FILED PURSUANT TO RULE 424(b)4
REGISTRATION NUMBER 333-43672
P_R_O_S_P_E_C_T_U_S
6,700,000 SHARES
[SUREBEAM LOGO]
CLASS A COMMON STOCK
------------
This is SureBeam Corporation's initial public offering. SureBeam Corporation
is selling all of the shares.
We are a majority-owned subsidiary of The Titan Corporation and will
continue to be controlled by Titan upon completion of this offering. Titan is
the sole owner of our Class B common stock. Holders of Class B common stock are
entitled to ten votes per share and holders of Class A common stock are entitled
to one vote per share.
Prior to this offering, no public market existed for the shares. The shares
have been approved for quotation on the Nasdaq National Market under the symbol
"SURE."
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN
THE "RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
-----------------
PER SHARE TOTAL
--------- -----
Public offering price.................................... $10.00 $67,000,000
Underwriting discount.................................... $.70 $4,690,000
Proceeds, before expenses, to SureBeam................... $9.30 $62,310,000
The underwriters also may purchase up to an additional 1,005,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about March 21, 2001.
-------------------
MERRILL LYNCH & CO. CREDIT SUISSE FIRST BOSTON
FIRST UNION SECURITIES, INC. A.G. EDWARDS & SONS, INC.
------------
The date of this prospectus is March 15, 2001.
[First Panel: Centered text stating, "SureBeam...
the extra measure of safety that helps reduce the threat of harmful food-borne
bacteria."]
[Second Panel: Graphics depicting hamburger with newspaper headlines describing
recent recalls.]
[Third Panel: Graphics depicting SureBeam's in-line system and a service center.
The graphic of the service center has a caption stating, "In the illustration
above of SureBeam's Sioux City facility, portions of the ceiling, protective
shielding and flooring of the facility have been removed in order to portray a
full layout of the SureBeam service center system." The graphic of the in-line
system has a caption stating, "In the illustration above, room walls and
portions of the protective shielding of the facility have been removed in order
to portray the full layout of the SureBeam in-line system that SureBeam expects
to install in its customers' production facilities." Both graphics have a legend
that identifies the various components of the systems depicted in the graphics.
A SureBeam logo is also depicted.]
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Special Note Regarding Forward-Looking Statements........... 20
Use of Proceeds............................................. 21
Dividend Policy............................................. 21
Capitalization.............................................. 22
Dilution.................................................... 23
Selected Historical and Pro Forma Financial Information..... 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 37
Management.................................................. 50
Certain Relationships and Related Party Transactions........ 62
Principal Stockholders...................................... 66
Description of Capital Stock................................ 67
Shares Eligible for Future Sale............................. 70
Underwriting................................................ 72
Legal Matters............................................... 76
Experts..................................................... 76
Where You Can Find More Information......................... 76
Index to Financial Statements............................... F-1
-------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different
information, you should not rely on it. We are not, and the underwriters are
not, making an offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the information appearing
in this prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
SureBeam-Registered Trademark- is a registered trademark of SureBeam
Corporation.
i
PROSPECTUS SUMMARY
This summary highlights information that we present more fully in the rest
of this prospectus. This summary does not contain all the information you should
consider before buying shares in this offering. You should read the entire
prospectus carefully, including the "Risk Factors" section and the financial
statements and the notes to those statements.
OVERVIEW
We are a leading provider of electronic irradiation systems and services for
the food industry. Our SureBeam electronic food irradiation process
significantly improves food safety, prolongs shelf life and provides
disinfestation, without compromising food taste, texture or nutritional value.
Our SureBeam process is based on proven electron beam technology that destroys
harmful food-borne bacteria such as E-coli, salmonella and listeria, eliminates
or renders harmless fruit flies and other pests and reduces food spoilage.
Heightened awareness of food safety issues has prompted food growers, packers,
processors and retailers to find new, safe and efficient ways to eliminate
bacteria and insects from their products and to reduce food spoilage. Unlike
older irradiation technologies, the SureBeam process does not use nuclear
radioactive materials as a means of irradiation. Instead, the SureBeam system
uses ordinary electricity and operates in an efficient and environmentally
responsible manner. As a result, we believe we have an opportunity to establish
electronic irradiation as a new standard for food safety and SureBeam as the
leading brand for food safety solutions.
Our electronic food irradiation system combines our patented conveyor and
shielding systems and proprietary software with publicly available electron
beam, x-ray and linear accelerator technology. We intend to offer our
irradiation processing services at centrally located service centers we would
own and operate or through service centers that would be owned by third parties
to which we would sell systems. We also have designed our systems so that we can
install a system as part of a customer's production line. We built, own and
operate in Sioux City, Iowa the first commercial electronic food irradiation
service center in the United States. We use this service center for both
commercial processing of ground beef for customers and for testing the
processing of products for other customers. We plan on building additional
company-owned service centers in Los Angeles, Philadelphia and Chicago during
the next 18 months. In July 2000, the first third-party-owned processing center
opened in Hilo, Hawaii. This facility is used for disinfestation of fruits and
vegetables.
Under our business model, we intend to generate revenue from processing food
using our electronic food irradiation system as well as from the sale of our
systems. In addition to the company-owned service centers, we plan to retain
ownership and operate any systems that we install within a customer's production
line. We may also sell systems to third parties who would own and operate
service centers in the United States or internationally. We generally structure
these sale transactions so that we can participate in the potential future value
created through the use of the systems we sold. Typically, we obtain a right to
acquire a minority equity interest in the entity that owns and operates the
system, and we currently hold a minority equity interest in one entity. We
recognize revenue from the sale of the systems and expect to recognize income
from processing revenue commensurate with our equity ownership in these
entities. We have provided and may in the future provide limited working capital
or project financing in connection with these third party service centers. A
significant portion of our revenues to date has been derived under the
percentage-of-completion accounting method from the design and construction of
our SureBeam systems not yet installed or in operation.
We have executed agreements with many of the major meat and poultry
providers and processors in the United States, including American Food Service
Corporation, Cargill, Emmpak, Huisken Meats, IBP, Omaha Steaks, Tyson Foods and
United Food Group. In addition, we have signed agreements with Anchor Foods, Del
Monte and Kraft for applying the SureBeam technology to processed foods. Our
customer agreements generally provide that we will be the exclusive provider of
any food
1
irradiation services, including gamma irradiation services that we do not
currently provide, that our customers elect to use. We are currently
electronically irradiating ground beef for commercial sale by Cargill, Emmpak,
Huisken, IBP, Omaha Steaks and Schwan's. Our other customers are currently
testing products processed by the SureBeam system.
We have identified several global markets for our SureBeam process, which
include over 19 billion pounds of ground beef and over one trillion pounds of
fruits and vegetables. We also plan to target the pork, cut beef, egg and
processed food markets. Each of these markets is substantial and represents a
significant opportunity since we intend to derive the majority of our revenue by
charging a per pound fee for food processed with our electronic irradiation
systems.
OUR STRATEGY
Our strategy is to be the premier global provider of electronic food
irradiation systems and services and to establish our process as a new standard
for food safety. The key elements of our strategy are to:
- Continue to expand relationships with leading food processors and other
customers in the United States and abroad.
- Install and operate in-line turnkey electronic irradiation systems that
are directly integrated into customer production lines. Customers pay a
per pound processing fee to establish recurring revenue sources for us.
- Build, own and operate additional electronic food irradiation service
centers in locations near major food processors.
- Build the SureBeam brand as the leading electronic irradiation brand with
both food processors and consumers in the retail and foodservice markets.
- Promote consumer awareness of electron beam technology by educating
consumers on the SureBeam system's ability to increase food safety and
highlighting major endorsements by health and industry officials.
- Pursue global opportunities through strategic relationships with local
entities in international markets, signing exclusive agreements when
possible.
- Protect our SureBeam technology by aggressively enforcing our current
patents and filing additional patent applications in the United States and
other countries.
- Develop new opportunities for SureBeam by continuing to develop new
applications of our technology.
OTHER INFORMATION
Our electronic food irradiation business is at an early stage of development
and we began generating revenues from this business in 1999. Our business is
subject to a number of risks and uncertainties that involve the new application
of an existing technology, including the need to gain consumer acceptance of
irradiated foods and our SureBeam system.
Our principal executive offices are located at 3033 Science Park Road, San
Diego, California 92121-1199 and our telephone number at that address is
(858) 552-9480. Our Internet site address is WWW.SUREBEAMSAFE.COM. Any
information that is included on or linked to our Internet site or Titan's
Internet site is not a part of this prospectus.
2
CONTROL BY TITAN
Upon completion of this offering, The Titan Corporation will own all of our
Class B common stock, which will represent approximately 84% of the number of
shares of our outstanding common stock and approximately 98% of our voting
power, and will be able to control the election of our directors and all other
matters requiring stockholder approval. Each share of Class B common stock is
convertible into one share of Class A common stock at any time at the option of
the holder and upon the occurrence of any of the events described in
"Description of Capital Stock--Common Stock."
Titan is a publicly traded company, and its filings with the Securities and
Exchange Commission, or SEC, are available to the public over the Internet at
the SEC's web site at HTTP://WWW.SEC.GOV, at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048
and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Titan's SEC
recording number is 1-6035. Our relationship with Titan is described more fully
in the "Certain Relationships and Related Party Transactions" section of this
prospectus.
OUR HISTORY
We trace our corporate history to Titan Purification, Inc., a wholly owned
subsidiary of Titan formed in December 1997. Titan Purification subsequently
changed its name to SureBeam Corporation. We were formed in August 2000 to
facilitate a reorganization of Titan's food irradiation and medical
sterilization division in the most tax-efficient manner. At that time, Titan
contributed to us the assets, liabilities and operations related to its
electronic food irradiation business. We in turn contributed the same assets,
liabilities and operations to SB Operating Co. (previously named SureBeam
Corporation and originally named Titan Purification, Inc.) in exchange for all
of the common stock of SB Operating Co. held by Titan and Dr. Gene Ray,
President and Chief Executive Officer of Titan. Concurrently, we substituted the
outstanding options and assumed the outstanding warrants to acquire common stock
of SB Operating Co. that had been granted by SB Operating Co. As a result, the
holders of the substituted options and assumed warrants have the right to
receive shares of our class A common stock instead of shares of SB Operating Co.
common stock. In addition, we assumed Titan's investment in all of SureBeam's
operations as evidenced by the subordinated promissory note payable to Titan.
Also at the time of the contribution, we licensed to Titan the patent rights for
the SureBeam technology to be used solely for its medical equipment
sterilization business. We and SB Operating Co. had limited assets prior to the
contribution.
Prior to August 2000, Titan's electronic food irradiation business had been
operated as part of a division of Titan, together with Titan's medical equipment
sterilization business and its linear electron beam accelerator business. Our
electronic food irradiation process is based principally on electron beam
accelerator technology that was created by Titan and refined over the past 18
years. Since 1992, Titan has utilized its electron beam technology for medical
equipment sterilization. We have successfully demonstrated the reliability of
our system with over 8,000 hours logged on our system for food irradiation
applications and over 100,000 hours for medical equipment sterilization
applications.
3
THE OFFERING
Class A common stock offered by SureBeam................ 6,700,000 shares
Common stock to be outstanding after the offering:
Class A common stock.................................. 9,168,942 shares
Class B common stock.................................. 46,583,850 shares
Total............................................... 55,752,792 shares
Use of proceeds......................................... We estimate that our net proceeds from the
offering, assuming no exercise of the
underwriters' over-allotment option, will be
approximately $60.5 million. We intend to
use the net proceeds to:
- build new SureBeam systems and service
centers;
- expand our manufacturing capacity;
- increase our marketing activities;
- pursue strategic transactions;
- pursue acquisitions of complementary
businesses and technologies;
- fund working capital; and
- fund general corporate purposes.
Risk factors............................................ See "Risk Factors" and other information
included in this prospectus for a discussion
of factors you should carefully consider
before deciding to invest in shares of the
Class A common stock.
Nasdaq National Market symbol........................... SURE
The number of shares of common stock outstanding after the offering is based
upon the number of shares of Class A common stock and Class B common stock
outstanding as of December 31, 2000 and:
- includes 2,236,023 shares of Class A common stock issuable upon the
exercise of currently outstanding warrants that expire upon the closing of
this offering;
- excludes 2,170,800 shares of Class A common stock reserved for issuance
under our 2000 Stock Option and Incentive Plan, of which options to
purchase 349,374 shares at an exercise price of $0.1438 have been granted
and are outstanding as of December 31, 2000;
- excludes 7,975,137 shares of Class A common stock reserved for issuance
under our Nonstatutory Stock Option Plan, of which options to purchase
7,714,269 shares at an exercise price of $0.1438 have been granted and are
outstanding as of December 31, 2000; and
- excludes 250,000 shares of Class A common stock reserved for issuance
under our 2000 Employee Stock Purchase Plan.
In addition, except as otherwise noted, all information in this prospectus
assumes no exercise of the underwriters' over-allotment option.
4
SUMMARY FINANCIAL INFORMATION
The following summary financial information should be read in conjunction
with the SureBeam financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The pro forma statement of
operations information for the year ended December 31, 2000 should be read in
conjunction with the unaudited pro forma financial information included
elsewhere in this prospectus. The historical financial information prior to the
August 2000 contribution by Titan to SureBeam is based on the historical
operating results of SureBeam's predecessor business, which was operated
principally as a division of Titan and which included a medical equipment
sterilization and electronic food irradiation business, as well as a linear
accelerator business. The historical results of operations and financial
condition of these businesses are presented as a combination of entities under
common control in a manner similar to a pooling of interests for all periods
presented. Separate financial statements for SB Operating Co. have not been
included since SB Operating Co. did not have operations prior to the
contribution of Titan's electronic food irradiation and medical equipment
sterilization division to us. The pro forma statement of operations information
gives effect to the elimination of the operations related to the medical
equipment sterilization and linear accelerator businesses in order to create
SureBeam, the electronic food irradiation business. The unaudited as adjusted
balance sheet information also gives effect to the issuance of 2,236,023 shares
of Class A common stock issuable upon the exercise of currently outstanding
warrants that expire upon the closing of this offering, and gives effect to the
sale of 6,700,000 shares of Class A common stock in this offering, at the
initial public offering price of $10.00 per share and after deducting the
underwriting discount and commissions and estimated offering expenses. The
unaudited pro forma statement of operations information and the unaudited as
adjusted balance sheet information do not give effect to accounting for the
conversion of stock options granted under the Nonstatutory Stock Option Plan
from variable plan options to fixed plan options. Upon the completion of this
offering, stock options granted under the Nonstatutory Stock Option Plan will be
converted from variable plan options to fixed plan options. Accordingly,
deferred compensation will be recorded to the extent that the fair market value
on the date of completion of the offering exceeds the exercise price. This
deferred compensation will be recognized over the four year vesting period of
the related options. Based on the initial public offering price of $10.00 per
share and assuming that the offering had been completed as of December 31, 2000,
the Company would have recorded deferred compensation of approximately
$78.6 million. Additionally, since a substantial portion of these options would
have been vested as of December 31, 2000, approximately $33.8 million of the
$78.6 million of deferred compensation would have been recognized as
compensation expense upon completion of the offering, with the balance being
recognized as compensation expense over the remaining four year vesting period
of the options. The unaudited pro forma statement of operations information and
the unaudited as adjusted balance sheet information presented do not give effect
to the additional deferred compensation that would have been recorded at
December 31, 2000, or to the compensation expense and the resulting income tax
benefit that would have been recognized for the year ended December 31, 2000. If
the unaudited pro forma statement of operations information included the effect
of the deferred compensation charges arising from these options, pro forma net
loss would have been $21.7 million or $0.46 per share, which includes an income
tax benefit of approximately $13.6 million. If the unaudited as adjusted balance
sheet information included the effect of the deferred compensation charges
arising from these options, total assets and total stockholders' equity would
have increased to $128.2 million and $60.2 million, respectively, as a result of
the deferred income taxes which would have arisen if the offering were completed
as of December 31, 2000.
5
Prior to the commencement of our food irradiation business in January 1999,
substantially all revenues for SureBeam's predecessor business were derived from
selling medical equipment sterilization systems and from providing medical
equipment sterilization services and, to a lesser extent, from selling
electronic beam accelerator systems for use by the federal government.
YEARS ENDED DECEMBER 31,
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PRO FORMA
1996 1997 1998 1999 2000 2000 (1)
----------- -------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS INFORMATION:
Revenues................................................ $ 7,930 $ 8,255 $11,184 $14,339 $29,448 $25,210
Cost of revenues........................................ 7,522 8,010 8,909 8,576 19,602 15,738
------- ------- ------- ------- ------- -------
Gross profit.......................................... 408 245 2,275 5,763 9,846 9,472
Operating expenses:
Selling, general and administrative................... 1,211 1,591 2,067 4,138 8,640 7,514
Research and development.............................. -- -- -- -- 524 499
------- ------- ------- ------- ------- -------
Income (loss) from operations........................... (803) (1,346) 208 1,625 682 1,459
Interest expense, net................................... 1,169 1,302 1,154 1,299 3,611 3,768
------- ------- ------- ------- ------- -------
Income (loss) before tax................................ (1,972) (2,648) (946) 326 (2,929) (2,309)
Income tax provision (benefit).......................... (592) (794) (284) 121 (1,130) (882)
------- ------- ------- ------- ------- -------
Net income (loss)....................................... $(1,380) $(1,854) $ (662) $ 205 $(1,799) $(1,427)
======= ======= ======= ======= ======= =======
Basic earnings (loss) per share:
Net income (loss)..................................... $ (0.03) $ (0.04) $ (0.01) $ 0.00 $ (0.04) $ (0.03)
======= ======= ======= ======= ======= =======
Diluted earnings (loss) per share:
Net income (loss)..................................... $ (0.03) $ (0.04) $ (0.01) $ 0.00 $ (0.04) $ (0.03)
======= ======= ======= ======= ======= =======
Shares used in computing basic earnings (loss) per
share(2).............................................. 46,584 46,584 46,584 46,630 46,817 46,817
======= ======= ======= ======= ======= =======
Shares used in computing diluted earnings (loss) per
share (2)............................................. 46,584 46,584 46,584 53,082 46,817 46,817
======= ======= ======= ======= ======= =======
DECEMBER 31,
DECEMBER 31, 2000
2000 AS ADJUSTED
------------ ------------
(UNAUDITED)
BALANCE SHEET INFORMATION:
Cash........................................................ $ -- $ 61,512
Working capital............................................. 19,284 80,796
Total assets................................................ 53,181 114,693
Subordinated promissory note................................ 58,072 58,072
Total stockholders' equity (deficit)........................ $(14,875) $ 46,637
------------------------------
(1) The pro forma statement of operations information gives effect to the
contribution by Titan to SureBeam of Titan's electronic food irradiation
business as if such contribution had occurred as of January 1, 2000.
(2) For the number of shares used in the per share calculations, see the pro
forma SureBeam financial statements and Note 2 to the historical SureBeam
financial statements.
6
RISK FACTORS
ANY INVESTMENT IN SHARES OF OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE
OF RISK. YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING INFORMATION ABOUT THESE
RISKS, TOGETHER WITH ALL OF THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS
BEFORE YOU DECIDE TO BUY OUR CLASS A COMMON STOCK. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
FUTURE GROWTH PROSPECTS COULD BE MATERIALLY ADVERSELY AFFECTED. ADDITIONAL RISKS
AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY BELIEVE TO BE
IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS. ANY ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD RESULT IN A DECLINE IN THE
TRADING PRICE OF OUR CLASS A COMMON STOCK AND THE LOSS OF ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT. WE ARE SUBJECT TO THE RISKS OF
NEW ENTERPRISES AND THE COMMERCIALIZATION OF A TECHNOLOGY THAT REQUIRES CONSUMER
ACCEPTANCE.
Our early stage of development makes it difficult to assess our prospects or
predict our future operating results. We are subject to risks and uncertainties
frequently encountered by early stage companies that involve the new application
of an existing technology. These risks include our inability to:
- build consumer confidence in the benefits of food irradiation and
establish the acceptance of our SureBeam electronic irradiation
technology;
- establish and maintain a sufficient number of food industry customers and
strategic relationships; and
- obtain substantial capital to support the further development of our
technology and the commercialization of our systems and services.
If we do not successfully address these risks, we may not be able to
increase revenues or commercialize our SureBeam system.
IF WE ARE UNABLE TO SUCCESSFULLY ACHIEVE BROAD MARKET ACCEPTANCE OF THE SUREBEAM
SYSTEM, WE MAY NOT BE ABLE TO GENERATE ENOUGH REVENUES IN THE FUTURE TO ACHIEVE
OR SUSTAIN PROFITABILITY.
We are dependent on the successful commercialization of our SureBeam system.
The market for electronically irradiated food is at an early stage of
development. Six food processors are currently selling food electronically
irradiated by us. Other food processors are testing our technology and it is
uncertain whether or when they will choose to begin commercial production. We
also do not know whether or when any fast food or other national chain
restaurants or food retailers will decide to offer irradiated meat and create
demand for our electronic irradiation systems. For example, Wal-Mart announced
in March 2000 that it would carry irradiated frozen hamburger patties on a trial
basis and one of our customers confirmed publicly that it shipped irradiated
product to Wal-Mart. However, to our knowledge, Wal-Mart has not offered any
frozen irradiated hamburger patties for sale at any of its stores. We expect
that some food processors will not irradiate food unless industry leaders first
commit to distribute irradiated food.
The markets for our SureBeam system are unproven. The SureBeam technology
may not gain adequate commercial acceptance or success. A variety of the risk
factors discussed in this section will determine the success of our market
development and commercialization efforts and the rate and extent of market
acceptance of the SureBeam system.
7
PUBLIC CONCERNS OVER THE IRRADIATION OF FOOD COULD NEGATIVELY IMPACT MARKET
ACCEPTANCE OF THE SUREBEAM PROCESS AND SUREBEAM BRANDED FOOD PRODUCTS.
Irradiation of food by any technology, whether using an electron beam or
nuclear radioactive materials, is opposed by several organized and vocal
consumer groups who claim that irradiated food products are unsafe for
consumption or pose a danger to the environment. These groups attempt to
influence public policy and promote consumer opposition to irradiated food
through activities such as picketing stores that offer irradiated food and
lobbying politicians. Because irradiation of foods by electron beam technology
is a new process, consumers need to be informed about the benefits and safety of
food irradiation. Since irradiation of food by any method, whether using
electron beam or nuclear radioactive materials, must be disclosed under the same
label "Treated with Radiation" or "Treated by Irradiation," consumers may fear
that our process makes food unsafe for consumption, has unknown future health
effects or poses a danger to the environment. We risk not being able to overcome
these fears through our educational efforts or to distinguish our process from
gamma irradiation. If the public or our potential customers perceive our systems
and services as unsafe or undesirable, our systems and services may not gain
market acceptance, which would severely limit our ability to market and sell our
products. In addition, negative public attitudes may prompt state legislatures
to prohibit the sale of irradiated food. New York, New Jersey and Maine have all
in the past prohibited the sale of irradiated food and New Jersey currently is
considering the adoption of a moratorium on the sale or distribution of
irradiated food. The adoption of such legislation in a number of states could
have a material adverse effect on our revenues and business model. Further,
consumers may be unwilling to pay for the higher cost of food products processed
by our SureBeam system which could negatively impact the market acceptance of
our process.
WE HAVE A HISTORY OF LOSSES AND WE MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY.
We have incurred operating losses in each quarter since we commenced
operations. As of December 31, 2000, we had an accumulated deficit of
approximately $18.0 million. In addition, at the time of this offering and based
on the initial public offering price of $10.00 per share, we will record a
deferred compensation expense of approximately $78.6 million, which will be
recognized over the four year vesting period of the related options. This charge
is recorded in accordance with the vesting provisions of the related options
through 2004. Since a significant portion of the options will have vested at the
time of the closing of this offering, approximately $38.7 million of this
charge, which includes $4.9 million related to the vesting of options in the
first quarter of 2001, will be recognized at the time of the closing of this
offering. This charge will have a significant adverse impact on our earnings
from 2001 to 2004 and it may cause our stock price to decline after this
offering. We expect to derive our future revenues from sales of our SureBeam
systems and related food processing services. However, these revenues are highly
uncertain. We expect to continue to devote substantial resources to expand our
sales and marketing activities, including our consumer branding efforts, further
increase manufacturing capacity, build new SureBeam service centers and expand
our research and development activities. As a result, we expect that our
operating losses will increase and that we will incur operating losses for the
foreseeable future.
OUR CUSTOMER CONTRACTS CAN BE CANCELLED ON SHORT NOTICE WITH LITTLE PENALTY AND
THESE CONTRACTS ALLOW THE CUSTOMERS TO USE OTHER ELECTRONIC IRRADIATION
PROVIDERS IN LIMITED CIRCUMSTANCES.
While our customer contracts generally provide for a term of more than one
year, the customers may terminate such contracts with a nominal termination fee
and upon short notice, typically one month. If one or more customers that are
processing a significant volume of products decide to terminate their contracts,
our results of operations would be adversely affected. While a termination of a
contract by a customer would not generally release a customer from the exclusive
provider arrangement in the customer's contract, we generally must release a
customer from the exclusive
8
provider arrangement if they can find an alternative food irradiation source
that can provide a comparable service at a lower price, or if we cannot fully
meet the customer's demand.
IF WE CANNOT ESTABLISH AND MAINTAIN RELATIONSHIPS WITH FOOD PROCESSORS,
DISTRIBUTORS, RETAILERS AND FOOD SERVICE OPERATORS, WE MAY NOT BE ABLE TO
INCREASE REVENUES OR COMMERCIALIZE OUR SUREBEAM SYSTEM.
In order to increase our revenues and successfully commercialize our
SureBeam system, we must establish and maintain relationships with our existing
and potential customers and strategic partners. A reduction, delay or
cancellation of orders from one or more significant customers or the loss of one
or more key customers could significantly reduce our revenues and could damage
our reputation among our current and potential customers as well as consumers.
We cannot assure you that our current customers will continue to place orders
with us, that our current customers evaluating the technology will elect to
enter into commercial production, that orders by existing commercial customers
will increase, or that we will be able to obtain orders from new customers or
continue to secure additional strategic relationships.
IF WE CANNOT DEVELOP AND MAINTAIN POSITIVE SUREBEAM BRAND AWARENESS, OUR
REVENUES MAY BE MATERIALLY ADVERSELY AFFECTED.
To promote awareness of our brand, we intend to continue to spend
significant amounts of capital, including some portion of the net proceeds of
this offering, on an aggressive brand-enhancement campaign. Our efforts to
develop and maintain positive SureBeam brand awareness with consumers and our
customers may be unsuccessful. As a result, SureBeam systems may not gain market
acceptance causing our revenues, customer relationships and business prospects
to be materially adversely affected.
IF WE CANNOT ASSEMBLE A LARGE NUMBER OF SUREBEAM SYSTEMS, WE MAY NOT MEET
ANTICIPATED MARKET DEMAND OR WE MAY NOT MEET OUR PRODUCT COMMERCIALIZATION
SCHEDULE.
To be successful, we will have to assemble our SureBeam systems in large
quantities at acceptable costs while also preserving high product quality,
safety and reliability. If we cannot maintain high product quality on a large
scale, our business will be adversely affected. We intend to apply a portion of
the net proceeds of this offering to significantly expand our production of
SureBeam systems. We cannot assure you that we will be successful in expanding
our assembly activities. We may encounter difficulties in scaling up production
of our systems, including problems with the supply of key components. Even if we
are successful in developing our assembly capability, we do not know whether we
will do so in time to meet our product commercialization schedule or to satisfy
the requirements of our customers.
IF WE EXPERIENCE QUALITY CONTROL PROBLEMS OR SUPPLY SHORTAGES FROM COMPONENT
SUPPLIERS, OUR REVENUES AND PROFIT MARGINS MAY SUFFER.
Our dependence on third-party suppliers for components of our systems
involves several risks, including limited control over pricing, availability of
materials, quality and delivery schedules. These components include the
microwave cavities of our linear accelerators which we currently obtain from a
single source. We may experience quality control problems or supply shortages
with respect to these components in the future. Any quality control problems or
interruptions in supply with respect to one or more components or increases in
component costs could materially adversely affect our customer relationships,
revenues and profit margins.
THE USE OF OUR SYSTEMS TO IRRADIATE FOOD IS SUBJECT TO SIGNIFICANT GOVERNMENT
REGULATION THAT COULD PROHIBIT THE SALE OF IRRADIATED FOOD IN VARIOUS
JURISDICTIONS, INCREASE THE COST OF USING OUR PRODUCTS AND DELAY OR PREVENT THE
USE OF OUR SYSTEMS AND SERVICES BY OUR CUSTOMERS.
Food irradiation is subject to significant regulation as a food additive by
the U.S. Food and Drug Administration. Use of our SureBeam system, including
product labeling, is also subject to regulation by the U.S. Department of
Agriculture's Food Safety and Inspection Service and by health and
9
environmental safety departments within various states. The FDA has approved the
use of irradiation for beef, poultry, pork, fruits and vegetables. The FDA has
not yet approved the use of irradiation for two of the primary food markets we
expect to target, processed foods and seafood. The failure of the FDA to approve
irradiation of processed foods and seafood would prevent us from generating
revenues from the application of our technology in these significant markets.
Furthermore, the FDA could remove or restrict its approval of the use of
irradiation for currently approved food products, which would severely limit our
ability to provide services and systems.
Several state legislatures have in the past prohibited the sale or
distribution of any irradiated food. A bill to impose a five-year moratorium on
the sale or distribution of irradiated foods, regardless of whether the
irradiation was applied by electricity or nuclear radiation, is currently
pending in the New Jersey state legislature. No assurance can be given that this
bill will not be enacted into law or that similar bills in other states might
not be adopted.
In addition, FDA regulations require that all food that has been irradiated
must carry the Radura symbol, an international symbol for irradiation, and state
that the product has been "Treated with Radiation" or "Treated by Irradiation"
on the label. States such as Vermont have similar labeling requirements. These
labeling regulations may increase the risk that consumers will not purchase
goods that have been treated by our products or services, which could negatively
impact our revenues.
FDA regulations also require approval for packaging materials used by our
customers. While the FDA has approved a number of packaging materials, many
other materials commonly used for packaging food have not been approved. Failure
or delay in receiving such approvals could have a material adverse effect on our
customer relationships and revenues.
We also are required to obtain regulatory approval from foreign regulatory
authorities before we can offer our systems and services in those jurisdictions.
These jurisdictions may apply different criteria than the U.S. regulatory
agencies in connection with their approval processes. Monitoring changes in, and
our compliance with, diverse and numerous foreign regulatory requirements may
increase our costs. Regulatory approvals in foreign countries that regulate
irradiation are subject to similar risks and uncertainties as regulatory
approvals in the United States. If we are unable to obtain approval to sell our
products and services in these markets, our ability to generate revenues from
these markets would be adversely affected.
Our processing facilities also are subject to various other federal, state
and municipal regulations regarding health, safety and environmental issues. Our
facilities are subject to continuous supervision, in the case of the USDA, or
periodic inspection by other regulators.
