Statements.    
(a) (2) The following consolidated financial statement schedule of STERIS Corporation and subsidiaries is included in Item 8:
    Schedule II—Valuation and Qualifying Accounts    
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(a) (3) Exhibits    

 

Exhibit
Number
   Exhibit Description
3.1    1992 Amended Articles of Incorporation of STERIS Corporation, as amended on May 14, 1996, November 6, 1996, and August 6, 1998 (filed as Exhibit 3.1 to Form 10-K filed for the fiscal year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by reference).
3.2    Amended and Restated Regulations of STERIS Corporation (filed as Exhibit 3.2 to Form 10-Q for the fiscal quarter ended September 30, 2004, as originally filed (Commission File No. 1-14643), and incorporated herein by reference).
4.1    Specimen Form of Common Stock Certificate (filed as Exhibit 4.1 to Form 10-K filed for the fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by reference).
4.2    Amended and Restated Rights Agreement, dated as of January 21, 1999, between STERIS Corporation and National City Bank, as successor Rights Agent (filed as Exhibit 4.2 to the Registration Statement on Form 8-A filed April 16, 1999 (Commission File No. 1-14643), and incorporated herein by reference).
4.3    Amendment No. 1, dated June 7, 2002, to Amended and Restated Rights Agreement, dated as of January 21, 1999, between STERIS Corporation and National City Bank, as successor Rights Agent (filed as Exhibit 4.1 to the Registration Statement on Form 8-A/A filed June 10, 2002 (Commission File No. 1-14643), and incorporated herein by reference).
10.1    Amended and Restated Non-Qualified Stock Option Plan.*
10.2    STERIS Corporation 1994 Equity Compensation Plan.*

 

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Exhibit
Number
   Exhibit Description
10.3    STERIS Corporation 1994 Nonemployee Directors Equity Compensation Plan (filed as Exhibit 10.3 to Form 10-K filed for the fiscal year ended March 31, 2002 (Commission File No. 1-14643), and incorporated herein by reference).*
10.4    STERIS Corporation Form of Nonqualified Stock Option Grant Agreement for Directors (filed as Exhibit 10.4 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File No. 1-14643), and incorporated herein by reference).*
10.5    STERIS Corporation Form of Notice of Restricted Grant for Directors (filed as Exhibit 10.3 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File No. 1-14643), and incorporated herein by reference).*
10.6    STERIS Corporation Form of Nonqualified Stock Option Agreement for Employees (filed as Exhibit 10.2 to Form 10-Q for the fiscal quarter ended December 31, 2004 (Commission File No. 1-14643), and incorporated herein by reference).*
10.7    STERIS Corporation 1997 Stock Option Plan (filed as Exhibit 10.5 to Form 10-K for the fiscal year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).*
10.8    STERIS Corporation 1998 Long-Term Incentive Stock Plan (filed as Exhibit 10.8 to Form 10-K for fiscal year ended March 31, 1999 (Commission File No. 1-14643), and incorporated herein by reference).*
10.9    STERIS Corporation 2002 Stock Option Plan (filed as Exhibit 10.7 to Form 10-K for the fiscal year ended March 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).*
10.10    STERIS Corporation Management Incentive Compensation Plan.*
10.11    Senior Executive Management Incentive Compensation Plan (filed as Exhibit 10.11 to Form 10-K for the fiscal year ended March 31, 1999 (Commission File No. 1-14643), and incorporated herein by reference).*
10.12    Change of Control Agreement between STERIS Corporation and Mr. Vinney (filed as Exhibit 10.18 to Form 10-K filed for the fiscal year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by reference).*
10.13    Form of Change of Control Agreement between STERIS Corporation and the executive officers of STERIS Corporation other than Mr. Vinney (filed as Exhibit 10.2 to Form 10-Q filed for the quarter ended June 30, 1999 (Commission File No. 1-14643), and incorporated herein by reference).*
10.14    Employment Agreement between STERIS Corporation and Mr. Vinney (filed as Exhibit 10.21 to Form 10-K filed for the fiscal year ended March 31, 2000 (Commission File No. 1-14643), and incorporated herein by reference).*
10.15    Amended and Restated Credit Agreement, dated March 29, 2004, among STERIS Corporation, various financial institutions, and KeyBank National Association, as Agent, Joint Lead Arranger and Book Runner (filed as Exhibit 10.13 to Form 10-K filed for the fiscal year ended March 31, 2004 (Commission File No. 1-14643), and incorporated herein by reference).
10.16    Amendment No. 1 dated March 22, 2005 to Amended and Restated Credit Agreement dated March 29, 2004 among STERIS Corporation, various financial institutions, and KeyBank National Association, as Agent, Joint Lead Arranger and Book Runner (filed as Exhibit 10.1 to Form 8-K dated March 22, 2005 (Commission File No. 1-14643), and incorporated herein by reference).
10.17    Note Purchase Agreement, dated December 17, 2003, between STERIS Corporation and certain institutional investors (filed as Exhibit 10.3 to Form 10-Q filed for the third quarter ended December 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).

 

81


Table of Contents

 

Exhibit
Number
   Exhibit Description
10.18    Subsidiary Guaranty, dated December 17, 2003, by certain subsidiaries of STERIS Corporation (filed as Exhibit 10.4 to Form 10-Q filed for the third quarter ended December 31, 2003 (Commission File No. 1-14643), and incorporated herein by reference).
10.19    Guaranty Supplement dated March 29, 2004 by SterilTek Holdings, Inc. and STERIS Corporation (filed as Exhibit 10.16 to Form 10-K for the fiscal year ended March 31, 2004 (Commission File No. 1-14643), and incorporated herein by reference).
10.20    Guaranty Supplement dated January 7, 2005 by STERIS Isomedix Services, Inc. and STERIS Corporation.
10.21    Asset Purchase Agreement dated as of November 15, 2004 between Cosmed Group, Inc. and STERIS Corporation (filed as Exhibit 10.1 to Form 10-Q for the third quarter ended December 31, 2004 (Commission File No. 1-14643), and incorporated herein by reference).
21.1    Subsidiaries of STERIS Corporation
23.1    Consent of Registered Public Accounting Firm
24.1    Power of Attorney.
31.1    Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)
31.2    Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)
32.1    Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* A management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.

 

STERIS or its subsidiaries are parties to several indentures relating to long-term debt instruments, which, individually or in the aggregate, do not exceed 10% of the total assets of STERIS and its subsidiaries on a consolidated basis. STERIS will furnish a copy of any such indenture to the Securities and Exchange Commission upon request.

 

(b) Exhibits

 

The response to this portion of Item 15 is included under (a) (3) of this Item 15.

 

(c) Financial Statement Schedules

 

Not applicable.

 

82

Amended and Restated Non-Qualified Stock Option Plan

Exhibit 10.1

 

STERIS CORPORATION

 

AMENDED AND RESTATED NON-QUALIFIED STOCK OPTION PLAN

 

(as amended through January 5, 2000)

 

1. Purpose.

 

This Amended and Restated Non-Qualified Stock Option Plan (the “Plan”) of STERIS Corporation (the “Company”) is intended to advance the interests of the Company and its shareholders. The purposes of the Plan are to attract and retain key employees for the Company and its Subsidiaries, to provide key employees with a proprietary interest in the Company, and to stimulate the interest of key employees and of independent members of the Board of Directors of the Company (the “Board) in the development and financial success of the Company.

 

2. Administration.

 

The Plan shall be administered by a committee which shall consist of not less than two directors of the Company (the “Committee”) appointed by the Board. The Board may also appoint one or more directors as alternate members of the Committee. No officer or employee of the Company or of a Subsidiary shall be a member or alternate member of the Committee. The Committee shall at all times be so comprised as to satisfy the disinterested administration standard contained in Rule 16b-3, promulgated under the Securities Exchange Act of 1934 (the “1934 Act”), if required to qualify for the exemption from Section 16(b) of the 1934 Act that is available under Rule 16b-3 (the “Rule 16b-3 Exemption”). The members of the Committee shall serve at the pleasure of the Board, which may remove members from the Committee or appoint new members to the Committee from time to time, and members of the Committee may resign by written notice to the Chairman of the Board or the Secretary of the Company. The Committee may adopt any rules it considers appropriate for the conduct of its business or the administration of the Plan, may make interpretations of the Plan, may take any other actions it considers appropriate in connection with the Plan (including, if the Committee deems appropriate, accelerating the date on which outstanding Options may be exercised), and shall have such additional authority as the Board may determine to be desirable from time to time.

 

3. Shares Subject to the Plan.

 

The aggregate number of Common Shares of the Company that may be issued upon exercise of Options granted under the Plan shall be 1,181,750 Common Shares, which may be authorized but unissued Common Shares or issued Common Shares reacquired by the Company and held as treasury shares. If any Option granted under the Plan expires or terminates for any reason without having been fully exercised, the unpurchased Common Shares that had been subject to that Option shall again be available for other Options to be granted under the Plan. The authorized number of 1,181,750 Common Shares takes into account the 6-for-1 stock split authorized by the shareholders of the Company on March 30, 1992 and includes Options outstanding prior to March 30, 1992 covering 681,750 Common Shares. The aggregate number of Common Shares subject to the Plan shall be subject to adjustment under Section 8 hereof.

 

4. Participants in Plan.

 

Only those individuals who are either “Eligible Employees,” as defined in Section 4(a) or “Independent Directors,” as defined in Section 4(b) shall be eligible to receive Options under the Plan.

 

(a) “Eligible Employees” shall include only employees of the Company or a Subsidiary who are executive, administrative, professional, or technical personnel who have responsibilities affecting the management, development, and financial success of the Company or of a Subsidiary.


(b) “Independent Directors” shall include only individuals who are members of the Board and are neither employed by the Company or a Subsidiary nor affiliated with any institutional investor that holds more than two percent of the Company’s outstanding Common Shares.

 

5. Grants to Eligible Employees.

 

The Committee shall designate from time to time, in its discretion, the Eligible Employees to whom Options shall be granted under the Plan and the number of Common Shares which shall be subject to each Option granted under the Plan. All actions of the Committee under this section shall be conclusive, and no Eligible Employee shall have a right to be granted any Options unless, and except to the extent, so designated by the Committee. No Options shall be granted under the Plan after March 29, 2002.

 

6. Option Agreements.

 

Each Option granted to an Eligible Employee pursuant to the Plan shall be authorized by the Committee and shall be evidenced by a written Non-Qualified Stock Option Agreement (the “Agreement”), in form approved by the Committee, which shall be dated as of the date on which the Option is granted, shall be signed by the President or another officer of the Company authorized by the Committee, and shall be signed by the individual to whom the Option is granted (the “Optionee”). The Agreement shall set forth the number of Common Shares covered by the Option, the price per Common Share at which the Option may be exercised (the “Exercise Price”), the term of the Option, and such other provisions as the Committee shall approve. Unless the Committee specifies another date, the date on which the Committee approves the granting of an Option shall be deemed the date on which the Option is granted. The Agreement shall not be inconsistent with the Plan, including without limitation, in the case of Options granted to Eligible Employees, the following provisions, but may contain more restrictive provisions than the Plan provisions:

 

(a) Term of Option. The term of each option shall be for a period ending not more than ten years and one week from the date of the Agreement. The Option shall expire at the close of regular business hours at the Company’s principal office on the last day of the term of the Option or, if earlier, on the applicable expiration date provided for in the Agreement.

 

(b) Exercise Date. Unless otherwise specified by the Committee, each Option shall be exercisable to the extent of:

 

(i) from and after the first anniversary date of the Agreement, 25% of the Common Shares subject to the Option;

 

(ii) from and after the second anniversary date of the Agreement, an additional 25% of the Common Shares subject to the Option;

 

(iii) from and after the third anniversary date of the Agreement, an additional 25% of the Common Shares subject to the Option; and

 

(iv) from and after the fourth anniversary date of the Agreement, the remaining 25% of the Common Shares subject to the Option.

 

All Options granted on or before March 30, 1992, are by their terms exercisable in full from and after the sale of Common Shares pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “1933 Act”); provided that such sale yields proceeds to the Company and the selling shareholders (if any) of not less than $7,500,000 and is made at a public offering price per share not less than three times the quotient of (a) $11.50 divided by (b) the number of Common Shares into which a Class B 6% Convertible Preferred Share of the Company is convertible at the time of such sale (the “Initial Public Offering”). Unless expressly so provided by the Committee at the time of the grant, no Option granted after March 30, 1992 shall be accelerated to any extent by the Initial Public Offering. Except as provided in subsections (c) and (d) below, no Option granted to an Eligible Employee may be exercised at any time unless the Optionee is an employee of the Company or a Subsidiary, unless the Committee otherwise determines. If, by reason of the application of subsection (c) or (d) below, an Option may be exercised at a time when an Optionee is no longer an employee of

 

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the Company, and, on the date upon which the Optionee, for any reason, ceased to be an employee of the Company (the “Employment Termination Date”), the Optionee held any Options that were not then otherwise fully exercisable, each such Option shall be exercisable as of the Employment Termination Date: (A) to the extent that it was exercisable pursuant to the foregoing schedule, plus (B) a percentage determined by multiplying 25 by a fraction the numerator of which is the number of days between the Employment Termination Date and the immediately preceding anniversary date of the Optionee’s Agreement (or, if no anniversary date has occurred, the numerator will be the number of days between the Employment Termination Date and the date of the Optionee’s Agreement) and the denominator of which is 365.

 

(c) Death or Disability. If an Optionee dies while in the employ of the Company or within the period available to the Optionee to exercise the Optionee’s option rights under the circumstances provided for in the last sentence of this subsection (c) (dealing with disability) or in subsection (d) below, then within the year next succeeding such death (but within the term of the Option under subsection (a) above), the person entitled by will or the applicable laws of descent and distribution may exercise the Option to the extent that the Optionee was entitled to exercise the same as of the Optionee’s date of death. If an Optionee’s employment is terminated on account of disability, then the Optionee may during the year next succeeding such termination date (but within the term of the Option under subsection (a) above) exercise the Option to the extent that the Optionee was entitled to exercise the same as of the termination date of the Optionee’s employment.