EFFORTS TO CHANGE THE LABELING REQUIREMENTS WITH RESPECT TO ELECTRONIC FOOD
IRRADIATION MAY NOT BE SUCCESSFUL AND MAY RESULT IN CONSUMER CONFUSION.
Along with food industry groups and others, we are seeking to change the
labeling requirements for foods treated with electronic irradiation to allow the
use of words like "cold pasteurization" or "electronic pasteurization" instead
of "irradiation" or "radiation." Although we believe that the proposed changes
may improve the overall acceptance of the SureBeam process, we cannot assure you
that the proposed changes will be accepted, or if accepted, that we will
recognize any benefit from such changes. Additionally, a continued reference to
the SureBeam process as "irradiation" or "radiation" could adversely affect the
consumer acceptance of our process.
INTERNATIONAL EXPANSION WILL SUBJECT US TO RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS THAT COULD INCREASE OUR COSTS AND DECREASE OUR PROFIT MARGINS IN BOTH
OUR DOMESTIC AND OUR INTERNATIONAL OPERATIONS.
Our success will depend in part on our ability to expand internationally as
we obtain regulatory approvals to market and sell our SureBeam systems in other
countries. We have entered into
10
agreements to establish operations in both Japan and Brazil. Expansion of our
international operations could impose substantial burdens on our resources,
divert management's attention from domestic operations and otherwise adversely
affect our business. Furthermore, international operations are subject to
several inherent risks that could increase our costs and decrease our profit
margins including:
- reduced protection of intellectual property rights;
- changes in foreign currency exchange rates;
- changes in a specific country's or region's political or economic
conditions;
- trade protective measures and import or export licensing requirements or
other restrictive actions by foreign governments; and
- changes in tax laws.
IF WE CANNOT EFFECTIVELY MANAGE OUR INTERNAL GROWTH, OUR BUSINESS PROSPECTS,
REVENUES AND PROFIT MARGINS MAY SUFFER.
If we fail to effectively manage our internal growth in a manner that
minimizes strains on our resources, we could experience disruptions in our
operations and ultimately be unable to generate revenues or profits. We expect
that we will need to significantly expand our operations to successfully
implement our business strategy. As we add manufacturing, marketing, sales, and
other personnel, both domestically and internationally, and expand our
manufacturing, irradiation processing and research and development capabilities,
we expect that our operating expenses and capital requirements will increase. To
effectively manage our growth, we must continue to expend funds to improve our
operational, financial and management controls, and our reporting systems and
procedures. In addition, we must effectively expand, train and manage our
employee base. If we fail in our efforts to manage our internal growth, our
business prospects, revenues and profit margins may suffer.
WE INTEND TO PURSUE STRATEGIC TRANSACTIONS, WHICH COULD DISRUPT OUR OPERATIONS,
INCREASE OUR COSTS AND NEGATIVELY IMPACT OUR EARNINGS.
We intend to pursue strategic transactions that provide access to new
technologies, products or markets. These transactions could include
acquisitions, partnerships, joint ventures, business combinations and
investments. Any transaction may require us to incur non-recurring or on-going
charges and may pose significant integration challenges and/or management and
business disruptions, any of which could increase our costs and negatively
impact our earnings. In addition, we may not succeed in retaining key employees
of any business that we acquire. We may not consummate these transactions on
favorable terms or obtain the benefits we anticipate from a transaction.
OUR TECHNOLOGY COMPETES AGAINST OTHER FOOD IRRADIATION TECHNOLOGIES. COMPETITION
IN OUR MARKET MAY RESULT IN PRICING PRESSURES, REDUCED MARGINS OR THE INABILITY
OF OUR PRODUCTS AND SERVICES TO ACHIEVE MARKET ACCEPTANCE.
We compete against several companies seeking to address the food safety
market. Our electronic food irradiation technology competes against gamma ray
technology and alternatives to irradiation, such as thermal sterilization,
fumigation and chemical washes. We may be unable to compete successfully against
our current and potential competitors, which may result in price reductions,
reduced margins and the inability to achieve market acceptance for our products.
The current level of market penetration for food irradiation products is
relatively low when compared to the overall size of the food markets to which we
are targeting our food irradiation services and products. As food irradiation
gains consumer acceptance and the market increases, we expect competition to
grow significantly. Our competitors include Flow International Corporation, Ion
Beam Applications, s.a., MDS/Nordion Food Technologies Corporation and STERIS
Corporation. These organizations may have significantly more capital, research
and development, regulatory, manufacturing,
11
marketing, human and other resources than we do. As a result, they may be able
to devote greater resources to the manufacture, promotion and sale of their
products, initiate or withstand substantial price competition, or take advantage
of acquisition or other opportunities more readily.
THE HISTORICAL FINANCIAL INFORMATION PRESENTED IN THIS PROSPECTUS IS NOT
REPRESENTATIVE OF OUR RESULTS AS A SEPARATE ELECTRONIC FOOD IRRADIATION BUSINESS
BECAUSE IT INCLUDES TITAN'S MEDICAL EQUIPMENT STERILIZATION BUSINESS AND THE
LINEAR ELECTRON BEAM ACCELERATOR BUSINESS FOR GOVERNMENT USE. ACCORDINGLY, YOU
SHOULD NOT RELY ON THIS INFORMATION OR ANY DISCUSSION OF IT IN THIS PROSPECTUS
AS BEING INDICATIVE OF OUR HISTORICAL OR FUTURE RESULTS OF OPERATIONS OR
FINANCIAL CONDITION AS A SEPARATE ELECTRONIC FOOD IRRADIATION BUSINESS.
The historical financial information contained in this prospectus does not
reflect the results of operations and financial condition of the electronic food
irradiation business on a stand-alone basis. The pro forma results of operations
for the year ended December 31, 2000 give effect to the contribution by Titan to
SureBeam of the electronic food irradiation business as if such contribution
occurred on January 1, 2000. The pro forma results of operations information
contained in this prospectus is the only results of operations information that
addresses the electronic food irradiation business on a stand-alone basis. The
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section is based upon the historical results of operations of
Titan's entire electron beam business, including the medical equipment
sterilization business and the linear electron beam accelerator business for
government use, and thus it is not comparable with the pro forma financial
information. Accordingly, you should not rely on the discussion in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section or upon the historical financial information contained in
this prospectus as being indicative of our historical or future results of
operations or financial condition.
TO DATE WE HAVE DERIVED A SIGNIFICANT PORTION OF OUR REVENUES FROM THE SALE OF
SYSTEMS TO A LIMITED NUMBER OF THIRD PARTIES, WHICH WILL OPERATE PROCESSING
CENTERS. REVENUES FROM SYSTEM SALES MAY DECLINE IN THE FUTURE IF ANY EXISTING
ORDERS ARE CANCELLED OR WE FAIL TO MAKE NEW SYSTEM SALES.
Our historical revenues are primarily attributable to the design and
construction of systems for a limited number of third party service centers,
which we account for under the percentage of completion method. For example, for
the year ended December 31, 1999 revenue from three customers represented
approximately 40% of our total revenues and for the year ended December 31, 2000
revenue from three customers represented approximately 80% of our total
revenues. Some of these systems are not yet installed or in operation and we
expect to continue to derive system sales revenue as we complete construction of
these systems. A reduction or delay of system sales to one or more significant
customers or the loss of one or more key customers could significantly reduce
our revenues. In addition, once these systems become operational, we will no
longer derive revenue from these system sales, but expect to derive income from
food processing revenues commensurate to our equity ownership in the entities
that own and operate the third party service centers. We cannot assure you that
we will continue to derive revenues from these customers, that revenues from
these customers will continue at current or historical levels, that we will be
able to derive revenue from new customers or that we will be able to derive
income from significant food processing revenues from the completed systems in
the future.
OUR INABILITY TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS IN THE UNITED STATES
AND FOREIGN COUNTRIES COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS PROSPECTS
AND COMPETITIVE POSITION.
Our success depends on our ability to obtain and maintain patent and other
proprietary-right protection for our technology and systems and services in the
United States and other countries. The laws of some foreign countries do not
protect proprietary rights to the same extent as the laws of the United States,
and many companies have encountered significant problems and costs in protecting
their proprietary rights in these foreign countries. If we are unable to obtain
or maintain these protections,
12
we may not be able to prevent third parties from using our proprietary rights.
In addition, we may incur significant expense in protecting our intellectual
property and defending or assessing claims with respect to intellectual property
owned by others.
Our patents may be challenged, narrowed, invalidated or circumvented. In
addition, our issued patents may not contain claims sufficiently broad to
protect us against third parties with similar technologies or products, or
provide us with any competitive advantage. We are not certain that our pending
patent applications will be issued. Moreover, our competitors could challenge or
circumvent our patents or pending patent applications.
We also rely on trade secrets, proprietary know-how and continuing
technological innovation to remain competitive. We have taken measures to
protect our trade secrets and know-how, including the use of confidentiality
agreements with our employees, consultants and advisors. It is possible that
these agreements may be breached and that any remedies for a breach will not be
sufficient to compensate us for damages incurred. We generally control and limit
access to, and the distribution of, our product documentation and other
proprietary information. Despite our efforts to protect these proprietary
rights, unauthorized parties may copy aspects of our products and obtain and use
information that we regard as proprietary. We also cannot guarantee that other
parties will not independently develop our know-how or otherwise obtain access
to our technology.
THE VALIDITY OF OUR CORE PATENT HAS BEEN CHALLENGED IN A LEGAL ACTION THAT, IF
SUCCESSFUL, WOULD ALLOW POTENTIAL COMPETITORS TO DEVELOP AND COMMERCIALIZE
ELECTRON BEAM FOOD IRRADIATION SYSTEMS, THAT COULD MATERIALLY ADVERSELY AFFECT
OUR BUSINESS PROSPECTS AND COMPETITIVE POSITION.
On January 6, 2000, Ion Beam Applications s.a., a Belgian corporation, and
its related U.S. subsidiaries filed an action for declaratory judgment against
Titan in a federal court in Virginia relating to our patents for our SureBeam
systems. The action challenges the validity of our core Irradiation System
Utilizing Conveyor Transported Article Carriers patent, seeks a declaration that
Ion Beam Applications and its customers have not infringed any of the claims in
our patent, and alleges that we have engaged in unfair competition and that our
conduct constitutes patent misuse. The case has been moved to the federal court
in San Diego. On November 22, 2000, Ion Beam Applications filed an amended
complaint alleging, in addition to the original claims, that we have engaged in
false advertising, monopolization, restraint on trade and unfair business
practices. We intend to vigorously defend our patent position and defend against
all allegations. However, a finding in favor of Ion Beam Applications in this
action would allow Ion Beam Applications and other potential competitors to
develop and commercialize electron beam food irradiation systems that would
compete against our SureBeam systems and services.
OTHER COMPANIES MAY CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY OR
PROPRIETARY RIGHTS, WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR
PREVENT US FROM SELLING OUR PRODUCTS.
Our success depends on our ability to operate without infringing the patents
and proprietary rights of third parties. Product development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when filed,
with regard to similar technologies. Future patents issued to third parties may
contain claims that conflict with our patents. Although we believe that our
current product does not infringe the proprietary rights of any third parties,
third parties could assert infringement claims against us in the future. Any
litigation or interference proceedings, regardless of their outcome, would
probably be costly and require significant time and attention of our key
management and technical personnel. Litigation or interference proceedings could
also force us to:
- stop or delay selling, manufacturing or using products that incorporate
the challenged intellectual property;
- pay damages; or
- enter into licensing or royalty agreements that may be unavailable on
acceptable terms.
13
PRODUCT LIABILITY CLAIMS COULD MATERIALLY ADVERSELY AFFECT OUR CUSTOMER
RELATIONSHIPS AND COSTS.
Our involvement in the processing of food results in a significant risk that
we will be subject to product liability claims resulting from the consumption of
contaminated food. We may be held liable or incur costs to settle or defend
liability claims if any of our systems cause, or are claimed to cause, injury or
are found unsuitable during product testing, manufacturing, marketing, sale or
use. These risks exist even with respect to products that have received, or may
in the future receive, regulatory approval, registration or clearance for
commercial use. Also, we may be liable to our customers for the costs they incur
from product recalls. We cannot guarantee that we will be able to avoid product
liability exposure.
While we currently maintain product liability insurance at levels that we
believe are sufficient and consistent with industry standards for companies at
our stage of development, we cannot guarantee that our product liability
insurance is adequate. It is also possible that at any time our insurance
coverage may become unavailable on commercially reasonable terms or at all. A
product liability claim or product recall could result in liability to us
greater than our assets and/or insurance coverage. Moreover, product liability
claims, recalls and expenses associated with defending against claims or recalls
could have an adverse impact on us even if we have adequate insurance coverage.
IF WE CANNOT RETAIN KEY PERSONNEL OR ATTRACT QUALIFIED PERSONNEL, OUR CUSTOMER
RELATIONSHIPS, COMPETITIVE POSITION AND REVENUES COULD SUFFER.
Our success depends to a significant extent upon the efforts of our key
management, sales and marketing, technical support and research and development
personnel, none of whom have entered into agreements not to compete with us. The
loss of key personnel could adversely affect us. We believe that our future
success will depend in large part upon our continuing ability to attract and
retain highly skilled managerial, sales and marketing, technical support and
research and development personnel. Like other emerging growth companies, we
face intense competition for our personnel needs, and we have at times
experienced and continue to experience difficulty in recruiting qualified
personnel. We cannot assure you that we will be successful in attracting,
assimilating and retaining additional qualified personnel in the future. If we
were to lose the services of one or more of our key personnel, or if we failed
to attract and retain additional qualified personnel, it could materially and
adversely affect our customer relationships, competitive position and revenues.
IF WE CANNOT EFFECTIVELY INCREASE AND ENHANCE OUR SALES AND MARKETING
CAPABILITIES, WE MAY NOT BE ABLE TO INCREASE OUR REVENUES OR COMMERCIALIZE OUR
SUREBEAM SYSTEM.
We need to further develop our sales and marketing capabilities to support
our commercialization efforts. As of December 31, 2000, we had six employees in
our sales and marketing force. If we fail to increase and enhance our marketing
and sales force, we may not be able to enter new or existing markets for the
irradiation of food. Failure to recruit, train and retain new sales personnel,
or the inability of new sales personnel to effectively market and sell our
products and services, could impair our ability to gain market acceptance of our
products and services and cause our sales to suffer. Further, since the
irradiation of food has only recently been approved, we will need to
commercialize our products and services and enhance our brand quickly in order
to gain market share, which will only be possible if we increase our sales and
marketing capabilities.
WE WILL REQUIRE SIGNIFICANT ADDITIONAL CAPITAL TO FUND OUR FUTURE OPERATIONS,
WHICH MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS OR AT ALL.
We believe that our existing capital resources are adequate to support our
current level of operations for the next 12 months. The net proceeds from this
offering will provide additional funds to
14
expand growth over this period. However, our future capital requirements will
depend on many factors, including:
- fluctuations in our working capital requirements;
- the costs of components for our systems, and the production cost of
assembling our systems;
- the adequacy of our manufacturing and other facilities to meet demand for
our products and services;
- the size and complexity of, and the progress in, our research and
development programs;
- the costs of filing and prosecuting patent applications, and maintaining,
defending and enforcing our patents; and
- the timing, scope and results of market testing by food processors.
We currently have available a maximum of $75 million of indebtedness under a
subordinated, unsecured promissory note from us to Titan. As of December 31,
2000 and February 28, 2001, we had approximately $58.1 million and
$64.6 million, respectively, outstanding under this note. In the past, Titan
financed all of our working capital and other capital requirements. However, we
will not be able to rely on Titan for future funding in addition to amounts
under the note. If our capital requirements vary from our current plans, we may
require additional financing sooner than we anticipate. We expect we will need
to obtain additional debt or equity financing in order to execute our business
strategy. Future equity financings would be dilutive to the existing holders of
our common stock. Future debt financings could involve restrictive covenants. We
will likely not be able to obtain financing with interest rates or other terms
as favorable as those that we have obtained from Titan and financing from Titan
or from third parties may be unavailable to us when needed. In the event we are
unable to generate sufficient cash flow and obtain necessary financing, we may
have to delay, curtail or eliminate some or all of our operations or capital
expenditures.
DELAYS IN THE CONSTRUCTION AND INSTALLATION OF OUR SYSTEMS COULD NEGATIVELY
AFFECT OUR REVENUES.
Our business model depends on the successful deployment of our systems,
whether the systems are constructed and installed in service centers or in a
customer's production line. A number of factors beyond our control can slow or
delay the deployment of our systems such as site preparation, zoning and
permitting requirements, the availability of skilled construction personnel and
construction equipment, and adverse weather conditions. For example, our
expected completion date of the first service center in Brazil was postponed
from the fourth quarter of 2000 to the third quarter of 2001 as a result of
unanticipated delays in the construction process. Any delay in the deployment of
our systems could adversely affect our revenues and cash flows.
RISKS RELATED TO OUR RELATIONSHIP WITH TITAN
FOLLOWING THIS OFFERING, STOCKHOLDERS OTHER THAN TITAN WILL BE UNABLE TO AFFECT
STOCKHOLDER VOTING.
Following this offering, Titan will own all of our outstanding shares of
Class B common stock, which has ten votes per share, representing approximately
98% of our voting power. As a result, Titan will have the ability to control the
outcome of all matters requiring stockholder approval, including the election
and removal of our board of directors, approval of any merger, consolidation or
sale of all or substantially all of our assets.
TITAN'S CONTROL OF OUR COMPANY COULD MAKE IT DIFFICULT FOR ANOTHER COMPANY TO
ACQUIRE US, WHICH COULD DEPRESS OUR STOCK PRICE.
Following this offering, Titan will have the ability to control our
management and affairs. This control could discourage others from initiating any
potential merger, takeover or other change of
15
control transaction that may otherwise be beneficial to our business or our
stockholders. As a result, this control could reduce the price that investors
are willing to pay in the future for shares of our Class A common stock.
OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED IF TITAN'S INTERESTS RECEIVE
PRIORITY OVER OUR INTERESTS.
Conflicts of interest have arisen and may in the future arise between Titan
and us in a number of areas relating to our past and ongoing relationships.
Titan is a diversified technology company whose offerings include information
technology products and services that it markets to defense, intelligence and
other government agencies. Potential factors that may create a conflict of
interest between Titan and us include the following:
- the terms of the intercompany agreements that we have entered into with
Titan in connection with this offering, which include a corporate services
agreement, a tax allocation agreement, a contribution agreement and a
credit facility;
- sales or distributions by Titan of all or any portion of its ownership
interest in us;
- Titan's ability to control our management and affairs; and
- several of our directors and executive officers also are directors or
executive officers of Titan.
Titan is under no obligation to resolve any conflicts that might develop
between it and us in a manner that is favorable to us and we cannot guarantee
that such conflicts will not result in harmful consequences to our business or
prospects.
SOME OF OUR DIRECTORS AND EXECUTIVE OFFICERS ALSO ARE DIRECTORS OR EXECUTIVE
OFFICERS OF TITAN, WHICH COULD CAUSE TITAN'S INTERESTS TO RECEIVE PRIORITY OVER
OUR INTERESTS.
One of our directors, Gene W. Ray, and our executive officers, Larry A.
Oberkfell, Eric M. DeMarco and Nicholas J. Costanza, also are directors or
executive officers of Titan. Because our financial results will be included in
Titan's consolidated financial statements and our financial results are
consolidated with Titan's in computing Titan's compliance with its financial
covenants under its senior credit facility, these directors and executive
officers may consider not only the short-term and long-term impact of financial
and operating decisions on us, but also the impact of these decisions on Titan's
consolidated financial results and its stockholders. In some instances, the
impact of these decisions could be disadvantageous to us while advantageous to
Titan. We cannot guarantee that all conflicts will be resolved in a manner that
is favorable to us or that such conflicts will not result in harmful
consequences to our business or prospects. In addition, the members of our board
of directors currently have and may have in the future an equity interest in
Titan that represents a significant portion of their personal financial
portfolio. This equity interest could affect their decisions in resolving
conflicts between us and Titan.
IF WE CANNOT RAISE EQUITY CAPITAL OR ISSUE COMMON STOCK IN CONNECTION WITH
ACQUISITIONS IN THE FUTURE BECAUSE OF OUR RELATIONSHIP WITH TITAN, WE MAY BE
UNABLE TO FUND PLANNED EXPENDITURES TO BUILD NEW SUREBEAM SYSTEMS AND SERVICE
CENTERS, FURTHER DEVELOP OUR TECHNOLOGY OR INCREASE MARKETING ACTIVITIES.
We may be constrained in our ability to raise equity capital in the future
or to issue Class A common stock or other equity securities in connection with
future acquisitions because of Titan's desire to maintain at least an 80%
ownership interest in us in order to consolidate our financial results in its
tax returns.
16
OUR BUSINESS MAY SUFFER BECAUSE WE HAVE ENTERED INTO AFFILIATE AGREEMENTS WITH
TITAN THAT ARE NOT BASED ON ARMS' LENGTH NEGOTIATIONS. FOR EXAMPLE, ALTHOUGH
COSTS TO DEVELOP TITAN'S MEDICAL PRODUCT STERILIZATION BUSINESS WERE ALLOCATED
TO US, WE WILL NOT RECEIVE ANY ROYALTIES RELATED TO THE MEDICAL STERILIZATION
BUSINESS.
We have entered into various intercompany agreements with Titan including a
corporate services agreement, tax allocation agreement, contribution agreement,
license agreement and credit facility. Because we are currently a majority-owned
subsidiary of Titan, none of these agreements resulted from arms' length
negotiations. These agreements may include terms and conditions that are less
favorable to us than we could have obtained from independent third parties.
Substantially all of our assets and liabilities were contributed to us by Titan
on August 4, 2000. This contribution was not made on arms' length terms and
recourse to Titan is limited since representations regarding title to
transferred assets and related matters are not contained in the contribution
agreement. In connection with such contributions we licensed our patents and
technology to another subsidiary of Titan to be used solely for medical
equipment sterilization. This license is royalty free to Titan. In addition, we
were allocated approximately $39 million of indebtedness by Titan at the time of
the contribution. This indebtedness is in an amount equal to the net cash flow
required by Titan to develop its electron beam business since inception,
including its medical equipment sterilization business and its electron beam
business for governmental use. Under the tax allocation agreement, Titan will
determine the amount of separate taxable income and tax liability that we would
realize if we filed a separate tax return. In addition, because we file a
consolidated tax return with Titan, we would be obligated to pay taxes for the
entire group of Titan companies if those companies defaulted in the payment of
their taxes.
WE WILL BE RESTRICTED BY COVENANTS CONTAINED IN TITAN'S CREDIT FACILITY, WHICH
COULD IMPAIR OUR ABILITY TO MAKE CAPITAL EXPENDITURES FOR NEW SYSTEMS OR SERVICE
CENTERS OR FUND EXPANSION OF OUR INFRASTRUCTURE AND SALES AND MARKETING EFFORTS.
Titan's credit facility contains covenants that require a minimum level of
financial performance and that restrict its ability on a consolidated basis to
take corporate actions such as changing its business operations, incurring new
unsecured indebtedness, making payments on the principal of subordinated debt or
merging with or into another entity. Since we are a majority-owned subsidiary of
Titan, our activities are included in the determination of whether Titan has
maintained the requisite financial performance. Titan may limit our activities,
such as our capital expenditures or indebtedness, if such activities, together
with those of other Titan subsidiaries, would negatively impact Titan's ability
to meet the requisite financial performance. Titan also may restrict our
activities because of competing needs of other Titan subsidiaries that are also
included in Titan's consolidated financial performance. These restrictions may
impair our ability to meet our business objectives. In addition, together with
Titan's other subsidiaries, we are a guarantor of Titan's obligations under the
credit facility and we would be liable for any amounts not repaid by Titan. As
of December 31, 2000, Titan had approximately $263 million outstanding under its
credit facility. Titan has entered into an amendment to the credit facility
under which we will be removed from the guaranty concurrently with the
completion of this offering, although we will continue to be included for the
purpose of determining Titan's level of financial performance.
TITAN WILL PLEDGE ITS EQUITY INTEREST IN US AS COLLATERAL FOR ITS CREDIT
FACILITY. A DEFAULT BY TITAN COULD RESULT IN AN INADVERTENT CHANGE IN CONTROL.
As collateral for the credit facility, Titan has pledged its equity interest
in us. Therefore, if Titan defaults on its credit facility, Titan's creditors
could obtain ownership of Titan's equity interest in us, which would effectuate
a change in our control.
17
RISKS RELATED TO THIS OFFERING
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE AND COULD FALL BELOW EXPECTATIONS
OF SECURITIES ANALYSTS AND INVESTORS, RESULTING IN A DECREASE IN OUR STOCK
PRICE.
Our operating results for a particular quarter or year may fall below the
expectations of securities analysts and investors, which could result in a
decrease in our stock price. We believe that period-to-period comparisons of our
operating results are generally not meaningful and are not a good indication of
our future performance. Numerous factors will contribute to the unpredictability
of our operating results, including:
- the six to nine month period of our sales cycle;
- the size of individual customer orders;
- the delay or deferral of customer implementations;
- the delay or deferral of construction and installation of new service
centers or in-line systems;
- the fiscal or quarterly budget cycles of our customers;
- the high level of our fixed costs such as research and development and
general and administrative expenses; and
- general or industry-specific economic conditions.
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
Prior to this offering, there has been no public market for our Class A
common stock. The initial public offering price of our Class A common stock,
which was determined through negotiations between the representatives of the
underwriters, and us, may not be indicative of future market prices. An active
trading market in our Class A common stock may not develop or be sustained
following this offering. As a result, if you decide to purchase our shares, you
may not be able to resell your shares at or above the initial public offering
price. Stock markets may experience significant price and volume fluctuations
that are unrelated to the operating performance of particular companies. The
stock prices of early-stage companies in particular have experienced extreme
price fluctuations, often unrelated to the operating performance of these
companies.
The market price of our Class A common stock is likely to be very volatile
due to a number of factors, including:
- the degree to which we successfully implement our business strategy and
commercialize our SureBeam system;
- actual or anticipated variations in quarterly or annual operating and
financial results;
- changes in securities analysts' earnings projections or securities
analysts' recommendations;
- governmental regulatory initiatives;
- patent or proprietary rights developments;
- announcements of technological innovations or new products by us or our
competitors; and
- changes in business conditions affecting our competitors and us.
In addition, the stock market recently has experienced significant
volatility that often has been unrelated or disproportionate to the operating
performance of particular companies, such as ours. These broad market and
industry fluctuations also may adversely affect the market price of our Class A
common stock, regardless of our actual operating performance. Furthermore, our
stock price may fluctuate based on developments concerning our proprietary
rights or those of our competitors.
18
We have filed an application to include our Class A common stock for
quotation on the Nasdaq National Market System. We do not know the extent to
which investor interest in our company will lead to the development of a trading
market for our Class A common stock or how our Class A common stock will trade
in the future.
WE BELIEVE THAT THIRD PARTIES HAVE DISSEMINATED, AND MAY IN THE FUTURE
DISSEMINATE, INACCURATE STATEMENTS REGARDING OUR BUSINESS THAT MAY ADVERSELY
AFFECT OUR STOCK PRICE.
We believe that third parties have disseminated inaccurate statements
regarding our business and may continue to do so in the future. Titan believes
the recent drop in its stock price was caused by the dissemination by short
sellers and others, through Internet bulletin boards and other means, of
inaccurate information about SureBeam and other Titan business units. Inaccurate
information may artificially cause our stock price to rise or fall depending on
the nature of the inaccurate information.
OUR MANAGEMENT HAS BROAD DISCRETION AS TO THE USE OF THE NET PROCEEDS FROM THIS
OFFERING.
Our management has broad discretion as to the use of the net proceeds that
we will receive from this offering. We cannot assure you that our management
will apply these funds effectively, nor can we assure you that the net proceeds
from this offering will be invested to yield a favorable return.
ANTITAKEOVER PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
PROVISIONS OF DELAWARE LAW COULD DELAY OR PREVENT A CHANGE OF CONTROL THAT YOU
MAY FAVOR.
In addition to Titan's ability to control the outcome of our stockholder
meetings and actions, our certificate of incorporation, our bylaws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to you. These provisions could discourage potential
takeover attempts and could adversely affect the market price of our Class A
common stock. Because of these provisions, you might not be able to receive a
premium on your investment. These provisions:
- authorize our board of directors, without stockholder approval, to issue
up to 5,000,000 shares of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and prevent a takeover attempt;
- limit who has the authority to call a special meeting of our stockholders;
- prohibit stockholder action by written consent, requiring stockholder
actions to be taken at stockholder meetings;
- establish advance notice requirements for nominations for election to the
board of directors and for proposals to be acted upon at stockholder
meetings; and
- establish staggered terms of office for the members of our board of
directors.
Any of the provisions described above could delay or make more difficult
transactions involving a change in control of us or our management.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF THIS OFFERING.
The initial public offering price is substantially higher than the book
value per share of our outstanding Class A common stock. As a result, investors
purchasing Class A common stock in this offering will incur immediate and
substantial dilution in net tangible book value per share of the common stock
from the initial public offering price in the amount of $9.23 per share, based
on the initial public offering price of $10.00 per share. In addition, we have
issued options and warrants to purchase Class A common stock at prices
significantly below the initial public offering price. To the extent these
outstanding options and warrants are ultimately exercised, there will be further
dilution to investors in this offering.
19
FUTURE SALES OF OUR COMMON STOCK OR THE AVAILABILITY OF SUCH STOCK FOR SALE MAY
DEPRESS OUR STOCK PRICE.
Sales of a large number of shares of our common stock, or the availability
of a large number of shares for sale, could adversely affect the market price of
our common stock and could impair our ability to raise funds in additional stock
offerings. Based on shares outstanding as of December 31, 2000, upon completion
of this offering we will have outstanding 55,752,792 shares of common stock,
assuming the exercise of outstanding warrants that will expire if not exercised
before the completion of this offering, and no exercise of options after
December 31, 2000. Holders of 49,052,792 shares are subject to agreements with
the underwriters that restrict their ability to transfer their stock for
180 days after the date of this prospectus. Merrill Lynch, on behalf of the
underwriters, may in its sole discretion and at any time waive the restrictions
on transfer in these agreements during this period. After these agreements
expire, approximately 6,932,919 shares of Class A common stock and
46,583,850 shares of Class B common stock held by Titan will be eligible for
sale in the public market assuming no exercise of stock options or warrants
after December 31, 2000. Titan must beneficially own at least 80% of the total
voting power of our capital stock and 80% of any class of nonvoting capital
stock to be able to effect a tax-free distribution of its SureBeam stock to its
stockholders in the future. Neither Titan nor SureBeam currently contemplates
that Titan will distribute its majority interest to the Titan stockholders in
the immediate future.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These include statements about our expectations, plans,
objectives, assumptions or future events. In some cases, you can identify
forward-looking statements by terminology such as "anticipate," "estimate,"
"plans," "projects," "continuing," "ongoing," "expects," "management believes,"
"we believe," "we intend" and similar expressions. These statements involve
estimates, assumptions and uncertainties that could cause actual results to
differ materially from those expressed for the reasons described in this
prospectus. You should not place undue reliance on these forward-looking
statements.
The forward-looking statements speak only as of the date on which they are
made, and, except as required by law, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of unanticipated
events. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
20
USE OF PROCEEDS
We expect to receive approximately $60.5 million in net proceeds from the
sale by us of the shares of Class A common stock in this offering (approximately
$70 million if the underwriters' over-allotment option is exercised in full),
and after deducting the underwriting discount and commissions and the estimated
offering expenses. We currently intend to use up to approximately $40 million of
the net proceeds of this offering to build new SureBeam in-line systems and
service centers, $5 million to expand and enhance our manufacturing and research
and development facilities and $15 million to expand our sales and marketing
activities. We also may use a portion of the net proceeds to pursue strategic
relationships and to pursue acquisitions of complementary businesses and
technology. We have no present understandings, commitments or agreements to
enter into any potential acquisitions or make any investments. We intend to use
the remaining portion of the net proceeds for working capital and general
corporate purposes. Pending the uses described above, we will invest the net
proceeds in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends in
the foreseeable future.
21
CAPITALIZATION
The following table sets forth our actual capitalization as of December 31,
2000:
- on an actual basis;
- as adjusted to give effect to:
- the sale of 6.7 million shares of Class A common stock in this
offering, at the initial public offering price of $10.00 per share and
after deducting the underwriting discount and commissions and estimated
offering expenses; and
- the issuance of 2,236,023 shares of our Class A common stock upon the
exercise of outstanding warrants that expire upon the closing of this
offering.
DECEMBER 31, 2000
(UNAUDITED)
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Cash........................................................ $ -- $ 61,512
======== ========
Subordinated promissory note(1)............................. 58,072 58,072
Stockholders' equity:
Preferred stock, $.001 par value, authorized 5,000,000
shares, none issued..................................... -- --
Class A common stock, $.001 par value; 200,000,000 shares
authorized and 232,919 shares issued and outstanding,
actual; 200,000,000 shares authorized and
9,168,942 shares issued and outstanding, as adjusted.... -- 9
Class B common stock, $.001 par value; 50,000,000 shares
authorized and 46,583,850 shares issued and outstanding,
actual; 50,000,000 shares authorized and 46,583,850
shares issued and outstanding, as adjusted.............. 47 47
Additional paid-in capital................................ 5,687 67,190
Deferred compensation..................................... (2,584) (2,584)
Retained deficit.......................................... (18,025) (18,025)
-------- --------
Total stockholders' equity (deficit).................... (14,875) 46,637
-------- --------
Total capitalization.................................. $ 43,197 $104,709
======== ========
------------------------------
(1) As of February 28, 2001, approximately $64.6 million was outstanding under
the subordinated promissory note.
The above table does not include:
- deferred compensation arising as a result of the Nonstatutory Stock Option
Plan converting from a variable plan to a fixed plan whereby deferred
compensation is measured based on the difference between the offering
price and the exercise price of the options; or
- compensation expense being recognized to the extent that options granted
from the Nonstatutory Stock Option Plan are vested.
The number of shares of common stock outstanding after the offering is based
upon the number of shares of Class A common stock and Class B common stock
outstanding as of December 31, 2000 and:
- includes 2,236,023 shares of common stock issued upon the exercise of
warrants concurrently with the closing of this offering;
- excludes 2,170,800 shares of Class A common stock reserved for issuance
under our 2000 Stock Option and Incentive Plan, of which options to
purchase 349,374 shares at an average exercise price of $0.1438 have been
granted and were outstanding as of December 31, 2000;
- excludes 7,975,137 shares of Class A common stock reserved for issuance
under our Nonstatutory Stock Option Plan, of which options to purchase
7,714,269 shares at an average exercise price of $0.1438 have been granted
and are outstanding as of December 31, 2000; and
- excludes 250,000 shares of Class A common stock reserved for issuance
under our 2000 Employee Stock Purchase Plan.
The number of shares of common stock outstanding after this offering on a
fully diluted basis giving effect to the exercise of all outstanding stock
options will be 64,077,303.
Please read the above information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes beginning on page F-1 of this
prospectus.
22
DILUTION
If you invest in our Class A common stock, your interest will be diluted to
the extent of the difference between the public offering price per share and the
adjusted net tangible book value per share after this offering. Our net tangible
book value (deficit) as of December 31, 2000 was approximately ($18.8) million,
or ($0.40) per share, based on the number of common shares outstanding as of
December 31, 2000. Net tangible book value (deficit) per share is equal to the
amount of our total tangible assets less total liabilities, divided by the
number of shares of common stock outstanding as of December 31, 2000.
After giving effect to the issuance of 2,236,023 shares of Class A common
stock issuable upon the exercise of currently outstanding warrants that expire
upon closing of this offering, and giving effect to the sale of 6.7 million
shares of common stock in this offering at the initial public offering price of
$10.00 per share (less the underwriting discount and commissions and estimated
expenses we will pay in connection with this offering), our as adjusted net
tangible book value at December 31, 2000 would have been $42.7 million, or $0.77
per share. This represents an immediate increase in the adjusted net tangible
book value of $1.17 per share to existing stockholders and an immediate and
substantial dilution of $9.23 per share to new investors. These figures do not
include the impact of the accounting for the conversion of options granted under
the Nonstatutory Stock Option Plan from variable plan options to fixed plan
options which would have resulted in additional deferred compensation of
$78.6 million as of December 31, 2000. Of this $78.6 million, $33.8 million of
compensation expense would have been recognized had the offering been completed
as of December 31, 2000. The following table illustrates the per share dilution
on the basis described above:
Assumed initial public offering price per share............. $10.00
Net tangible book value (deficit) per share as of
December 31, 2000....................................... $(0.40)
Increase per share attributable to new investors.......... 1.17
------
As adjusted net tangible book value per share after this
offering.................................................. 0.77
------
Dilution per share to new investors....................... $ 9.23
======
If the underwriters' over-allotment option is exercised in full, the net
tangible book value per share after this offering would be $0.92 per share, the
increase in net tangible book value per share to existing stockholders would be
$1.32 per share and the dilution in net tangible book value to new investors
would be $9.08 per share.
The following table shows as of December 31, 2000, on the basis described
above, the differences between existing shareholders and the new investors with
respect to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid before deducting the
underwriting discount and commissions and our estimated offering expenses.
SHARES TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
Existing stockholders.................... 49,052,792 88.0% $ 1,087,000 1.6% $ 0.022
New investors............................ 6,700,000 12.0 67,000,000 98.4 $ 10.00
---------- ----- ----------- -----
Total................................ 55,752,792 100.0% $68,087,000 100.0%
========== ===== =========== =====
These tables assume the exercise of warrants to purchase 2,236,023 shares of
Class A common stock, no exercise of stock options outstanding at December 31,
2000 and include 232,919 shares subject to repurchase by us under certain
circumstances at an exercise price of $0.1438.
23
At December 31, 2000, there were 349,374 shares of Class A common stock
issuable upon exercise of outstanding stock options under our 2000 Stock Option
and Incentive Plan at an exercise price of $0.1438 per share, 7,714,269 shares
of Class A common stock issuable upon exercise of outstanding stock options
under our Nonstatutory Stock Option Plan at a weighted average exercise price of
$0.1438 per share and 2,236,023 shares of common stock issuable upon exercise of
outstanding warrants at a weighted-average exercise price of $0.4712 per share.
In addition to the shares reserved for issuance under outstanding options, we
have reserved an aggregate of 2,332,294 shares of common stock for issuance
under our 2000 Stock Option and Incentive Plan, our Nonstatutory Stock Option
Plan and our 2000 Employee Stock Purchase Plan. To the extent these options and
warrants are exercised, and to the extent we issue new options and warrants or
other rights under our stock plans or issue additional shares of common stock in
the future, new investors will experience further dilution. The shares reserved
under and issuable upon exercise of outstanding options under our 2000 Stock
Option and Incentive Plan and our Nonstatutory Stock Option Plan are stated as
if such outstanding options and reserves were existing as of December 31, 2000.
24
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following selected financial information should be read in conjunction
with the SureBeam financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The pro forma statement of
operations information for the year ended December 31, 2000 should be read in
conjunction with the unaudited pro forma financial information included
elsewhere in this prospectus. The historical financial information prior to the
August 2000 contribution by Titan to SureBeam is based on the historical
operating results of SureBeam's predecessor business, which was operated
principally as a division of Titan and which included a medical equipment
sterilization and electronic food irradiation business, as well as a linear
accelerator business. The historical results of operations and financial
condition of these businesses are presented as a combination of entities under
common control in a manner similar to a pooling of interests for all periods
presented. Separate financial statements for SB Operating Co. have not been
included since SB Operating Co. did not have operations prior to the
contribution of Titan's electronic food irradiation and medical equipment
sterilization division to us. The historical statement of operations information
for the years ended December 31, 1997, 1998, 1999 and 2000 and balance sheet
information as of December 31, 1998, 1999 and 2000 are derived from audited
financial statements for SureBeam and SureBeam's predecessor business. The
historical statement of operations information for the year ended December 31,
1996 and the balance sheet information as of December 31, 1996 and 1997 are
derived from unaudited financial statements. The unaudited financial statements
have been prepared on substantially the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of the financial
position and results of operations for the periods presented. The pro forma
statement of operations information gives effect to the elimination of the
operations related to the medical equipment sterilization and linear accelerator
businesses in order to create SureBeam, the electronic food irradiation
business. The unaudited as adjusted balance sheet information also gives effect
to the issuance of 2,236,023 shares of Class A common stock issuable upon the
exercise of currently outstanding warrants that expire upon the closing of this
offering, and gives effect to the sale of 6,700,000 shares of Class A common
stock in this offering, at the initial public offering price of $10.00 per share
and after deducting the underwriting discount and commissions and estimated
offering expenses. The unaudited pro forma statement of operations information
and the unaudited as adjusted balance sheet information do not give effect to
accounting for the conversion of stock options granted under the Nonstatutory
Stock Option Plan from variable plan options to fixed plan options. Upon the
completion of this offering, stock options granted under the Nonstatutory Stock
Option Plan will be converted from variable plan options to fixed plan options.
Accordingly, deferred compensation will be recorded to the extent that the fair
market value on the date of completion of the offering exceeds the exercise
price. This deferred compensation will be recognized over the four year vesting
period of the related options. Based on the initial public offering price of
$10.00 per share and assuming that the offering had been completed as of
December 31, 2000, the Company would have recorded deferred compensation of
approximately $78.6 million. Additionally, since a substantial portion of these
options would have been vested as of December 31, 2000, approximately
$33.8 million of the $78.6 million of deferred compensation would have been
recognized as compensation expense upon completion of the offering, with the
balance being recognized as compensation expense over the remaining four year
vesting period of the options. The unaudited pro forma statement of operations
information and the unaudited as adjusted balance sheet information presented do
not give effect to the additional deferred compensation that would have been
recorded at December 31, 2000, or to the compensation expense and the resulting
income tax benefit that would have been recognized for the year ended
December 31, 2000. If the unaudited pro forma statement of operations
information included the effect of the deferred compensation charges arising
from these options, pro forma net loss would have been $21.7 million or $0.46
per share, which includes an income tax benefit of approximately $13.6 million.
If the unaudited as adjusted balance
25
sheet information included the effect of the deferred compensation charges
arising from these options, total assets and total stockholders' equity would
have increased to $128.2 million and $60.2 million, respectively, as a result of
the deferred income taxes which would have arisen if the offering were completed
as of December 31, 2000.
Prior to the commencement of our electronic food irradiation business in
January 1999, substantially all revenues for SureBeam's predecessor business
were derived from selling medical equipment sterilization systems and from
providing medical equipment sterilization services and, to a lesser extent, from
selling electronic beam accelerator systems for use by the federal government.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
PRO FORMA
1996 1997 1998 1999 2000 2000 (1)
----------- ----------- -------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS INFORMATION:
Revenues....................................... $ 7,930 $ 8,255 $11,184 $14,339 $29,448 $ 25,210
Cost of revenues............................... 7,522 8,010 8,909 8,576 19,602 15,738
------- ------- ------- ------- ------- --------
Gross profit................................. 408 245 2,275 5,763 9,846 9,472
Operating expenses:
Selling, general and administrative.......... 1,211 1,591 2,067 4,138 8,640 7,514
Research and development..................... -- -- -- -- 524 499
------- ------- ------- ------- ------- --------
Income (loss) from operations.................. (803) (1,346) 208 1,625 682 1,459
Interest expense, net.......................... 1,169 1,302 1,154 1,299 3,611 3,768
------- ------- ------- ------- ------- --------
Income (loss) before tax....................... (1,972) (2,648) (946) 326 (2,929) (2,309)
Income tax provision (benefit)................. (592) (794) (284) 121 (1,130) (882)
------- ------- ------- ------- ------- --------
Net income (loss).............................. $(1,380) $(1,854) $ (662) $ 205 $(1,799) $ (1,427)
======= ======= ======= ======= ======= ========
Basic earnings (loss) per share:
Net income (loss)............................ $ (0.03) $ (0.04) $ (0.01) $ 0.00 $ (0.04) $ (0.03)
======= ======= ======= ======= ======= ========
Diluted earnings (loss) per share:
Net income (loss)............................ $ (0.03) $ (0.04) $ (0.01) $ 0.00 $ (0.04) $ (0.03)
======= ======= ======= ======= ======= ========
Shares used in computing basic earnings (loss)
per share(2)................................. 46,584 46,584 46,584 46,630 46,817 46,817
======= ======= ======= ======= ======= ========
Shares used in computing diluted earnings
(loss) per share(2).......................... 46,584 46,584 46,584 53,082 46,817 46,817
======= ======= ======= ======= ======= ========
DECEMBER 31, DECEMBER 31,
--------------------------------------------------------------- 2000
1996 1997 1998 1999 2000 AS ADJUSTED
----------- ----------- -------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET INFORMATION:
Cash........................................... $ -- $ -- $ -- $ -- $ -- $ 61,512
Working capital................................ 3,317 4,114 3,739 6,566 19,284 80,796
Total assets................................... 14,851 15,115 14,192 23,924 53,181 114,693
Subordinated promissory note................... -- -- -- -- 58,072 58,072
Parent company investment...................... 15,518 16,505 16,272 22,526 -- --
Total stockholders' equity (deficit)........... 14,851 15,115 11,792 18,287 $(14,875) $ 46,637
------------------------------
(1) The pro forma statement of operations information gives effect to the
contribution by Titan to SureBeam of Titan's electronic food irradiation
business as if such contribution had occurred as of January 1, 2000.
(2) For the number of shares used in the per share calculations, see the pro
forma SureBeam financial statements and Note 2 to the historical SureBeam
financial statements.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WHEN YOU READ THIS SECTION OF THIS PROSPECTUS, IT IS IMPORTANT THAT YOU ALSO
READ THE FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS SECTION OF THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. WE USE WORDS SUCH AS "MAY," "WILL,"
"SHOULD," "EXPECT," "PLAN," "INTEND," "ANTICIPATE," "BELIEVE," "ESTIMATE,"
"PREDICT," "POTENTIAL," OR "CONTINUE," THE NEGATIVE OF SUCH TERMS OR OTHER
TERMINOLOGY TO IDENTIFY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS FOR
MANY REASONS, INCLUDING THE FACTORS DESCRIBED BELOW AND IN "RISK FACTORS."
INTRODUCTION
SureBeam Corporation was formed in August 2000 in connection with the
contribution by Titan of the assets, liabilities and operations related to its
electronic food irradiation business. Titan's electronic food irradiation
business had previously been operated as part of a division of Titan, together
with Titan's medical equipment sterilization business and its linear electron
beam accelerator business. The historical financial information included in this
prospectus relates to the three businesses of Titan that comprised this division
and not just the electronic food irradiation business. References to SureBeam,
the Company or us in this discussion and analysis section and in the historical
financial statements refer to this division of Titan prior to the date of the
contribution of the electronic food irradiation business to us by Titan.
Titan developed its electron beam process from technology developed under
contracts with the federal government related to strategic defense initiatives
during the 1980s. Titan has accounted for its electron beam technology business
as a separate business segment since 1993. Prior to 1999, substantially all of
the revenues of this segment were derived from selling medical equipment
sterilization systems and from providing medical equipment sterilization
services and, to a lesser extent, from selling linear electron beam accelerator
systems for use by the federal government.
The historical financial information contained herein does not reflect the
results of operations and financial condition of the electronic food irradiation
business on a stand-alone basis. The pro forma results of operations for the
year ended December 31, 2000 give effect to the contribution by Titan to
SureBeam of the electronic food irradiation business as if such contribution had
occurred on January 1, 2000. The pro forma results of operations information
contained herein is the only results of operations information that addresses
the electronic food irradiation business on a stand-alone basis. This discussion
and analysis section is based upon the historical results of operations of
Titan's entire linear electron beam accelerator business, including the medical
equipment sterilization business and the linear electron beam accelerator
business for government use; thus it is not comparable with the pro forma
information. Accordingly, you should not rely on the following discussion or
upon the historical financial information contained herein as being indicative
of our historical or future results or financial condition as a separate
electronic food irradiation business. The historical results of operations and
financial condition of SureBeam are presented as a combination of entities under
common control on a historical cost basis in a manner similar to a pooling of
interests for all periods presented.
We have historically derived our revenues from the manufacturing of medical
equipment sterilization and electronic food irradiation systems, providing
medical equipment sterilization services and the manufacturing of linear
electron beam accelerators for use by government agencies. Revenue derived from
medical equipment sterilization systems represented 56%, 14% and 1%, medical
equipment sterilization services represented 33%, 36% and 10%, and linear
electron beam accelerators represented 11%, 23% and 3% of total revenues in
1998, 1999 and 2000, respectively.
For the year ended December 31, 1999, our first year of operations in the
electronic food irradiation business, sales of our SureBeam systems were equal
to $3.8 million or 26% of total revenue.
27
This primarily resulted from the project for Hawaii Pride. For the year ended
December 31, 2000, we had electronic food irradiation system sales and food
processing revenue of $25.2 million, or 86% of total revenue. Of this
$25.2 million, 97% was derived from sales of electronic food irradiation systems
and 3% was derived from food processing services provided to our customers. To
date, our agreements with the third parties to our strategic relationships
represent substantially all of our sales of SureBeam systems for food
irradiation. Food processing service revenue was primarily derived in connection
with our customer production runs as well as test marketing programs. We expect
to derive a larger amount of our revenues from providing food processing
services in future periods. We also expect to derive a larger amount of our
income from food irradiation services through our equity ownership interests in
the special purpose entities that operate service centers. Our profit margins on
irradiation services currently are higher than the profit margins on system
sales. Accordingly, if we can increase the portion of our revenues attributable
to processing, as opposed to system sales, our profit margins could increase.
Revenues derived from providing medical equipment sterilization and
electronic food irradiation services are recorded at the time services are
performed. Revenues derived from sales of medical equipment sterilization and
electronic food irradiation systems under fixed-price contracts are accounted
for using the percentage-of-completion method. These systems currently take a
total of approximately nine to 15 months to design, construct, install,
integrate and deliver. These systems are highly customized to meet a customer's
strict specifications and require us to construct new facilities or effect
significant modifications to existing facilities to ensure efficient operation
as they are integrated into the customer's facilities. We plan to make advances
in the technology so that we may deliver complete systems in a shorter time
period. A limited amount of other revenues, principally those arising from fixed
price contracts with the federal government in connection with our providing
linear electron beam accelerator systems have been recognized using the
percentage-of-completion or completed contract method based on the duration of
the contract and the nature of the products or services delivered. If a customer
defaults on its obligations under a contract accounted for on the
percentage-of-completion method, previously recorded revenues in respect of such
contract would be reversed as a charge to earnings at the time the default
occurs.
Our cost of revenues consists primarily of the components and materials
associated with the linear accelerator, material handling system and controls
and direct labor to assemble, install and integrate the medical equipment
sterilization and electronic food irradiation systems, as well as overhead such
as travel, indirect labor and fringe benefits related to the production of the
systems and the manufacturing of linear electron beam accelerators. Also
included in cost of revenues are all direct and indirect costs associated with
providing medical equipment sterilization and electronic food irradiation
services. These costs are comprised of direct and indirect labor, depreciation,
rent, dosimetry supplies, maintenance and utilities as well as other related
costs to operate a service center.
Our selling, general and administrative expenses consist primarily of
non-project personnel costs, occupancy costs, staff recruiting costs, travel
expenses, depreciation expense, and sales, marketing and promotional costs.
Administrative expenses also include an expense allocation from Titan for its
performance on our behalf of routine corporate services, including financial,
insurance, accounting, employee benefits, payroll, tax and legal services. We
have entered into a corporate services agreement with Titan under which Titan
will provide these services until December 31, 2001, subject to annual renewal
at our option. For the year ended December 31, 2000, we spent $8.6 million in
selling, general and administrative expenses primarily to expand our recruiting
and sales and marketing efforts, further develop our brand and build our
administrative infrastructure. On a pro forma basis for the year ended
December 31, 2000, after giving effect to the elimination of the medical
equipment sterilization business and the linear accelerator business, our
selling, general and administrative expenses would have been $7.5 million.
Our SureBeam system is based principally on electron beam accelerator
technology Titan initially developed in the 1980's that was researched and
developed through funding under contracts with the
28
federal government. The benefits we realized were incidental to the work being
performed on Titan's contracts with the federal government and were in the form
of Titan's right to retain any technologies developed as a result of Titan's
efforts on those contracts. Since a significant portion of the research and
development efforts expended by us since inception have been funded as a result
of work performed under customer contracts, and therefore included as contract
costs, these costs are not separately identifiable in our statement of
operations. Costs associated with future research and development activities to
further develop and enhance the Company's products and technology will be
expensed as incurred in the statement of operations. We expect our research and
development expenses to increase as we further develop our electronic food
irradiation business on an independent basis and not on a basis effectively
financed through government contracts. Research and development expenditures
were $524,000 during the year ended December 31, 2000.
The cumulative amount of cash flow deficit attributable to SureBeam's
operations and advanced by Titan is accounted for as an investment by Titan in
the historical financial statements of SureBeam. In connection with Titan's
contribution of specified assets, liabilities and operations of the electronic
food irradiation business to us, we assumed the cumulative advances of
approximately $39.0 million on August 4, 2000. These advances are now evidenced
by a subordinated promissory note payable to Titan that at December 31, 2000 had
a principal amount outstanding of $58.1 million. The promissory note matures in
August 2005. We will make quarterly interest payments at the greater of the rate
of 10% per annum or Titan's effective weighted average interest rate under its
senior credit facility, which amount can fluctuate daily based on a number of
factors inherent in the calculation. Titan's effective weighted average interest
rate as of December 31, 2000 was 10.53%. Prior to the time of the contribution,
we recognized an imputed interest expense based on the amount of Titan's
investment in us.
HISTORICAL RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1998, 1999 and 2000.
YEAR ENDED DECEMBER 31,
------------------------------------ PRO FORMA
1998 1999 2000 2000
-------- -------- -------- ---------
Statements of Operations:
Revenues.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................................... 79.7 59.8 66.6 62.4
----- ----- ----- -----
Gross profit............................................ 20.3 40.2 33.4 37.6
Selling, general and administrative expenses.............. 18.5 28.9 29.3 29.8
Research and development.................................. -- -- 1.8 2.0
----- ----- ----- -----
Income from operations.................................... 1.9 11.3 2.3 5.8
Income (loss) before income taxes......................... (8.5) 2.3 (9.9) (9.2)
Income tax provision (benefit)............................ (2.5) 0.8 (3.8) (3.5)
----- ----- ----- -----
Net income (loss)......................................... (5.9)% 1.4% (6.1)% (5.7)%
REVENUES
Our revenues increased from $11.2 million in 1998 to $14.3 million in 1999
and to $29.4 million in 2000. The increase in 1999 is primarily related to
revenues recognized from sales of our electronic food irradiation systems, using
the percentage-of-completion method of accounting, principally attributable to
the sale of an electronic food irradiation system with x-ray capabilities to
Hawaii Pride, and to a lesser extent, due to the completion of two medical
equipment sterilization in-line systems. The increase in 2000 is primarily
related to revenues recognized from sales of our electronic food irradiation
systems, using the percentage-of-completion method of accounting, principally to
Tech Ion Industrial Brasil, S.A., a Brazilian food irradiation company and, to a
lesser extent, to Hawaii Pride and Texas A&M University.
29
Titan's medical equipment sterilization business has historically sold
systems similar to ours, for the purpose of medical equipment sterilization. We
have sold our systems in connection with our strategic relationships at our
standard prices, without any discount for options granted to us to purchase
equity interests in a new entity formed through the strategic relationship. To
date, such options have generally been exercisable for $1 million. As a
protective measure, we also seek to retain an option to acquire additional
equity, typically up to a 50% ownership position, in the event circumstances
occur which could prove detrimental to us such as a default on a loan or
mismanagement of the operating entity.
In December 1999, we entered into an agreement with Japan's Mitsubishi
Corporation to sell a SureBeam electronic food irradiation system to a new
entity to be formed by Mitsubishi. In connection with this agreement, we
received a warrant to acquire a 19.9% equity interest in the entity for
$1.0 million. Under the percentage-of-completion method, we recorded revenues of
$700,000 in 1999 and revenues of $100,000 during 2000.
In December 1999, we agreed to sell a SureBeam electronic food irradiation
system to a new entity, Zero Mountain SureBeam, to be formed by Zero Mountain
Cold Storage. Zero Mountain will construct, at its expense, and the new entity
will operate, an electronic food irradiation service center in Arkansas. Zero
Mountain will need to obtain, and is currently seeking, financing to construct
the service center. Upon completion of the SureBeam system, we will acquire a
19.9% equity interest in the new entity for $1.0 million. Under the
percentage-of-completion method, we recorded revenues of $900,000 in 1999 and
revenues of $800,000 during 2000. The agreement to purchase the SureBeam system
may be terminated for cause by either Zero Mountain or us.
In connection with our agreement with Texas A&M University and the
Agricultural Experiment Station (collectively, "Texas A&M"), we agreed to
provide three electronic food irradiation systems (collectively, "the system")
pursuant to a ten-year lease with title passing to Texas A&M at the end of the
ten-year term. The sale of the system is manifested by the passage of title to
the system to Texas A&M, which occurs in two stages under the arrangement.
First, immediate conveyance of title to the system shield and all connecting
physical structures (comprising approximately 15-20% of the complete system)
occurs upon completion. Second, the ultimate conveyance of title to the
remaining equipment (consisting primarily of the linear accelerator, the
material handling and conveyor system and the overall integration of the system
into the facility) occurs at the end of the ten-year term of the arrangement.
Our rights to use the system also terminate at the end of the ten-year term of
the arrangement with Texas A&M. The ultimate transfer of title to the complete
system as well as all responsibilities for the system at the end of the ten-year
term was structured primarily for tax planning purposes as discussed below.
Additionally, the passage of title at the end of the ten-year term serves as a
protective measure to provide a mechanism by which we receive value in the
exchange and ensures our ability to realize the benefits resulting from the sale
of the system. Our right to repossess any aspect of the system delivered to
Texas A&M extends only to circumstances in which Texas A&M breaches the
agreement, such as in the remote event that the university is not funded by the
Texas state legislature throughout the term of the arrangement.
The agreement provides us access to Texas A&M employees for research and
consulting services at below-market rates and access to research performed
independently by Texas A&M at no cost. Also, under the agreement, we retain
certain benefits related to the system, including the rights to use the system
for performing irradiation services for our customers for at least ten hours per
day subject to an overall maximum of 25% of the system's capacity. Lastly, Texas
A&M will provide and maintain the facilities at no cost to us. These items
represent all of the consideration we will receive in exchange for the system we
are providing to Texas A&M. Since we retain the right to use the system through
the end of the term of the arrangement, we have accounted for this transaction
as a sale-leaseback.
As the consideration in this lease is nonmonetary, we have accounted for
this element of the agreement in accordance with APB No. 29, "Accounting for
Nonmonetary Transactions." Sales are recorded on a percentage of completion
basis at the fair market value of the electronic food irradiation
30
system sold to Texas A&M and total system profits of approximately $2.6 million
will be deferred and recognized ratably over the remaining term of the
arrangement commencing upon delivery of the system.
The fair value of the system of $10 million was determined by employing our
historical pricing methodology used for similar systems sold under other
customer contracts. The accompanying balance sheet also reflects a long-term
asset for the fair value received by us in this transaction. The asset will
consist of the estimated discounted cash value of the economic rights to the
research services and the leaseback of the system's capacity. As revenues are
recorded under the percentage-of-completion method a long-term asset is being
recorded which will be realized over the ten-year term of the arrangement. The
percentage-of-completion method has been applied using the cost-to-cost method
whereby revenues are recorded based on the percentage that total costs incurred
bears to the total estimated costs at completion. The long-term asset will be
realized through two mechanisms. First, it will be realized through free rent to
the extent that it pertains to our use of the system as a provider of electronic
food irradiation services to our customers. Second, it will be realized as Texas
A&M performs free or discounted research and other consulting services for us.
Examples of these services include research, product testing, taste-testing and
other test-marketing activities, among other things, performed by Texas A&M at
no cost or significantly discounted rates. The free and discounted research and
other consulting costs will be recorded as research and development expense as
the services are performed and rent expense will be recorded as a component of
the cost of sales associated with the electronic food irradiation services that
we will perform for our customers at the facility.
The carrying amount of this long-term asset will be reviewed annually or
more frequently if conditions warrant. An analysis of the research and
development services received as well as the prepaid rent amortization will be
conducted in order to determine the existence of asset impairment. If an
impairment is deemed to exist, the carrying value of the long-term asset will be
adjusted to the present value of the estimated free rent and free or discounted
research and consulting services to be received.
Under the percentage-of-completion method, we recorded no revenues in 1999
and recorded $4.7 million in revenues during 2000. The $4.7 million has been
recorded as a long-term asset at December 31, 2000 and no profit has been
recognized in 2000. As of December 31, 2000, we had deferred profits amounting
to $1.2 million, which are included as other liabilities in the accompanying
balance sheet. These deferred profits will be amortized ratably to reduce cost
of sales over the remaining term of the ten-year term of the arrangement
commencing upon delivery of the system to Texas A&M. As of December 31, 2000,
the long-term asset arising from this transaction represents the cumulative
revenues recognized related to the design, construction, installation,
integration and delivery of the system for Texas A&M. The deferred profit of
$1.2 million as of December 31, 2000 represents the difference between the
cumulative costs incurred and the cumulative revenues recognized. As of
December 31, 2000, none of the deferred profit had been amortized to income
since final delivery of the system had not yet taken place.
With respect to the impact of the transaction with Texas A&M on our
liquidity, we have expended funds of approximately $3.5 million related to the
construction of the system through December 31, 2000. These costs have been
incurred primarily related to the design of the system, construction of and
modification to the physical structure which will house the system, and for the
manufacture of the linear accelerators and x-ray components as well as the
material handling and conveyor systems. We estimate that there will be
approximately $3.9 million of additional costs to be incurred to complete and
deliver the system. We expect that all of the remaining costs will be incurred
in 2001.