 

(d) Other Termination. Except as provided in the last sentence of this subsection (d), if an Optionee’s employment with the Company is terminated for any reason other than death or disability, the Optionee, at any time within the three month period following such termination of employment (but within the term of the Option under subsection (a) above), may exercise the Option to the extent that he was entitled to exercise the same as of the termination date of the Optionee’s employment. If an Optionee’s employment is terminated by reason of fraud, theft, embezzlement or other felonious conduct, proven or admitted, in connection with that employment, all rights of the Optionee under any Agreement shall terminate immediately and all outstanding Options held by the Optionee shall expire immediately.

 

(e) Limitations on Transfer. No Option may be transferred other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act, or the rules thereunder.

 

(f) No Employment Rights. Nothing in the Plan or in any Agreement shall confer upon any Optionee any right to continue in the employ of the Company, or to interfere with or limit the right of the Company to terminate the Optionee’s employment at any time.

 

(g) Exercise of Option. An Optionee electing to exercise an Option shall deliver to the Treasurer of the Company at its executive office: (i) a completed Notice of Exercise of Option setting forth the number of Common Shares with respect to which the Option is being exercised, the manner in which the Optionee’s name shall appear on the share certificates, and the Optionee’s current address and social security number, and (ii) payment of the full aggregate Exercise Price as provided in subsection (h).

 

(h) Payment For Common Shares. Upon exercise of an Option by an Optionee, the aggregate Exercise Price for the Common Shares with respect to which the Option is being exercised shall be payable by the Optionee in cash or in such other form of consideration as the Committee determines may be accepted, including, without limitation, securities or other property, or any combination of cash, securities, or other property, or by delivery by the Optionee (with the written notice of election to exercise) of irrevocable instructions to a broker registered under the 1934 Act to promptly deliver to the Company the amount of sale or loan proceeds to pay the aggregate Exercise Price. The Committee, in its sole discretion, may grant to an Optionee the right to transfer Common Shares acquired upon the exercise of a part of an Option in payment of the aggregate Exercise Price payable upon immediate exercise of a further part of the Option.

 

7. Grants to Independent Directors.

 

Each individual who is an Independent Director on the date of closing of the Initial Public Offering (the “IPO Date”) shall be granted an Option, effective on the IPO Date, to purchase such number of Common Shares as the Committee may determine, at

 

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an exercise price equal to the price at which Common Shares are sold by the Company in the Initial Public Offering. Each individual who becomes an Independent Director after the IPO Date may be granted an Option, at the discretion of the Committee, effective on the date on which the individual becomes an Independent Director, to purchase such number of Common Shares as the Committee may determine, at an exercise price equal to fair market value of the Common Shares on the date on which the individual becomes an Independent Director. Any Option granted under this Section 7 shall be exercisable in whole or in part at the election of the Optionee at any time during the period beginning six months after the date on which the Option is granted and ending ten years and one week after the date on which the Option is granted. Except as expressly provided in this Section 7, all of the provisions of Section 6 shall be applicable to Options granted to Independent Directors (but taking into account the Independent Director’s tenure as a director in place of an Eligible Employee’s tenure as an employee of the Company or a Subsidiary).

 

8. Change in Capital Structure.

 

In the event the Company changes its outstanding Common Shares by reason of stock splits, stock dividends, or any other increase or reduction of the number of outstanding Common Shares without receiving consideration in the form of money, services, or property, the aggregate number of Common Shares subject to the Plan shall be adjusted, and the number of Common Shares and the option price for each Common Share subject to the unexercised portion of any then-outstanding Option shall be adjusted by the Committee as may be necessary and equitable to continue in favor of the Optionee the benefits intended to be conferred by the Option.

 

In the event of any other recapitalization or any merger, consolidation, or other reorganization of the Company, the Committee shall make such adjustment, if any, as it may deem appropriate to accurately reflect the number and kind of Common Shares deliverable, and the option prices payable, upon subsequent exercise of any then-outstanding Options.

 

The Committee’s determination of the adjustments appropriate to be made under this Section 8 shall be conclusive upon all Optionees under the Plan.

 

9. Securities Law Restrictions.

 

Unless and until a registration statement under the 1933 Act has become effective with respect to shares reserved under the Plan, notwithstanding any provisions to the contrary in the Plan or any Agreement made pursuant to the Plan:

 

(a) Ohio Securities Law. No Option shall be exercisable unless the Common Shares subject thereto are exempt from registration under the Ohio securities law, are the subject matter of an exempt transaction, are registered by description or qualification, or are the subject matter of a transaction which has been registered by description, as contemplated by Section 1707.03(G)(3) of the Ohio Revised Code;

 

(b) Opinion of Counsel. No Option shall be exercisable unless the Company, upon its request, receives an opinion of, or satisfactory to, its counsel that the issuance of Common Shares upon such exercise would not violate the federal securities laws or any applicable state securities laws; and

 

(c) Subsequent Transfers. Any Common Shares issued upon exercise of any Option may not be sold or otherwise transferred, and the Company and its transfer agent shall not be required to transfer any Common Shares so issued, unless they have been registered under the federal and state securities laws or a valid exemption from such registration is available.

 

The Company may imprint on each certificate evidencing the ownership of any Common Shares a legend reflecting the restrictions of this Section 9 and may use the following or any other appropriate legend for that purpose:

 

The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities law and may not be sold or otherwise transferred without such registration unless a valid exemption from such registration is available and the corporation has received an opinion of, or satisfactory to, its counsel that such transfer would not violate any federal or state securities laws.

 

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10. Shareholders’ Agreement Restriction.

 

If the Agreement with respect to the Option so provides, any Common Shares that an Optionee may acquire by virtue of the exercise of an Option shall be subject to the terms and provisions of the Shareholders’ Agreement, dated April 26, 1988, as amended from time to time, by and among the Company, Bill R. Sanford, Primus Capital Fund, Primus Capital Fund II Limited Partnership, Invacare Corporation, McDonald & Company Venture Capital Inc., II, Medical Ventures, Ltd., A. T. Capital Corp., A. T. Venture Investments, Frontenac Venture V Limited Partnership, Allsop Venture Partners III L.P., NYSTRS/NV Capital, Limited Partnership, Robinson Investment Co., Raymond C. Kralovic, and Edward T. Schneider so long as the Shareholders’ Agreement remains in effect.

 

11. Withholding of Taxes.

 

The Committee may, in its discretion and subject to such rules as the Committee may adopt from time to time, permit or require an Optionee to satisfy, in whole or in part, any withholding tax obligation that may arise in connection with exercise of any Option by having the Company hold back some portion of the Common Shares that would otherwise be delivered upon exercise of the Option or by delivering to the Company an amount equal to the withholding tax obligation arising with respect to such exercise in (a) cash, (b) Common Shares, or (c) such combination of cash and Common Shares as the Committee may determine. The fair market value of the Common Shares to be so held back by the Company or delivered by the Optionee shall be determined as of the date on which the obligation to withhold first arose. The Company shall apply the provisions of this Section 11 only to meet required tax withholding (based on the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to the supplemental income recognized by an employee) and shall not withhold (or repurchase) Common Shares in excess of the minimum number required for tax withholding.

 

12. Rights as Shareholder.

 

No Optionee or his executor, administrator, heirs, or legatees shall have any rights of a shareholder in the Company with respect to the Common Shares covered by his Option unless and until the Common Shares are transferred of record on the books of the Company’s transfer agent.

 

13. Definition of Subsidiary.

 

The term “Subsidiary” when used in the Plan or any Agreement made pursuant to the Plan means a subsidiary corporation in which the Company owns directly or indirectly 50% or more of the total combined voting power of all classes.

 

14. Definition of Fair Market Value.

 

For purposes of the Plan, the “Fair Market Value” of Common Shares as of any date shall be the average of the closing sales prices of the Common Shares as reported on the national securities exchange on which the Common Shares are traded, or, if applicable, as reported on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”) National Market, on the last five trading days preceding that date. If the Common Shares are not or cease to be traded on a national securities exchange or on the NASDAQ National Market, the “Fair Market Value” of Common Shares shall be determined in the manner prescribed by the Committee.

 

15. Amendment or Termination of Plan.

 

The Board may amend or terminate the Plan at any time, but no such amendment or termination shall affect the rights of the Optionee of any then-outstanding Option without the consent of the Optionee.

 

16. Government Regulations.

 

Notwithstanding any provision of the Plan or any Agreement made pursuant to the Plan, the Company’s obligations under the Plan and any Agreement shall be subject to all applicable laws, rules, and regulations and to such approvals as may be required by any governmental or regulatory agencies.

 

17. Governing Law.

 

The Plan shall be construed and governed by the laws of the State of Ohio.

 

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18. Genders and Numbers.

 

When permitted by the context, each pronoun used in the Plan includes the same pronoun in other genders and numbers.

 

19. Captions.

 

The captions of the various sections of the Plan are not part of the context of the Plan, but are only labels to assist in locating those sections, and shall be ignored in construing the Plan.

 

20. Effective Date.

 

The Company first adopted the Non-Qualified Stock Option Plan effective September 25, 1987 and subsequently amended that Plan effective on each of July 12, 1988, July 25, 1989, and August 22, 1991. The plan was further amended by action of the Board on March 20, 1992, which action was approved by the Shareholders of the Company on March 30, 1992, effective as of March 20, 1992. This document amends and restates the Plan, effective January 5, 2000, pursuant to a resolution of the Compensation Committee adopted on that date.

 

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STERIS Corporation 1994 Equity Compensation Plan

Exhibit 10.2

 

STERIS CORPORATION

1994 EQUITY COMPENSATION PLAN

 

(as amended through January 5, 2000)

 

1. Purpose. The STERIS Corporation 1994 Equity Compensation Plan is intended to promote the interests of STERIS Corporation and its shareholders. The purposes of the Plan are to attract and retain key employees for the Company and its Subsidiaries, to provide key employees with a proprietary interest in the Company, and to stimulate the interest of key employees in the development and financial success of the Company. To achieve these purposes, the Company may grant Awards of Options, Stock Appreciation Rights, Restricted Stock, and Performance Shares to selected Employees, all in accordance with the terms and conditions hereinafter set forth. Capitalized terms used in this Plan have the meanings ascribed to them in Section 26, the last section hereof.

 

2. Administration. The Plan shall be administered by the Committee. No Award may be made under the Plan to any member or alternate member of the Committee. The Committee shall have authority, subject to the terms of the Plan, (a) to determine the Employees who are eligible to participate in the Plan, the type, size, and terms of Awards to be granted to any Employee, the time or times at which Awards shall be exercisable or at which restrictions, conditions, and contingencies shall lapse, and the terms and provisions of the instruments by which Awards shall be evidenced, (b) to establish any other restrictions, conditions, and contingencies on Awards in addition to those prescribed by the Plan, (c) to interpret the Plan, and (d) to make all determinations necessary for the administration of the Plan. The construction and interpretation by the Committee of any provision of the Plan or any Award Instrument delivered pursuant to the Plan and any determination by the Committee pursuant to any provision of the Plan or any Award Instrument shall be final and conclusive. No member or alternate member of the Committee shall be liable for any such action or determination made in good faith. The Committee may act only by a majority of its members. Any determination of the Committee may be made, without a meeting, by a writing or writings signed by all of the members of the Committee. In addition, the Committee may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee and the Committee may delegate to one or more employees, agents, or officers of the Company, or to one or more third party consultants, accountants, lawyers, or other advisors, such ministerial duties related to the operation of the Plan as it may deem appropriate.

 

3. Eligibility. Awards may be granted to Employees of the Company or any Subsidiary selected by the Committee in its sole discretion. The granting of any Award to an Employee shall not entitle that Employee to, nor disqualify that Employee from, participation in any other grant of an Award. The maximum number of Common Shares with respect to which any Employee may receive Awards during any calendar year shall be 50,000 Common Shares.

 

4. Stock Subject to the Plan. The aggregate number of Common Shares of the Company that may be issued and distributed to Employees in connection with Awards granted under the Plan shall be 500,000 Common Shares which may be authorized and unissued Common Shares, treasury Common Shares, or Common Shares acquired on the open market specifically for distribution under the Plan, as the Board of Directors may from time to time determine. The number of Common Shares remaining available for grants of additional Awards under the Plan at any particular time shall be reduced, upon the granting thereafter of any Award under the Plan, by the full number of Common Shares subject to that Award except that, in the case of any particular Tandem Award, the number of Common Shares counted as being subject to such Tandem Award shall be the maximum number of Common Shares with respect to which the Employee may receive value under such Tandem Award. If any Award for any reason expires or is terminated, in whole or in part, without the receipt by an Employee of Common Shares (or the equivalent thereof in cash or other property), the Common Shares subject to that part of the Award that has so expired or terminated shall again be available for the future grant of Awards under the Plan. Notwithstanding any other provision of the Plan, but subject to adjustment under Section 12, the maximum number of Common Shares that may be issued under the Plan pursuant to Incentive Stock Options shall be 500,000 Common Shares.

 

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5. Stock Options.

 

5.1 Type and Date of Grant of Options.

 

(a) The Award Instrument pursuant to which any Incentive Stock Option is granted shall specify that the Option granted thereby shall be treated as an Incentive Stock Option. The Award Instrument pursuant to which any Nonqualified Option is granted shall specify that the Option granted thereby shall not be treated as an Incentive Stock Option.

 

(b) The day on which the Committee authorizes the grant of an Incentive Stock Option shall be the date on which that Option is granted. No Incentive Stock Option may be granted on any date after the tenth anniversary of the date of adoption of the Plan.