For income tax purposes, the use of the SureBeam system by Texas A&M will be
treated as a lease. The lease income recognized in connection with the
transaction will be based upon the imputed value of the facilities and services
provided by Texas A&M to SureBeam. There will be a corresponding tax deduction
for rent expense and services expense related to the use of the facilities and
services
31
provided to us. For any aspect of the system in which title transfers prior to
use of the system, such as the conveyance of title to the system shield and all
connecting physical structures upon completion of construction, SureBeam will
report taxable income related to the sale of such equipment or other constructed
assets.
In 1999, each of Hawaii Pride, Zero Mountain and Mitsubishi Corporation
contributed 10% or more to our revenues from our electronic food irradiation
business for the period. For the year ended December 31, 2000, Hawaii Pride,
Texas A&M and Tech Ion Industrial Brasil each contributed 10% or more of our
revenues.
SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses were $2.1 million,
$4.1 million and $8.6 million in 1998, 1999 and 2000, respectively. Selling,
general and administrative expenses, as a percentage of revenues, were 18.5%,
28.9% and 29.3% in 1998, 1999 and 2000, respectively. The increase from 1998 to
1999 primarily relate to increased personnel and related costs associated with
the hiring of managerial personnel. The increase from 1999 to 2000 primarily
represents increased sales and marketing costs and increased personnel costs.
STOCK-BASED COMPENSATION
During 1999, we granted 3,237,578 options to purchase shares of our Class A
common stock with a weighted average exercise price of $0.1438 per share. These
option grants resulted in deferred compensation to us calculated as the
difference between the fair market value of the shares of common stock
underlying the option at the date of grant and the option exercise price. The
deferred compensation is amortized over the vesting period of the underlying
options which is four years. Accordingly, we recorded deferred compensation of
approximately $17,000 which resulted in an insignificant non-cash compensation
amortization expense for the year ended December 31, 1999. During 2000, we
recorded deferred compensation of approximately $3.2 million which resulted in a
non-cash compensation amortization expense of approximately $648,000. There will
be an additional amount recorded as deferred compensation of approximately
$78.6 million at the time the initial public offering closes, based on the
initial public offering price of $10.00 per share, which will be recognized as a
non-cash charge to earnings of approximately $38.7 million upon completion of
this offering, which includes $4.9 million related to the vesting of options in
the first quarter of 2001, and the balance over the remaining four year vesting
period of the options.
INCOME FROM OPERATIONS
Operating results improved from operating income of $208,000 in 1998 to
$1.6 million in 1999 and decreased to $682,000 in 2000. Increased operating
income in 1999 was a result of the increased revenue volumes noted previously
and the decrease in 2000 was primarily due to the increase in selling, general
and administrative expenses. Operating results of 1999 primarily related to the
medical equipment sterilization and linear accelerator businesses, while the
operating results of 2000 primarily related to the electronic food irradiation
business.
INTEREST EXPENSE, NET
Our net imputed interest expense was $1.2 million, $1.3 million and
$3.6 million in 1998, 1999 and 2000, respectively. Interest expense remained
fairly constant in 1998 and 1999, primarily as a direct result of Titan's net
investment in us. Also contributing to this steady interest expense is the
capitalization of interest costs associated with the construction of the Sioux
City, Iowa electronic food irradiation facility. The increase in interest
expense from 1999 to 2000 is primarily a result of the increase in the
cumulative net cash funded by Titan to us, including the assumption of the net
cash funded by Titan to the medical equipment sterilization business and the
linear accelerator business
32
from the inception of such operations, partially offset by interest income
related to a note receivable from a customer of the medical equipment
sterilization business. This investment was primarily for the establishment of
the electronic food irradiation business.
INCOME TAXES
Income taxes reflect an effective rate of 30%, 37% and 40% in 1998, 1999 and
2000, respectively. The difference between the actual provision and the
effective rate (based on the United States statutory tax rate) was due primarily
to the utilization of net operating losses.
NET INCOME (LOSS)
Our net loss decreased from $662,000 in 1998 to net income of $205,000 in
1999 and our net income in 1999 decreased to a net loss of $1.8 million in 2000.
The increase in 1999 primarily related to revenues recognized from sales of
electronic food irradiation systems using the percentage-of-completion
accounting method. The decrease from net income of $205,000 in 1999 to a loss of
$1.8 million in 2000 is primarily attributable to decreased operating income and
increased interest expense during the period.
LIQUIDITY AND CAPITAL RESOURCES
We have used cash principally to construct facilities and systems, to invest
in our strategic relationships and to fund working capital requirements. Our
cash requirements have been met primarily through investments in us by Titan and
cash flows from operations. In connection with the contribution by Titan to
SureBeam in August 2000, we assumed the cumulative advances of approximately
$39 million, as evidenced by the subordinated, unsecured promissory note payable
to Titan. Under this note, Titan has agreed to lend us a maximum of
$75 million. Amounts not borrowed under the note cannot be canceled by Titan.
The promissory note is due in August 2005 and bears interest, payable quarterly,
at the greater of the rate of 10% per annum or Titan's effective weighted
average interest rate under its senior credit facility. As of December 31, 2000,
we had approximately $58.1 million in principal outstanding under the note.
Titan's effective weighted average interest rate under its senior credit
facility as of December 31, 2000 was 10.53%. We may, with Titan's approval,
prepay amounts outstanding under the promissory note with the net proceeds of
any asset sales we make that are not in the ordinary course of business or if we
obtain a credit facility from a third party lender. Under the terms of the
promissory note, we cannot use any of the proceeds of this offering to pay
amounts outstanding under the promissory note or under any indebtedness we incur
to refinance the promissory note.
Titan's credit facility contains financial covenants that require Titan to
maintain minimum financial performance measures and that restrict Titan on a
consolidated basis from taking corporate actions such as changing its business
operations, incurring new unsecured indebtedness, making payments on the
principal of subordinated debt or merging with or into another entity. As a
majority-owned subsidiary of Titan, we are affected by the restrictions in the
covenants in Titan's credit facility. Since our financial results will be
included in Titan's consolidated financial results, Titan, as the controlling
stockholder, may limit our capital expenditures, our indebtedness and our rate
of spending on infrastructure and sales and marketing to grow our business if
our net losses, our capital expenditures, our net worth or other financial
performance measures together with those of other Titan subsidiaries would
adversely affect Titan's ability to comply with its covenants. It is possible
that Titan could restrict our activities because of competing needs or
unexpected performance of other Titan subsidiaries. Such covenants include
maximum leverage ratios (debt to earnings before interest, taxes and
depreciation and amortization), minimum interest coverage ratios, minimum fixed
charge ratios and minimum net worth requirements. These covenants may restrict
our capital expenditure capacity as well as our ability to expand our
infrastructure and sales and marketing efforts to grow our business.
33
Our operating activities used cash of $17.8 million for the year ended
December 31, 2000, primarily due to personnel costs and other expenditures
associated with the establishment of the electronic food irradiation business as
well as an increase in accounts receivable of $12.6 million, and to a lesser
extent, to an increase in inventories of $3.5 million. The increase in accounts
receivable principally relates to unbilled revenues that have been recognized
under the percentage-of-completion method but where payments have not yet been
due or made under such contracts.
Our investing activities used cash of $17.7 million for the year ended
December 31, 2000, primarily due to the capital expenditures related to the
Sioux City facility, purchase of intangible assets from Applied Power Associates
and payment for purchase of a linear accelerator for the medical equipment
sterilization business. Also included in cash used for investing activities for
the year ended December 31, 2000 were advances to the special purpose entities
in Hawaii and Brazil aggregating $5.9 million to be used for start-up and
working capital requirements.
In 1999, we entered into an agreement with Cloverleaf Cold Storage in Sioux
City, Iowa whereby Cloverleaf would construct and lease to us a facility in
which we would install food irradiation systems and process food for our
customers. As part of our agreement with Cloverleaf, we issued a warrant to
Cloverleaf to purchase 465,838 shares of our Class A common stock for a nominal
amount. We also granted an additional warrant to Cloverleaf to purchase
1,397,515 shares of our common stock at an exercise price of $0.7156 per share.
Both warrants expire on the earliest of: (a) May 23, 2003; (b) our initial
public offering or (c) the date we are sold.
In November 1999, we entered into an agreement with Hawaii Pride LLC and
affiliated parties, whereby Hawaii Pride would acquire a SureBeam system and
construct a facility in Hilo, Hawaii for the purpose of disinfesting fruit and
other products. Under the percentage-of-completion method, we recorded revenues
of $2.2 million in 1999 and $3.3 million in 2000. Prior to Hawaii Pride
obtaining third party financing, we advanced $3.9 million to Hawaii Pride, which
is included in the accompanying balance sheet as other assets. The monies
advanced were utilized for costs relating to the acquisition of land,
construction of the building and infrastructure, equipment (excluding the
SureBeam system) and other start-up costs. We can forgive $1.0 million of the
amount advanced for the exercise of our option for 19.9% of the equity of Hawaii
Pride. Although we have the ability to convert the remaining balance of the
advance into 50% ownership of Hawaii Pride, this conversion feature may only be
exercised upon Hawaii Pride's default of its loan obligations, mismanagement of
the operating facility, a liquidity event or if Hawaii Pride fails to operate
the business in a prudent and reasonable manner. The remaining balance of the
advance represents a note receivable bearing interest at 10%, with interest
payments due to us monthly. In June 2000, Hawaii Pride obtained a 15-year loan
of approximately $6.8 million from the USDA. If Hawaii Pride defaults on its
USDA loan obligations, or fails to comply with USDA requirements, we have the
right to acquire 100% of the equity of Hawaii Pride for a nominal amount. Titan
has agreed that upon our acquisition of any equity interest in Hawaii Pride, it
will guarantee a percentage amount of the USDA loan equal to the percentage of
our equity interest in Hawaii Pride. Under the terms of the agreement, we will
receive a management fee based on the facility's net revenues over the term of
the USDA loan.
In early 2000, as part of the settlement of a patent infringement case we
brought against Electron Ventures Limited, we acquired from Electron Ventures a
linear accelerator system and all ancillary equipment for $2.5 million for use
in Titan's medical equipment sterilization business. We also assumed some of
Electron Ventures' liabilities, including a long-term capital lease on the
linear accelerator with an aggregate value of $1.2 million as of the acquisition
date. The excess of the purchase price over the net assets acquired of
approximately $1.2 million is being amortized over five years. Electron Ventures
also entered into a consent decree acknowledging the validity of our core
patents and their infringement of our core patents and ceased business
operations.
In May 2000, we acquired the intangible assets of Applied Power Associates,
Inc., which included a customer list, know-how related to food irradiation and
product installation and two-year agreements
34
from two key employees not to compete in the food irradiation industry, for
$5.0 million in cash and a warrant to acquire 372,670 shares of SureBeam common
stock at a price per share of $0.1438. The warrant expires on the earliest of:
(a) May 1, 2003; (b) our initial public offering or (c) the date we are sold.
The purchase price of approximately $5.5 million, which includes $508,000
related to the fair market value of the warrant, is being amortized on a
straight-line basis over the two year term of the non-compete agreements
included as part of this transaction.
In May 2000, we received purchase orders from Tech Ion Industrial Brasil
S.A. for eleven electronic food irradiation systems which we expect to result in
approximately $55.0 million in sales revenues to us over the next three years.
We began construction of these systems in July 2000, and have recorded revenues
of $15.5 million under the percentage-of-completion method for the year ended
December 31, 2000. Also in May 2000, we, through our wholly owned subsidiary,
Titan SureBeam Brazil Ltd., and Tech Ion jointly established SureBeam Brasil
Ltda. SureBeam Brasil will provide, among other things, food irradiation
services through four planned service centers to various food companies in
Brazil. We acquired a 19.9% equity interest in SureBeam Brasil without charge at
the time of our signing of the agreement to establish SureBeam Brasil, which is
a start up company that was created with no initial capital contribution from
either party. We and Tech Ion are each entitled to elect an equal number of
directors of SureBeam Brasil and therefore these representatives must mutually
agree on any board actions. We have the right, exercisable at any time within 20
years of the formation of the strategic relationship to acquire up to 50% of the
total equity interest in SureBeam Brasil for $1 million. The agreement further
provides that we or another Titan affiliate will provide a $5.0 million working
capital line of credit to Tech Ion, and advances will bear interest at 10% per
annum and are secured by the stock and assets of Tech Ion. At December 31, 2000,
there was $2.2 million outstanding under this line of credit. Tech Ion will use
the line of credit to finance the purchase of land, construction costs and costs
for improvements to the land. Our agreement with Tech Ion also entitles us to
intellectual property rights and subjects us to intellectural property
obligations.
Our financing activities provided cash of $35.5 million for the year ended
December 31, 2000. These amounts are comprised of amounts invested in us by
Titan to fund our operating and investing activities discussed above.
At December 31, 2000, we had working capital of $19.3 million and debt
outstanding of $58.1 million.
We currently anticipate capital expenditures will be approximately
$45 million for the next 12 months. We expect to spend approximately
$40 million on the construction of in-line electronic food irradiation systems
and service centers and approximately $5 million on an additional manufacturing
and research and development facility. We anticipate using a portion of the
proceeds from this offering to pay these amounts.
We expect to experience significant growth in our operating expenses for the
foreseeable future. Accordingly, we currently anticipate that our operating
expenses, primarily selling, general and administrative expenditures will
constitute a greater portion of future cash requirements. We currently expect
our sales and marketing expenditures for the next twelve months to be
approximately $15 million, a portion of which we expect to use for a brand and
product awareness campaign.
In periods after the next twelve months, we expect that we will continue to
evaluate our need for funds based on our assessment of access to public or
private capital markets and the timing of our need for funds. Other than any
cash flow from operations, we have not identified any specific sources of
liquidity or capital resources that we will use during periods that are after
the next twelve months. We may seek to raise additional funds through private or
public debt or equity financings. Titan may be opposed to or prohibited from
permitting us to raise additional capital when we believe it is desired or
required. There is no guarantee that additional capital will be available or, if
available, may not be on terms favorable to us. Any future financing may be
dilutive in ownership, preferences, rights or privileges to our stockholders.
35
Under the terms of our tax allocation agreement with Titan, if Titan offsets
taxable gains with our losses, Titan will have to compensate us in cash for the
benefit it receives for its use of our losses.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We currently are exposed to market risks related to changes in interest
rates. Some of the proceeds of this offering may be invested in short-term,
interest-bearing, investment grade securities. The value of these securities
will be subject to interest rate risk and could fall in value if interest rates
rise, We currently have an unsecured subordinated promissory note payable to
Titan that bears interest, payable quarterly, at the greater of the rate of 10%
per annum or Titan's effective weighted average interest rate based on floating
rates under its senior credit facility. Additionally, our future borrowings will
have a variable component that will fluctuate as interest rates change. If
market interest rates were to increase immediately and uniformly by 10%, there
would not be a material impact on our financial condition or results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation (an Interpretation of APB Opinion No. 25)" ("FIN 44"). Among other
issues, this Interpretation clarifies (a) the definition of employee for
purposes of applying APB No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. The accounting and disclosure provisions of FIN 44 are effective
beginning July 1, 2000. The adoption of FIN 44 did not have a material impact on
our financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." This SAB summarizes the SEC's
view in applying generally accepted accounting principles to revenue recognition
in financial statements. Our accounting policies comply with the provisions of
SAB 101.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In June 1999, the effective date of SFAS 133 was amended to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 by Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of Effective Date of
FASB Statement No. 133." We anticipate that the adoption of SFAS 133 will not
have a material impact on our financial position or results of operations.
36
BUSINESS
OVERVIEW
We are a leading provider of electronic irradiation systems and services for
the food industry. Our electronic food irradiation process significantly
improves food safety, prolongs shelf life and provides disinfestation, without
compromising food quality. Our patented SureBeam process is based on proven
electron beam technology that operates in an efficient and environmentally
responsible manner. The SureBeam system is powered by ordinary electricity and
destroys harmful food-borne bacteria such as E-coli, salmonella and listeria and
eliminates or renders harmless fruit flies and other pests. We can provide our
electronic irradiation services at our service centers, such as our Sioux City
facility, that are capable of processing foods received from a variety of food
processing customers, or we can install our systems as part of a customer's
production line.
Heightened awareness of food safety issues has prompted food growers,
packers, processors and retailers to find new, safe and efficient ways to
eliminate bacteria and insects from their products and to reduce food spoilage.
Unlike older irradiation technologies, the SureBeam process does not use nuclear
radioactive materials as a means for irradiation. As a result, we believe we
have an opportunity to establish electronic irradiation as a new food industry
standard and SureBeam as the leading brand for food safety solutions.
We have executed agreements with many of the major meat and poultry
providers and processors in the United States, including American Food Service
Corporation, Cargill, Emmpak, Huisken Meats, IBP, Omaha Steaks, Tyson Foods and
United Food Group. These companies accounted for approximately 75% of the
$57.2 billion in sales of beef and approximately 57% of the $92.5 billion in
sales of all meat (including beef, pork and poultry) in the United States in
1999. In addition, we have signed agreements with Anchor Foods, Del Monte and
Kraft for applying the SureBeam technology to processed foods. Our customer
agreements generally provide that we will be the exclusive provider of food
irradiation services, including gamma irradiation services we do not currently
provide that our customers elect to use.
Currently, we are electronically irradiating ground beef for commercial sale
by Cargill, Emmpak, Huisken, IBP, Omaha Steaks, and Schwan's. Since Huisken
Meats introduced SureBeam electronically irradiated ground beef in Minnesota on
May 16, 2000, distribution of their SureBeam-processed products has expanded
from approximately 80 stores to approximately 2,000 stores. In addition,
Schwan's and Omaha Steaks are distributing SureBeam-processed ground beef
nationwide through either catalog sales, home delivery networks or retail
stores. Our other customers are currently testing products processed by the
SureBeam system. We believe that a growing number of food processors will
integrate the SureBeam process into their food production operations.
We built, own and operate the first commercial electronic food irradiation
service center in the United States at Cloverleaf Cold Storage in Sioux City,
Iowa. Pursuant to a strategic relationship with Hawaii Pride LLC, Hawaii Pride
also operates a facility in Hilo, Hawaii to disinfest produce. Additionally, we
have entered into strategic relationships to open electronic irradiation
facilities with Tech Ion Industrial Brasil S.A. in Brazil in the third quarter
of 2001 and Zero Mountain Cold Storage in Arkansas in the fourth quarter of
2001.
INDUSTRY BACKGROUND
FOOD SAFETY
There is growing concern about the safety of the world's food supply. The
Centers for Disease Control reported that food-borne bacteria cause more than
5,100 deaths, 325,000 hospitalizations, and 76 million cases of illness annually
in the United States alone. In 1997, the USDA ordered Hudson Foods Inc. to close
its Columbus, Nebraska meat processing plant and recall 25 million pounds of
37
ground beef after it was linked to an outbreak of E-coli contamination. In 1999,
the USDA recalled nearly 40 million pounds of food in over 60 reported product
recalls. Additionally, zero tolerance liability laws on E-coli and listeria and
increasing litigation related to other food-borne illnesses are exerting
additional pressure on food processors to meet increasing food safety standards.
As a result, food processors spend substantial amounts of capital to minimize
the risk of food contamination.
The FDA has stated that the only effective methods of safeguarding against
E-coli and other food-borne bacteria are cooking foods to 160 DEG. F or
irradiating food. Relying solely on cooking as a safeguard against food-borne
illnesses is not satisfactory since bacteria can be spread when contaminated
food is handled prior to cooking and remain if food is undercooked. Irradiation
offers food producers and processors a method to safeguard against food-borne
bacteria before their products reach consumers. Although the FDA approved the
irradiation of a number of foods in the early 1960s, food processors and
consumers reacted unfavorably towards the concept of irradiation because older
food irradiation methods involve exposing food to radioactive isotopes.
Furthermore, we believe that older food irradiation methods can negatively
affect the taste and texture of some types of food.
FOOD INFESTATION AND SPOILAGE
In addition to food safety, our SureBeam system can be used to eliminate
infestation of food by fruit flies and other pests and to reduce food spoilage
and prolong shelf life. For instance, Hawaii Pride's facility disinfests
produce, while Tech Ion's initial international facility in Brazil is intended
to increase the shelf life of food.
Hawaii and countries such as Brazil and Australia that produce fruits and
vegetables with known insect infestations are prohibited from shipping those
fruits and vegetables into the United States and other countries unless they
comply with disinfestation regulations. These regulations are becoming more
difficult to meet as traditional methods of disinfestation are being banned or
reevaluated due to environmental concerns and negative effects on food taste,
texture and nutritional value.
Traditional methods of disinfesting food products such as fruits and
vegetables include the use of vapor heat, fumigation and irradiation. Using heat
to disinfest fruit can compromise taste, texture and nutritional value. The use
of fumigation, such as methyl bromide, is being challenged due to its negative
environmental impact. The use of radioactive isotopes to disinfest food products
elicits the same negative reaction from food processors and consumers that is
associated with using radioactive isotopes to eliminate food-borne bacteria.
Food spoilage is a major concern for food growers, processors and retailers
since it limits shelf life and the distance food products may be shipped,
thereby limiting market access. Food spoilage in developing countries is
estimated to be 30% in fresh fruits and vegetables. In addition, transportation
distances in an increasingly global food industry contribute to the food
spoilage problem.
MARKET OPPORTUNITY
We have identified five primary global markets, highlighted below, for our
SureBeam process. Over time, we also plan to target the pork, cut beef, egg and
other processed food markets. Each of these markets is substantial and
represents a significant opportunity for SureBeam because we intend to derive a
significant portion of our revenues by charging on a per pound basis for food
processed by our electronic irradiation systems, whether at our service centers
or our customers' production facilities.
38
MARKET SIZE (POUNDS PRODUCED, IN MILLIONS)(1)
U.S. INTERNATIONAL TOTAL
-------- ------------- ---------
Ground Beef............................... 9,000(2) 10,000(2) 19,000
Poultry................................... 35,000 100,000 135,000
Processed Meats........................... 25,000 N/A 25,000
Seafood................................... 12,000(3) 250,000 262,000
Fruits & Vegetables....................... 65,000 1,300,000 1,365,000
------- --------- ---------
Total..................................... 146,000 1,660,000 1,806,000
======= ========= =========
------------------------
(1) The sources used to compile this data have not consented to our use of their
names or this information in this prospectus. Unless otherwise indicated,
the source of all U.S. and International figures is the Food and Agriculture
Organization of the United Nations.
(2) Source: National Cattlemen's Beef Summit (November 1999).
(3) Sources: U.S. Census Bureau; U.S. Department of Agriculture.
THE SUREBEAM SOLUTION
Our electronic food irradiation system offers a new method of irradiation
that utilizes ordinary electricity to accelerate electrons. We believe that
consumers have demonstrated acceptance of food safety methods, as in the case of
pasteurized milk, when the method is environmentally safe and maintains the
product's characteristics. Consumers and health and industry officials are
beginning to view irradiation positively. For example, many prominent health and
medical organizations support the use of irradiation technology, including the
American Dietetic Association, the American Medical Association, the Centers for
Disease Control, the FDA, the USDA and the World Health Organization. In
addition, the World Health Organization is expected to approve the irradiation
of all foods. The World Health Organization's standards may serve as uniform
standards for some other countries.
Utilizing our patented technology, we have developed an electronic
irradiation system that we believe addresses food safety, disinfestation and
spoilage concerns and provides many benefits including:
- DESTROYING DANGEROUS BACTERIA. Use of our electronic irradiation system
can effectively kill dangerous bacteria such as E-coli, listeria
monocytogenes, salmonella and campylobacter in all food products,
including meats, poultry, vegetables, eggs and seafood. We provide food
processors with a solution that improves their ability to comply with food
safety laws and may reduce costly product recalls or damaging liability
lawsuits.
- KILLING FRUIT FLIES AND OTHER PESTS. The SureBeam system can kill fruit
flies and other pests or prevent them from reproducing, thereby rendering
them harmless. This benefit enables food producers and processors to gain
access to new markets that have previously been denied or limited due to
fruit fly and pest quarantines.
- REDUCING FOOD SPOILAGE AND PROLONGING SHELF LIFE. The SureBeam system can
increase the shelf life of foods such as meats, poultry, fruits and
vegetables, by decreasing microbial levels that cause food spoilage.
Irradiation has demonstrated an ability to extend shelf life by two to
three times in foods such as raspberries, strawberries, raw beef, chicken
and pork. As a result, food processors have the ability to ship product
less frequently and over further distances while food retailers and food
service companies have the ability to stock and store product longer,
thereby generating supply chain efficiencies.
39
- UTILIZING ORDINARY ELECTRICITY. Unlike older irradiation methods that use
nuclear radioactive materials as their energy source, the SureBeam system
uses ordinary electricity and has received greater acceptance from food
processors and consumers because of its environmentally responsible
features.
- MAINTAINING FOOD TASTE, TEXTURE AND NUTRITIONAL VALUE. Because of the
rapid rate at which the food is processed by the SureBeam system and the
small increase in food product temperature during processing, the
oxidation effects on food products are minimized. As a result, when
properly applied, the SureBeam process has minimal effect on food taste,
texture or nutritional value.
- INTEGRATING FULLY INTO PRODUCTION LINES. The SureBeam system is the only
food irradiation system available that can be fully integrated into
customers' production lines, avoiding additional transportation costs. The
system's footprint and ability to accommodate different products make it
efficient to integrate into an existing production line. Attributes that
enable the SureBeam system to be incorporated into production lines
include:
- SCALABLE SYSTEM. The SureBeam system is scalable and can be designed to
meet a wide range of production volume requirements.
- FAST PROCESSING TIME. The SureBeam system pasteurizes food products in
a matter of seconds, maintaining the speed of a production line.
- PRECISE DOSING. Electron beam processing delivers a measurable and
consistent dose to products based upon pre-set parameters. All
processing parameters are under constant measurement to maintain dosage
within a predetermined range.
- FLEXIBLE DOSING. The SureBeam system can switch from one targeted dose
to another in a matter of seconds. In addition, our system can utilize
either electron beam or x-ray technology depending on the density and
thickness of the product, with x-ray technology allowing us to process
thicker products over a somewhat longer processing period. Changeovers
are easy and designed to accommodate various products.
- ENVIRONMENTALLY RESPONSIBLE. The SureBeam system uses ordinary
electricity as its power source. There are no nuclear radioactive
materials used in the SureBeam process, and as a result, the licensing
and operation of facilities using the SureBeam system do not require
any review by the Nuclear Regulatory Commission.
OUR STRATEGY
Our goal is to leverage our proprietary technology to be the premier global
provider of electronic irradiation systems and services to the food industry. To
meet this goal, we plan to:
- EXPAND OUR CUSTOMER BASE. We have already entered into relationships with
leading food processors and other customers in the United States and
abroad. We intend to continue to develop relationships both domestically
and internationally. We believe food industry leaders will provide us with
a growing stream of per pound processing fees as consumer acceptance
continues to expand for electronically irradiated food.
- INSTALL AND OPERATE IN-LINE TURNKEY ELECTRONIC IRRADIATION SYSTEMS. We
intend to offer turnkey electronic irradiation systems that are directly
integrated into customer production lines. We will generally retain
ownership of the systems and customers will pay a per pound processing
fee.
- BUILD, OWN AND OPERATE ADDITIONAL ELECTRONIC FOOD IRRADIATION SERVICE
CENTERS. We intend to continue to build service centers that provide
electronic irradiation services in strategic locations near major
producers and processors of meat, poultry, fruits or vegetables. For
example, our facility in Sioux City, Iowa is located in proximity to
several leading meat producers, including IBP and
40
Cargill. We expect that building facilities in strategic locations will
accelerate the development of a market for food irradiation services.
These facilities also serve as test centers for food processors evaluating
our process and as commercial irradiation centers for processors where
turnkey systems may not be cost effective. We plan to build electronic
food irradiation facilities in Los Angeles, Chicago and Philadelphia
within the next 18 months.
- BUILD THE SUREBEAM BRAND. Our goal is to establish SureBeam as the leading
electronic irradiation brand with both food processors and consumers in
the retail and foodservice markets. We believe establishing a leading
brand with consumers will prompt food processors to purchase our products
and services so that their products can carry our SureBeam seal, thereby
creating pull through demand for our process in the distribution chain. We
expect to allocate significant additional resources to establish our brand
in the retail and foodservice businesses. We will utilize a wide range of
communication media to build awareness of the SureBeam brand. Our SureBeam
logo currently appears on some of the products of five food processors
that currently sell food processed with our SureBeam system.
- ESTABLISH A NEW INDUSTRY STANDARD FOR FOOD SAFETY. We intend to promote
the widespread use of electronic irradiation by food processors to
establish a new industry standard for food safety and quality. We believe
the need for such a standard is driven by food processors' desires to meet
retail and foodservice demand for safe food products.
- PROMOTE CONSUMER AWARENESS OF ELECTRON BEAM TECHNOLOGY. We plan to utilize
a variety of media to educate consumers on the SureBeam system's ability
to increase food safety and other produce benefits and to highlight major
endorsements of food irradiation technology by health and industry
officials. In addition, we will leverage our contracts and alliances with
major food producers and processors as validation of the SureBeam system.
- PURSUE GLOBAL OPPORTUNITIES THROUGH STRATEGIC ALLIANCES. We will continue
to enter into strategic alliances with local partners in international
markets and to sign exclusive agreements when possible. We plan to build
service centers to encourage testing of the SureBeam process and to open
opportunities for future relationships. At the same time, we will continue
to focus our marketing efforts in such markets on key food growers,
packers, processors and retailers. We believe that this strategy, when
combined with our existing expertise and proprietary technology, will
provide a barrier to others attempting to enter these markets. We are
currently using this approach in Japan and Brazil and will continue to
target other key food and export markets, such as Australia, Asia and
South America.
- PROTECT OUR TECHNOLOGY. We own our SureBeam technology through patents,
patent applications, know-how and trade secrets. We have not granted any
rights to our SureBeam technology, other than those granted to Texas A&M
University and the Texas Agricultural Experiment Station solely for
research and development purposes, those retained by the U.S. government
for military applications and those granted to Titan solely for medical
equipment sterilization. We will continue to protect our technology
aggressively by enforcing our current patents and filing additional patent
applications in the United States and other countries.
- DEVELOP NEW OPPORTUNITIES FOR SUREBEAM. We will continue to develop new
applications of our technology, including the irradiation and
disinfestation of additional products such as flowers, grains, spices,
coffee beans and pet food.
THE SUREBEAM SYSTEM
Our SureBeam system is based principally on electron beam accelerator
technology initially developed in the 1980s. For the past 18 years, Titan has
worked to create and refine an electronic processing system capable of meeting
the functionality, reliability and 24 hour-per-day cycles required
41
in medical equipment sterilization and electronic food irradiation applications.
We have successfully demonstrated the reliability of our SureBeam system with
over 108,000 operating hours logged on our systems for both medical equipment
sterilization and food irradiation applications.
The patented SureBeam process is the only turnkey electronic food
irradiation solution currently on the market. The SureBeam system can be
integrated into a customer's production line such that a packaged or unpackaged
product can be processed by the SureBeam system. Other food irradiation
processes that utilize nuclear radioactive materials as their power source
require extensive space and must meet additional requirements of the Nuclear
Regulatory Commission that have proven impractical in an in-line production
setting. Existing food processing facilities are not constructed to comply with
these standards and we do not believe that food processors will be willing to
build new processing facilities to accommodate systems utilizing nuclear
radioactive materials.