 

(c) The day on which the Committee authorizes the grant of a Nonqualified Option shall be considered the date on which that Option is granted, unless the Committee specifies a later date.

 

5.2 Exercise Price. The Exercise Price under any Option shall be not less than the Fair Market Value of the Common Shares subject to the Option on the date the Option is granted.

 

5.3 Option Expiration Date. The Option Expiration Date under any Incentive Stock Option shall not be later than ten years from the date on which the Option is granted. The Option Expiration Date under any Nonqualified Option shall not be later than ten years and one month from the date on which the Option is granted.

 

5.4 Exercise of Options.

 

(a) Except as otherwise provided in Section 9, an Option may be exercised only (i) while the Employee to whom the Option was granted is in the employ of the Company or of a Subsidiary, and (ii) after the Employee to whom the Option was granted has been in the continuous employ of the Company or of a Subsidiary for at least six months from the date on which the Option was granted. Subject to these requirements, and unless otherwise specified by the Committee in the relevant Award Instrument, each Option shall become exercisable to the extent of:

 

(w) from and after the first anniversary date of the Agreement, 25% of the Common Shares subject to the Option;

 

(x) from and after the second anniversary date of the Agreement, an additional 25% of the Common Shares subject to the Option;

 

(y) from and after the third anniversary date of the Agreement, an additional 25% of the Common Shares subject to the Option; and

 

(z) from and after the fourth anniversary date of the Agreement, the remaining 25% of the Common Shares subject to the Option.

 

If, by reason of the application of Section 9, an Option may be exercised at a time when an Optionee is no longer an employee of the Company, and, on the Employment Termination Date, the Optionee held any Options that were not then otherwise fully exercisable, each such Option shall be exercisable as of the Employment Termination Date: (I) to the extent that it was exercisable pursuant to the foregoing schedule, plus (II) to the extent of an additional percentage determined by multiplying 25% by a fraction the numerator of which is the number of days between the Employment Termination Date and the immediately preceding anniversary date of the Optionee’s Agreement (or, if no anniversary date has occurred, the numerator will be the number of days between the Employment Termination Date and the date of the grant of the Option) and the denominator of which is 365. Once any portion of an Option becomes exercisable, that portion shall remain exercisable until expiration or termination of the Option. An Employee to whom an Option is granted may exercise the Option from time to time, in whole or in part, up to the total number of Common Shares with respect to which the Option is then exercisable, except that no fraction of a Common Share may be purchased upon the exercise of any Option.

 

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(b) An Employee electing to exercise an Option shall deliver to the Company (i) the Exercise Price payable in accordance with Section 5.5 and (ii) written notice of the election that states the number of whole Common Shares with respect to which the Employee is exercising the Option.

 

5.5 Payment For Common Shares. Upon exercise of an Option by an Employee, the Exercise Price shall be payable by the Employee in cash or in such other form of consideration as the Committee determines may be accepted, including, without limitation, securities or other property, or any combination of cash, securities or other property, or by delivery by the Employee (with the written notice of election to exercise) of irrevocable instructions to a broker registered under the 1934 Act to promptly deliver to the Company the amount of sale or loan proceeds to pay the Exercise Price. The Committee, in its sole discretion, may grant to an Employee the right to transfer Common Shares acquired upon the exercise of a part of an Option in payment of the Exercise Price payable upon immediate exercise of a further part of the Option.

 

6. Stock Appreciation Rights.

 

6.1 Grant of SARs. An SAR may be granted only in connection with an Option. An SAR granted in connection with an Incentive Stock Option may be granted only when the Incentive Stock Option is granted. An SAR granted in connection with a Nonqualified Option may be granted either when the related Nonqualified Option is granted or at any time thereafter, including, in the case of any Nonqualified Option resulting from the conversion of an Incentive Stock Option to a Nonqualified Stock Option, simultaneously with or after the conversion.

 

6.2 Exercise of SARs.

 

(a) An Employee electing to exercise an SAR shall deliver written notice to the Company of the election identifying the SAR and the related Option with respect to which the SAR was granted to the Employee and specifying the number of whole Common Shares with respect to which the Employee is exercising the SAR. Upon exercise of the SAR, the related Option shall be deemed to be surrendered to the extent that the SAR is exercised.

 

(b) SARs may be exercised only (i) after the expiration of six months from the date of grant of the SAR, (ii) on a date when the Fair Market Value of a Common Share exceeds the Exercise Price stated in the Option related to that SAR, (iii) at a time and to the same extent as the related Option is exercisable, (iv) by surrender to the Company, unexercised, of the related Option or any applicable portion thereof, and (v) in compliance with all restrictions set forth in or specified by the Committee pursuant to Section 6.2(c).

 

(c) The Committee may specify in the Award Instrument pursuant to which any SAR is granted waiting periods and restrictions on permissible exercise periods in addition to the restrictions on exercise set forth in Section 6.2(b), including, without limitation, any restriction necessary to make applicable the Rule 16b-3 Exemption.

 

6.3 Payment for SARs. The amount payable upon exercise of an SAR may be paid by the Company in cash, or, if the Committee shall determine in its sole discretion, in whole Common Shares (taken at their Fair Market Value at the time of exercise of the SAR) or in a combination of cash and whole Common Shares; provided, however, that in no event shall the total number of Common Shares that may be paid to an Employee pursuant to the exercise of an SAR exceed the total number of Common Shares subject to the related Option.

 

6.4 Termination, Amendment, or Suspension of SARs. An SAR shall terminate and may no longer be exercised upon the first to occur of (a) exercise or termination of the related Option, or (b) any termination date specified by the Committee at the time of grant of the SAR. In addition, the Committee may in its sole discretion at any time before the occurrence of a Change of Control amend, suspend, or terminate any SAR theretofore granted under the Plan without the holder’s consent; provided that, in the case of amendment, no provision of the SAR, as amended, shall be in conflict with any provision of the Plan. The amendment, suspension, or termination of any SAR by the Committee as described in the immediately preceding sentence shall not affect the holder’s rights in any related Option.

 

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7. Restricted Stock.

 

7.1 Additional Conditions on Restricted Stock. In addition to the restrictions on disposition of Restricted Stock during the Restriction Period and the requirement to offer Restricted Stock to the Company if the Employee’s employment terminates during the Restriction Period, the Committee may provide in the Award Instrument with respect to any Award of Restricted Stock other restrictions, conditions, and contingencies, which other restrictions, conditions, and contingencies, if any, may relate to, in addition to such other matters as the Committee may deem appropriate, the Employee’s personal performance, corporate performance, or the performance of any subunit of the Company or any Subsidiary, in each case measured in such manner as may be specified by the Committee. The Committee may impose different restrictions, conditions, and contingencies on separate Awards of Restricted Stock granted to different Employees, whether at the same or different times, and on separate Awards of Restricted Stock granted to the same Employee, whether at the same or different times. The Committee may specify a single Restriction Period for all of the Restricted Stock subject to any particular Award Instrument or may specify multiple Restriction Periods so that the restrictions with respect to the Restricted Stock subject to the Award will expire in stages according to a schedule specified by the Committee and set forth in the Award Instrument; provided, however, that no Restriction Period with respect to any Restricted Stock shall end earlier than six months after the date on which that Restricted Stock is granted.

 

7.2 Payment for Restricted Stock. Each Employee to whom an Award of Restricted Stock is made shall pay the Acquisition Price with respect to that Restricted Stock to the Company not later than 30 days after the delivery to the Employee of the Award Instrument with respect to that Restricted Stock. If any Employee fails to pay the Acquisition Price with respect to any Award of Restricted Stock within that 30 day period, the Employee’s rights under that Award shall be forfeited.

 

7.3 Rights as a Shareholder. Upon payment by an Employee in full of the Acquisition Price for Restricted Stock under an Award, the Employee shall have all of the rights of a shareholder with respect to the Restricted Stock, including voting and dividend rights, subject only to such restrictions and requirements referred to in Section 7.1 as may be incorporated in the Award Instrument with respect to that Restricted Stock.

 

7.4 Lapse of Restrictions following Unaccepted Offer of Resale. If (a) an Employee or an Employee’s Representative becomes required, under the terms of the Plan or any provision of an Award Instrument, to offer for resale at the Acquisition Price to the Company Restricted Stock held by the Employee at the Employment Termination Date and makes the required offer to the Company in writing, and (b) the Company fails to repurchase that Restricted Stock at the Acquisition Price within 60 days of the date on which the Company receives that written offer, all restrictions on that Restricted Stock shall lapse and neither the Employee nor the Employee’s Representative shall thereafter be required to offer to resell that Restricted Stock to the Company.

 

8. Performance Shares.

 

8.1 Discretion of Committee with Respect to Performance Shares. The Committee shall have full discretion to select the Employees to whom Awards of Performance Shares are made, the number of Performance Shares to be granted to any Employee so selected, the kind and level of the Performance Goals and whether those Performance Goals are to apply to the Company, a Subsidiary, or any one or more subunits of the Company or of any Subsidiary, and the dates on which each Performance Period shall begin and end, and to determine the form and provisions of the Award Instrument to be used in connection with any Award of Performance Shares.

 

8.2 Conditions to Payment for Performance Shares.

 

(a) Unless otherwise provided in the relevant Award Instrument, an Employee must be employed by the Company or a Subsidiary on the last day of a Performance Period to be entitled to payment for any Performance Shares.

 

(b) The Committee may establish, from time to time, one or more formulas to be applied against the Performance Goals to determine whether all, some portion but less than all, or none of the Performance Shares granted with respect to a Performance Period are treated as earned pursuant to any Award. An Employee will be entitled to receive payments with respect to any Performance Shares only to the extent that those Performance Shares are treated as earned under one or more such formulas.

 

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8.3 Payment for Performance Shares. The Company shall pay each Employee who is entitled to payment for Performance Shares earned with respect to any Performance Period an amount for those Performance Shares (a) in cash (based upon the per share Fair Market Value of Common Shares on the last day of the Performance Period), (b) in Common Shares (one Common Share for each Performance Share earned), (c) in Restricted Stock (one Common Share of Restricted Stock for each Performance Share earned), or (d) any combination of the foregoing, in such proportions as the Committee may determine. Restricted Stock issued by the Company in payment of Performance Shares shall be subject to all the provisions of Section 7.

 

9. Termination of Employment. After an Employee’s Employment Termination Date, the rules set forth in this Section 9 shall apply. All factual determinations with respect to the termination of an Employee’s employment that may be relevant under this Section 9 shall be made by the Committee in its sole discretion.

 

9.1 Termination Other Than Upon Death or Disability or for Cause. Upon any termination of an Employee’s employment for any reason other than the Employee’s disability or death or the Employee’s termination for cause:

 

(a) Unless otherwise provided in the relevant Award Instrument, the Employee shall have the right during the period ending three months after the Employment Termination Date, but not later than the Option Expiration Date, to exercise any Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee on the Employment Termination Date,

 

(b) Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price to the Company each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and

 

(c) Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed.

 

9.2 Termination Due To Disability. Upon any termination of an Employee’s employment due to disability:

 

(a) Unless otherwise provided in the relevant Award Instrument, the Employee, or the Employee’s Representative, shall have the right (i) to exercise, from time to time during the period ending one year after the Employment Termination Date, but not later than the Option Expiration Date, any Nonqualified Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent those Options and SARs were exercisable by the Employee on the Employment Termination Date, and (ii) to exercise, from time to time during the period ending one year after the Employment Termination Date, but not later than the Option Expiration Date, any Incentive Stock Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee on the Employment Termination Date (even though exercise of the Incentive Stock Option more than one year after the Employment Termination Date may cause the Option to fail to qualify for Incentive Stock Option treatment under the Code),

 

(b) Unless otherwise provided in the relevant Award Instrument, the Employee, or the Employee’s Representative, shall offer for resale at the Acquisition Price to the Company each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and

 

(c) Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed.

 

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9.3 Death of an Employee. Upon the death of an Employee while employed by the Company or any Subsidiary or within any of the periods referred to in any Section 9.1 or 9.2 during which any particular Option or SAR remains potentially exercisable:

 

(a) Unless otherwise provided in the relevant Award Instrument (in which the Committee may specify a different period of extension of the Option Expiration Date in the event of the death of the Employee), if the Option Expiration Date of any Nonqualified Option that had not expired before the Employee’s death would otherwise expire before the first anniversary of the Employee’s death, that Option Expiration Date shall automatically be extended to the first anniversary of the Employee’s death,

 

(b) Unless otherwise provided in the relevant Award Instrument, any Options and related SARs that had been outstanding for at least six months on the date of the Employee’s death shall become immediately exercisable in full and the Employee’s Representative shall have the right to exercise, from time to time during the period ending one year after the date of the Employee’s death, but not later than the Option Expiration Date, any such Options and related SARs in accordance with Section 5.4 (as to any Options) or Section 6.2 (as to any SARs),

 

(c) Unless otherwise provided in the relevant Award Instrument, (i) the Restriction Period with respect to all outstanding Awards of Restricted Stock that had been outstanding for at least six months on the date of the Employee’s death shall immediately terminate, and (ii) the Employee’s Representative shall offer for resale at the Acquisition Price to the Company each Common Share of Restricted Stock held by the Employee at the date of the Employee’s death that had not been outstanding for at least six months on that date, and

 

(d) Unless otherwise provided in the relevant Award Instrument, (i) the restrictions, conditions, or contingencies on any Performance Shares that had been outstanding for at least six months on the date of the Employee’s death shall be modified in such manner as the Committee may specify to give the Employee’s Representative the benefit of those Performance Shares through the date of the Employee’s death, and (ii) each Performance Share held by the Employee at the date of the Employee’s death that had not been outstanding for at least six months on that date shall be forfeited.

 

9.4 Termination for Cause. Upon any termination of an Employee’s employment for Cause:

 

(a) All of the Employee’s rights with respect to unexercised Options and SARs shall expire immediately before the Employment Termination Date,

 

(b) The Employee shall offer for resale at the Acquisition Price to the Company each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and

 

(c) The Employee shall forfeit each Performance Share with respect to which, as of the Employment Termination Date, any restrictions, conditions, or contingencies have not lapsed.

 

10. Acceleration Upon Change of Control. Unless otherwise specified in the relevant Award Instrument, upon the occurrence of a Change of Control of the Company, each Award theretofore granted to any Employee that then remains outstanding shall, subject to Section 16, be modified as follows: (a) any outstanding Option shall become immediately exercisable in full, (b) SARs related to any such Options shall also become immediately exercisable in full, (c) the Restriction Period with respect to all outstanding Awards of Restricted Stock shall immediately terminate, and (d) the restrictions, conditions, or contingencies on any Performance Shares shall be modified in such manner as the Committee may specify to give the Employee the benefit of those Performance Shares through the date of Change of Control.

 

11. Assignability. No Option, SAR, Restricted Stock or Performance Share may be transferred other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in Section 414(p)(1)(B) of the Code that satisfies the requirements of Section 414(p)(1)(A) of the Code. During an Employee’s lifetime, only the Employee (or in the case of incapacity of an Employee, the Employee’s attorney in fact or legal guardian) may exercise any Award requiring or permitting exercise.

 

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12. Adjustment Upon Changes in Common Shares. In the event of any stock dividend, stock split, or share combination of the Common Shares or any reclassification, recapitalization, merger, consolidation, other form of business combination, liquidation, or dissolution involving the Company or any spin-off or other distribution to shareholders of the Company (other than normal cash dividends), (a) the Committee shall make appropriate adjustments to the maximum number of Common Shares that may be issued under the Plan pursuant to Section 4, and (b) the Committee shall adjust the number and kind of shares subject to, the price per share under, and the terms and conditions of each then outstanding Award to the extent necessary and in such manner that the benefits of Employees under all then outstanding Awards shall be maintained substantially as before the occurrence of such event. Any adjustment so made by the Committee shall be conclusive and binding for all purposes of the Plan as of such date as the Committee may determine.

 

13. Purchase For Investment. Each person acquiring Common Shares pursuant to any Award may be required by the Company to furnish a representation that he or she is acquiring the Common Shares so acquired as an investment and not with a view to distribution thereof if the Company, in its sole discretion, determines that such representation is required to insure that a resale or other disposition of the Common Shares would not involve a violation of the Securities Act of 1933, as amended, or of applicable blue sky laws. Any investment representation so furnished shall no longer be applicable at any time such representation is no longer necessary for such purposes.

 

14. Withholding of Taxes. The Company will withhold from any payments of cash made pursuant to the Plan such amount as is necessary to satisfy all applicable federal, state, and local withholding tax obligations. The Committee may, in its discretion and subject to such rules as the Committee may adopt from time to time, permit or require an Employee to satisfy, in whole or in part, any withholding tax obligation that may arise in connection with the grant of an Award, the lapse of any restrictions with respect to an Award, the acquisition of Common Shares pursuant to any Award, or the disposition of any Common Shares received pursuant to any Award by such means as the Committee may determine including, without limitation, by having the Company hold back some portion of the Common Shares that would otherwise be delivered pursuant to the Award or by delivering to the Company an amount equal to the withholding tax obligation arising with respect to such grant, lapse, acquisition, or disposition in (a) cash, (b) Common Shares, or (c) such combination of cash and Common Shares as the Committee may determine. The Fair Market Value of the Common Shares to be so held back by the Company or delivered by the Employee shall be determined as of the date on which the obligation to withhold first arose. The Company shall apply the provisions of this Section 14 only to meet required tax withholding (based on the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to the supplemental income recognized by an employee) and shall not withhold (or repurchase) Common Shares in excess of the minimum number required for tax withholding. With respect to Section 16(b) Employees, any applicable conditions with respect to tax withholding required under Rule 16b-3 in order to obtain or be eligible for the Rule 16b-3 Exemption in respect thereof shall be deemed to be incorporated into the Plan.

 

15. Awards in Substitution for Awards Granted by Other Companies. Awards, whether Incentive Stock Options, Nonqualified Options, SARs, Restricted Stock, or Performance Shares, may be granted under the Plan in substitution for awards held by employees of a company who become Employees of the Company or a Subsidiary as a result of the merger or consolidation of the employer company with the Company or a Subsidiary, or the acquisition by the Company or a Subsidiary of the assets of the employer company, or the acquisition by the Company or a Subsidiary of stock of the employer company as a result of which it becomes a Subsidiary. The terms, provisions, and benefits of the substitute Awards so granted may vary from the terms, provisions, and benefits set forth in or authorized by the Plan to such extent as the Committee at the time of the grant may deem appropriate to conform, in whole or in part, to the terms, provisions, and benefits of the awards in substitution for which they are granted.

 

16. Holding Periods. No Section 16(b) Employee shall sell or exercise, as the case may be, any equity security or derivative security (which includes, without limitation, Options and SARs), in each case as defined in the 1934 Act or the rules and regulations promulgated thereunder, acquired pursuant to an Award under the Plan, before the earliest date on which the sale or exercise is eligible for the Rule 16b-3 Exemption. If any provision of this Section 16 must be modified or becomes unnecessary to comply with the requirements of Rule 16b-3, the Committee may waive such provision and/or amend the Plan to add to or modify the provisions hereof accordingly.

 

17. Legal Requirements. No Awards shall be granted and the Company shall have no obligation to make any payment under the Plan, whether in Common Shares, cash, or any combination thereof, except in compliance with all applicable Federal and state laws and regulations, including, without limitation, the Code and Federal and state securities laws.

 

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18. Duration and Termination of the Plan. The Plan shall become effective and shall be deemed to have been adopted on the date on which it is approved by the shareholders of the Company and shall remain in effect thereafter until terminated by action of the Board of Directors. No termination of the Plan shall adversely affect the rights of any Employee with respect to any Award granted before the effective date of the termination.

 

19. Amendments. The Board of Directors, or a duly authorized committee thereof, may alter or amend the Plan from time to time prior to its termination in any manner the Board of Directors, or such duly authorized committee, may deem to be in the best interests of the Company and its shareholders, except that no amendment may be made without shareholder approval if shareholder approval is required under Rule 16b-3 to qualify for the Rule 16b-3 Exemption, is required by any applicable securities law or tax law, or is required by the rules of the registered national securities association through whose inter-dealer quotation system the Common Shares are quoted. The Committee shall have the authority to amend the terms and conditions applicable to outstanding Awards (a) in any case where expressly permitted by the terms of the Plan or of the relevant Award Instrument or (b) in any other case with the consent of the Employee to whom the Award was granted. Except as expressly provided in the Plan or in the Award Instrument evidencing the Award, the Committee may not, without the consent of the holder of an Award granted under the Plan, amend the terms and conditions applicable to that Award in a manner adverse to the interests of the Employee.

 

20. Plan Noncontractual. Nothing herein contained shall be construed as a commitment to or agreement with any person employed by the Company or a Subsidiary to continue such person’s employment with the Company or the Subsidiary, and nothing herein contained shall be construed as a commitment or agreement on the part of the Company or any Subsidiary to continue the employment or the annual rate of compensation of any such person for any period. All Employees shall remain subject to discharge to the same extent as if the Plan had never been put into effect.

 

21. Interest of Employees. Any obligation of the Company under the Plan to make any payment at any future date merely constitutes the unsecured promise of the Company to make such payment from its general assets in accordance with the Plan, and no Employee shall have any interest in, or lien or prior claim upon, any property of the Company or any Subsidiary by reason of that obligation.

 

22. Claims of Other Persons. The provisions of the Plan shall in no event be construed as giving any person, firm, or corporation any legal or equitable right against the Company or any Subsidiary, their officers, employees, agents, or directors, except any such rights as are specifically provided for in the Plan or are hereafter created in accordance with the terms and provisions of the Plan.

 

23. Absence of Liability. No member of the Board of Directors of the Company or a Subsidiary, of the Committee, of any other committee of the Board of Directors, or any officer or Employee of the Company or a Subsidiary shall be liable for any act or action under the Plan, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, or, except in circumstances involving his bad faith or willful misconduct, for anything done or omitted to be done by himself.

 

24. Severability. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom.

 

25. Governing Law. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio.

 

26. Definitions.

 

26.1 1934 Act. The term “1934 Act” shall mean the Securities Exchange Act of 1934, as amended.

 

26.2 Acquisition Price. The term “Acquisition Price” with respect to Restricted Stock shall mean such amount as may be specified by the Committee in the Award Instrument with respect to that Restricted Stock as the consideration to be paid by the Employee for that Restricted Stock.

 

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26.3 Award. The term “Award” shall mean an award granted under the Plan of an Option, of Stock Appreciation Rights, of Restricted Stock, or of Performance Shares.

 

26.4 Award Instrument. The term “Award Instrument” shall mean a written instrument evidencing an Award in such form and with such provisions as the Committee may prescribe, including, without limitation, an agreement to be executed by the Employee and the Company, a certificate issued by the Company, or a letter executed by the Committee or its designee. Each Award Instrument shall provide that acceptance of the Award Instrument by an Employee constitutes agreement to the terms of the Award evidenced thereby.

 

26.5 Cause. The Company shall be deemed to have “Cause” for the termination of an Employee’s employment if the Employee has committed any act or series of acts determined by the Committee (in a determination made either before or after the Employment Termination Date) to warrant discharge from employment, including, without limitation, any act of theft or dishonesty in connection with the Employee’s employment with the Company, any unauthorized disclosure of confidential information belonging to the Company, or other similar action.

 

26.6 Change of Control. A “Change of Control” shall be deemed to have occurred if at any time or from time to time after the date of adoption of the Plan:

 

(a) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report), each as adopted under the 1934 Act, disclosing the acquisition of 25% or more of the voting stock of the Company in a transaction or series of transactions by any person (as the term “person” is used in Section 13(d) and Section 14(d)(2) of the 1934 Act),

 

(b) during any period of 730 consecutive days or less, individuals who at the beginning of such period constitute the directors of the Company cease for any reason to constitute at least a majority thereof unless the election of each new director of the Company was approved or recommended by the vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period,

 

(c) the Company merges with or into or consolidates with another corporation following approval of the shareholders of the Company of such merger or consolidation and, after giving effect to such merger or consolidation, less than fifty percent (50%) of the then outstanding voting securities of the surviving or resulting corporation represent or were issued in exchange for voting securities of the Company outstanding immediately prior to such merger or consolidation,

 

(d) there is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company following approval of the shareholders of the Company of such transaction or series of transactions, or

 

(e) the shareholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company.

 

26.7 Code. The term “Code” shall mean the Internal Revenue Code of 1986, as amended.

 

26.8 Committee. The term “Committee” shall mean a committee appointed by the Board of Directors of the Company to administer the Plan. The Committee shall be composed of not less than two directors of the Company. The Board of Directors may also appoint one or more directors as alternate members of the Committee. No officer or Employee of the Company or of any Subsidiary shall be a member or alternate member of the Committee. The Committee shall at all times be so comprised as to satisfy the disinterested administration standard contained in Rule 16b-3, if required to qualify for the Rule 16b-3 Exemption.

 

26.9 Common Shares. The term “Common Shares” shall mean common shares of the Company without par value.

 

26.10 Company. The term “Company” shall mean STERIS Corporation and its successors, including the surviving or resulting corporation of any merger of STERIS Corporation with or into, or any consolidation of STERIS Corporation with, any other corporation or corporations.

 

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26.11 Disability. An Employee shall be deemed to have suffered a “Disability” if and only if (a) the Employee has established to the satisfaction of the Committee that the Employee is unable to perform the Employee’s normal duties and responsibilities with the Company by reason of a medically determinable physical or metal impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, all within the meaning of Section 22(e)(3) of the Code, and (b) the Employee has satisfied any other requirement that may be imposed by the Committee.

 

26.12 Employee. The term “Employee” shall mean any individual employed by the Company or by any Subsidiary (including any individual employed by the Company or any Subsidiary who is also a member of the Board of Directors of the Company or of any Subsidiary).

 

26.13 Employee’s Representative. The term “Employee’s Representative” shall mean, (a) in the case of a deceased Employee, the Employee’s executor or administrator or the person or persons to whom the Employee’s rights under any Award are transferred by will or the laws of descent and distribution, and (b) in the case of a disabled or incapacitated Employee, the Employee’s attorney in fact or legal guardian.

 

26.14 Employment Termination Date. The term “Employment Termination Date” with respect to an Employee shall mean the first date on which the Employee is no longer employed by the Company or any Subsidiary.

 

26.15 Exercise Price. The term “Exercise Price” with respect to an Option shall mean the price specified in the Option at which the Common Shares subject to the Option may be purchased by the holder of the Option.

 

26.16 Fair Market Value. Except as otherwise determined by the Committee, the term “Fair Market Value” with respect to Common Shares shall mean the closing sales price of the Common Shares as reported on the national securities exchange on which the Common Shares are traded, or, if applicable, as reported on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”) National Market, on the date for which the determination of fair market value is made or, if there are no sales of Common Shares on that date, then on the next preceding date on which there were any sales of Common Shares. If the Common Shares are not or cease to be traded on a national securities exchange or on the NASDAQ National Market, the “Fair Market Value” of Common Shares shall be determined in the manner prescribed by the Committee.

 

26.17 Incentive Stock Option. The term “Incentive Stock Option” shall mean an Option intended by the Committee to qualify as an “incentive stock option” within the meaning of Section 421 of the Code.

 

26.18 Nonqualified Option. The term “Nonqualified Option” shall mean an Option intended by the Committee not to qualify as an “incentive stock option” under Section 421 of the Code.

 

26.19 Option. The term “Option,” shall mean an Award entitling the holder thereof to purchase a specified number of Common Shares at a specified price during a specified period of time.