The SureBeam process combines proven linear accelerator technology with a
patented material handling system and a real-time control-monitoring platform
providing the highest degree of process integrity. The energy generated from the
acceleration of electrons is sufficient for processing pre-packaged or
post-packaged and fresh or frozen products in seconds. The rapid speed of the
SureBeam system makes it well suited for integration into customer production
lines.
The SureBeam system is comprised of a linear accelerator that produces a
beam of electrons. A series of resonant microwave cavities are then used to
accelerate the electrons to nearly the speed of light. A magnetic deflection
system is then used to scan the beam across the product. The electrons disrupt
the DNA chain of the organisms hit and either destroy them or prevent their
reproduction, thereby rendering them harmless. Our process utilizes ordinary
electricity to generate electrons to administer a direct electron or x-ray
treatment that is suitable for a wide range of products of various sizes, shapes
and densities. X-rays are produced when electrons exit the accelerator and make
contact with a metal target. The x-rays are directed at the product being
processed and have the same ability as electron beams to kill bacteria or pests,
or inhibit their reproduction. X-rays are generally used to penetrate larger and
denser products than electron beams. Electron beams can generally penetrate food
products of up to a thickness of approximately four inches, while x-rays can
penetrate thicker products. The processing time using x-rays is generally
somewhat longer than the processing time required when using electron beams.
The SureBeam system is designed to contain the irradiation process inside a
protective shield to ensure the operator's safety. The operator and maintenance
staff are not exposed to a hazardous environment when they need to enter the
protective shield because the system is shut off and no electrons are generated
when the power supply is cut off and because our process does not use
radioactive isotopes, toxic gases or high temperatures. In addition to the
protective shield, a safety control system monitors the operation of the system
to detect abnormal operating conditions, such as smoke and fire, intrusion into
a restricted area, loss of utilities or equipment failures (power, compressed
air or cooling) and the system is designed to shut down if any abnormal
conditions are detected.
The SureBeam system can be configured to include electron beam or x-ray
capabilities or both, can provide doses in one or more directions, and can
handle food products in individual packages or cases. Our proprietary SureTrack
information and control system guides both the operator and material loaders
through the overall process checking for the completion of each task and
verifying the integrity of the process. The dose, or the amount of energy
deposited, is controlled by our proprietary software, the SureTrack system. The
dose varies depending on the thickness and density of the product and on whether
the objective is to pasteurize, disinfest or extend shelf life. Our control
systems include components to detect failures and unscheduled downtime. Our
SureTrack system provides dose verification and validation, and continuously
archives all the processing information required to substantiate the successful
completion of the SureBeam process. Unlike systems that utilize nuclear
isotopes, our systems can be turned off at any time.
42
The FDA has approved all forms of food irradiation technology, including the
use of an electron beam as utilized by the SureBeam process. The FDA rigorously
evaluated the safety and efficacy of irradiation as part of its standard
approval process and established standards for the use of irradiation based on
this evaluation. The FDA reviewed results from over 40 years of testing and
research of the impact of irradiation on food and concluded that irradiated food
is safe to eat, does not put consumers at risk and does not adversely affect the
nutritional value of food. Each facility that utilizes our SureBeam process must
be validated prior to opening by the FDA to ensure compliance with the FDA
standards.
[THE SUREBEAM SERVICE CENTER GRAPHIC
The language to the left of the graphic lists the components of the SureBeam
service center. The caption below the graphic reads as follows:
"In the illustration above of SureBeam's Sioux City facility, portions of the
ceiling, protective shielding and flooring of the facility have been removed in
order to portray the full layout of the SureBeam service center system. Layouts
of other service centers will be similar to that of the Sioux City facility."]
OUR SERVICES
We offer services for the electronic irradiation of food through in-line
turnkey systems and centrally located service centers allowing food growers,
packers and processors to choose the most convenient and cost effective way to
utilize our SureBeam system for electronically irradiating their products. We
offer services directly and through third parties with which we have strategic
relationships. While no in-line turnkey systems have as yet been contracted for
or installed in our customers' production facilities, one company-owned service
center is currently in operation.
COMPANY-OWNED SERVICE CENTERS. In 1999, we began operating the nation's
first electronic food irradiation service center in Sioux City, Iowa. This
facility currently has the capacity to process up to approximately 40,000 pounds
of meat per hour. The facility is operating at a small percent of its maximum
processing capacity. The facility has the capability of irradiating large cases
of products, as well as products that are not uniform in shape or size. Our
service center generates revenue by charging a per pound processing fee. We plan
on building additional service centers in Los Angeles, Philadelphia and Chicago
over the next 18 months.
IN-LINE TURNKEY SYSTEMS. We offer turnkey systems that can be integrated
directly into a customer's production facility. We expect to generally retain
ownership of the systems and charge our customers a per-pound processing fee. In
limited circumstances, we may sell turnkey systems directly to our
43
customers, recognize revenue for the sale and receive no on-going revenue
stream. We have agreed to design and engineer one or more in-line turnkey
systems for IBP.
[THE SUREBEAM IN-LINE SYSTEM GRAPHIC
The language to the left of the graphic lists the components of the SureBeam
in-line system. The caption below the graphic reads as follows:
"In the illustration above, room walls and portions of the protective shielding
of the facility have been removed in order to portray the full layout of a
prototype SureBeam in-line system that SureBeam expects to install in its
customers' production facilities. Each system will be customized and configured
for integration into the specific customer's production facilities."]
STRATEGIC RELATIONSHIPS
We have maintained a strategy of establishing strategic relationships with
third parties to own and operate service centers to provide food irradiation and
disinfestation services. We generally structure these relationships so that we
are given an option to acquire a minority equity interest in a special purpose
entity to be formed by the third party to ensure our participation in the
potential future value created through the use of our systems. We intend to
generate revenue and recognize earnings from the sale of our systems to the
third parties and recognize earnings from processing revenue as allocated
through our equity ownership of the special purpose entities.
In July 2000, Hawaii Pride LLC began operating a service center using our
technology in Hilo, Hawaii for the disinfestation of fruits and vegetables. We
sold a SureBeam system to Hawaii Pride and we have an option to acquire a 19.9%
interest in the special purpose entity operating the service center.
Zero Mountain Cold Storage is scheduled to open a service center for
processing poultry and other meat in Russellville, Arkansas in the fourth
quarter of 2001. We sold a SureBeam system to Zero Mountain Cold Storage in 1999
and upon completion of the system we will acquire a 19.9% equity interest in the
special purpose entity that will operate the service center.
Internationally, we intend to establish strategic relationships with
businesses that have expertise in their local food markets and recognize an
opportunity to utilize the SureBeam system. In May 2000, Tech Ion Industrial
Brasil S.A. placed purchase orders with us for eleven electronic food processing
systems. SureBeam Brasil Ltda., a special purpose entity that has been jointly
established by Tech Ion, our exclusive partner in Brazil, and Titan SureBeam
Brazil Ltd., our wholly owned subsidiary, will provide, among other things, food
irradiation services through four planned service centers to various food
companies in Brazil. The first of these service centers is expected to be
operational in the third
44
quarter of 2001. We have a 19.9% equity interest in SureBeam Brasil and the
right to acquire up to 50% of the total equity interest in SureBeam Brasil for
$1.0 million.
CUSTOMERS
We currently have agreements with 26 customers to provide food irradiation
services at our Sioux City facility. Our customer agreements vary in some
respects from customer to customer. The following discussion is intended only to
describe some of the more common terms. The agreements to provide food
irradiation services are generally for an initial term of one year with
automatic annual renewals. Although our customers can generally terminate the
agreement to provide food irradiation services upon 30 days notice, such
agreements typically provide that we will be the exclusive provider of food
irradiation services, including gamma irradiation services we do not currently
provide, for a multi-year period, even if the customer terminates the agreement
before the end of the multi-year period. The exclusivity periods of our customer
contracts as of the date of this prospectus will terminate over the next five
years. We generally must release a customer from the exclusive provider
arrangement if the customer can find a comparable service at a lower price, if
we cannot fully meet the customer's demand or if we cannot demonstrate
compatibility with the customer's products.
The agreements provide for a test period followed by a commercial production
period. We charge a per pound processing fee, which generally decreases as
monthly production volume increases. A customer may elect to convert to the
commercial production period at any time during the test period, at which time
the per pound processing fee decreases and the customer is required to commit to
processing a minimum number of pounds of food for each 12-month period. The
customer agrees to pay us for such minimum amount, even if the food is not
processed. Currently, Huisken Meats and Omaha Steaks are operating in the
commercial production period. Those customers operating in the test period are
not required to convert to the commercial production schedule in order to sell
irradiated food commercially.
SALES AND MARKETING
We focus our sales and marketing initiatives on establishing SureBeam as the
leading consumer brand in providing solutions to food safety issues, such as the
incidence of bacteria and pests in food, as well as food spoilage. We promote
our brand in order to build revenues, gain worldwide market share, and promote
consumer and industry awareness and acceptance. We target the growing public
demand for safer food by helping food processors meet heightened standards of
quality and safety through our technology. Our sales and marketing personnel,
who possess technical expertise regarding the SureBeam system, market and sell
our systems and services to food processors, as well as educate food industry
constituents, food processors and consumers on the uses and benefits of our
technology. In order to enhance our commercialization efforts, we expect to
continue to expand our sales and marketing capabilities.
We conduct a number of sales and marketing programs to support the promotion
and sale of the SureBeam system and to reinforce brand awareness. Our consumer
programs are designed to educate the public that the SureBeam process is safe
and environmentally responsible, and to explain that the taste, texture and
nutritional value of food products remain essentially unaffected by this
process. In addition, we promote the placement of our SureBeam seal on packages
of food products processed with our patented SureBeam system. Our goal is for
consumers to easily identify SureBeam processed products and associate our seal
with food safety, thereby increasing brand awareness and further developing
brand loyalty. We will seek to create consumer demand that will serve to
encourage food processors to co-brand with us and to use our electronic
irradiation system. We currently intend to use a portion of the proceeds of this
offering to conduct a brand building program primarily through the use of mass
media aimed at the consumer.
Our trade programs are designed to educate food processors about the
advantages of using our technology and to encourage processors to market their
SureBeam processed products using our brand.
45
We also work cooperatively with our service center partners to reinforce the
SureBeam brand and extend our sales effort in international markets.
MANUFACTURING
Our manufacturing operation involves assembly and testing of SureBeam
systems. We obtain many of our components under long term supply contracts.
While we currently procure the accelerating section of the linear accelerator
from one supplier, we will seek to secure multiple sources for substantially all
of our components. We believe that we have the manufacturing capacity and
component supply to meet our currently anticipated near-term commercial
requirements. Our manufacturing operation allows us to build systems to the size
requested by our customers. We intend to use a portion of the proceeds from this
offering to expand our manufacturing capacity. Currently, our sole manufacturing
facility is located in Dublin, California.
RESEARCH AND DEVELOPMENT
Our current research and development activities are focused on increasing
the capability and efficiency of our existing technology, minimizing the space
occupied by our SureBeam systems, and developing new food product applications.
Historically, our research and development activities were incidental to Titan's
performance under its government contracts for strategic defense.
We have assembled a team of experts in our industry to enhance and drive our
research and development efforts. Our research and development experts have many
years of experience in the area of enhancing food safety and extending shelf
life using irradiation in addition to their broad experience with linear
accelerators and charged particle beams. In June 2000, we entered into an
agreement with Texas A&M University and the Texas Agricultural Experiment
Station for the purpose of researching and developing product applications for
our technology. In addition, we often benefit from the research and development
efforts of our component suppliers.
PATENTS AND PROPRIETARY RIGHTS
We own 33 U.S. and foreign patents and patent applications, consisting of
ten U.S. and foreign issued patents and 23 patent applications pending in the
United States and abroad. The U.S. and foreign issued patents relating to the
SureBeam technology have claims relating to methods of transporting products
through the electron beam process, means of increasing the efficiency and
reliability of the process, and ways of shielding the process that miniaturizes
the size of the system. Our pending patent applications include claims relating
to improvements in the operation, efficiency, and reliability of the SureBeam
technology, shielding, multiple pass x-ray system and in-line processing
systems. While electron beam, x-ray and linear accelerator machines and
technology are considered to be part of the public domain and not patentable, we
believe our patents cover the most efficient method of utilizing electron beam,
x-ray and linear accelerator technology for food and other applications.
These patents, foreign and domestic, have been assigned to us and include
patents related to electron beam or x-ray systems issued to Thomas Allen, our
Vice President, Systems Integration, that Mr. Allen assigned to us. The initial
patent was granted on March 7, 1995. These patents will expire over the period
from 2009 to 2018. These patents have been issued or are pending in those
markets that are key targets for our expansion such as Brazil, Korea and Japan.
Protection of our proprietary rights is vital to our business. In addition to
our policy of seeking patents on our inventions, we rely on trade secrets and
know-how that is not patented, and continuing technological innovation to
develop and maintain our competitive position. In addition, we maintain a policy
of entering into confidential information and invention assignment agreements
with our employees, consultants and other third parties. We believe that we have
a strong patent position on the application of electron beam technology in a
conveyor-based irradiation process.
46
On January 6, 2000, Ion Beam Applications s.a., a Belgian corporation, and
its related U.S. subsidiaries filed an action for declaratory judgment in a
federal court in Virginia against us relating to our patents for our SureBeam
systems. The action challenges the validity of our core Irradiation System
Utilizing Conveyor Transported Article Carriers patent, seeks a declaration that
Ion Beam Applications and its customers have not infringed any of the claims in
our patent, and alleges that we have engaged in unfair competition and that our
conduct constitutes patent misuse. The action does not allege that our products
infringe the proprietary rights of any third parties. The case has been moved to
the federal court in San Diego. On November 22, 2000, Ion Beam Applications
filed an amended complaint alleging, in addition to the original claims, that we
have engaged in false advertising, monopolization, restraint on trade and unfair
business practices. We intend to vigorously defend our patent position and
defend against all allegations. However, a finding in favor of Ion Beam
Applications in this action could materially adversely affect our competitive
position and our business.
Third parties also could independently develop competing technology or
design around our technology. If we are unable to successfully detect
infringement and enforce our rights in our technology, we may lose competitive
position in the market. We cannot assure you that our means of protecting our
proprietary rights in the United States or abroad will be adequate or that
competing companies will not independently develop similar technology.
To date we have not been notified that our products infringe the proprietary
rights of any third parties, but third parties may, in the future, claim that
our current or future products infringe upon their proprietary rights. In
addition, third parties have and may continue to challenge the validity or
enforceability of our proprietary rights. Any such claim, whether meritorious or
not, could be time consuming, result in costly litigation, cause product
installation delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements may not be available on terms acceptable to
us, or at all. As a result, any such claim could harm our business and
prospects.
SureBeam is a registered trademark in the United States. Applications to
register this trademark are pending in other key foreign jurisdictions.
GOVERNMENT REGULATION
Domestically, our technology is subject to significant regulation as a food
additive under the Federal Food, Drug and Cosmetic Act, which is administered by
the FDA. Use of the SureBeam system, including product labeling, is also subject
to regulation by the USDA's Food Safety and Inspection Service and by health and
environmental safety departments within various states.
Food irradiation first gained regulatory approval in the United States in
1963 for use in the control of insects in wheat and wheat flour, followed by
approval in 1964 for the prevention of sprouting in potatoes. In February 1984,
the FDA granted approval for irradiation to inhibit the maturation of fresh
fruits and vegetables, to disinfest food of insects, and to disinfect spices of
microorganisms. In 1990, the FDA approved the irradiation of poultry. In
December 1997, the FDA approved the irradiation of meat. In December 1999, the
USDA issued regulations setting forth the guidelines for irradiation of beef and
other fresh meats, leading to the approval of commercial sales in
February 2000. Our SureBeam technology complies with these regulations. FDA
approvals for the use of irradiation to treat processed foods and seafood are
currently pending. The USDA has approved the use of irradiation for the purposes
of reducing food borne pathogens and extending shelf life in meat and poultry in
accordance with the requirements established by the FDA. While the FDA has
approved the use of irradiation for reducing food borne pathogens in meat and
poultry, it has not approved the use of irradiation to extend shelf life of
poultry.
Internationally, each country sets its own irradiation regulations.
Government regulatory bodies in 38 countries have approved the use of
irradiation to destroy bacteria and pests on only specified foods. We are
required to obtain regulatory approval from a number of foreign regulatory
authorities before we can offer our services in those jurisdictions. These
jurisdictions may apply different criteria from the
47
FDA in connection with their approval processes. We believe that we currently
comply with all applicable regulations in countries where we intend to provide
services.
In the United States and other countries that follow World Health
Organization guidelines, all electronically irradiated food, whether processed
with electron beam or x-rays, must be labeled with the symbol for irradiation,
known as the Radura symbol, and the phrase "Treated with Radiation" or "Treated
by Irradiation." In the United States, this label does not have to be any larger
than the ingredients' font size. If the irradiated product is to be used as an
ingredient in a further processed product, the Radura symbol is not required and
the only label required is in the ingredients section (e.g. potatoes, irradiated
ground beef, natural flavors). Bulk or wholesale items processed with
irradiation require labeling only on the case of irradiated items and not the
individual contents. For items not in packages but processed in their entirety
(e.g. fruit, vegetables) the label may either be placed on each individual item,
on the bulk container, or on a counter sign as long as it is next to the product
and plainly in view. U.S. federal regulations do not require retail food service
providers, such as fast food restaurants, to disclose that their food products
have been irradiated. Since irradiation is regulated as a food additive, our
customers also are subject to packaging and labeling requirements. Additionally,
states like Vermont have, and others may, adopt similar labeling requirements.
Our processing facilities also are subject to various other federal, state
and municipal regulations with regards to health, safety and environmental
issues. Such facilities are subject to supervision or periodic inspection by
other regulators. All SureBeam locations in the United States that process meat
are required to have a USDA inspector on the premises when processing.
COMPETITION
We compete against several companies seeking to address the food safety
market. Our electronic food irradiation technology competes with gamma ray
irradiation, as well as alternatives to irradiation such as thermal
sterilization, gas fumigation, chemical washes and high-pressure sterilization
techniques. We believe that none of our competitors currently is using electron
beam technology to irradiate food for commercial sale. However, Ion Beam
Applications, s.a. claims that it provides electronic food irradiation systems
and services. Our competitors include Flow International Corporation, Ion Beam
Applications, s.a., MDS/Nordion Food Technologies Corporation and STERIS
Corporation. We are aware of other companies that are attempting to develop
in-line electronic food irradiation systems. While we believe that our patents
with respect to our conveyor and shielding systems provide us with an advantage
in processing products through the electron beam, competitors may develop their
own different methods of processing that would not fall within the scope of our
patents and would adversely affect our competitive position.
Flow International Corporation is a developer and manufacturer of
ultrahigh-pressure technology for cutting, cleaning and food safety
applications. Ion Beam Applications s.a. is a provider of gamma ray technology
systems for medical product sterilization, food irradiation and other industrial
applications, and, additionally, it claims to provide electronic food
irradiation systems. STERIS Corporation offers services including gamma ray
technology and gas fumigation, which are primarily for medical product
sterilization. STERIS and Ion Beam Applications have each announced that they
intend to pursue food irradiation opportunities using electronic irradiation.
MDS/Nordion, both independently and through its majority ownership of Food
Technologies Service, currently offers only gamma ray technology irradiation.
These organizations may have significantly more capital, research and
development, regulatory, manufacturing, marketing, human and other resources
than we do. We believe that our system has advantages over gamma ray irradiation
in that our system uses ordinary electricity, can be integrated into a
customer's production line and pasteurizes food faster than gamma ray
irradiation. In addition, the cost of overall operation of the SureBeam system
is comparable to that of other irradiation products. However, gamma ray
irradiation does not require products to be removed from the shipping pallet
prior to processing, while our SureBeam process does when products are processed
in the service centers. Our system also has advantages over alternatives to
irradiation.
48
Thermal and high pressure sterilization can alter the flavor and quality of most
food products. Gas fumigation is not approved for food use in the United States
and chemical washes kill surface bacteria but have little effect on pathogens
beneath the surface of food. However, to the extent a customer is concerned with
killing surface pathogens only or is not concerned with alteration of food
flavor or quality, these alternative methods may be sufficient and less
expensive.
FACILITIES
Our principal offices are located in San Diego, California, and consist of
approximately 5,600 square feet of office space that we occupy pursuant to a
corporate services agreement with Titan through December 31, 2001 and that is
automatically renewable for one year terms. We lease approximately 19,400 square
feet from Cloverleaf Cold Storage to operate our processing facility located in
Sioux City, Iowa. We lease the Sioux City facility pursuant to a sub-lease that
expires on February 1, 2020, but which provides us with an option to reduce the
term of the lease to a ten-year period. We lease 44,323 square feet of space for
our manufacturing facility located in Dublin, California. Our lease for the
manufacturing space is on a monthly basis with an option to extend the lease
term to five years. We lease additional space for sales offices in Omaha,
Nebraska.
EMPLOYEES
As of December 31, 2000, we employed 83 full-time employees. None of our
employees is represented by a collective bargaining agreement and we have never
experienced a strike or similar work stoppage. We consider our relations with
our employees to be good.
LEGAL PROCEEDINGS
On January 6, 2000, Ion Beam Applications s.a., a Belgian corporation, and
its related U.S. subsidiaries filed an action for declaratory judgment in a
federal court in Virginia against us relating to our patents for our SureBeam
systems. The action challenges the validity of our core Irradiation System
Utilizing Conveyor Transported Article Carriers patent, seeks a declaration that
Ion Beam Applications and its customers have not infringed any of the claims in
our patent, and alleges that we have engaged in unfair competition and that our
conduct constitutes patent misuse. The case has been moved to the federal court
in San Diego. On November 22, 2000, Ion Beam Applications filed an amended
complaint alleging, in addition to the original claims, that we have engaged in
false advertising, monopolization, restraint on trade and unfair business
practices. We intend to vigorously defend our patent position and defend against
all allegations. However, a finding in favor of Ion Beam Applications in this
action could materially adversely affect our competitive position and business
prospects.
On August 30, 2000, Titan filed an action in the Los Angeles County Superior
Court against third parties that Titan alleges have disseminated and may in the
future disseminate inaccurate statements regarding Titan and its subsidiaries,
including our business. See "Risk Factors--Risks Related to this Offering--We
believe that third parties have disseminated and may in the future disseminate
inaccurate statements regarding our business that may adversely affect our stock
price." On February 26, 2001, Titan announced that it had reached a settlement
agreement with these third parties.
We are subject to litigation from time to time in the ordinary course of our
business, and may in the future become subject to litigation that may have a
material adverse effect on our business and financial performance.
49
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information regarding our current executive
officers, directors and key employees as of February 28, 2001:
NAME AGE POSITION
---- -------- --------
Larry A. Oberkfell........................ 47 President, Chief Executive Officer and
Director
Susan Golding............................. 55 Director
Gene W. Ray, Ph.D......................... 62 Chairman of the Board of Directors
Thomas Allen.............................. 53 Vice President, Systems Integration
Martha M. Cashman......................... 47 Vice President, International Business
Development
Kevin K. Claudio.......................... 44 Vice President and Chief Financial Officer
Nicholas J. Costanza...................... 45 Senior Vice President, General Counsel and
Secretary
Eric M. DeMarco........................... 37 Executive Vice President
Gary Loda................................. 55 Vice President, Manufacturing
Bruce Miller, Ph.D........................ 53 Vice President, Technology Development
Dennis Olson, Ph.D........................ 54 Vice President, Research and Development
for Food Applications
Donald Segal.............................. 41 Vice President, Sales and Marketing
LARRY A. OBERKFELL has served as our President and Chief Executive Officer
since November 1999. From December 1995 to November 1999, he held various
positions at Anchor Foods Products, Inc., a manufacturer of frozen food
appetizers, most recently as Chief Executive Officer. From October 1992 to
December 1995, he held various positions at Orval Kent Food Company, a
refrigerated salad company, most recently as Chief Executive Officer.
Mr. Oberkfell received a B.S. degree from the University of Missouri and an
M.B.A. degree from St. Louis University.
SUSAN GOLDING has served as one of our directors since August 2000. She
served as Mayor of San Diego from 1992 to 2000. Prior to serving as Mayor, Ms.
Golding chaired the San Diego County Board of Supervisors, served as Deputy
Secretary of Business, Transportation and Housing for the State of California
and was a member of the San Diego City Council. Ms. Golding received a B.A.
degree from Carleton College, an M.A. degree from Columbia University and taught
as a Ph.D. fellow at Emory University.
GENE W. RAY, PH.D., has served as one of our directors and our Chairman
since January 1998. He was a co-founder of Titan Systems, Inc., the parent of
which merged into The Titan Corporation in 1985. He served as a director,
President and Chief Executive Officer of Titan Systems from its inception in
1981 until the merger. He has been President and Chief Executive Officer of The
Titan Corporation since the merger and became Chairman of the Board in 1999. He
currently serves on the board of directors of The Titan Corporation, a
diversified technology company that provides information technology,
communications and electronic food irradiation and medical equipment
sterilization systems and services. Dr. Ray received a B.S. degree from Murray
State and M.S. and Ph.D. degrees from the University of Tennessee.
THOMAS ALLEN has served as our Vice President, Systems Integration since
January 1994. From September 1991 to December 1993 he provided technical
consultant services to The Titan Corporation for the design and start-up of the
SureBeam medical sterilization process. Since 1991, Mr. Allen has been
responsible for the design and implementation of a dozen electron beam or x-ray
systems for both food irradiation and medical equipment sterilization
applications, and has been issued three patents, with five more pending in this
field. He received a B.S. degree from Cornell University, is a Senior Member of
SME and IIE, and is certified as a Professional in Systems Integration.
50
MARTHA M. CASHMAN has served as Vice President, International Business
Development since February 2001. From September 1991 to December 2000 she held
various positions at Land O'Lakes, Inc., a food and agricultural cooperative,
most recently as Vice President, International Division. She received a B.A.
degree from the University of Minnesota.
KEVIN K. CLAUDIO has served as Vice President and Chief Financial Officer
since January 2000. Mr. Claudio served as the Director of Business Operations of
The Titan Corporation from August 1999 to December 1999. From April 1996 to
July 1999, he was the Controller of Palomar Systems, a division of Electro
Scientific Industries, a high-tech capital equipment manufacturer. From 1986 to
1996, he held various positions at General Dynamics Corporation, most recently
as Controller of the Convair Division. Mr. Claudio received a B.S. degree from
Fairmont State College and is a Certified Public Accountant in the State of
California.
NICHOLAS J. COSTANZA has served as our Senior Vice President, General
Counsel and Secretary since August 1999. Mr. Costanza has been Senior Vice
President, General Counsel and Secretary of The Titan Corporation since August
of 1999. From 1980 to 1998, he served in several legal and other senior
executive roles, including most recently as Vice President, Chief Administrative
Officer, General Counsel and Secretary of Exide Electronics Group, Inc., a high
technology public company. He was Executive Vice President, General Counsel and
Secretary of Enfinity Corporation, an energy and indoor environmental systems
and services industry consolidation company that filed its initial public
offering in 1998.
ERIC M. DEMARCO has served as our Executive Vice President since
September 1997. He served as our Chief Financial Officer from September 1997 to
December 1999. He served as Senior Vice President and Chief Financial Officer of
The Titan Corporation from January 1997 to August 1998 and has been Executive
Vice President and Chief Financial Officer of The Titan Corporation since
August 1998. From June 1986 to January 1997, he held various positions at Arthur
Andersen LLP, most recently as a Senior Manager. Mr. DeMarco received a B.S.
degree from the University of New Hampshire.
GARY LODA has served as our Vice President, Manufacturing since
October 1997. Mr. Loda was retired from 1990 to 1997. Prior to his retirement,
Mr. Loda served as President of the Beta Division of The Titan Corporation from
1983 to 1990. From 1980 to 1983, Mr. Loda founded and served as President of
Beta Development Corporation, a manufacturer of high-energy lasers and electron
accelerators. Beta Development Corporation merged with Titan Systems, the
predecessor to The Titan Corporation, in 1983. Mr. Loda received B.S. and M.S.
degrees from the University of Wisconsin.
BRUCE MILLER, PH.D., has served as our Vice President, Technology
Development since August 2000. From 1998 to 2000, he was Project Director for
the Atlas Pulsed Power Project, and Director of Spallation Neutron Source Linac
Division, for the Los Alamos National Laboratory. Dr. Miller served as General
Manager of the Albuquerque Innovative Technology office of Titan Research and
Technology from 1987 to 1998, where he was responsible for research programs in
high-current linear induction accelerators, high power microwave generation,
charged particle beam transport, nuclear weapon effects, and x-ray laser
development. Dr. Miller received B.S., M.S. and Ph.D. degrees from Ohio State
University.
DENNIS OLSON, PH.D., has served as our Vice President, Research and
Development for Food Applications since July 2000. Prior to joining us, from
1980 to 2000, Dr. Olson was a professor of Animal Science and Food Science and
Human Nutrition at Iowa State University. He also served as Director of the
Utilization Center for Agricultural Products from 1990 to 2000 and the Director
of the NASA Food Technology Commercial Space Center at Iowa State University
from 1999 to 2000. For the last fifteen years, his work has been directed at
enhancing meat safety and extending shelf-life using irradiation. Dr. Olson
received B.S. and Ph.D. degrees from Iowa State University.
51
DONALD SEGAL has served as our Vice President, Sales and Marketing since
January 2000. Prior to joining us, Mr. Segal served as Vice President, Worldwide
Sales and Marketing for PurePulse Technologies from 1998 to 1999. From 1981 to
1998, he held various positions at STERIS Corporation, a company specializing in
medical and industrial sterilization, most recently as Vice President, Sales,
Scientific Division. Mr. Segal received a B.S. degree from Clarion University.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors currently has no committees. We intend to have the
majority of our board of directors independent from SureBeam and Titan. We
currently have one director who is independent from SureBeam and Titan. We will
seek to appoint at least two additional independent directors within 90 days
following the completion of the offering. Concurrent with or shortly after these
appointments, the board expects to create audit and compensation committees, the
members of which will be independent directors.
ELECTION OF DIRECTORS
Upon the completion of the offering, under the terms of our certificate of
incorporation, our board of directors will be divided into three classes:
- Class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2001;
- Class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2002; and
- Class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2003.
DIRECTOR COMPENSATION
Our directors currently do not receive any cash compensation for their
service on the board of directors or any committee thereof, but directors are
reimbursed for expenses incurred in connection with attendance at board and
committee meetings. All directors that are not employees of SureBeam or Titan
are eligible to participate in our 2000 Stock Option and Incentive Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2000, we did not have a compensation committee. The board of
directors made all decisions concerning executive compensation during 2000. None
of our executive officers serves as a member of the board of directors or
compensation committee of an entity that has an executive officer serving as a
member of our board of directors or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned in 2000 and 1999 for services rendered to us in all capacities by our
President and Chief Executive Officer, our Chief Financial Officer, and our
three other most highly compensated officers, whose compensation, as such term
is defined by the SEC, exceeded $100,000 in 2000. Gene W. Ray, Ph.D., our
Chairman, Eric M. DeMarco, our Executive Vice President, and
Nicholas J. Costanza, our Senior Vice President, are not included in this table
because an allocation of such executive officers' compensation between the
services rendered to Titan and the services rendered to us would result in
compensation attributable to services rendered to us in each of 2000 and 1999 of
less than $100,000.
In accordance with the rules of the SEC, the compensation described in this
table does not include medical, group life insurance or other benefits which are
available generally to all of our salaried employees and certain perquisites and
other personal benefits received which do not exceed the lesser
52
of $50,000 or 10% of any officer's salary and bonus disclosed in this table.
This table also does not include our executive officers who were also executive
officers of Titan during 2000 and whose compensation was paid by Titan for
services rendered in all capacities to Titan and SureBeam.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS
--------------------------------------
NUMBER OF NUMBER OF
ANNUAL COMPENSATION SECURITIES SECURITIES
------------------------------------- UNDERLYING UNDERLYING
OTHER ANNUAL SUREBEAM TITAN ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS(3) OPTIONS COMPENSATION
--------------------------- -------- -------- -------- --------------- ---------- ---------- ------------
Larry A. Oberkfell(4),......... 2000 $350,002 $260,000 $ 7,200 -- -- --
President and 1999 40,385 30,000 600 1,863,354 40,000 $56,080(5)
Chief Executive Officer
Thomas Allen,.................. 2000 147,200 60,000 -- -- -- --
Vice President, 1999 141,617 55,000 -- 93,167 10,000 --
System Integration
Kevin K. Claudio(6),........... 2000 150,546 100,000 3,462 372,670 -- --
Vice President and 1999 52,096 40,000 1,523 -- 30,000 --
Chief Financial Officer
Gary Loda,..................... 2000 150,388 53,000 4,431 -- -- --
Vice President, 1999 144,094 57,000 4,430 46,583 10,000 --
Manufacturing
Donald Segal................... 2000 164,914 61,000 -- 465,838 2,000 --
Vice President, 1999 -- -- -- -- -- --
Sales and Marketing
--------------------------
(1) At the time our 2000 fiscal year financial statements were issued, our
management had concluded that no bonuses would be paid related to the 2000
fiscal year. However, after the issuance of our financial statements,
Titan's compensation committee met and approved these bonuses.
(2) Other annual compensation represents car allowance.
(3) The SureBeam option numbers have been adjusted to reflect options granted by
our operating subsidiary to the individuals listed above in 1999. We
substituted these options in connection with the contribution of the
electronic food irradiation business from Titan to us.
(4) Mr. Oberkfell commenced employment with us in November 1999.
(5) All other compensation represents moving expenses.
(6) The compensation listed reflects compensation Mr. Claudio received from
Titan from August 1999 to December 1999 in connection with services he
provided to Titan's medical equipment sterilization and electronic food
irradiation business.
SUREBEAM OPTION GRANTS IN YEAR ENDED 2000
The following table sets forth summary information regarding the option
grants made to our President and Chief Executive Officer, our Chief Financial
Officer and our three other most highly compensated officers, whose
compensation, as such term is defined by the SEC, exceeded $100,000 in 2000.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES PRICE PER EXPIRATION -------------------------
NAME GRANTED IN 2000 SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- ----------- -----------
Larry A. Oberkfell............. -- -- -- -- -- --
Thomas Allen................... -- -- -- -- -- --
Kevin K. Claudio............... 372,670 17.9% $0.1438 01/02/2010 $ 6,628,383 $10,563,778
Gary Loda...................... -- -- -- -- -- --
Donald Segal................... 465,838 22.4% $0.1438 01/17/2010 $ 8,285,487 $13,204,737
53
25% of the options listed in the table above vest on each anniversary of the
grant date. The board of directors has the right to accelerate the vesting of
these options. The term of the options is 10 years.
The option numbers and exercise prices have been adjusted to reflect options
granted by our operating subsidiary to the individuals listed above. We
substituted these options in connection with the contribution of the electronic
food irradiation business from Titan to us. The percent of total options granted
is based on a total of 2,077,633 options granted to employees in 2000, as
adjusted.
The potential realizable value is calculated based on the term of the option
and is calculated by assuming that the fair market value of common stock on the
date of the grant as determined by the board appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the option
is exercised and the common stock received therefore is sold on the last day of
the term of the option for the appreciated price. The 5% and 10% rates of
appreciation are derived from the rules of the SEC. The actual value realized
may be greater than or less than the potential realizable values set forth in
the table.
AGGREGATED SUREBEAM OPTION EXERCISES IN FISCAL 2000 AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth, with respect to our President and Chief
Executive Officer, our Chief Financial Officer and our three other most highly
compensated officers, whose compensation, as such term is defined by the SEC,
exceeded $100,000 in 2000, information regarding the number and value of
securities underlying unexercised options for our Class A common stock held by
them as of December 31, 2000, as well as the number and value of our Class A
shares acquired by the individuals listed below pursuant to stock options
exercised during 2000:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR END AT YEAR END
ACQUIRED ON VALUE ---------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ------------ ------------- ----------- -------------
Larry A. Oberkfell.... -- -- 465,839 1,397,516 $4,591,397 $13,774,192
Thomas Allen.......... -- -- 256,211 302,794 $2,252,264 $ 2,984,401
Kevin K. Claudio...... -- -- -- 372,670 -- $ 3,673,110
Gary Loda............. -- -- 244,565 267,856 $2,410,479 $ 2,640,045
Donald Segal.......... -- -- -- 465,838 -- $ 4,591,393
The values of unexercised in-the-money options at year-end in the table
above were determined based on the initial public offering price of $10.00 per
share minus the per share exercise price multiplied by the number of shares.
All stock options that we have granted are immediately exercisable for
shares of restricted common stock, subject to our right of repurchase on vested
or unvested shares at book value. These options are shown as unexercisable in
the table above. At year-end, Mr. Oberkfell held 1,397,516 options remaining
subject to a vesting schedule; Mr. Allen held 302,794 options remaining subject
to a vesting schedule; Mr. Claudio held 372,670 options subject to a vesting
schedule; Mr. Loda held 267,856 options remaining subject to a vesting schedule
and Mr. Segal held 465,838 options subject to a vesting schedule. 25% of the
options listed in the table above vest on each anniversary of the grant date.
The board of directors has the right to accelerate the vesting of these options.
The term of the options is 10 years.
54
AGGREGATED TITAN OPTION EXERCISES IN FISCAL 2000 AND FISCAL YEAR END OPTION
VALUES
The following table sets forth, with respect to our President and Chief
Executive Officer, our Chief Financial Officer and our two other most highly
compensated officers, whose compensation, as such term is defined by the SEC,
exceeded $100,000 in 2000, information regarding the number and value of
securities underlying unexercised options for Titan's common stock held by them
as of December 31, 2000, as well as the number and value of Titan shares
acquired by the individuals listed below pursuant to stock options exercised
during 2000.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NUMBER OF SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ---------------- -------- ----------- ------------- ----------- -------------
Larry A. Oberkfell......... -- -- 10,000 30,000 -- --
Thomas Allen............... -- -- 7,500 7,500 $ 74,688 $ 48,281
Kevin K. Claudio........... -- -- 7,500 22,500 $ 48,281 $ 144,844
Gary Loda.................. -- -- 13,750 11,250 $119,453 $ 82,734
Donald Segal............... -- -- -- 2,000 -- --
Dollar values in the table above are calculated by taking the fair market
value of Titan's common stock as of January 2, 2001, subtracting the per share
exercise price of the option and multiplying the result by the number of shares.
Options were granted at an exercise price equal to the fair market value of
Titan's common stock, as determined by Titan's board of directors on the date of
grant. 25% of the options listed in the table above vest on each anniversary of
the grant date. The board of directors has the right to accelerate the vesting
of these options. The term of the options is 10 years.
EMPLOYMENT AGREEMENTS
Pursuant to our contribution agreement with Titan, we assumed a letter
agreement dated October 7, 1999, which was further amended on October 18, 1999,
with Larry Oberkfell, our President and Chief Executive Officer, regarding the
terms of his employment. This agreement provides for an annual base salary of
$350,000 and provides that Mr. Oberkfell is entitled to participate in our
standard benefit programs generally available to all of our executive and
managerial employees. Under the terms of the letter agreement, Mr. Oberkfell
received a signing bonus of $30,000. In March 2001, Mr. Oberkfell's base salary
was increased to $400,000. The letter agreement provides for an annual bonus of
up to 75% of Mr. Oberkfell's salary and a car allowance. In accordance with the
terms of the letter agreement, we granted Mr. Oberkfell options to purchase
1,863,354 shares of our Class A common stock at an exercise price of $0.1438 per
share and options to purchase 40,000 shares of Titan common stock at an exercise
price of $20.938 per share. These options vest at a rate of 25% per year for
four years, with the first 25% vesting on the first anniversary of the date the
options were granted and an additional 25% vesting on each subsequent
anniversary of that date. In addition, the letter agreement provides that we
will loan Mr. Oberkfell $375,000 to compensate him for deferred bonus
compensation he gave up as a result of leaving his former employer. We will
forgive this loan over a five year period unless Mr. Oberkfell voluntarily
terminates his employment with us or if we terminate him for cause. If we
terminate Mr. Oberkfell's employment within the first two years for reasons
other than if he is grossly negligent in the performance of his material work
duties, Mr. Oberkfell shall receive a payment equal to one year of base salary
at the then current rate. If we terminate Mr. Oberkfell's employment after the
first two years for reasons other than if he is grossly negligent in the
performance of his material work duties, Mr. Oberkfell shall receive a payment
equal to six months of base salary at the then current rate.
Pursuant to our contribution agreement with Titan, we assumed a letter
agreement dated July 14, 1999, with Kevin Claudio, our Vice President and Chief
Financial Officer, regarding the terms of his employment. This agreement
provides for an annual base salary of $129,000 and provides that
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Mr. Claudio is entitled to participate in our standard benefit programs
generally available to all of our executive and managerial employees. In July
2000, Mr. Claudio's base salary was increased to $180,000. The letter agreement
provides for an annual bonus of up to 25% of Mr. Claudio's salary and a car
allowance of $300 per month. For the 2000 fiscal year, Mr. Claudio was eligible
for an annual bonus of up to 55% of his salary. In accordance with the terms of
the letter agreement, Mr. Claudio received options to purchase 30,000 shares of
Titan common stock at an exercise price of $9.75 per share. These options vest
at a rate of 25% per year for four years, with the first 25% vesting on the
first anniversary of the date the options were granted and an additional 25%
vesting on each subsequent anniversary of that date. If we terminate
Mr. Claudio's employment within the first year other than for cause,
Mr. Claudio shall receive severance of twelve months of base salary. If we
terminate Mr. Claudio's employment after the first year other than for cause,
Mr. Claudio shall receive severance of six months of base salary.
2000 STOCK OPTION AND INCENTIVE PLAN
In August 2000, we adopted and our stockholders approved our 2000 Stock
Option and Incentive Plan. Outstanding options will continue to be governed by
the original terms of the option agreements which we assumed pursuant to our
reorganization with Titan. We have reserved an aggregate of 2,170,800 shares of
common stock for issuance upon the exercise of stock awards granted to
employees, directors and consultants under the 2000 Stock Option and Incentive
Plan. The 2000 Stock Option and Incentive Plan will terminate in August 2010,
unless sooner terminated by our board.
The 2000 Stock Option and Incentive Plan permits the granting of options
intended to qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, to employees,
including officers and employee directors, and options that do not so qualify to
employees, directors and consultants, including non-employee directors. The 2000
Stock Option and Incentive Plan also permits the granting of options to any
other person that our board deems to be in SureBeam's best interest. In
addition, the 2000 Stock Option and Incentive Plan permits the granting of stock
appreciation rights, or SARs, with or independently of options, as well as stock
bonuses and rights to purchase restricted stock.
The 2000 Stock Option and Incentive Plan is administered by our board, a
committee appointed by our board or a person appointed by our board who is a
member of our board and one of our executive officers. Subject to the
limitations set forth in the 2000 Stock Option and Incentive Plan, our board has
the authority to select the persons to whom grants are to be made, to designate
the number of shares to be covered by each stock award, to determine whether an
option is to be an incentive stock option or a nonstatutory stock option, to
establish vesting schedules, to specify the option exercise price and the type
of consideration to be paid upon exercise and, subject to some restrictions, to
specify other terms of stock awards.
The maximum term of options granted under the 2000 Stock Option and
Incentive Plan is 10 years. The aggregate fair market value, determined at the
time of grant, of the shares of common stock with respect to which incentive
stock options are exercisable for the first time by an optionee during any
calendar year may not exceed $100,000, or the options or portion thereof which
exceed such limit, according to the order in which they are granted, will be
treated as nonstatutory stock options. Options granted under the 2000 Stock
Option and Incentive Plan generally are non-transferable and expire 90 days
after the termination of an optionee's service to us. In general, if an optionee
is permanently disabled or dies during his or her service to us, such person's
options may be exercised up to 12 months following such disability and following
such death.
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The exercise price of options granted under the 2000 Stock Option and
Incentive Plan is determined by our board of directors or its designee in
accordance with the guidelines set forth in the 2000 Stock Option and Incentive
Plan. The exercise price of an option cannot be less than 100% of the fair
market value of the common stock on the date of the grant. Options granted under
the 2000 Stock Option and Incentive Plan vest at the rate specified in the
option agreement. The exercise price of incentive stock options granted to any
person who at the time of grant owns stock representing more than 10% of the
total combined voting power of all classes of our capital stock must be at least
110% of the fair market value of such stock on the date of grant and the term of
such incentive stock options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the 2000
Stock Option and Incentive Plan will be in such form and will contain such terms
and conditions as the board deems appropriate. The purchase price under any
restricted stock purchase agreement will not be less than 85% of the fair market
value of the common stock on the date of grant. Stock bonuses and restricted
stock purchase agreements awarded under the 2000 Stock Option and Incentive Plan
are generally non-transferable.
Options granted under the 2000 Stock Option and Incentive Plan vest in full
upon a specified change in control of our company.
As of December 31, 2000, options to purchase 349,374 shares of common stock
have been granted under the 2000 Stock Option and Incentive Plan.
NONSTATUTORY STOCK OPTION PLAN
Our Nonstatutory Stock Option Plan will terminate on February 19, 2008. An
aggregate of 7,975,137 shares of Class A common stock currently are authorized
for issuance under the Nonstatutory Stock Option Plan. As of December 31, 2000,
options to purchase a total of 7,714,269 shares of our Class A common stock were
held by all participants under the Nonstatutory Stock Option Plan. No shares of
our Class A common stock remain available for grant.
Our Nonstatutory Stock Option Plan provides for grants of nonstatutory stock
options to our officers and directors and the officers and directors of Titan.
Our Nonstatutory Stock Option Plan provides that we have a right to repurchase
shares received on the exercise of an option at the book value of those shares
if the purchaser terminates service prior to the completion of our initial
public offering and the listing of our stock on either The New York Stock
Exchange or The Nasdaq Stock Market.
In August 2000, several optionees agreed to exchange options we assumed
pursuant to our reorganization with Titan for options under our Nonstatutory
Stock Option Plan. Other than the provision described above, all substantive
provisions of the options, such as the exercise price, the vesting period and
the vesting commencement date, remained the same.
METHOD OF ACCOUNTING. The Nonstatutory Stock Option Plan constitutes a
variable plan within the provisions of APB No. 25 since employees who qualify as
sophisticated investors have agreed to resell to us at book value any shares
purchased through the exercise of their options. If the book value per share is
greater than the exercise price at the date of grant, or in any subsequent
period, deferred compensation will be recognized to the extent that the book
value per share exceeds the exercise price. Compensation expense related to
these option grants will be recognized over the period that the options vest. We
have not recognized compensation expense related to any of the option grants
under this plan, as the exercise price per share has exceeded the book value per
share since the date of grant. However, upon the completion of this offering or
another similar liquidity event, these options will be accounted for as fixed
options, and deferred compensation will be recorded to the extent that the fair
market value exceeds the exercise price. This deferred compensation will be
recognized over the four
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year vesting period of the related options. Based on the initial public offering
price of $10.00 per share and assuming that the offering closes prior to
March 31, 2001, we will record deferred compensation of approximately
$78.6 million, which will be recognized over the four year vesting term of the
options. Additionally, since a substantial portion of these options will be
vested upon the closing of this offering, approximately $38.7 million, of which
$4.9 million relates to the vesting of options in the first quarter of 2001,
will be recognized as compensation expense upon completion of the offering with
the balance being recognized as compensation expense over the remainder of the
four year vesting period of the options.
STOCK OPTIONS. Stock options are granted pursuant to stock option
agreements. After the completion of this offering, the exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the common stock on the date of grant. Options granted under the Nonstatutory
Stock Option Plan vest at the rate specified in the option agreement.
The term of stock options granted under the Nonstatutory Stock Option Plan
may not run beyond February 19, 2008. Unless the terms of an optionee's stock
option agreement provide for earlier termination, in the event an optionee's
service relationship with us, or any affiliate of ours, ceases due to disability
or death, the optionee or his beneficiary may exercise any vested options up to
twelve months after the date such service relationship ends. If an optionee's
relationship with us, or any affiliate of ours, ceases for any reason other than
disability or death, the optionee may exercise any vested options up to
3 months from cessation of service, unless the terms of the stock option
agreement provide for earlier termination. If an optionee is permanently
disabled during his or her service to us, such person's options may be exercised
up to 12 months following such disability. If an optionee dies during his or her
service to us, such person's options may be exercised up to 18 months following
such death.
Acceptable consideration for the purchase of common stock issued under the
Nonstatutory Stock Option Plan is determined by our board of directors and may
include cash, common stock previously owned by the optionee, a deferred payment
arrangement and other legal consideration approved by our board of directors.
Generally, an optionee may not transfer a stock option other than by will or
the laws of descent or distribution unless the optionee holds a nonstatutory
stock option that provides otherwise. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death.
TAX LIMITATIONS ON STOCK OPTION GRANTS. Until our Class A common stock is
publicly traded, we cannot grant nonstatutory stock options to any person who,
at the time of the grant, owns or is deemed to own stock possessing more than
10% of the total combined voting power of SureBeam or any affiliate unless the
following conditions are satisfied:
- the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
- the term of any incentive stock option award must not exceed five years
from the date of grant.
SECTION 162(m). Section 162(m) of the Code generally denies a corporate tax
deduction to publicly held corporations for some compensation paid to specified
employees in a taxable year to the extent that the compensation exceeds
$1,000,000 and is not paid based on performance.
CHANGES IN CONTROL. Under specified changes in control, all outstanding
options under the Nonstatutory Stock Option Plan either will be assumed,
continued or substituted for by any surviving entity. If the surviving entity
does not assume, continue or substitute for these awards, the vesting provisions
of these stock awards will be accelerated and these stock awards will be
terminated upon the change in control if not previously exercised.
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PLAN ADMINISTRATION. Our board of directors administers the Nonstatutory
Stock Option Plan. Our board of directors may delegate authority to administer
the Nonstatutory Stock Option Plan to a committee. Subject to the terms of the
plan, our board of directors or its authorized committee determines recipients,
the numbers and types of stock awards to be granted, and the terms and
conditions of the stock awards including the period of their exercisability and
vesting. Subject to the plan limitations, our board of directors or its
authorized committee also determines the exercise price of options granted.
Our board of directors or its designated committee may, in its sole
discretion, amend the terms of any one or more options granted or made under the
Nonstatutory Stock Option Plan if the optionee consents to the change in
writing. Our board of directors or its designated committee may also, in its
sole discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the Nonstatutory Stock Option Plan
may be exercised. In the event of a decline in the value of our common stock,
our board of directors or its designated committee has the authority to offer
optionees the opportunity to replace outstanding higher priced options with new
lower priced options.
EMPLOYEE STOCK PURCHASE PLAN
In August 2000, we adopted our Employee Stock Purchase Plan covering an
aggregate of 250,000 shares of common stock. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Code. Under the Purchase Plan, the board may authorize participation by
eligible employees, including officers, in periodic offerings following the
commencement of the Purchase Plan. The initial offering under the Purchase Plan
will commence on the effective date of this offering.
Unless otherwise determined by the board, employees are eligible to
participate in the Purchase Plan only if they are employed by us or our
subsidiary designated by the board for at least 20 hours per week and are
customarily employed by us or our subsidiary designated by the board for at
least five months per calendar year. Employees who participate in an offering
may have up to 15% of their earnings withheld under the Purchase Plan. The
amount withheld is then used to purchase shares of the common stock on specified
dates determined by the board. The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the
common stock at the commencement date of each offering period or the relevant
purchase date. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment with us.
In the event of a merger, reorganization, consolidation or liquidation
involving our company, the board has discretion to provide that each right to
purchase common stock will be assumed or an equivalent right substituted by the
successor corporation, or the board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The board has the
authority to amend or terminate the Purchase Plan, provided, however, that no
such action may adversely affect any outstanding rights to purchase common
stock.
SUPPLEMENTAL RETIREMENT PLAN FOR EXECUTIVES
Eligible employees are entitled to participate in Titan's Supplemental
Retirement Plan for Executives. Titan's compensation committee has the sole
discretion to determine which executives are eligible to participate in the
Supplemental Retirement Plan for Executives. Each participant must defer at
least $2,000 of his or her salary per year, and each participant may defer up to
the maximum percentage of the participant's base salary permitted by Titan's
compensation committee. Titan matches each participant's salary deferral
contributions dollar-for-dollar, not including bonus deferral
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contributions. In order to receive Titan's matching contribution made during
that year, the participant must remain an employee of Titan or its subsidiaries
until the end of the calendar year. The deferrals accrue interest yearly at a
rate equal to the effective yield on constant-maturity three-year U.S. Treasury
notes as of the first business day of each October of the previous year plus 3%.
Participants who are at least 62 years old and have participated in the
Supplemental Retirement Plan for Executives for at least 6 years are entitled to
receive monthly payments from their account. If a participant terminates
employment with Titan before this time, the participant is entitled to receive
his or her deferral amounts and percentage of the matching contributions and
interest earnings based on his or her length of employment with Titan. In the
event of a change in control, the account balance for each participant becomes
fully vested and, at the participant's discretion, is fully due and payable
within 90 days of the participant's termination of employment with Titan.
TAX QUALIFIED PLANS
We are a participating employer in The Titan Corporation Consolidated
Retirement Plan. The Consolidated Plan is composed of two portions: (1) the
401(k) portion of the Consolidated Plan and (2) the Employee Stock Ownership
Plan portion of the Consolidated Plan as set forth below:
- 401(k) PLAN. The 401(k) portion of the Consolidated Plan is intended to be
a tax-qualified defined contribution plan under Subsections 401(a) and
401(k) of the Code. All employees who are at least 21 years old are
eligible to participate and may enter the 401(k) plan as of any
January 1, April 1, July 1 or October 1. Each participant may contribute
up to 15% of his or her pre-tax gross compensation to the savings plan,
subject to statutorily prescribed annual limits, which limit is $10,500 in
calendar year 2001. We match employee contributions dollar-for-dollar, up
to a maximum of 5% of each participant's compensation. Each participant's
contributions, the matching contributions, and the corresponding
investment earnings, are generally not taxable to the participants until
withdrawn from the plan. Employee contributions and our matching
contributions are held in trust and invested by the savings plan trustee
as required by law. Individual participants may direct the trustee to
invest their accounts in authorized investment alternatives.
- EMPLOYEE STOCK OWNERSHIP PLAN. The Employee Stock Ownership Plan portion
of the Consolidated Plan is intended to be a tax-qualified defined
contribution plan under Subsection 401(a) and an employee stock ownership
plan under 4975(e)(7) of the Code. This portion of the plan is designed to
invest primarily in employer securities. All employees who are at least
21 years old and employed on December 31 of any plan year in which we make
a discretionary contribution are eligible to receive a portion of such
contribution. Our contributions are discretionary. Our contributions, and
the corresponding investment earnings, are generally not taxable to the
participants until withdrawn. Contributions are held in trust as required
by law. Qualified individual participants who are at least 55 years old
and have participated in the Employee Stock Ownership Plan portion of the
Consolidated Plan for at least 10 years may direct the trustee to invest
up to 50% of their accounts in authorized investment alternatives.
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent permitted by Delaware law, except with respect to proceedings
initiated by such persons that are not specifically exempted in our bylaws. We
are also empowered under our bylaws to enter into indemnification contracts with
our directors and executive officers and to purchase insurance on behalf of any
person we are required or permitted to indemnify. Pursuant to this provision, we
have entered into indemnification agreements with each of our directors and
executive officers.
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In addition, our certificate of incorporation provides that no director will
be personally liable to us or our stockholders for monetary damages for any
breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derives an improper personal
benefit.
Our certificate of incorporation also provides that if the Delaware General
Corporation Law is amended after the approval by our stockholders of the
restated certificate to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of our
directors shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended. The provision does not affect a
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
GENERAL
As long as Titan beneficially owns a majority of our voting power, Titan
will have the ability to elect all of the members of the board of directors and
ultimately control our management. Titan may control or influence all decisions
relating to our acquisitions, dispositions, credit facilities and borrowing
levels, the sale of our equity or debt securities, and the declaration and
payment of any dividends on our common stock. In addition, Titan will be able to
determine the outcome of any matter submitted to a vote of our stockholders for
approval and to cause or prevent us from engaging in a transaction that involves
a change in control. Dr. Gene Ray, the chairman of our board of directors, was
during our fiscal years ended December 31, 1999 and December 31, 2000, and is
currently the chairman of the board of directors, president and chief executive
officer of Titan. Furthermore, Messrs. Costanza and DeMarco, each of whom is one
of our executive officers, also are executive officers of Titan.
Titan could decide to sell or otherwise dispose of all or a portion of our
common stock that it holds, whether those shares be Class B or Class A common
stock.
Titan has advised us that its current intent is to continue to hold all of
its outstanding shares of Class B common stock. Titan has also generally agreed,
in connection with this offering, not to sell or otherwise dispose of any shares
of our common stock or any security convertible into or exchangeable or
exercisable for our common stock for a period of 180 days after the date of this
prospectus, without the prior written consent of Merrill Lynch. After such
180-day period, Titan may sell or otherwise dispose of its Class B common stock.
Titan must beneficially own at least 80% of the total voting power of our
capital stock and 80% of any class of nonvoting capital stock to be able to
effect a tax-free distribution of its SureBeam stock to its stockholders in the
future. We currently do not have any class of nonvoting capital stock. Neither
Titan nor SureBeam currently contemplates that Titan will distribute its
majority interest to the Titan stockholders in the immediate future. We expect
that Titan will continue to own at least 80% of the total voting power of our
capital stock after completion of this offering. Titan may limit our future sale
of equity securities to preserve its ownership percentage and control of us.
Our bylaws provide that we shall indemnify our directors and officers to the
fullest extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. We also intend to
enter into indemnification agreements with our officers and directors. These
agreements may require us to pay or reimburse directors or officers for claims
brought against them and to advance expenses incurred by them in defending
claims. We also will maintain directors' and officers' insurance if available on
reasonable terms.
The Delaware General Corporation Law governs our transactions with related
parties. We expect to have three directors who are independent from us and Titan
on our board within 90 days following the completion of the offering. In
connection with significant transactions between us and an interested party,
including significant transactions between us and Titan, the Delaware General
Corporation Law requires approval by a majority of the members of our board of
directors who do not have an interest in the proposed transaction.
CONTRIBUTION AGREEMENT
In August 2000, we entered into a contribution agreement with Titan, a
holder of more than five percent of our outstanding common stock, and with
Dr. Gene W. Ray, the chairman of our board of directors. Under the contribution
agreement, Titan contributed to us the assets and liabilities associated with
Titan's electronic food irradiation business in exchange for 46,583,850 shares
of our Class B common stock and Dr. Ray contributed all of the shares he owned
in our operating company, SB Operating Co., which had no operations and limited
assets, in exchange for 232,919 shares of our
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Class A common stock so that we could become the sole owner of SB Operating Co.
We structured the contribution agreement to create a holding company for SB
Operating Co. to reduce the risk that Titan's extension of credit to us would
cause the contribution to be recharacterized as a taxable transaction.
INTERCOMPANY CONTRACTUAL ARRANGEMENTS
Our relationship with Titan also is governed by a corporate services
agreement and a tax allocation agreement. In addition, we have issued a
subordinated, unsecured promissory note in favor of Titan and, in connection
with the contribution agreement, we have entered into a separate license
agreement with Titan. We have not negotiated these agreements at arms' length.
We have not undertaken any negotiations with unaffiliated third parties with
respect to these agreements. Accordingly, we cannot assess whether the terms
obtained from Titan are more or less favorable than could be obtained with
unaffiliated third parties. As a result, the prices we pay to Titan for these
services may be higher than the costs we would incur from purchasing these
services from third parties or hiring additional staff to perform these
services.
The following are summaries of these agreements, which have been filed as
exhibits to the registration statement relating to this prospectus.
CORPORATE SERVICES AGREEMENT
Titan provides to us routine and ordinary corporate services, including
financial, insurance, accounting, employee benefits, payroll, tax and legal
services. Titan also provides us corporate planning, government relations and
corporate quality assurance services. We share administrative systems with
Titan, including Titan's accounting system and human resource system. Because
Titan engages in government contracts work, Titan allocates costs to its
subsidiaries based upon government cost accounting requirements. We pay Titan
for human resources services based upon our percentage of the total number of
Titan group employees. We pay for other corporate services based upon the
average of three percentages: (1) the percentage of our payroll to the total
payroll of the Titan group, (2) the percentage of our operating revenues to the
total operating revenues of the Titan group and (3) the percentage of our
average net book value which is the sum of our tangible capital assets plus
inventories to the total average net book value of the tangible capital assets
plus inventory of the Titan group as of the end of the last fiscal year and as
of the final day of each calendar quarter in the current fiscal year. Titan may
adjust its fees based upon its assessment of our relative use of these services.
We have subleased approximately 5,600 square feet in San Diego, California
from Titan. Under the corporate services agreement, Titan provides us rent,
maintenance, property taxes, utilities, landlord pass-through expenses, property
insurance, reception desk services, telephone services and centralized mail and
postage and other services. We pay Titan an annual fee determined by our
percentage of Titan's annual costs for this facility. Our percentage is based
upon the percentage of the total square feet in the facility that we occupy.
The initial term of the corporate services agreement expires on
December 31, 2001. This agreement renews automatically unless we elect not to
renew by giving Titan notice. If the agreement is terminated, we cannot
guarantee that we will be able to replace these services in a timely manner or
at comparable cost.
TAX ALLOCATION AGREEMENT
As long as Titan maintains beneficial ownership of at least 80% of the total
voting power of our capital stock and 80% of the total value of our outstanding
common stock, we will be included in Titan's consolidated federal income tax
returns.
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We and Titan have entered into a tax allocation agreement. Under the tax
allocation agreement, we have agreed to pay to the applicable tax authorities an
amount generally equal to the tax liability that we would have incurred if we
had prepared and filed a separate return, although we will not be filing a
separate return. Titan will determine the amount of separate taxable income we
would realize and the tax liability and expense we would incur on such a
separate return. In computing this separate tax liability, our tax attributes,
including net operating loss and tax credit carryovers, will be deemed to be the
amount that we would have had if we had always owned the businesses transferred
to us by Titan. Under the terms of our tax allocation agreement with Titan, if
Titan offsets taxable gains with our losses, Titan will have to compensate us in
cash for the benefit it receives for its use of our losses.