 

26.20 Option Expiration Date. The term “Option Expiration Date” with respect to any Option shall mean the date selected by the Committee after which, except as provided in Section 9.3 in the case of the death of the Employee to whom the option was granted, the Option may not be exercised.

 

26.21 Performance Goal. The term “Performance Goal” shall mean a performance goal specified by the Committee in connection with the potential grant of Performance Shares and may include, without limitation, goals based upon cumulative earnings per Common Share, return on investment, return on shareholders’ equity, or achievement of any other goals, whether or not readily expressed in financial terms, that are related to the performance by the Company, by any Subsidiary, or by any Employee or group of Employees in connection with services performed by that Employee or those Employees for the Company, a Subsidiary, or any one or more subunits of the Company or of any Subsidiary.

 

26.22 Performance Period. The term “Performance Period” shall mean such one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be relevant in connection with one or more Awards of Performance Shares.

 

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26.23 Performance Shares. The term “Performance Shares” shall mean an Award denominated in Common Shares and contingent upon attainment of one or more Performance Goals by the Company or a Subsidiary or any subunit of the Company or of any Subsidiary over a Performance Period.

 

26.24 Plan. The term “Plan” shall mean this STERIS Corporation 1994 Equity Compensation Plan as from time to time hereafter amended in accordance with Section 19.

 

26.25 Restricted Stock. The term “Restricted Stock” shall mean Common Shares of the Company delivered to an Employee pursuant to an Award subject in every case to:

 

(a) the restriction that the Employee not sell, transfer, otherwise dispose of, or pledge or otherwise hypothecate the Restricted Stock during the applicable Restriction Period, and

 

(b) the requirement that, subject to the provisions of Section 9, if the Employee’s employment terminates so that the Employee is no longer employed by the Company or any Subsidiary before the end of the applicable Restriction Period, the Employee will offer to sell to the Company at the Acquisition Price each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed.

 

In addition to the restriction and requirement set forth in (a) and (b), above, each Common Share of Restricted Stock shall be subject to such other restrictions, conditions, and contingencies, if any, as the Committee may provide in the Award Instrument with respect to that Restricted Stock.

 

26.26 Restriction Period. The term “Restriction Period” with respect to an Award of Restricted Stock shall mean the period selected by the Committee and specified in the Award Instrument with respect to that Restricted Stock during which the Employee may not sell, transfer, otherwise dispose of, or pledge or otherwise hypothecate that Restricted Stock.

 

26.27 Rule 16b-3. The term “Rule 16b-3” shall mean Rule 16b-3 or any successor provision under the 1934 Act.

 

26.28 Rule 16b-3 Exemption. The term “Rule 16b-3 Exemption” shall mean the exemption from Section 16(b) of the 1934 Act that is available under Rule 16b-3.

 

26.29 Section 16(b) Employee. The term “Section 16(b) Employee” shall mean an individual who is, or at any time within the preceding six months was, a director, officer, or 10% shareholder of the Company within the meaning of Section 16(b) of the 1934 Act.

 

26.30 Stock Appreciation Right. The term “Stock Appreciation Right” or “SAR” shall mean an Award granted to an Employee with respect to all or any part of any Option that entitles the holder thereof to receive from the Company, upon exercise of the SAR and surrender of the related Option, or any portion of the SAR and the related Option, an amount equal to 100%, or such lesser percentage as the Committee may determine at the time of the grant of the Award, of the excess, if any, measured at the time of the exercise of the SAR, of (a) the Fair Market Value of the Common Shares subject to the Option with respect to which the SAR is exercised over (b) the Exercise Price of those Common Shares under the Option.

 

26.31 Subsidiary. The term “Subsidiary” shall mean any corporation, partnership, joint venture, or other business entity in which the Company owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock (in the case of a corporation) or other ownership interests (in the case of any entity other than a corporation).

 

26.32 Tandem Award. The term “Tandem Award” shall mean any two or more Awards that are linked by the terms of any such Awards so that the exercise of one such Award, in whole or in part, requires or will automatically result in the surrender or cancellation, in whole or in proportionate part, of the other such Awards.

 

- 11 -

STERIS Corporation Management Incentive Compensation Plan

Exhibit 10.10

 

STERIS CORPORATION

 

Management Incentive Compensation Plan

 

1. Objective. The objective of the STERIS Management Incentive Compensation Plan (the “Plan”) is to encourage greater initiative, resourcefulness, teamwork, efficiency, and achievement of objectives on the part of key employees whose performance and responsibilities directly affect the profits of STERIS Corporation (“STERIS”) and its subsidiaries (collectively, together with STERIS, the “Company”).

 

2. Eligibility. Participation in the Plan will be limited to those key employees that are selected for participation on an annual basis and will normally include employees at or above the rank of Manager. Key employees selected for participation each year will be notified of their participation and given the parameters for bonus calculations early in the fiscal year.

 

A participant will be entitled to receive a bonus earned under the Plan for a particular fiscal year if and only if he or she remains in the employ of the Company through the end of that fiscal year and thereafter through the date on which bonuses are paid for the fiscal year.

 

3. Target Bonus. Each participant will be assigned a percentage target bonus based upon his or her position and level within the Company. The target bonus will range from 5% to 100% of the participant’s base salary.

 

4. Financial Goals. Each year the Compensation and Corporate Governance Committee of the Board of Directors of STERIS (“Committee”) will select a threshold performance target for the Company, the attainment of which will be a prerequisite to the payment of any bonuses under the Plan. In addition, the Committee will select one or more measures of current year financial performance for the Company as a whole, such as revenue growth, free cash flow and earnings before interest and taxes (EBIT), to be used as goals for determining the payment of bonuses under the Plan. For each financial goal, the Committee will designate numerical “threshold,” “target,” and “maximum” levels. The Committee may adjust the threshold performance target and levels of such other goals it may have selected if, during the course of a fiscal year, the Company records a special charge or conditions that the Committee determines should be disregarded, either partially or in its entirety, when calculating the amounts of bonuses to be paid under the Plan.

 

5. Weighting of Goals. Each year during which the Committee selects more than one goal to be applicable to any group of participants, the Committee will also specify the weight to be given to each such goal. For example, the Committee might determine to give 75% weight to revenue and 25% weight to EBIT.

 

6. Achievement Percentages. For each goal, a participant will be entitled to a bonus (with respect to that goal) based on Company performance as follows:

 

a. If performance is at the threshold level, the bonus will be at 50% of target.

 

b. If performance is at the target level, the bonus will be at 100% of target.

 

c. If performance is at or above the maximum level, the bonus will be at 150% of target.

 

For performance at any level between these set points, the bonus amount will be interpolated. For example, if performance is exactly half way between the target and maximum levels, the bonus will be at 125% of target.

 

7. Individual Performance. Upon determination of a participant’s bonus based on Company performance, the participant’s personal performance is considered when determining the final bonus amount.

 

8. Calculation of Bonuses. No bonuses will be paid for a fiscal year unless the performance of the Company is at least equal to the threshold performance target level selected by the Committee for the year. Assuming that criteria is met, a participant’s bonus will be determined by multiplying his or her target bonus by the achievement percentages attained during the year, taking into account the weighting of goals as appropriate. If the threshold level is not attained for any goal, no bonus will be earned with respect to that goal. The bonus earned by any participant during a fiscal year based on Company performance may range from zero (if performance is below threshold on all goals) to 150% of the target bonus (if performance is at or above

 


maximum on all goals). A participant’s final bonus amount, with consideration of personal performance, may range from 0% to 130% of the bonus amount based on Company performance.

 

9. Payment of Earned Bonuses. Unless the Committee determines to pay all or any part of bonuses under the Plan earlier or either of Sections 10 and 11 applies, bonuses earned under the Plan will be paid to participants not later than 90 days after the end of the fiscal year in which they are earned.

 

10. Midyear Additions and Adjustments. An individual assuming a key position during a fiscal year may be included in the Plan and be eligible for a pro rata portion of a full year bonus. A participant whose position or level within the Company changes during a fiscal year may be assigned an increased or decreased target bonus for the year taking into account, on a pro rata basis, the participant’s new position and compensation.

 

11. Effect of Changes in Operations. If, during any fiscal year, the operations of the Company are materially altered, whether by an acquisition of substantial additional assets or one or more lines of business, disposition of substantial existing assets or one or more existing lines of business, merger, consolidation, or similar event, the Committee may, in its sole discretion, adjust the parameters of the Plan for that fiscal year in such a manner as to preserve to the participants the same relative prospects for earning a bonus under the Plan as would have been the case if the material alteration had not occurred. If the Company disposes of an entire operating division or line of business during a fiscal year, the Company shall make to each participant, if any, who ceases to be employed by the Company as a result of that disposition, an “Interim Payment” in the same amount, at the same time, and with the same effect, as if the disposition constituted a Change of Control as defined in Section 11 below.

 

12. Effect of a Change of Control. Within five days after the occurrence of the first Change of Control (as defined below) to occur in any fiscal year, the Company shall pay to each participant an interim lump-sum cash payment (the “Interim Payment”) with respect to his or her participation in the plan. The amount of the Interim Payment shall be equal to the dollar amount of the participant’s target bonus for the entire fiscal year multiplied by a fraction, the numerator of which is the number of months between the beginning of the fiscal year and the end of the month in which the Change of Control occurs and the denominator of which is 12. The making of the Interim Payment will not reduce the obligation of the Company to make a final payment under the terms of the Plan, but the amount of any Interim Payment shall be offset against any later payment due under the Plan for the fiscal year in which the Change of Control occurs. Except as an offset against a final payment as provided in the immediately preceding sentence, the amount of the Interim Payment will not be offset against any amount due to the participant from or on behalf of the Company and a participant will not in any circumstances be required to refund any portion of the Interim Payment to the Company.

 

For purposes of the Plan, a “Change of Control” shall be deemed to have occurred if at any time or from time to time while this Agreement is in effect:

 

(a) Any person (other than STERIS, any of its subsidiaries, any employee benefit plan or employee stock ownership plan of STERIS, or any person organized, appointed, or established by STERIS for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of 15% or more (but less than 50%) of the Common Shares then outstanding;

 

(b) Any person (other than STERIS, any of its subsidiaries, any employee benefit plan or employee stock ownership plan of STERIS, or any person organized, appointed, or established by STERIS for or pursuant to the terms of any such plan), alone or together with any of its affiliates, becomes the beneficial owner of 50% or more of the Common Shares then outstanding;

 

(c) Any person commences or publicly announces an intention to commence a tender offer or exchange offer the consummation of which would result in the person becoming the beneficial owner of 15% or more of the Common Shares then outstanding;

 

(d) At any time during any period of 24 consecutive months, individuals who were directors at the beginning of the 24-month period no longer constitute a majority of the members of the Board of Directors of STERIS, unless the election, or the nomination for election by STERIS’s shareholders, of each director who was not a director at the beginning of the period is approved by at least a majority of the directors who (i) are in office at the time of the election or nomination and (ii) were directors at the beginning of the period;

 

2


(e) A record date is established for determining shareholders entitled to vote upon (i) a merger or consolidation of STERIS with another corporation in which those persons who are shareholders of STERIS immediately before the merger or consolidation are to receive or retain less than 60% of the stock of the surviving or continuing corporation, (ii) a sale or other disposition of all or substantially all of the assets of STERIS, or (iii) the dissolution of STERIS;

 

(f) (i) STERIS is merged or consolidated with another corporation and those persons who were shareholders of STERIS immediately before the merger or consolidation receive or retain less than 60% of the stock of the surviving or continuing corporation, (ii) there occurs a sale or other disposition of all or substantially all of the assets of STERIS, or (iii) STERIS is dissolved; or

 

(g) Any person who proposes to make a “control share acquisition” of STERIS, within the meaning of Section 1701.01(Z) of the Ohio General Corporation Law, submits or is required to submit an acquiring person statement to STERIS.

 

Notwithstanding anything herein to the contrary, if an event described in clause (b), clause (d), or clause (f) above occurs, the occurrence of that event will constitute an irrevocable Change of Control. Furthermore, notwithstanding anything herein to the contrary, if an event described in clause (c) occurs, and the Board of Directors either approves such offer or takes no action with respect to such offer, then the occurrence of that event will constitute an irrevocable Change of Control. On the other hand, notwithstanding anything herein to the contrary, if an event described in clause (a), clause (e), or clause (g) above occurs, or if an event described in clause (c) occurs and the Board of Directors does not either approve such offer or take no action with respect to such offer as described in the preceding sentence, and a majority of those members of the Board of Directors who were Directors prior to such event determine, within the 90-day period beginning on the date such event occurs, that the event should not be treated as a Change of Control, then, from and after the date that determination is made, that event will be treated as not having occurred. If no such determination is made, a Change of Control resulting from any of the events described in the immediately preceding sentence will constitute an irrevocable Change of Control on the 91st day after the occurrence of the event.

 

3

Guaranty Supplement dated January 7, 2005 by STERIS Isomedix Services, Inc.

Exhibit 10.20

 

GUARANTY SUPPLEMENT

 

To the Holders of the Series A-1 Notes, Series

  A-2 Notes and Series A-3 Notes (as

  hereinafter defined) of STERIS Corporation

  (the “Company”)

 

  Re: STERIS Isomedix Services, Inc.

 

Ladies and Gentlemen:

 

WHEREAS, in order to refinance certain debt and for general corporate purposes, the Company issued (a) $40,000,000 aggregate principal amount of its 4.20% Senior Notes, Series A-1, due December 15, 2008 (the “Series A-1 Notes”), (b) $40,000,000 aggregate principal amount of its 5.25% Senior Notes, Series A-2, due December 15, 2013 (the “Series A-2 Notes”) and (c) $20,000,000 aggregate principal amount of its 5.38% Senior Notes, Series A-3, due December 15, 2015 (the “Series A-3 Notes”; the Series A-1 Notes, Series A-2 Notes and the Series A-3 Notes shall be collectively referred to herein to the “Notes”) pursuant to those certain Note Purchase Agreements dated as of December 17, 2003 (the “Note Purchase Agreements”) between the Company and each of the purchasers named on Schedule A thereto (the “Initial Note Purchasers”).