As a member of the Titan group for purposes of filing consolidated federal
income tax returns, we will be liable for the federal income tax of the Titan
group if Titan or any member of the group fails to pay its taxes. Titan will
indemnify us against any taxes for which Titan is liable and any costs and
expenses arising out of Titan's failure to pay its share of taxes.
ALLOCATED COSTS
Tax, administrative, corporate services and facilities costs were
approximately $1.0 million and $827,000 for the years ended December 31, 1999
and 2000, respectively. Although the corporate services agreement and tax
allocation agreement were not in place until August 4, 2000, these costs were
allocated to us by Titan as if the parties had entered into those agreements on
January 1, 1999.
HAWAII PRIDE
Titan has agreed that upon our acquisition of any equity interest in Hawaii
Pride, it will guarantee a percentage amount of the USDA loan to Hawaii Pride
equal to the percentage of our equity interest in Hawaii Pride.
EMPLOYEE BENEFIT PLANS
Our employees are eligible to participate in the Titan benefit plans. Those
plans include a 401(k) plan, an employee stock ownership plan, a non-qualified
executive deferred compensation plan, an employee stock purchase plan, and a
health and welfare cafeteria plan. The direct cost of these plans for our
employees are charged by Titan to us.
LICENSE AGREEMENT
In connection with the contribution agreement, we entered into a separate
license agreement with Titan. Under the terms of the license agreement, we
granted Titan an exclusive, fully paid, royalty free, perpetual license to use
our technology for medical equipment sterilization applications. Under the
license agreement, Titan has irrevocably assigned to us its right, title and
interest in any inventions or discoveries Titan may make through the use of the
technology we licensed to it. Titan has also agreed to share one half the costs
of maintaining and pursuing patent protection for our technology we licensed to
Titan under the license agreement.
SUBORDINATED PROMISSORY NOTE
As of December 31, 2000 and February 28, 2001, we owed approximately
$58.1 million and $64.6 million, respectively, to Titan under a subordinated,
unsecured promissory note. Under this note, Titan has agreed to lend us a
maximum of $75 million. Amounts unborrowed under the note cannot be canceled by
Titan. The amount outstanding under the note is due in August 2005 and bears
interest, payable quarterly, at the greater of the rate of 10% per annum or
Titan's effective weighted average interest rate under its senior credit
facility, subject to applicable limits on interest rates established by law.
Titan's effective weighted average interest rate is calculated at any given
period of time by
64
multiplying the daily balance of Titan's total bank debt outstanding times the
applicable interest rate for that day, which yields an interest expense for that
day. The sum of the daily interest expense amounts is divided by the sum of the
daily balances of the total bank debt outstanding to yield a daily effective
weighted average interest rate that is then multiplied by 365 to yield an annual
effective weighted average interest rate. Titan's effective weighted average
interest rate under its senior credit facility as of December 31, 2000 was
10.53%. We may, with Titan's approval, prepay amounts outstanding under the
promissory note with the net proceeds of any asset sales we make that are not in
the ordinary course of business or if we obtain a credit facility from a third
party lender and the facility permits the use of proceeds to repay existing
indebtedness. We cannot use any of the proceeds of this offering to pay amounts
outstanding under the promissory note or under any indebtedness we incur to
refinance the promissory note. To date, we have not made any payments under the
promissory note.
OTHER RELATED PARTY TRANSACTIONS
Pursuant to our reorganization with Titan, we assumed a loan agreement with
Larry Oberkfell, our President and Chief Executive Officer. The loan agreement
was for a principal of $375,000 and bears interest at 6.5% per year. The balance
outstanding under the loan agreement as of December 31, 2000 is $300,000. The
purpose of the loan agreement was to compensate Mr. Oberkfell for deferred bonus
payments from his previous employer he forfeited as a result of accepting his
position with SureBeam. We will forgive this loan over a five year period unless
Mr. Oberkfell voluntarily terminates his employment with us or if we terminate
him for cause.
65
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of common stock as of December 31, 2000 by:
- each person who is known by us to own beneficially more than five percent
of our common stock;
- each of our directors and named executive officers; and
- all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person or a group and the percentage ownership of that
person or group, shares of our common stock subject to options or warrants held
by that person or group currently exercisable or exercisable within 60 days of
December 31, 2000 are deemed outstanding. These shares, however, are not deemed
outstanding for computing the percentage ownership of any other person. Except
as indicated by footnote, and subject to community property laws where
applicable, the stockholders named in the table below have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them. Percentage ownership is based on 49,052,792 shares
of common stock outstanding as of December 31, 2000, together with applicable
options and warrants for each stockholder. Unless otherwise indicated, the
address of each person listed below is in the care of SureBeam Corporation, 3033
Science Park Road, San Diego, California 92121.
SHARES BENEFICIALLY OWNED
-------------------------------------------
PERCENT BEFORE PERCENT AFTER
BENEFICIAL OWNER NUMBER OFFERING OFFERING
---------------- ---------- -------------- -------------
The Titan Corporation(1).................................... 46,583,850 95.0% 83.6%
Thomas Allen(2)............................................. 372,669 * *
Kevin K. Claudio(2)......................................... 93,167 * *
Susan Golding............................................... -- -- --
Gary Loda(2)................................................ 361,023 * *
Larry A. Oberkfell(2)....................................... 465,839 * *
Gene W. Ray, Ph.D.(2)....................................... 465,838 * *
Donald Segal(2)............................................. 116,459 * *
All executive officers and directors as a group(2).......... 2,340,830 4.6% 4.0%
------------------------
* Represents beneficial ownership of less than one percent
(1) Represents shares of Class A common stock issuable upon conversion of
46,583,850 shares of Class B common stock currently held by Titan. Titan has
pledged its shares of our Class B common stock as security for its
obligations under its credit facility. If an unremedied default occurs under
that credit facility, the lenders under this credit facility could cause all
the shares of our Class B common stock held by Titan to be registered in the
name of its agent, which would result in a change of control of us. Upon
completion of this offering, the number of shares owned by Titan will
represent approximately 98% of our voting power.
(2) Includes shares which the specified executive officers and directors have
the right to acquire within 60 days of December 31, 2000 pursuant to
outstanding options, as follows:
- Thomas Allen, 372,669 shares;
- Kevin K. Claudio, 93,167 shares;
- Gary Loda, 361,023 shares;
- Larry A. Oberkell, 465,839 shares;
- Gene W. Ray, 232,919 shares;
- Donald Segal, 116,459 shares; and
- all executive officers and directors as a group, 2,107,912 shares.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 shares of Class A
common stock, $0.001 par value per share, 50,000,000 shares of Class B common
stock, $0.001 par value per share and 5,000,000 shares of preferred stock,
$0.001 par value per share. These figures for our authorized Class A and
Class B common stock reflect the increases in our authorized common stock
described in the "Capitalization" section of this prospectus. As of the date
hereof, 232,919 shares of our Class A common stock and 46,583,850 shares of our
Class B common stock are issued and outstanding. None of our shares of preferred
stock is issued and outstanding. All of our Class B common stock is held by
Titan. Warrants to purchase 2,236,023 shares of Class A common stock are issued
and outstanding, which will expire if not exercised before completion of this
offering. Of the 200,000,000 shares of Class A common stock authorized,
6,700,000 are being offered in this offering, 46,583,850 shares will be reserved
for issuance upon conversion of Class B common stock into Class A common stock
and 10,395,937 shares have been reserved for issuance pursuant to our employee
benefits plans. An additional 1,005,000 shares of Class A common stock will be
offered in this offering if the underwriters' over-allotment is exercised in
full.
COMMON STOCK
VOTING RIGHTS. The holders of Class A common stock and Class B common stock
generally have identical rights except that holders of Class A common stock are
entitled to one vote per share while holders of Class B common stock are
entitled to ten votes per share on all matters to be voted on by stockholders.
Holders of shares of Class A common stock and Class B common stock are not
entitled to cumulate their votes in the election of directors. Generally, all
matters to be voted on by stockholders must be approved by a majority of the
votes entitled to be cast by all shares of Class A common stock and Class B
common stock present in person or represented by proxy, voting together as a
single class, subject to any voting rights granted to holders of any preferred
stock. Except as otherwise provided by law, and subject to any voting rights
granted to holders of any outstanding preferred stock, amendments to our
certificate of incorporation generally must be approved by a majority of the
combined voting power of all Class A common stock and Class B common stock
voting together as a single class. However, amendments to our certificate of
incorporation that would alter or change the powers, preferences or special
rights of the Class A common stock or the Class B common stock so as to affect
them adversely also must be approved by a majority of the votes entitled to be
cast by the holders of the shares affected by the amendment, voting as a
separate class. Notwithstanding the foregoing, any amendment to our certificate
of incorporation to increase the authorized shares of any class or authorize the
creation, authorization or issuance of any securities convertible into, or
warrants or options to acquire, shares of any class or classes of stock shall be
approved by the affirmative vote of the holders of a majority of the votes to be
cast by the holders of the Class A common stock and Class B common stock, voting
together as a single class.
DIVIDENDS. Holders of Class A common stock and Class B common stock will
share in an equal amount per share in any dividend declared by the board of
directors, subject to any preferential rights of any outstanding preferred
stock. Dividends consisting of shares of Class A common stock and Class B common
stock may be paid only as follows: (1) shares of Class A common stock may be
paid only to holders of Class A common stock and shares of Class B common stock
may be paid only to holders of Class B common stock and (2) shares shall be paid
proportionally with respect to each outstanding share of Class A common stock
and Class B common stock.
CONVERSION. Each share of Class B common stock is convertible at the
holder's option into one share of Class A common stock. Additionally, each share
of Class B common stock shall automatically convert into one share of Class A
common stock if at any time prior to a tax-free-spin-off:
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- the number of outstanding shares of Class B common stock owned by the
following entities or persons represents less than 50% of the total voting
power of SureBeam; or
- such shares of Class B common stock are transferred to an entity or person
other than the following entities or persons:
-- Titan,
-- any of Titan's subsidiaries,
-- any single unrelated person who receives shares of Class B common
stock representing more than 50% of our outstanding common stock from
Titan or any of its subsidiaries in a single transaction, or
-- any subsidiary of that unrelated person.
If SureBeam later determines that it is in its best interest to have Titan
spin-off its Class B common stock to the stockholders of Titan and Titan elects
to effect the spin-off, then the Class B common stock shall no longer be
convertible into shares of Class A common stock at the option of the holder
thereof. The shares of Class B common stock shall automatically convert into
shares of Class A common stock on the fifth anniversary of the tax-free
spin-off, unless prior to such transaction, Titan, or an unrelated person, as
the case may be, delivers to SureBeam an opinion of counsel reasonably
satisfactory to SureBeam to the effect that (1) such conversion could adversely
affect the ability of Titan, or the unrelated person, as the case may be, to
obtain a favorable ruling from the Internal Revenue Service that the transfer
would be a tax-free spin-off or (2) the Internal Revenue Service has adopted a
general non-ruling policy on tax-free spin-offs and that such conversion could
adversely affect the status of the transaction as a tax-free spin-off, in which
case no such conversion shall take place.
OTHER RIGHTS. On liquidation, dissolution or winding up of SureBeam, after
payment in full of the amounts required to be paid to holders of preferred
stock, if any, all holders of common stock, regardless of class, are entitled to
share ratably in any assets available for distribution to holders of shares of
common stock. No shares of either class of common stock are subject to
redemption or have preemptive rights to purchase additional shares of common
stock. Upon consummation of the offering, all the outstanding shares of Class A
common stock and Class B common stock will be legally issued, fully paid and
nonassessable.
PREFERRED STOCK
Under our certificate of incorporation, our board of directors has the
authority, without further action by stockholders, to designate up to 5,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon the preferred stock, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, liquidation preference and sinking fund
terms, any or all of which may be greater than the rights of the common stock.
The issuance of preferred stock could adversely affect the voting power of
holders of common stock and reduce the likelihood that common stockholders will
receive dividend payments and payments upon liquidation. The issuance could have
the effect of decreasing the market price of the common stock. The issuance of
preferred stock also could have the effect of delaying, deterring or preventing
a change in control of SureBeam. We have no present plans to issue any
additional shares of preferred stock.
REGISTRATION RIGHTS
In May 2000, we issued warrants to each of Cloverleaf Cold Storage Co., or
Cloverleaf, and Applied Power Associates, Inc., or APA, to purchase shares of
our capital stock. The holders of these warrants will exercise these warrants
concurrent with the closing of this offering for a total of 2,236,023 shares of
our Class A common stock. The holders of these warrants have registration rights
under these warrants. If we
68
propose to register any of our securities under the Securities Act, they have
the right to require us to use our best efforts to include all or a portion of
their shares of Class A common stock in such registration. The managing
underwriter, if any, of any such offering will have the right to limit or
exclude registrable securities from such registration. In connection with this
offering, each investor has waived their right to our obligations under the
above mentioned registration rights to cause their shares of our Class A common
stock to be included in this offering and to comply with the specific notice
requirements of the registration rights with respect to this offering. These
registration rights do not apply to registrations in connection with our
employee benefit plans, a dividend or interest reinvestment plan, or mergers,
consolidations and acquisitions of assets. The warrants provide that these
registration rights will terminate three years after the applicable date of the
warrant.
ANTI-TAKEOVER PROVISIONS
DELAWARE LAW. We are governed by the provisions of Section 203 of the
Delaware General Corporation Law. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved by the corporation's board of directors and the
vote of at least 66 2/3% of the outstanding voting stock of the corporation that
is not owned by the "interested stockholder." Generally, a "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns or, within three prior years,
did own, 15% or more of the corporation's outstanding voting stock. Since our
board of directors approved the contribution transaction where Titan acquired
greater than a 15% interest in our outstanding voting stock, Titan is not
considered an "interested stockholder" under Section 203. The statute could have
the effect of delaying, deferring or preventing a change in our control.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS. Our certificate of
incorporation and bylaws provide that the board of directors will be divided
into three classes of directors, with each class serving a staggered three-year
term. The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain control
of us and may maintain the composition of the board of directors, as the
classification of the board of directors generally increases the difficulty of
replacing a majority of directors. Our certificate provides that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing. In addition, our bylaws provide that special meetings of our
stockholders may be called only by the Chairman of the board of directors, our
Chief Executive Officer, or by the board of directors pursuant to a resolution
adopted by a majority of the total number of authorized directors. Our
certificate also specifies that the authorized number of directors may be
changed only by resolution of the board of directors and does not include a
provision for cumulative voting for directors. Under cumulative voting, a
minority stockholder holding a sufficient percentage of a class of shares may be
able to ensure the election of one or more directors. These and other provisions
contained in our amended certificate and bylaws could delay or discourage
transactions involving an actual or potential change in control of us or our
management, including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices. Such provisions could also
limit the ability of stockholders to remove current management or approve
transactions that stockholders may deem to be in their best interests and could
adversely affect the price of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Class A common stock is American
Stock Transfer & Trust Co.
QUOTATION ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET
The Nasdaq National Market has approved our Class A common stock for
quotation under the trading symbol "SURE."
69
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices. Furthermore, since only a
limited number of shares will be available for sale shortly after this offering
because of contractual and legal restrictions on resale, sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect prevailing market prices and our ability to raise equity
capital in the future.
Upon completion of this offering, based on shares outstanding as of
December 31, 2000, we will have 55,752,792 shares of common stock outstanding,
assuming the exercise of outstanding warrants to purchase 2,236,023 shares of
Class A common stock that will expire if not exercised before the completion of
this offering, and assuming no exercise of options after December 31, 2000. Of
these shares, the 6,700,000 shares sold in this offering, plus any shares issued
upon exercise of the underwriters' over-allotment option, will be freely
transferable without restriction or registration under the Securities Act,
except for shares purchased by any of our existing "affiliates," which generally
include officers, directors or 10% shareholders, as that term is defined in
Rule 144 under the Securities Act. The remaining 49,052,792 shares of common
stock outstanding upon completion of this offering are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered, or if they qualify for an
exemption from registration under Rule 144, 144(k) or 701 promulgated under the
Securities Act, each of which is summarized below.
Including our directors and executive officers holding substantially all of
the outstanding options to purchase our Class A common stock, holders of a total
of 49,052,792 shares of common stock, have entered into lock-up agreements
generally providing that they will not, without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated., directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock
for a period of 180 days after the date of this prospectus. We have entered into
a similar agreement with Merrill Lynch. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
will not be eligible for sale until these agreements expire or are waived by
Merrill Lynch. Taking into account the lock-up agreements, and assuming Merrill
Lynch does not release the parties from these agreements, the following shares
will be eligible for sale in the public market at the following times:
- beginning on the effective date of this offering, 6,700,000 shares will be
immediately available for sale in the public market;
- beginning 180 days after the date of this prospectus, the expiration date
of the lock-up agreements, approximately 232,919 shares of Class A common
stock and 46,583,850 shares of Class B common stock held by Titan will be
eligible for sale pursuant to Rules 144, 144(k) and 701. Shares eligible
to be sold by affiliates pursuant to Rule 144 are subject to the volume
restrictions described below. Titan must beneficially own at least 80% of
the total voting power of our capital stock and 80% of any class of
nonvoting capital stock to be able to effect a tax-free distribution of
its SureBeam stock to its stockholders in the future. Neither Titan nor
SureBeam currently contemplates that Titan will distribute its majority
interest to the Titan stockholders in the immediate future; and
- an additional 2,236,023 shares will become eligible for sale pursuant to
Rule 144 beginning approximately one year after the date of this
prospectus. Shares eligible to be sold by affiliates pursuant to Rule 144
are subject to the volume restrictions described below.
70
RULE 144. In general, under Rule 144 as currently in effect, beginning
90 days after the date of this prospectus, a person, or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year, including the holding period of any prior owner other than an affiliate,
is entitled to sell within any three-month period a number of shares that does
not exceed the greater of (1) 1% of our then outstanding shares of common stock,
approximately 557,527 shares immediately after this offering, or (2) the average
weekly trading volume of our common stock on the Nasdaq National Market during
the four calendar weeks preceding the date on which notice of the sale is filed
with the SEC. Sales under Rule 144 are also subject to manner of sale
provisions, notice requirements and the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the three months preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, may sell such shares without complying with the manner of sale, public
information, volume limitation, or notice provisions of Rule 144.
RULE 701. Beginning 90 days after the effective date of this prospectus,
subject to contractual restrictions, any of our employees, consultants or
advisors who purchased shares from us prior to the closing of this offering
pursuant to a written compensatory plan or contract may be entitled to rely on
the resale provisions of Rule 701. Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that persons other than
affiliates may sell shares in reliance on Rule 144 without having to comply with
the holding period, public information, volume limitation, or notice provisions
of Rule 144.
STOCK PLANS. As of December 31, 2000, options to purchase 7,714,269 shares
of common stock pursuant to our Nonstatutory Stock Option Plan were outstanding,
of which 2,175,452 shares were exercisable. No shares remain available for grant
under our Nonstatutory Stock Option Plan. In addition we have reserved 2,170,800
shares of common stock for future issuance under our 2000 Stock Option and
Incentive Plan and 250,000 shares of common stock for future issuance under our
2000 Employee Stock Purchase Plan. As of December 31, 2000, options to purchase
349,374 shares of common stock pursuant to our 2000 Stock Option and Incentive
Plan were outstanding, of which no shares were exercisable. No shares have been
issued to date under these plans.
After the closing of this offering, we intend to file registration
statements under the Securities Act to register shares to be issued pursuant to
our stock plans. Such registration statements are expected to become effective
immediately upon filing, and shares covered by such registration statements will
then become eligible for sale in the public market. As a result, shares issued
pursuant to our Nonstatutory Stock Option Plan, our 2000 Stock Option and
Incentive Plan and our 2000 Employee Stock Purchase Plan, after the
effectiveness of such registration statements, also will be freely transferable
in the public market, subject to Rule 144 limitations applicable to affiliates,
vesting restrictions and expiration of lock-up agreements.
LOCK-UP AGREEMENTS. Executive officers and directors holding substantially
all of the outstanding options to purchase our Class A common stock and all of
our stockholders have signed lock-up agreements. Under these agreements, they
have agreed, among other things, not to transfer or dispose of any shares of our
common stock, or securities convertible into shares of common stock, for a
period of 180 days after the date of this prospectus. Transfers or dispositions
can be made sooner with the prior written consent of Merrill Lynch. This consent
may be given at any time without public notice.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First
Boston Corporation, First Union Securities, Inc. and A.G. Edwards & Sons, Inc.
are acting as representatives of the underwriters named below. Subject to the
terms and conditions described in a purchase agreement between us and the
underwriters, we have agreed to sell to the underwriters, and the underwriters
severally and not jointly have agreed to purchase from us, the number of shares
listed opposite their names below.
NUMBER
UNDERWRITER OF SHARES
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................... 2,520,000
Credit Suisse First Boston Corporation...................... 2,220,000
First Union Securities, Inc................................. 960,000
A.G. Edwards & Sons, Inc.................................... 300,000
BB&T Capital Markets, A division of Scott & Stringfellow,
Inc....................................................... 100,000
Burnham Securities Inc...................................... 100,000
Davenport & Company LLC..................................... 100,000
Gerard Klauer Mattison & Co., Inc........................... 100,000
Gilford Securities Incorporated............................. 100,000
Gruntal & Co., L.L.C........................................ 100,000
Wells Fargo Van Kasper, LLC................................. 100,000
---------
Total............................................. 6,700,000
=========
Subject to the terms and conditions in the purchase agreement, the
underwriters have agreed to purchase all the shares of our common stock being
sold pursuant to the purchase agreement if any of these shares of our common
stock are purchased. If an underwriter defaults, the purchase agreement provides
that the purchase commitments of the nondefaulting underwriters may be increased
or the purchase agreement may be terminated.
We and Titan have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
The underwriters are offering the shares of our common stock, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of legal matters by their counsel, including the validity of the shares, and
other conditions contained in the purchase agreement, such as the receipt by the
underwriters of officers' certificates and legal opinions. The underwriters
reserve the right to withdraw, cancel or modify offers to the public and to
reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares of our common stock to the public at the initial public
offering price on the cover page of this prospectus and to dealers at that price
less a concession not in excess of $.40 per share. The underwriters may allow,
and the dealers may reallow, a discount not in excess of $.10 per share to other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
72
The following table shows the public offering price, underwriting discount
to be paid by us to the underwriters and the proceeds, before expenses, to us.
This information assumes either no exercise or full exercise by the underwriters
of their over-allotment options.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price............................ $10.00 $67,000,000 $77,050,000
Underwriting discount............................ $.70 $4,690,000 $5,393,500
Proceeds, before expenses, to SureBeam........... $9.30 $62,310,000 $71,656,500
The expenses of this offering, not including the underwriting discount, are
estimated at $1,852,000 and are payable by us.
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters to purchase up to
1,005,000 additional shares of our common stock at the initial public offering
price less the underwriting discount. The underwriters may exercise this option
for 30 days from the date of this prospectus solely to cover any
over-allotments. If the underwriters exercise this option, each underwriter will
be obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional shares of our common stock proportionate to that
underwriter's initial amount reflected in the above table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 335,000 shares of our common stock offered hereby
to be sold as part of the underwritten offering to certain individuals and
entities designated by us. We have reserved shares for senior executives
affiliated with our customers or prospective customers and for friends of
SureBeam. If these individuals purchase reserved shares, this will reduce the
number of shares available for sale to the general public. Any reserved shares
that are not orally confirmed for purchase within one day of the pricing of this
offering will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We, the executive officers and directors holding substantially all of the
outstanding options to purchase our Class A common stock, and holders of all of
our stock have agreed not to sell or transfer any shares of our common stock for
180 days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch. Specifically, we and these other individuals have
agreed not to directly or indirectly:
- offer, pledge, sell or contract to sell any shares of our common stock;
- sell any option or contract to purchase any shares of our common stock;
- purchase any option or contract to sell any shares of our common stock;
- grant any option, right or warrant for the sale of any shares of our
common stock;
- lend or otherwise dispose of or transfer any shares of our common stock;
- request or demand that we file a registration statement related to any
shares of our common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequences of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
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This lock-up provision applies to shares of our common stock and to
securities convertible into, or exchangeable or exercisable for, or repayable
with, shares of our common stock. It also applies to shares of our common stock
owned now or acquired later by the person executing the agreement or for which
the person executing the agreement later acquires the power of disposition.
Before this offering, there has been no public market for our common stock.
The initial public offering price was determined through negotiations between us
and Merrill Lynch. In addition to prevailing market conditions, the factors
considered in determining the initial public offering price were:
- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;
- our financial information;
- the history of, and the prospects for, our company and the industry in
which we compete;
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues;
- the present state of our development; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares of our common stock may not develop.
It is also possible that after this offering the shares will not trade in the
public market at or above the initial public offering price.
ELECTRONIC DISTRIBUTION
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the Internet Web site maintained by
Merrill Lynch. Other than the prospectus in electronic format, the information
on the Merrill Lynch Web site is not a part of this prospectus.
QUOTATION ON THE NASDAQ NATIONAL MARKET
The Nasdaq National Market has approved our Class A common stock for
quotation under the symbol "SURE."
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares of our common stock is completed, rules
of the Securities and Exchange Commission may limit underwriters and selling
group members from bidding for and purchasing our common stock. However, the
representatives may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain that price.
In connection with the offering, the underwriters may make short sales of
our common stock. Short sales involve the sale by the underwriters at the time
of the offering of a greater number of shares than they are required to purchase
in the offering. Covered short sales are sales made in an amount not greater
than the over-allotment option. The underwriters may close out any covered short
position by either exercising their over-allotment option or purchasing shares
in the open market. In determining the source of shares to close out the covered
short position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the public
offering price at which they may purchase the shares through the over-allotment
option.
74
Naked short sales are sales in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
Similar to other purchase transactions, the purchases by the underwriters to
cover syndicate short positions may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of our common stock may
be higher than it would otherwise be in the absence of these transactions.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
our common stock in the open market to reduce the underwriter's short position
or to stabilize the purchase of such shares, they may reclaim the amount of the
selling commission from the underwriters and selling group members who sold
those shares. The imposition of a penalty bid may also affect the price of the
shares of our common stock in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters make any representation that the representatives or the lead
managers will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
OTHER RELATIONSHIPS
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions.
Titan Corporation has a $425 million credit facility with a syndicate of
lenders represented by Credit Suisse First Boston, New York Branch, an affiliate
of Credit Suisse First Boston Corporation, as lead arranger and administrative
agent for the lenders, and First Union Securities, Inc., as co-arranger and
syndication agent. Both Credit Suisse First Boston Corporation and First Union
Securities are underwriters in the offering.
75
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
on for SureBeam by Cooley Godward LLP, San Diego, California. Certain legal
matters will be passed on for the underwriters by Brown & Wood LLP, New York,
New York.
EXPERTS
The audited financial statements of SureBeam Corporation as of December 31,
1999 and 2000 and for each of the three years in the period ended December 31,
2000 included in this prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered hereby. This prospectus,
which constitutes a part of the registration statement, does not contain all of
the information set forth in the registration statement or the exhibits and
schedules which are part of the registration statement. For further information
with respect to SureBeam and the common stock offered by this prospectus, we
refer you to the registration statement and the exhibits and schedules filed as
part of the registration statement. You may read and copy any document we file
at the SEC's public reference facilities in Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the SEC located at Seven World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may also obtain copies of such materials from the Public
Reference Room of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our
SEC filings are also available to the public from the SEC's website at
http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the SEC. These periodic reports, proxy
statements and other information will be available for inspection and copying at
the SEC's public reference rooms and the website of the SEC referred to above.
76
SUREBEAM CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Pro Forma Financial Information (Unaudited):
Unaudited Pro Forma Financial Information............... F-2
Pro Forma Combined Statement of Operations
(Unaudited)............................................ F-3
Notes to Pro Forma Combined Financial Information
(Unaudited)............................................ F-4
Historical Financial Statements:
Report of Independent Public Accountants................ F-6
Balance Sheets.......................................... F-7
Statements of Operations................................ F-8
Statements of Stockholders' Equity (Deficit)............ F-9
Statements of Cash Flows................................ F-10
Notes to Financial Statements........................... F-11
F-1
SUREBEAM CORPORATION
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information set forth below presents our
results of operations for the year ended December 31, 2000 as if the
contribution by Titan to us of the electronic food irradiation business in
August 2000 had occurred as of January 1, 2000. The unaudited pro forma
financial information presented reflects only the results of operations of our
electronic food irradiation business, as our historical financial information
has been adjusted to eliminate the operations of the medical equipment
sterilization business and the linear electron beam accelerator business which
have been retained by Titan.
The unaudited pro forma financial information presented does not assume the
completion of the initial public offering of the Company's stock as of
December 31, 2000 at the initial public offering price of $10.00 per share. In
connection with an initial public offering, or other similar liquidity event,
stock options granted under the Nonstatutory Stock Option Plan will be converted
from variable plan options to fixed plan options. Accordingly, deferred
compensation will be recorded to the extent that the fair market value on the
date of completion of an offering exceeds the exercise price. This deferred
compensation will be recognized over the four year vesting period of the related
options. Based on the initial public offering price of $10.00 per share and
assuming that the offering had been completed as of December 31, 2000, the
Company would have recorded deferred compensation of approximately
$78.6 million. Additionally, since a substantial portion of these options would
have been vested as of December 31, 2000, approximately $33.8 million of the
$78.6 million of deferred compensation would have been recognized as
compensation expense upon completion of the offering, with the balance being
recognized as compensation expense over the remaining four year vesting period
of the options. The unaudited pro forma financial information presented does not
give effect to the additional compensation expense or the resulting income tax
benefit that would have been recognized. If the unaudited pro forma statement of
operations information included the effect of the deferred compensation charges
arising from these options, pro forma net loss would have been $21.7 million or
$0.46 per share, which includes an income tax benefit of approximately
$13.6 million.
The unaudited pro forma financial information has been prepared on the basis
of certain assumptions and estimates made by management. The unaudited pro forma
financial information may not be indicative of the results of operations that
would have been achieved if the contribution of the electronic food irradiation
business had been affected on the date indicated, or which may be achieved in
the future. The unaudited pro forma financial information and notes thereto
should be read in conjunction with "Selected Historical and Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the financial statements of SureBeam Corporation
included elsewhere in this prospectus.
F-2
SUREBEAM CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
SUREBEAM (NOTE 3) SUREBEAM
---------- ----------- ---------
Revenues.................................................... $29,448 $(4,238)(a) $25,210
Cost of revenues............................................ 19,602 (3,864)(a) 15,738
------- ------- -------
Gross profit.............................................. 9,846 (374) 9,472
Selling, general and administrative expenses................ 8,640 (1,126)(b) 7,514
Research and development.................................... 524 (25)(c) 499
------- ------- -------
Income (loss) from operations............................... 682 777 1,459
Interest expense-net........................................ 3,611 157 (d) 3,768
------- ------- -------
Income (loss) before income taxes........................... (2,929) 620 (2,309)
Income tax provision (benefit).............................. (1,130) 248 (e) (882)
------- ------- -------
Net income (loss)........................................... $(1,799) $ 372 $(1,427)
======= ======= =======
Basic earnings (loss) per share:
Net income (loss)......................................... $ (0.04) $ 0.01 $ (0.03)
======= ======= =======
Weighted average shares--basic.............................. 46,817 -- 46,817
======= ======= =======
Diluted earnings (loss) per share:
Net income (loss)......................................... $ (0.04) $ 0.01 $ (0.03)
======= ======= =======
Weighted average shares--diluted............................ 46,817 -- 46,817
======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS UNAUDITED PRO FORMA
FINANCIAL STATEMENT.