 

WHEREAS, as a condition precedent to their purchase of the Notes, the Initial Note Purchasers required that certain subsidiaries of the Company enter into a Subsidiary Guaranty as security for the Notes (the “Guaranty”).

 

Pursuant to Section 9.7 of the Note Purchase Agreements, the Company has agreed to cause the undersigned, STERIS Isomedix Services, Inc., a corporation organized under the laws of Delaware (the “Additional Guarantor”), to join in the Guaranty. In accordance with the requirements of the Guaranty, the Additional Guarantor desires to amend the definition of Guarantor (as the same may have been heretofore amended) set forth in the Guaranty attached hereto so that at all times from and after the date hereof, the Additional Guarantor shall be jointly and severally liable as set forth in the Guaranty for the obligations of the Company under the Note Purchase Agreements and Notes to the extent and in the manner set forth in the Guaranty.

 

The undersigned is the duly elected Vice President and Treasurer of the Additional Guarantor, a subsidiary of the Company, and is duly authorized to execute and deliver this Guaranty Supplement to each of you. The execution by the undersigned of this Guaranty Supplement shall evidence its consent to and acknowledgment and approval of the terms set forth herein and in the Guaranty and by such execution the Additional Guarantor shall be deemed to have made in favor of the Holders the representations and warranties set forth in Section 5 of the Guaranty.

 


Upon execution of this Guaranty Supplement, the Guaranty shall be deemed to be amended as set forth above. Except as amended herein, the terms and provisions of the Guaranty are hereby ratified, confirmed and approved in all respects.

 

Any and all notices, requests, certificates and other instruments (including the Notes) may refer to the Guaranty without making specific reference to this Guaranty Supplement, but nevertheless all such references shall be deemed to include this Guaranty Supplement unless the context shall otherwise require.

 

Dated: January 7, 2005

 

STERIS ISOMEDIX SERVICES, INC.

By:    
   

William L. Aamoth

   

Vice President and Treasurer

Accepted and Agreed:

STERIS CORPORATION

By:

   
   

William L. Aamoth

   

Vice President and Corporate Treasurer

 

2


EXHIBIT A

 

Note Holders

 

Acacia Life Insurance Company

Lincoln, Nebraska 68510-2234

 

American United Life Insurance Company

Indianapolis, Indiana 46206-0368

 

Ameritas Life Insurance Corp.

Lincoln, Nebraska 68510-2234

 

Equitable Life Insurance Company of Iowa

c/o ING Investment Management LLC

Minneapolis, Minnesota 55401-2121

 

Golden American Life Insurance Company

c/o ING Investment Management LLC

Minneapolis, Minnesota 55401-2121

 

Life Insurance Company of Georgia

c/o ING Investment Management LLC

Minneapolis, Minnesota 55401-2121

 

MONY Life Insurance Company of America

c/o MONY Life Insurance Company

New York, New York 10019

 

Pioneer Mutual Life Insurance Company

c/o American United Life Insurance Company

Indianapolis, Indiana 46208-0368

 

Primerica Life Insurance Company

Hartford, Connecticut 06115-0449

 

The Prudential Insurance Company of America

c/o Prudential Capital Group

Chicago, IL 60601

 

ReliaStar Life Insurance Company

c/o ING Investment Management LLC

Minneapolis, Minnesota 55401-2121

 

Security Life of Denver Insurance Company

c/o ING Investment Management LLC

Minneapolis, Minnesota 55401-2121

 

The State Life Insurance Company

c/o American United Life Insurance Company

Indianapolis, Indiana 46208-0368

 

Teachers Insurance and Annuity Association of America

New York, New York 10017-3206

 

TIAA-CREF Life Insurance Company

New York, New York 10017-3206

 

The Travelers Insurance Company

Hartford, Connecticut 06115-0449

 

The Travelers Life and Annuity Company

Hartford, Connecticut 06115-0449

   

 


EXECUTION COPY

 


SUBSIDIARY GUARANTY

 

Dated as of December 17, 2003

 

  Re: $40,000,000 4.20% Senior Notes, Series A-1, due December 15, 2008
    $40,000,000 5.25% Senior Notes, Series A-2, due December 15, 2013
    $20,000,000 5.38% Senior Notes, Series A-3, due December 15, 2015

 

of

 

STERIS CORPORATION

 



 

TABLE OF CONTENTS

 

(Not a part of the Agreement)

 

SECTION


  

HEADING


   PAGE

Parties

        1

Recitals

        1

SECTION 1.

  

DEFINITIONS

   2

SECTION 2.

  

GUARANTY OF NOTES AND NOTE PURCHASE AGREEMENTS

   2

SECTION 3.

  

GUARANTY OF PAYMENT AND PERFORMANCE

   2

SECTION 4.

  

GENERAL PROVISIONS RELATING TO THE GUARANTY

   3

SECTION 5.

  

REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS

   8

SECTION 6.

  

GUARANTOR COVENANTS

   9

SECTION 7.

  

[RESERVED]

   9

SECTION 8.

  

GOVERNING LAW

   9

SECTION 9.

  

[RESERVED]

   10

SECTION 10.

  

AMENDMENTS WAIVERS AND CONSENTS

   10

SECTION 11.

  

NOTICES

   11

SECTION 12.

  

MISCELLANEOUS

   11

SECTION 13.

  

RELEASE

   12

Signature

        14

 

-i-


SUBSIDIARY GUARANTY

 

  Re: $40,000,000 4.20% Senior Notes, Series A-1, due December 15, 2008
    $40,000,000 5.25% Senior Notes, Series A-2, due December 15, 2013
    $20,000,000 5.38% Senior Notes, Series A-3, due December 15, 2015

 

This SUBSIDIARY GUARANTY dated as of December 17, 2003 (the or this “Guaranty”) is entered into on a joint and several basis by each of the undersigned, together with any entity which may become a party hereto by execution and delivery of a Guaranty Supplement in substantially the form set forth as Exhibit A hereto (a “Guaranty Supplement”) (which parties are hereinafter referred to individually as a “Guarantor” and collectively as the “Guarantors”).

 

R E C I T A L S

 

A. Each Guarantor is a direct or indirect subsidiary of STERIS Corporation, an Ohio corporation (the “Company”).

 

B. In order to refinance certain debt and for general corporate purposes, the Company has entered into those certain Note Purchase Agreements dated as of December 17, 2003 (the “Note Purchase Agreements”) between the Company and each of the purchasers named on Schedule A thereto (the “Initial Note Purchasers”; the Initial Note Purchasers, together with their successors, assigns or any other future holder of the Notes (as defined below), the “Holders”), providing for, inter alia, the issue and sale by the Company to the Initial Note Purchasers of $40,000,000 aggregate principal amount of its 4.20% Senior Notes, Series A-l, due December 15, 2008, $40,000,000 aggregate principal amount of its 5.25% Senior Notes, Series A-2, due December 15, 2013 and $20,000,000 aggregate principal amount of its 5.38% Senior Notes, Series A-3, due December 15, 2015.

 

C. The Initial Note Purchasers have required as a condition to their purchase of the Notes that the Company cause each of the undersigned to enter into this Guaranty and to cause each Subsidiary (as defined in the Note Purchase Agreements) that after the date hereof delivers a guaranty pursuant to the Bank Credit Agreement (as defined in the Note Purchase Agreements) to enter into a Guaranty Supplement, in each case as security for the Notes, and the Company has agreed to cause each of the undersigned to execute this Guaranty and to cause such additional Subsidiaries to execute a Guaranty Supplement, in each case in order to induce the Initial Note Purchasers to purchase the Notes and thereby benefit the Company and its Subsidiaries.

 

D. Each of the Guarantors will derive substantial direct and indirect benefit from the sale of the Notes to the Initial Note Purchasers.

 

-1-


NOW, THEREFORE, as required by the Note Purchase Agreements and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency whereof are hereby acknowledged, each Guarantor does hereby covenant and agree, jointly and severally, as follows:

 

SECTION 1. DEFINITIONS.

 

Capitalized terms used herein shall have the meanings set forth in the Note Purchase Agreements unless herein defined or the context shall otherwise require.

 

SECTION 2. GUARANTY OF NOTES AND NOTE PURCHASE AGREEMENTS.

 

(a) Subject to the limitation set forth in Section 2(b) hereof and to the provisions of Section 13 hereof, each Guarantor jointly and severally does hereby absolutely and unconditionally guarantee unto the Holders: (1) the full and prompt payment of the principal of, Make-Whole Amount, if any, and interest on the Notes from time to time outstanding, as and when such payments shall become due and payable whether by lapse of time, upon redemption or prepayment, by extension or by acceleration or declaration or otherwise (including (to the extent legally enforceable) interest due on overdue payments of principal, Make-Whole Amount, if any, or interest at the rate set forth in the Notes and interest accruing at the then applicable rate provided in the Notes after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) in Federal or other immediately available funds of the United States of America which at the time of payment or demand therefor shall be legal tender for the payment of public and private debts, (2) the full and prompt performance and observance by the Company of each and all of the obligations, covenants and agreements required to be performed or owed by the Company under the terms of the Notes and the Note Purchase Agreements and (3) the full and prompt payment, upon demand by any Holder, of all reasonable actual out of pocket costs and expenses, legal or otherwise (including attorneys’ fees), if any, as shall have been expended or incurred in the protection or enforcement of any rights, privileges or liabilities in favor of the Holders under or in respect of the Notes, the Note Purchase Agreements or under this Guaranty or in any consultation or action in connection therewith or herewith and in each and every case irrespective of the validity, regularity, or enforcement of any of the Notes or Note Purchase Agreements or any of the terms thereof or any other like circumstance or circumstances.

 

(b) The liability of each Guarantor under this Guaranty shall not exceed an amount equal to a maximum amount as will, after giving effect to such maximum amount and all other liabilities of such Guarantor, contingent or otherwise, result in the obligations of such Guarantor hereunder not constituting a fraudulent transfer, obligation or conveyance.

 

SECTION 3. GUARANTY OF PAYMENT AND PERFORMANCE.

 

This is a guarantee of payment and performance and each Guarantor hereby waives, to the fullest extent permitted by law, any right to require that any action on or in respect of any Note or the Note Purchase Agreements be brought against the Company or any other Person or that resort be had to any direct or indirect security for the Notes or for this Guaranty or any other remedy. Any Holder may, at its option, proceed hereunder against any Guarantor in the first instance to collect monies when due, the payment of which is guaranteed hereby, without first proceeding against the Company or any other Person and without first resorting to any direct or indirect security for the Notes or for this Guaranty or any other remedy. The liability of each

 

-2-


Guarantor hereunder shall in no way be affected or impaired by any acceptance by any Holder of any direct or indirect security for, or other guaranties of, any Debt, liability or obligation of the Company or any other Person to any Holder or by any failure, delay, neglect or omission by any Holder to realize upon or protect any such guarantees, Debt, liability or obligation or any notes or other instruments evidencing the same or any direct or indirect security therefor or by any approval, consent, waiver, or other action taken, or omitted to be taken by any such Holder.

 

The covenants and agreements on the part of the Guarantors herein contained shall take effect as joint and several covenants and agreements, and references to the Guarantors shall take effect as references to each of them and none of them shall be released from liability hereunder by reason of the guarantee ceasing to be binding as a continuing security on any other of them.

 

SECTION 4. GENERAL PROVISIONS RELATING TO THE GUARANTY.

 

(a) Each Guarantor hereby consents and agrees that any Holder or Holders from time to time, with or without any further notice to or assent from any other Guarantor may, without in any manner affecting the liability of any Guarantor under this Guaranty, and upon such terms and conditions as any such Holder or Holders may deem advisable:

 

(1) extend in whole or in part (by renewal or otherwise), modify, change, compromise, release or extend the duration of the time for the performance or payment of any Debt, liability or obligation of the Company or of any other Person secondarily or otherwise liable for any Debt, liability or obligations of the Company on the Notes, or waive any Default with respect thereto, or waive, modify, amend or change any provision of any other agreement or this Guaranty; or

 

(2) sell, release, surrender, modify, impair, exchange or substitute any and all property, of any nature and from whomsoever received, held by, or for the benefit of, any such Holder as direct or indirect security for the payment or performance of any Debt, liability or obligation of the Company or of any other Person secondarily or otherwise liable for any Debt, liability or obligation of the Company on the Notes; or

 

(3) settle, adjust or compromise any claim of the Company against any other Person secondarily or otherwise liable for any Debt, liability or obligation of the Company on the Notes.

 

Each Guarantor hereby ratifies and confirms any such extension, renewal, change, sale, release, waiver, surrender, exchange, modification, amendment, impairment, substitution, settlement, adjustment or compromise and that the same shall be binding upon it, and hereby waives, to the fullest extent permitted by law, any and all defenses, counterclaims or offsets which it might or could have by reason thereof, it being understood that such Guarantor shall at all times be bound by this Guaranty and remain liable hereunder.

 

-3-


(b) Each Guarantor hereby waives, to the fullest extent permitted by law:

 

(1) notice of acceptance of this Guaranty by the Holders or of the creation, renewal or accrual of any liability of the Company, present or future, or of the reliance of such Holders upon this Guaranty (it being understood that every Debt, liability and obligation described in Section 2 hereof shall conclusively be presumed to have been created, contracted or incurred in reliance upon the execution of this Guaranty);

 

(2) demand of payment by any Holder from the Company or any other Person indebted in any manner on or for any of the Debt, liabilities or obligations hereby guaranteed; and

 

(3) presentment for the payment by any Holder or any other Person of the Notes or any other instrument, protest thereof and notice of its dishonor to any party thereto and to such Guarantor.

 

The obligations of each Guarantor under this Guaranty and the rights of any Holder to enforce such obligations by any proceedings, whether by action at law, suit in equity or otherwise, shall not be subject to any reduction, limitation, impairment or termination (other than by payment in full of the Notes and the obligations of the Company under the Note Purchase Agreements), whether by reason of any claim of any character whatsoever or otherwise and shall not be subject to any defense, set-off, counterclaim (other than any compulsory counterclaim), recoupment or termination whatsoever.

 

(c) Subject to Section 13 hereof, the obligations of the Guarantors hereunder shall be binding upon the Guarantors and their successors and assigns, and shall remain in full force and effect until the entire principal, interest and Make-Whole Amount, if any, on the Notes and all other sums due pursuant to Section 2 shall have been paid and such obligations shall not be affected, modified or impaired upon the happening from time to time of any event, including without limitation any of the following, whether or not with notice to or the consent of the Guarantors:

 

(1) the genuineness, validity, regularity or enforceability of the Notes, the Note Purchase Agreements or any other agreement or any of the terms of any thereof, the continuance of any obligation on the part of the Company, any other Guarantors or any other Person on or in respect of the Notes or under the Note Purchase Agreements or any other agreement or the power or authority or the lack of power or authority of the Company to issue the Notes or the Company to execute and deliver the Note Purchase Agreements or any other agreement or of any other Guarantors to execute and deliver this Guaranty or any other agreement or to perform any of its obligations hereunder or the existence or continuance of the Company or any other Person as a legal entity; or

 

(2) any default, failure or delay, willful or otherwise, in the performance by the Company, any other Guarantor or any other Person of any obligations of any kind or character whatsoever under the Notes, the Note Purchase Agreements, this Guaranty or any other agreement; or

 

-4-


(3) any creditors’ rights, bankruptcy, receivership or other insolvency proceeding of the Company, any other Guarantor or any other Person or in respect of the property of the Company, any other Guarantor or any other Person or any merger, consolidation, reorganization, dissolution, liquidation, the sale of all or substantially all of the assets of or winding up of the Company, any other Guarantor or any other Person; or

 

(4) impossibility or illegality of performance on the part of the Company, any other Guarantor or any other Person of its obligations under the Notes, the Note Purchase Agreements, this Guaranty or any other agreements; or

 

(5) in respect of the Company, any other Guarantors or any other Person, any change of circumstances, whether or not foreseen or foreseeable, whether or not imputable to the Company, any other Guarantors or any other Person, or other impossibility of performance through fire, explosion, accident, labor disturbance, floods, droughts, embargoes, wars (whether or not declared), civil commotion, acts of God or the public enemy, delays or failure of suppliers or carriers, inability to obtain materials, action of any Federal or state regulatory body or agency, change of law or any other causes affecting performance, or any other force majeure, whether or not beyond the control of the Company, any other Guarantors or any other Person and whether or not of the kind hereinbefore specified; or

 

(6) any attachment, claim, demand, charge, Lien, order, process, encumbrance or any other happening or event or reason, similar or dissimilar to the foregoing, or any withholding or diminution at the source, by reason of any taxes, assessments, expenses, Debt, obligations or liabilities of any character, foreseen or unforeseen, and whether or not valid, incurred by or against the Company, any Guarantor or any other Person or any claims, demands, charges or Liens of any nature, foreseen or unforeseen, incurred by the Company, any Guarantor or any other Person, or against any sums payable in respect of the Notes or under the Note Purchase Agreements or this Guaranty, so that such sums would be rendered inadequate or would be unavailable to make the payments herein provided; or

 

(7) any order, judgment, decree, ruling or regulation (whether or not valid) of any court of any nation or of any political subdivision thereof or any body, agency, department, official or administrative or regulatory agency of any thereof or any other action, happening, event or reason whatsoever which shall delay, interfere with, hinder or prevent, or in any way adversely affect, the performance by the Company, any Guarantor or any other Person of its respective obligations under or in respect of the Notes, the Note Purchase Agreements, this Guaranty or any other agreement; or

 

(8) the failure of any Guarantor to receive any benefit from or as a result of its execution, delivery and performance of this Guaranty; or

 

(9) any failure or lack of diligence in collection or protection, failure in presentment or demand for payment, protest, notice of protest, notice of default and of nonpayment, any failure to give notice to any Guarantor of failure of the Company, any

 

-5-


Guarantor or any other Person to keep and perform any obligation, covenant or agreement under the terms of the Notes, the Note Purchase Agreements, this Guaranty or any other agreement or failure to resort for payment to the Company, any other Guarantor or to any other Person or to any other guaranty or to any property, security, Liens or other rights or remedies; or

 

(10) the acceptance of any additional security or other guaranty, the advance of additional money to the Company or any other Person, the renewal or extension of the Notes or amendments, modifications, consents or waivers with respect to the Notes, the Note Purchase Agreements or any other agreement, or the sale, release, substitution or exchange of any security for the Notes; or

 

(11) any merger or consolidation of the Company, any other Guarantor or any other Person into or with any other Person or any sale, lease, transfer or other disposition of any of the assets of the Company, any other Guarantor or any other Person to any other Person, or any change in the ownership of any shares of the Company, any other Guarantor or any other Person; or

 

(12) any defense whatsoever that: (i) the Company or any other Person might have to the payment of the Notes (principal, Make-Whole Amount, if any, or interest), other than payment thereof in Federal or other immediately available funds, or (ii) the Company or any other Person might have to the performance or observance of any of the provisions of the Notes, the Note Purchase Agreements or any other agreement, whether through the satisfaction or purported satisfaction by the Company, any other Guarantor or any other Person of its debts due to any cause such as bankruptcy, insolvency, receivership, merger, consolidation, reorganization, dissolution, liquidation, winding-up or otherwise, other than the defense of indefeasible payment in full in cash of the Notes; or

 

(13) any act or failure to act with regard to the Notes, the Note Purchase Agreements, this Guaranty or any other agreement or anything which might vary the risk of any Guarantor or any other Person; or

 

(14) any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Guarantor or any other Person in respect of the obligations of any Guarantor or other Person under this Guaranty or any other agreement, other than the defense of indefeasible payment in full in cash of the Notes;

 

provided that the specific enumeration of the above-mentioned acts, failures or omissions shall not be deemed to exclude any other acts, failures or omissions, though not specifically mentioned above, it being the purpose and intent of this Guaranty and the parties hereto that the obligations of each Guarantor shall be absolute and unconditional and shall not be discharged, impaired or varied except pursuant to Section 13 hereof and by the payment of the principal of, Make-Whole Amount, if any, and interest on the Notes in accordance with their respective terms whenever the same shall become due and payable as in the Notes provided and all other sums due and payable under the Note Purchase Agreements, at the place specified in and all in the manner and with the

 

-6-


effect provided in the Notes and the Note Purchase Agreements, as each may be amended or modified from time to time. Without limiting the foregoing, it is understood that repeated and successive demands may be made and recoveries may be had hereunder as and when, from time to time, the Company shall default under or in respect of the terms of the Notes or the Note Purchase Agreements and that notwithstanding recovery hereunder for or in respect of any given default or defaults by the Company under the Notes or the Note Purchase Agreements, this Guaranty shall remain in full force and effect and shall apply to each and every subsequent default.

 

(d) All rights of any Holder may be transferred or assigned at any time and shall be considered to be transferred or assigned at any time or from time to time upon the transfer of such Note in accordance with the Note Purchase Agreements whether with or without the consent of or notice to the Guarantors under this Guaranty or to the Company.

 

(e) To the extent of any payments made under this Guaranty, the Guarantors shall be subrogated to the rights of the Holder or Holders upon whose Notes such payment was made, but each Guarantor covenants and agrees that such right of subrogation shall be junior and subordinate in right of payment to the prior indefeasible final payment in cash in full of all amounts due and owing by the Company with respect to the Notes and the Note Purchase Agreements and by the Guarantors under this Guaranty, and the Guarantors shall not take any action to enforce such right of subrogation, and the Guarantors shall not accept any payment in respect of such right of subrogation, until all amounts due and owing by the Company under or in respect of the Notes and the Note Purchase Agreements and all amounts due and owing by the Guarantors hereunder have indefeasibly been finally paid in cash in full. If any amount shall be paid to any Guarantor in violation of the preceding sentence at any time prior to the indefeasible payment in cash in full (or other satisfaction agreed to by the Holders) of the Notes and all other amounts payable under the Notes, the Note Purchase Agreements and this Guaranty, such amount shall be held in trust for the benefit of the Holders and shall, except to the extent the Holders have received payment, promptly be paid to the Holders to be credited and applied to the amounts due or to become due with respect to the Notes and all other amounts payable under the Note Purchase Agreements and this Guaranty, whether matured or unmatured. Each Guarantor acknowledges that it has received direct and indirect benefits from the financing arrangements contemplated by the Note Purchase Agreements and that the waiver set forth in this paragraph (e) is knowingly made as a result of the receipt of such benefits.

 

(f) To the extent of any payments made under this Guaranty, each Guarantor making such payment shall have a right of contribution from the other Guarantors, but such Guarantor covenants and agrees that such right of contribution shall be subordinate in right of payment to the rights of the Holders for which full payment has not been made or provided for and, to that end, such Guarantor agrees not to claim or enforce any such right of contribution unless and until all of the Notes and all other sums due and payable under the Note Purchase Agreements have been fully and irrevocably paid and discharged.

 

(g) Each Guarantor agrees that to the extent the Company, any other Guarantor or any other Person makes any payment on any Note, which payment or any part thereof is subsequently invalidated, voided, declared to be fraudulent or preferential, set aside, recovered,

 

-7-


rescinded, or otherwise defeased or is required to be retained by or repaid to a trustee, receiver, or any other Person under any bankruptcy code, common law, or equitable cause, then and to the extent of such payment, the obligation or the part thereof intended to be satisfied shall be revived and continued in full force and effect with respect to the Guarantors’ obligations hereunder, as if said payment had not been made. The liability of the Guarantors hereunder shall not be reduced or discharged, in whole or in part, by any payment to any Holder from any source that is thereafter paid, returned or refunded in whole or in part by reason of the assertion of a claim of any kind relating thereto, including, but not limited to, any claim for breach of contract, breach of warranty, preference, illegality, invalidity, or fraud asserted by any account debtor or by any other Person.

 

(h) No Holder shall be under any obligation: (1) to marshal any assets in favor of the Guarantors or in payment of any or all of the liabilities of the Company under or in respect of the Notes or the obligations of the Guarantors hereunder or (2) to pursue any other remedy that the Guarantors may or may not be able to pursue themselves and that may lighten the Guarantors’ burden, any right to which each Guarantor hereby expressly waives.

 

(i) The obligations of each Guarantor under this Guaranty rank pari passu in right of payment with all other Debt of such Guarantor which is not secured or which is not expressly subordinated in right of payment to any other unsecured Debt of such Guarantor.

 

SECTION 5.  REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS.

 

Each Guarantor represents and warrants to each Holder that:

 

(a) Such Guarantor is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on (1) the business, operations, affairs, financial condition, assets or properties of the Company and its subsidiaries, taken as a whole, or (2) the ability of such Guarantor to perform its obligations under this Guaranty, or (3) the validity or enforceability of this Guaranty. Such Guarantor has the power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Guaranty and to perform the provisions hereof.

 

(b) This Guaranty has been duly authorized by all necessary action on the part of such Guarantor, and upon execution and delivery of this Guaranty and of the Note Purchase Agreements and receipt of consideration for the Note Purchase Agreements and the Notes, this Guaranty will constitute a legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms, except as such enforceability may be limited by (1) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (2) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

 

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(c) The execution, delivery and performance by such Guarantor of this Guaranty will not (1) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Guarantor under any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, charter document or by-law, or any other material agreement or instrument to which such Guarantor is bound or by which such Guarantor or any of its properties may be bound or affected, (2) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to such Guarantor or (3) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the such Guarantor.

 

(d) No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority by the Guarantor is required in connection with the execution, delivery or performance by such Guarantor of this Guaranty.

 

(e) Such Guarantor has capital not unreasonably small in relation to its business or any contemplated or undertaken transaction and has assets having a value both at fair valuation and at present fair salable value greater than the amount required to pay its debts as they become due and greater than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured. Such Guarantor does not intend to incur, or believe or should have believed that it will incur, debts beyond its ability to pay such debts as they become due. Such Guarantor will not be rendered insolvent by the execution and delivery of, and performance of its obligations under, this Guaranty. Such Guarantor does not intend to hinder, delay or defraud its creditors by or through the execution and delivery of, or performance of its obligations under, this Guaranty.

 

SECTION 6. GUARANTOR COVENANTS.

 

From and after the date of issuance of the Notes by the Company and continuing so long as any amount remains unpaid thereon each Guarantor agrees to comply with the terms and provisions of Sections 9.1, 9.2, 9.3, 9.4 and 9.5 of the Note Purchase Agreements, insofar as such provisions apply to such Guarantor, as if said Sections were set forth herein in full.

 

SECTION 7. [RESERVED]

 

SECTION 8. GOVERNING LAW.

 

(a) THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE THEREIN.

 

(b) Each Guarantor hereby (1) irrevocably submits and consents to the jurisdiction of the federal court located within the County of New York, State of New York (or if such court lacks jurisdiction, the State courts located therein), and irrevocably agrees that all actions or proceedings relating to this Guaranty may be litigated in such courts, and (2) waives any objection which it may have based on improper venue or forum non conveniens to the conduct of

 

-9-


any proceeding in any such court and waives personal service of any and all process upon it, and (3) consents that all such service of process be made by delivery to it at the address of such Person set forth in Section 11 below or to its agent referred to below at such agent’s address set forth below (with a courtesy copy to such Guarantor at the address set forth in Section 11) and that service so made shall be deemed to be completed upon actual receipt. Each Guarantor hereby irrevocably appoints CT Corporation System, with an office on the date hereof at 111 Eighth Avenue, New York, New York 10011, as its agent for the purpose of accepting service of any process within the State of New York. Nothing contained in this section shall affect the right of any Holder to serve legal process in any other manner permitted by law or to bring any action or proceeding in the courts of any jurisdiction against a Guarantor or to enforce a judgment obtained in the courts of any other jurisdiction.

 

(c) The parties hereto waive any right to have a jury participate in resolving any dispute, whether sounding in contract, tort, or otherwise, between them arising out of, connected with, related to or incidental to the relationship established between them in connection with this Guaranty, any financing agreement, any loan party document or any other instrument, document or agreement executed or delivered in connection herewith or the transactions related hereto. The parties hereto hereby agree and consent that any such claim, demand, action or cause of action shall be decided by court trial without a jury and that any of them may file an original counterpart or a copy of this Guaranty with any court as written evidence of the consent of the parties hereto to the waiver of their right to trial by jury.

 

SECTION 9. [RESERVED]

 

SECTION 10. AMENDMENTS, WAIVERS AND CONSENTS.

 

(a) This Guaranty may be amended, and the observance of any term hereof may be waived (either retroactively or prospectively), with (and only with) the written consent of each Guarantor and the Required Holders.

 

(b) The Guarantors will provide each Holder (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof. The Guarantors will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 10 to each Holder promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders.

 

(c) The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of fee or otherwise, or grant any security, to any Holder as consideration for or as an inducement to the entering into by any Holder of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each Holder even if such Holder did not consent to such waiver or amendment.

 

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(d) Any amendment or waiver consented to as provided in this Section 10 applies equally to all Holders and is binding upon them and upon each future holder and upon the Guarantors. No such amendment or waiver will extend to or affect any obligation, covenant or agreement not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Guarantors and any Holder nor any delay in exercising any rights hereunder shall operate as a waiver of any rights of any Holder. As used herein, the term “this Guaranty” and references thereto shall mean this Guaranty as it may from time to time be amended or supplemented.

 

(e) Solely for the purpose of determining whether the Holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Guaranty, Notes directly or indirectly owned by any Guarantor, the Company or any of their respective subsidiaries or Affiliates shall be deemed not to be outstanding.

 

SECTION 11. NOTICES.

 

All notices and communications provided for hereunder shall be in writing and sent (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:

 

(1) if to an Initial Note Purchaser or such Initial Note Purchaser’s nominee, to such Initial Note Purchaser or such Initial Note Purchaser’s nominee at the address specified for such communications in Schedule A to the Note Purchase Agreements, or at such other address as such Initial Note Purchaser or such Initial Note Purchaser’s nominee shall have specified to any Guarantor or the Company in writing,

 

(2) if to any other Holder, to such Holder at such address as such Holder shall have specified to any Guarantor or the Company in writing, or

 

(3) if to any Guarantor, to such Guarantor c/o the Company at its address set forth at the beginning of the Note Purchase Agreements to the attention of Corporate Treasurer, or at such other address as such Guarantor shall have specified to the Holders in writing.

 

Notices under this Section 11 will be deemed given only when actually received.

 

SECTION 12. MISCELLANEOUS.

 

(a) No remedy herein conferred upon or reserved to any Holder is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Guaranty now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default, omission or failure of performance hereunder shall impair any such

 

-11-


right or power or shall be construed to be a waiver thereof but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle any Holder to exercise any remedy reserved to it under the Guaranty, it shall not be necessary for such Holder to physically produce its Note in any proceedings instituted by it or to give any notice, other than such notice as may be herein expressly required.

 

(b) The Guarantors will pay all sums becoming due under this Guaranty by the method and at the address specified in the Note Purchase Agreements, or by such other method or at such other address as any Holder shall have from time to time specified to the Guarantors in writing for such purpose, without the presentation or surrender of this Guaranty or any Note.

 

(c) Any provision of this Guaranty that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.

 

(d) If the whole or any part of this Guaranty shall be now or hereafter become unenforceable against any one or more of the Guarantors for any reason whatsoever or if it is not executed by any one or more of the Guarantors, this Guaranty shall nevertheless be and remain fully binding upon and enforceable against each other Guarantor as if it had been made and delivered only by such other Guarantors.

 

(e) This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of each Holder and its successors and assigns so long as its Notes remain outstanding and unpaid.

 

(f) This Guaranty may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.

 

SECTION 13. RELEASE.

 

Notwithstanding anything that may be contained herein to the contrary, the Holders agree that, in accordance with Section 2.2(e) of the Note Purchase Agreements, this Guaranty shall be automatically released and discharged without the necessity of further action on the part of the Holders if, and to the extent, the corresponding guaranty given pursuant to the terms of the Bank Credit Agreement is released and discharged; provided that in the event the Guarantor shall again become obligated under or with respect to the previously discharged Guaranty pursuant to the terms and provisions of the Guaranty, the Bank Credit Agreement or any additional bank loan agreement entered into by the Company pursuant to which such lenders make available to the Company credit facilities which are pari passu with the Notes, then the obligations of such Guarantor under this Guaranty shall be reinstated and any release thereof previously given shall be deemed null and void, and such Guaranty shall again benefit the Holders on an equal and pro rata basis and such Guaranty shall once again be subject to the terms of the Intercreditor

 

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Agreement. Any release by the Holders shall be deemed to have occurred concurrently with the release and discharge under the Bank Credit Agreement. The Company shall promptly notify the Holders of any release of a Subsidiary Guaranty pursuant to this Section 13 and shall deliver evidence of any release or discharge of a guaranty or Lien in customary form.

 

[Intentionally Blank]

 

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IN WITNESS WHEREOF, the undersigned has caused this Subsidiary Guaranty to be duly executed by an authorized representative as of this 17th day of December, 2003.

 

ECOMED, INC.

AMERICAN STERILIZER COMPANY

STERIS EUROPE, INC.

STERIS ASIA PACIFIC, INC.

STERIS INC.

STERIS LATIN AMERICA, INC.

HTD HOLDING CORP.

HSTD LLC

HAUSTED, INC.

ISOMEDIX INC.

ISOMEDIX OPERATIONS INC.

STERILTEK, INC.

STRATEGIC TECHNOLOGY ENTERPRISES, INC.

By:

 

/s/ William L. Aamoth

   

Name:

 

William L. Aamoth

   

Title:

 

Treasurer

 

-14-


Accepted and Agreed:
STERIS CORPORATION
By:  

/s/ William L. Aamoth

   

Name:

 

William L. Aamoth

   

Title:

 

Treasurer

Subsidiaries of STERIS Corporation

 

Exhibit 21.1

 

Subsidiaries of STERIS Corporation

 

STERIS Corporation has no parent company. As of March 31, 2005, its direct and indirect subsidiaries were as follows:

 

Albert Browne International Limited

  United Kingdom

Albert Browne Limited

  United Kingdom

American Sterilizer Company

  Pennsylvania

Browne Health Care Limited

  United Kingdom

CLBV Limited

  United Kingdom

Ecomed, Inc.

  Indiana

Family Practitioner Supplies Limited

  United Kingdom

FHSurgical

  France

Global Risk Insurance Company

  Vermont

Hamo UK Limited

  United Kingdom

Hamo USA Inc.

  Florida

Hausted, Inc.

  Delaware

HSTD LLC

  Delaware

HTD Holding Corp.

  Delaware

Isomedix Corporation

  Canada

Isomedix Inc.

  Delaware

Isomedix Operations Inc.

  Delaware

SB Servicos Administrativos Ltda.

  Brazil

SterilTek Holdings, Inc.

  Delaware

SterilTek, Inc.

  Nevada

STERIS

  France

STERIS AB

  Sweden

STERIS AG

  Switzerland

STERIS Asia Pacific, Inc.

  Delaware

STERIS (Barbados) Corp.

  Barbados

STERIS Canada Corporation

  Canada

STERIS Canada Inc.

  Canada

STERIS CH Limited

  United Kingdom

STERIS Corporation de Costa Rica, S.A.

  Costa Rica

STERIS Europe, Inc.

  Delaware

STERIS Foreign Sales Corporation

  U.S. Virgin Islands

STERIS GmbH

  Germany

STERIS Group GmbH

  Switzerland

STERIS Holdings B.V.

  Netherlands

STERIS Hong Kong Limited

  Hong Kong

STERIS Iberia, S.A.

  Spain

STERIS Inc.

  Delaware

STERIS International Sales Corporation

  Delaware

STERIS Isomedix Services, Inc.

  Delaware

STERIS Japan Inc.

  Japan

STERIS Korea Limited

  Korea

STERIS Latin America, Inc.

  Delaware

STERIS Limited

  United Kingdom

STERIS Mexico, S. de R.L. de C.V.

  Mexico

STERISOnline Inc.

  Ohio

STERIS SA

  Belgium

STERIS SEA Sdn. Bhd.

  Malaysia

STERIS Singapore Pte. Ltd.

  Singapore

STERIS S.r.l.

  Italy

STERIS Surgical Technologies SAS

  France

Strategic Technology Enterprises, Inc.

  Delaware

Zeus XV Vermögensverwaltung GmbH

  Germany

 

Consent of Registered Public Accounting Firm

 

Exhibit 23.1

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the incorporation by reference of our reports dated June 9, 2005, with respect to the consolidated financial statements and schedule of STERIS Corporation and subsidiaries, management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of STERIS Corporation and subsidiaries included in this Annual Report (Form 10-K) for the year ended March 31, 2005 in the following Registration Statements and in the related Prospectuses:

 

Registration
Number
   Description
333-40058    Form S-8 Registration Statement—Nonqualified Stock Option Agreement between STERIS Corporation and Les C. Vinney
333-40082    Form S-8 Registration Statement—Nonqualified Stock Option Agreement between STERIS Corporation and Laurie Brlas and the Nonqualified Stock Option Agreement between STERIS Corporation and David L. Crandall
333-65155    Form S-8 Registration Statement—STERIS Corporation 1998 Long-Term Incentive Compensation Plan
333-55839    Form S-8 Registration Statement—Nonqualified Stock Option Agreement between STERIS Corporation and John Masefield and the Nonqualified Stock Option Agreement between STERIS Corporation and Thomas J. DeAngelo
333-32005    Form S-8 Registration Statement—STERIS Corporation 1997 Stock Option Plan
333-06529    Form S-3 Registration Statement—STERIS Corporation
333-01610    Post-effective Amendment to Form S-4 on Form S-8—STERIS Corporation
33-91444    Form S-8 Registration Statement—STERIS Corporation 1994 Equity Compensation Plan
33-91442    Form S-8 Registration Statement—STERIS Corporation 1994 Nonemployee Directors Equity Compensation Plan
33-55976    Form S-8 Registration Statement—STERIS Corporation 401(k) Plan
33-55258    Form S-8 Registration Statement—STERIS Corporation Amended and Restated Non-Qualified Stock Option Plan
33-63770    Form S-8 Registration Statement—Nonqualified Stock Option Agreement between STERIS Corporation and Charles L. Immel and Restricted Shares Agreement between STERIS Corporation and Charles L. Immel
333-63774    Form S-8 Registration Statement—Nonqualified Stock Option Agreement between STERIS Corporation and Peter A. Burke
333-101308    Form S-8 Registration Statement—STERIS Corporation 2002 Stock Option Plan
333-91302    Form S-8 Registration Statement- Nonqualified Stock Option Agreement between STERIS Corporation and Mark D. McGinley

 

/S/ ERNST & YOUNG LLP

 

Cleveland, Ohio

June 9, 2005

 

Power of Attorney

 

Exhibit 24.1

 

SIGNATURES

 

Pursuant to the requirements of Sections 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, on the date indicated.

 

STERIS Corporation

(Registrant)

/s/ LAURIE BRLAS

Laurie Brlas

Senior Vice President and

Chief Financial Officer

June 14, 2005

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

LES C. VINNEY, President and Chief Executive Officer, and Director; LAURIE BRLAS, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer); JOHN P. WAREHAM, Chairman of the Board of Directors; CYNTHIA L. FELDMANN, Director; STEPHEN R. HARDIS, Director; JACQUELINE KOSECOFF, Director; RAYMOND A. LANCASTER, Director; KEVIN M. MCMULLEN, Director; J.B. RICHEY, Director, JERRY E. ROBERTSON, Director; LOYAL W. WILSON, Director; and MICHAEL B. WOOD, Director.

 

STERIS Corporation

(Registrant)

/s/ MARK D. McGINLEY

Mark D. McGinley

Attorney-in-Fact

June 14, 2005

 

Section 302 - CEO Certification

 

Exhibit 31.1

 

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

 

I, Les C. Vinney, certify that:

 

  1. I have reviewed this annual report on Form 10-K of STERIS Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

 

  a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/s/ LES C. VINNEY

Les C. Vinney

President and Chief Executive Officer

 

Date: June 14, 2005

 

Section 302 - CFO Certification

 

Exhibit 31.2

 

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

 

I, Laurie Brlas, certify that:

 

  1. I have reviewed this annual report on Form 10-K of STERIS Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

 

  a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/s/ LAURIE BRLAS

Laurie Brlas

Senior Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

Date: June 14, 2005

 

Section 906 - CEO and CFO Certification

 

Exhibit 32.1

 

Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002

 

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Form 10-K of STERIS Corporation (the “Company”) for the fiscal year ended March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, that, to such officer’s knowledge:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

 

/s/ LES C. VINNEY

Name:

 

Les C. Vinney

Title:

 

President and Chief Executive Officer

/s/ LAURIE BRLAS

Name:

 

Laurie Brlas

Title:

 

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

Date: June 14, 2005

 

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