F-3
SUREBEAM CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
1. GENERAL
SureBeam Corporation ("SureBeam" or the "Company") was formed in August 2000
in connection with the contribution by The Titan Corporation ("Titan") of the
specified assets, liabilities and operations related to its electronic food
irradiation business. In 1997, a predecessor business to SureBeam had been
established by Titan as a wholly-owned subsidiary. Titan developed its
proprietary electron beam process from technology developed under contracts with
the federal government during the 1980s. Titan has accounted for its electron
beam technology business as a separate business segment since 1993. Prior to
1999, substantially all of the revenues of this segment were derived from
selling medical equipment sterilization systems and from providing medical
equipment sterilization services and, to a lesser extent, from selling electron
beam accelerator systems for use by the federal government.
The historical results of operations of this segment of Titan's operations
are presented herein as the historical results of operations of SureBeam and are
presented as a combination of entities under common control on a historical cost
basis in a manner similar to a pooling of interests. These historical results do
not reflect the results of operations of the electronic food irradiation
business on a stand-alone basis.
2. BASIS OF PRESENTATION
The accompanying unaudited pro forma financial information reflects only the
results of operations of our electronic food irradiation business, as our
historical financial statements have been adjusted to eliminate the operations
of our medical equipment sterilization business and our linear accelerator
business. The pro forma combined statement of operations assumes the
contribution by Titan to SureBeam of the electronic food irradiation business as
described in Note 3 below was consummated on January 1, 2000. The pro forma
combined statement of operations is not necessarily indicative of results that
would have occurred had the contribution been consummated as of the dates
specified or the results that may be achieved in the future.
The unaudited pro forma financial information presented does not assume the
completion of the initial public offering of the Company's stock as of
December 31, 2000 at the initial public offering price of $10.00 per share. In
connection with an initial public offering, or other similar liquidity event,
stock options granted under the Nonstatutory Stock Option Plan will be converted
from variable plan options to fixed plan options. Accordingly, deferred
compensation will be recorded to the extent that the fair market value on the
date of completion of an offering exceeds the exercise price. This deferred
compensation will be recognized over the four year vesting period of the related
options. Based on the initial public offering price of $10.00 per share and
assuming that the offering had been completed as of December 31, 2000, the
Company would have recorded deferred compensation of approximately
$78.6 million. Additionally, since a substantial portion of these options would
have been vested as of December 31, 2000, approximately $33.8 million of the
$78.6 million of deferred compensation would have been recognized as
compensation expense upon completion of the offering, with the balance being
recognized as compensation expense over the remaining four year vesting period
of the options. The unaudited pro forma financial information presented does not
give effect to the additional compensation expense or the resulting income tax
benefit that would have been recognized. If the unaudited pro forma statement of
operations information included the effect of the deferred compensation charges
arising from these options, pro forma net loss would have been $21.7 million or
$0.46 per share, which includes an income tax benefit of approximately
$13.6 million.
F-4
SUREBEAM CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
2. BASIS OF PRESENTATION (CONTINUED)
Certain information normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
has been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The pro forma combined statement of operations should be
read in conjunction with the historical financial statements of SureBeam and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
The historical information in the unaudited pro forma combined statement of
operations for the year ended December 31, 2000 has been derived from the
audited statement of operations of SureBeam for the year ended December 31,
2000. The unaudited pro forma combined balance sheet at December 31, 2000 has
been omitted since the contribution by Titan to SureBeam of the electronic food
irradiation business has been reflected in the historical balance sheet of
SureBeam at December 31, 2000.
3. ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
combined statement of operations:
(a) Revenues and associated cost of revenues related to the medical
equipment sterilization business and the linear accelerator business were
eliminated.
(b) Selling, general and administrative expenses related to the medical
equipment sterilization business and the linear accelerator business,
which consist primarily of sales and marketing activities, were
eliminated. These costs include advertising costs such as participating
in trade shows and related activities associated with the promotion of
the businesses being eliminated. Also eliminated is a portion of general
and administrative expenses allocated by Titan for services provided
under a services agreement that relates to the businesses being
eliminated.
(c) Expenses for research and development activities related to the medical
equipment sterilization business were eliminated.
(d) In connection with the contribution of Titan's electronic food
irradiation business to SureBeam, SureBeam was allocated indebtedness by
Titan in an amount equal to the accumulated net cash funded by Titan in
respect of all of SureBeam's operations, including the medical equipment
sterilization business and the linear accelerator business, since
inception through August 2000, at which time the contribution from Titan
to SureBeam had taken place. Subsequent to the completion of the
contribution from Titan to SureBeam, the Company incurred additional
indebtedness arising from cash funded by Titan. Interest has been imputed
on this amount at 10.53%, Titan's weighted average borrowing rate as of
December 31, 2000. The interest expense is recorded net of interest
income at the historical SureBeam entity that is related to the medical
equipment sterilization business in fiscal 2000; accordingly, such
interest income was not applicable to the pro forma SureBeam presentation
of the electronic food irradiation business and was eliminated.
(e) An income tax provision at 40% relating to income generated by the
medical equipment sterilization business and the linear accelerator
business was provided.
F-5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SureBeam Corporation:
We have audited the accompanying balance sheets of SureBeam Corporation (a
Delaware Corporation and a majority-owned subsidiary of The Titan Corporation)
as of December 31, 1999 and 2000, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 financial statements referred to above present fairly,
in all material respects, the financial position of SureBeam Corporation as of
December 31, 1999 and 2000 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Diego, California
February 12, 2001
F-6
SUREBEAM CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31,
-------------------
1999 2000
-------- --------
ASSETS
Current Assets:
Cash...................................................... $ -- $ --
Accounts receivable--net.................................. 7,240 17,678
Inventory................................................. 2,853 5,765
Prepaid expenses and other................................ 623 4,072
------- --------
Total current assets.................................... 10,716 27,515
Property and equipment--net................................. 12,540 9,362
Intangible assets--net...................................... 80 3,896
Other assets................................................ 588 12,408
------- --------
Total assets............................................ $23,924 $ 53,181
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ 2,969 $ 4,131
Accrued compensation and benefits......................... 532 584
Other current liabilities................................. 649 3,516
------- --------
Total current liabilities............................... 4,150 8,231
------- --------
Subordinated promissory note................................ -- 58,072
Deferred tax liability...................................... 1,487 795
Other long-term liabilities................................. -- 958
------- --------
Total liabilities....................................... 5,637 68,056
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred Stock, $.001 par value,
5,000,000 shares authorized, none issued
and outstanding......................................... $ -- $ --
Class A common stock, $.001 par value, 200,000,000 shares
authorized, 0 and 232,919 issued and outstanding,
respectively............................................ -- --
Class B common stock, $.001 par value, 50,000,000 shares
authorized, 46,583,850 and 46,583,850 issued and
outstanding, respectively............................... 47 47
Additional paid-in-capital................................ 51 5,687
Deferred compensation..................................... (15) (2,584)
Parent company investment................................. 22,526 --
Retained deficit.......................................... (4,322) (18,025)
------- --------
Total stockholders' equity (deficit).................... 18,287 (14,875)
------- --------
Total liabilities and stockholders' equity (deficit).... $23,924 $ 53,181
======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-7
SUREBEAM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
DECEMBER 31,
---------------------------
1998 1999 2000
------- ------- -------
Revenues.................................................... $11,184 $14,339 $29,448
Cost of revenues............................................ 8,909 8,576 19,602
------- ------- -------
Gross profit.............................................. 2,275 5,763 9,846
Selling, general and administrative expenses................ 2,067 4,138 8,640
Research and development.................................... -- -- 524
------- ------- -------
Income from operations...................................... 208 1,625 682
Interest expense--net....................................... 1,154 1,299 3,611
------- ------- -------
Income (loss) before income taxes........................... (946) 326 (2,929)
Income tax provision (benefit).............................. (284) 121 (1,130)
------- ------- -------
Net income (loss)........................................... $ (662) $ 205 $(1,799)
======= ======= =======
Basic earnings (loss) per share:
Net income (loss)......................................... $ (0.01) $ 0.00 $ (0.04)
======= ======= =======
Weighted average shares--basic.............................. 46,584 46,630 46,817
======= ======= =======
Diluted earnings (loss) per share:
Net income (loss)......................................... $ (0.01) $ 0.00 $ (0.04)
======= ======= =======
Weighted average shares--diluted............................ 46,584 53,082 46,817
======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-8
SUREBEAM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
COMMON STOCK ADDITIONAL PARENT RETAINED
---------------------- PAID-IN DEFERRED COMPANY EARNINGS
CLASS A CLASS B CAPITAL COMPENSATION INVESTMENT (DEFICIT) TOTAL
---------- --------- ---------- ------------- ---------- --------- --------
Balances at January 1, 1998.......... $ -- $47 $ -- $ -- $ 16,505 $ (3,865) $ 12,687
Net loss........................... -- -- -- -- -- (662) (662)
Distribution to Titan, net......... -- -- -- -- (233) -- (233)
---------- --- ------ ------- -------- -------- --------
Balances at December 31, 1998........ -- 47 -- -- 16,272 (4,527) 11,792
Net income......................... -- -- -- -- -- 205 205
Titan investment, net.............. -- -- -- -- 6,254 -- 6,254
Proceeds from issuance of common
stock in conjucton with exercise
of stock options................. -- -- 34 -- -- -- 34
Deferred compensation related to
the issuance of stock options.... -- -- 17 (17) -- -- --
Amortization of deferred
compensation..................... -- -- -- 2 -- -- 2
---------- --- ------ ------- -------- -------- --------
Balances at December 31, 1999........ -- 47 51 (15) 22,526 (4,322) 18,287
Net loss........................... -- -- -- -- -- (1,799) (1,799)
Titan investment, net.............. -- -- -- -- 23,642 23,642
Issuance of warrants............... -- -- 2,419 -- -- -- 2,419
Deferred compensation related to
the issuance of stock options.... -- -- 3,217 (3,217) -- -- --
Amortization of deferred
compensation..................... -- -- -- 648 -- -- 648
Impact of reorganization........... -- -- -- -- 11,904 (11,904) --
Conversion of parent company
investment into subordinated
promissory note.................. -- -- -- -- (58,072) -- (58,072)
---------- --- ------ ------- -------- -------- --------
Balances at December 31, 2000........ $ -- $47 $5,687 $(2,584) $ -- $(18,025) $(14,875)
========== === ====== ======= ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-9
SUREBEAM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(662) $ 205 $(1,799)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Nonmonetary research consideration........................ -- -- (4,701)
Depreciation and amortization............................. 877 842 3,059
Deferred income taxes..................................... 56 211 (1,303)
Deferred compensation charge.............................. -- 2 648
Change in operating assets and liabilities, net of the
effect of the reorganization:
Accounts receivable....................................... (22) (3,905) (12,577)
Inventory................................................. (200) (1,398) (3,528)
Prepaid expenses and other................................ (19) (550) (1,767)
Other assets.............................................. 149 (357) (1,235)
Accounts payable.......................................... 208 2,568 1,387
Accrued compensation and benefits......................... 94 81 217
Other accrued liabilities................................. (36) 377 3,775
----- ------- -------
Net cash provided by (used in) operating
activities............................................ 445 (1,924) (17,824)
----- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (212) (4,084) (4,297)
Advances to Hawaii Pride.................................... -- (200) (3,700)
Advances to Tech Ion........................................ -- -- (2,225)
Cash paid for purchase of linear accelerator................ -- -- (2,500)
Cash paid for purchase of intangible assets................. -- (80) (5,000)
----- ------- -------
Net cash used in investing activities................... (212) (4,364) (17,722)
----- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options................. -- 34 --
Titan investment (distribution), net........................ (233) 6,254 23,642
Net effect of reorganization................................ -- -- 11,904
----- ------- -------
Net cash provided by (used in) financing activities......... (233) 6,288 35,546
----- ------- -------
Net change in cash.......................................... -- -- --
Cash at beginning of year................................. -- -- --
----- ------- -------
Cash at end of year....................................... $ -- $ -- $ --
===== ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-10
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
SureBeam Corporation ("SureBeam" or the "Company") was formed in August 2000
in connection with the contribution by The Titan Corporation ("Titan") of
specified assets, liabilities and operations related to its electronic food
irradiation business. Also at the time of the contribution, the Company licensed
to Titan on a royalty-free basis the patent rights for the SureBeam technology
to be used solely for the medical equipment sterilization business, which was
retained by Titan. In 1997, a predecessor business to SureBeam had been
established by Titan as a wholly-owned subsidiary. Titan developed its
proprietary electron beam process from technology developed under contracts with
the federal government during the 1980s. Titan has accounted for its electron
beam technology business as a separate business segment since 1993. Prior to
1999, substantially all of the revenues of this segment were derived from
selling medical equipment sterilization systems and from providing medical
equipment sterilization services and, to a lesser extent, from selling electron
beam accelerator systems for use by the federal government.
Concurrent with the contribution by Titan to SureBeam in August 2000, the
Board of Directors and stockholders approved a 9.31677 for 1 stock split. The
financial statements and all references to common stock contained in these
financial statements and notes thereto give retroactive effect to the stock
split.
The historical results of operations and financial condition of this segment
of Titan's operations are presented herein as the historical results of
operations and financial condition of SureBeam and are presented as a
combination of entities under common control on a historical cost basis in a
manner similar to a pooling-of-interests for all periods presented. These
historical results do not reflect the results of operations and financial
condition of the electronic food irradiation business on a stand-alone basis,
which business was contributed by Titan to SureBeam in August 2000. Accordingly,
the historical results are not indicative of the results that would have
occurred had the contribution been consummated prior to the beginning of each of
the periods presented. In connection with the reorganization in August 2000, the
Company distributed all the assets and liabilities of the medical sterilization
business to its parent. The net assets distributed of $11.9 million is reflected
as a charge to retained earnings (deficit).
The Company faces a number of risks, including but not limited to:
- The market for electronic food irradiation systems and services is at an
early stage of development and the Company is subject to the risks of new
enterprises and the commercialization of a technology that requires
consumer acceptance.
- The Company has little history of generating revenues from sales of its
electronic food irradiation systems and services and may not achieve or
sustain profitability.
- The Company's further development of its electronic food irradiation
systems and services will require significant capital resources to fund
operations, including expansion of its manufacturing capacity and sales
and marketing activities and the building of SureBeam systems and service
centers. As a result, the Company expects to incur losses for the
foreseeable future.
See "Risk Factors" in the accompanying prospectus for a more complete
discussion of risks faced by the Company.
F-11
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION. Revenues derived from providing medical equipment
sterilization and electronic food irradiation services are recorded at the time
services are performed. Revenues derived from sales of medical equipment
sterilization and electronic food irradiation systems under fixed-price
contracts are accounted for using the percentage-of-completion method. The
Company applies the percentage-of-completion method using the cost-to-cost
method whereby revenues are recorded based on the percentage that total costs
incurred bears to the total estimated costs at completion. These contracts to
provide medical equipment sterilization and electronic food irradiation systems
also include the installation and integration into our customers' production
lines. Certain other revenues, principally those arising from the linear
accelerator business, are recognized using the percentage-of-completion method.
Estimated losses on fixed-price contracts are recorded in the period the losses
are determinable. In determining the applicability of the
percentage-of-completion method to accounting for fixed-price contracts, the
Company considers the risks associated with estimating its costs to complete a
contract. If these estimates are deemed unreliable or contain a significant
degree of risk the Company will seek to modify the contract to
time-and-materials or use the completed-contract method. To date, the Company
has not recorded any revenues under the completed-contract method.
PROPERTY AND EQUIPMENT. Property and equipment are stated at acquisition
cost. Depreciation is provided using the straight-line method, with estimated
useful lives of two to fifteen years for leasehold improvements (or the life of
the lease if shorter) and three to seven years for machinery and equipment and
furniture and fixtures. Depreciation on the medical equipment sterilization and
electronic food irradiation systems is based on the units-of-production method,
determined upon hours utilized, which approximates fifteen years.
CAPITALIZED INTEREST. Interest is capitalized on certain assets under
construction, including a facility in Sioux City, Iowa (See Note 8). During
1999, total interest costs were $1.5 million, of which $160,000 were
capitalized. During 2000, net interest costs were $3.9 million, of which
$252,000 were capitalized. There were no interest costs capitalized in 1998.
IMPAIRMENT OF LONG-LIVED ASSETS. Periodically, the Company reviews for
possible impairment its long-lived assets and certain identifiable intangibles
to be held and used. Whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be fully recoverable, asset values are
adjusted accordingly. In evaluating whether an impairment exists, the Company
compares the carrying value of the asset to the estimated undiscounted future
cash flows. If an impairment is deemed to exist, the asset's carrying value is
adjusted to the present value of its estimated future cash flows.
STOCK-BASED COMPENSATION. The Company has elected to adopt the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, the
Company will continue to account for its stock-based compensation plans under
the provisions of APB No. 25.
F-12
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES. The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for deferred income
taxes. Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of temporary differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end.
If it is more likely than not that some portion or all of a deferred tax asset
will not be realized, a valuation allowance is recognized.
The Company and Titan have a Tax Allocation Agreement under which the
Company will be included in Titan's consolidated federal and certain state
income tax returns. The Company believes that the agreement will be structured
so that in the years in which the Company has taxable income, it will pay Titan
amounts comparable to the taxes the Company would have paid if it had filed
separate tax returns. For so long as Titan maintains beneficial ownership of at
least 80% of the total voting power and 80% of the total value of the
outstanding Common Stock, the Company will be included in the consolidated
federal and certain state income tax returns filed by Titan.
MINORITY EQUITY INVESTMENTS. Investments in 20 percent to 50 percent owned
entities where control does not exist are accounted for under the equity method
and investments in less than 20 percent owned entities are accounted for under
the cost method. The Company periodically reviews for possible impairment its
investments in equity investees. Whenever events or changes in circumstances
indicate that the carrying value of an investment may not be fully recoverable,
the investment value is adjusted accordingly. The Company values its warrants in
equity investees at the fair value of the warrant at the time it is received.
PER SHARE INFORMATION. Basic and diluted earnings (loss) per share are
presented in conformity with Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. In
accordance with SFAS 128, basic earnings per share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
Diluted earnings per share include the effects of potentially dilutive
securities using the as-converted and treasury stock methods.
The following data summarize information relating to the per share
computations for continuing operations:
FOR THE YEAR ENDED DECEMBER 31, 2000
---------------------------------------
LOSS (000S) SHARES (000S) PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
----------- ------------- ---------
Basic EPS:
Net loss........................................ $(1,799) 46,817 $(0.04)
Effect of dilutive securities:
Stock options................................... -- -- --
------- ------ ------
Diluted EPS:
Net income (loss) plus assumed conversions...... $(1,799) 46,817 $(0.04)
======= ====== ======
F-13
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------
INCOME
(000S) SHARES (000S) PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
----------- ------------- ----------
Basic EPS:
Net income..................................... $ 205 46,630 $ 0.00
Effect of dilutive securities:
Stock options.................................. -- 6,452 --
----- ------ ------
Diluted EPS:
Net income (loss) plus assumed conversions..... $ 205 53,082 $ 0.00
===== ====== ======
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------
LOSS (000S) SHARES (000S) PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
----------- ------------- ----------
Basic EPS:
Net loss....................................... $ (662) 46,584 $(0.01)
Effect of dilutive securities:
Stock options.................................. -- -- --
------- ------ ------
Diluted EPS:
Net income (loss) plus assumed conversions..... $ (662) 46,584 $(0.01)
======= ====== ======
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of the Company's
financial instruments, including accounts receivable, accounts payable and
accrued liabilities approximate their fair values due to their short-term nature
except for the nonmonetary transaction described in Note 3. Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of trade accounts receivable. The Company believes it is
not exposed to any significant credit risk with respect to its accounts
receivable.
COMPREHENSIVE INCOME. The Company has adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The objective of the statement is to report a measure of all changes in equity
of an enterprise that result from transactions and other economic events in the
period other than transactions with owners. The Company has no components of
comprehensive income.
RESEARCH AND DEVELOPMENT COSTS. Historically, the benefits realized by the
Company were incidental to the work being performed on Titan's contracts with
the federal government and were in the form of Titan's right to retain any
technologies developed as a result of its efforts on those contracts. Since a
significant portion of the research and development efforts expended by the
Company since inception have been funded as a result of work performed under
customer contracts, and therefore included as contract costs, these costs are
not separately identifiable in the statement of operations. Costs associated
with independent research and development activities are expensed as incurred.
The Company incurred $524,000 of expenses related to such independent research
and development activities for the year ended December 31, 2000.
F-14
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
START-UP COSTS. The Company expenses the costs of start-up activities as
incurred in accordance with the provisions of AICPA Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities."
PARENT COMPANY INVESTMENT. The cash receipts and disbursements of the
Company's operations have historically been combined with other Titan cash
transactions and balances. The parent company investment in the accompanying
financial statements reflects the accumulated net cash funded by Titan in
respect of all of SureBeam's operations, including the medical equipment
sterilization business and the linear accelerator business from the inception of
such operations through the respective balance sheet dates.
NEW ACCOUNTING STANDARDS. In March 2000, the Financial Accounting Standards
Board ("FASB") issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation (an Interpretation of APB Opinion No.
25)" ("FIN 44"). Among other issues, this Interpretation clarifies (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The accounting and disclosure
provisions of FIN 44 are effective beginning July 1, 2000. The adoption of FIN
44 did not have a material impact on the Company's financial position or results
of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes the SEC's view in applying generally accepted
accounting principles to revenue recognition in financial statements. Management
believes the Company's accounting policies comply with the provisions of SAB
101.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In June 1999, the effective date of SFAS 133 was amended to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 by Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of Effective Date of
FASB Statement No. 133." The Company anticipates that the adoption of SFAS 133
will not have a material impact on the Company's financial position or results
of operations.
NOTE 3. STRATEGIC TRANSACTIONS
In connection with the Company's agreement with Texas A&M University and the
Agricultural Experiment Station (collectively, "Texas A&M"), SureBeam agreed to
provide three electronic food irradiation systems (collectively, "the system")
pursuant to a ten-year lease with title passing to Texas A&M at the end of the
ten-year term. The sale of the system is manifested by the passage of title to
the system to Texas A&M, which occurs in two stages under the arrangement.
First, immediate conveyance of title to the system shield and all connecting
physical structures (comprising
F-15
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. STRATEGIC TRANSACTIONS (CONTINUED)
approximately 15-20% of the complete system) occurs upon completion. Second, the
ultimate conveyance of title to the remaining equipment (consisting primarily of
the linear accelerator, the material handling and conveyor system and the
overall integration of the system into the facility) occurs at the end of the
ten-year term of the arrangement. The Company's rights to use the system also
terminate at the end of the ten-year term of the arrangement with Texas A&M. The
ultimate transfer of title to the complete system as well as all
responsibilities for the system at the end of the ten-year term was structured
primarily for tax planning purposes as discussed below. Additionally, the
passage of title at the end of the ten-year term serves as a protective measure
to provide a mechanism by which the Company receives value in the exchange and
ensures its ability to realize the benefits resulting from the sale of the
system. The Company's right to repossess any aspect of the system delivered to
Texas A&M extends only to circumstances in which Texas A&M breaches the
agreement, such as in the remote event that the university is not funded by the
Texas state legislature throughout the term of the arrangement.
The agreement provides the Company access to Texas A&M employees for
research and consulting services at below-market rates and access to research
performed independently by Texas A&M at no cost. Also, under the agreement, the
Company retains certain benefits related to the system, including the rights to
use the system for performing irradiation services for its customers for at
least ten hours per day subject to an overall maximum of 25% of the system's
capacity. Lastly, Texas A&M will provide and maintain the facilities at no cost
to the Company. These items represent all of the consideration the Company will
receive in exchange for the system it is providing to Texas A&M. Since the
Company retains the right to use the system through the end of the term of the
arrangement, it has accounted for this transaction as a sale-leaseback.
As the consideration in this lease is nonmonetary, it has accounted for this
element of the agreement in accordance with APB No. 29, "Accounting for
Nonmonetary Transactions." Sales are recorded on a percentage of completion
basis at the fair market value of the electronic food irradiation system sold to
Texas A&M and total system profits of approximately $2.6 million will be
deferred and recognized ratably over the remaining term of the arrangement
commencing upon delivery of the system.
The fair value of the system of $10 million was determined by employing the
Company's historical pricing methodology used for similar systems sold under
other customer contracts. The accompanying balance sheet also reflects a
long-term asset for the fair value received by the Company in this transaction.
The asset will consist of the estimated discounted cash value of the economic
rights to the research services and the leaseback of the system's capacity. As
revenues are recorded under the percentage-of-completion method, a long-term
asset is being recorded which will be realized over the ten-year term of the
arrangement. The percentage-of-completion method has been applied using the
cost-to-cost method whereby revenues are recorded based on the percentage that
total costs incurred bears to the total estimated costs at completion. The
long-term asset will be realized through two mechanisms. First, it will be
realized through free rent to the extent that it pertains to the Company's use
of the system as a provider of electronic food irradiation services to its
customers. Second, it will be realized as Texas A&M performs free or discounted
research and other consulting services for the Company. Examples of these
services include research, product testing, taste-testing and other test-
marketing activities, among other things, performed by Texas A&M at no cost or
significantly discounted rates. The free and discounted research and other
consulting costs will be recorded as research and development expense as the
services are performed and rent expense will be recorded as
F-16
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. STRATEGIC TRANSACTIONS (CONTINUED)
a component of the cost of sales associated with the electronic food irradiation
services that the Company will perform for its customers at the facility.
The carrying amount of this long-term asset will be reviewed annually or
more frequently if conditions warrant. An analysis of the research and
development services received as well as the prepaid rent amortization will be
conducted in order to determine the existence of asset impairment. If an
impairment is deemed to exist, the carrying value of the long-term asset will be
adjusted to the present value of the estimated free rent and free or discounted
research and consulting services to be received.
Under the percentage-of-completion method, the Company recorded no revenues
in 1999 and recorded $4.7 million in revenues during 2000. The $4.7 million has
been recorded as a long-term asset at December 31, 2000 and no profit has been
recognized in 2000. As of December 31, 2000, the Company had deferred profits
amounting to $1.2 million, which are included as other liabilities in the
accompanying balance sheet. These deferred profits will be amortized ratably to
reduce cost of sales over the remaining term of the ten-year term of the
arrangement commencing upon delivery of the system to Texas A&M. As of
December 31, 2000, the long-term asset arising from this transaction represents
the cumulative revenues recognized related to the design, construction,
installation, integration and delivery of the system for Texas A&M. The deferred
profit of $1.2 million as of December 31, 2000 represents the difference between
the cumulative costs incurred and the cumulative revenues recognized. As of
December 31, 2000, none of the deferred profit had been amortized to income
since final delivery of the system had not yet taken place.
With respect to the impact of the transaction with Texas A&M on the
Company's liquidity, it has expended funds of approximately $3.5 million related
to the construction of the system through December 31, 2000. These costs have
been incurred primarily related to the design of the system, construction of and
modification to the physical structure which will house the system, and for the
manufacture of the linear accelerators and x-ray components as well as the
material handling and conveyor systems. The Company estimates that there will be
approximately $3.9 million of additional costs to be incurred to complete and
deliver the system. The Company expects that all of the remaining costs will be
incurred in 2001.
For income tax purposes, the use of the SureBeam system by Texas A&M will be
treated as a lease. The lease income recognized in connection with the
transaction will be based upon the imputed value of the facilities and services
provided by Texas A&M to SureBeam. There will be a corresponding tax deduction
for rent expense and services expense related to the use of the facilities and
services provided to the Company. For any aspect of the system in which title
transfers prior to use of the system, such as the conveyance of title to the
system shield and all connecting physical structures upon completion of
construction, SureBeam will report taxable income related to the sale of such
equipment or other constructed assets.
In May 2000, the Company received purchase orders from Tech Ion Industrial
Brasil S.A. ("Tech Ion") for eleven electronic food processing systems. Also in
May 2000, the Company, through its wholly owned subsidiary, Titan SureBeam
Brazil Ltd., and Tech Ion jointly established SureBeam Brasil Ltda. SureBeam
Brasil will provide, among other things, food irradiation services through four
planned service centers to various food companies in Brazil. The Company
acquired a 19.9% equity interest in SureBeam Brasil without charge at the time
the Company signed the agreement to establish SureBeam Brasil, which is a start
up company that was created with no initial capital contribution from either
F-17
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. STRATEGIC TRANSACTIONS (CONTINUED)
party. Moreover, the Company does not have the ability to exercise significant
influence over the operations of SureBeam Brasil and, accordingly, recorded the
investment under the cost method of accounting. The Company has the right,
exercisable at any time within 20 years of the formation of the strategic
relationship, to acquire up to 50% of the total equity interest in SureBeam
Brasil for $1.0 million. The agreement futher provides that the Company or
another Titan affiliate will provide a $5.0 million working capital line of
credit to Tech Ion, and advances will bear interest at 10% per annum and are
secured by the stock and assets of Tech Ion. At December 31, 2000 there was
$2.2 million outstanding under this line of credit.
In December 1999, the Company agreed to sell a SureBeam system to a new
entity, Zero Mountain SureBeam, to be formed by Zero Mountain Cold Storage. A
facility will be constructed and the entity will operate an electronic food
irradiation service center in Arkansas. Upon completion of the SureBeam system,
the Company will acquire a 19.9% equity interest in the new entity for
$1.0 million.
In December 1999, SureBeam entered into an agreement with Japan's Mitsubishi
Corporation ("Mitsubishi") to sell a SureBeam electronic food irradiation system
to an entity to be formed by Mitsubishi. In connection with this agreement,
SureBeam received a warrant to acquire a 19.9% equity interest in the new entity
for $1.0 million.
In November 1999, SureBeam entered into an agreement with Hawaii Pride LLC
and affiliated parties, whereby Hawaii Pride would acquire a SureBeam system and
construct a facility in Hilo, Hawaii for the purpose of disinfesting fruit and
other products. Prior to Hawaii Pride obtaining third party financing, the
Company advanced $3.9 million to Hawaii Pride, which is included in the
accompanying balance sheet as other long term assets. The monies advanced were
utilized for costs relating to the acquisition of land, construction of the
building and infrastructure, equipment (excluding the SureBeam system) and other
start-up costs. The Company can forgive $1.0 million of the amount advanced for
the exercise of its option for 19.9% of the equity of Hawaii Pride. Although
SureBeam also has the ability to convert the remaining balance of the advance
into 50% ownership of Hawaii Pride, the conversion feature may only be exercised
upon default of its USDA loan, a liquidity event or if Hawaii Pride engages in
illegal, unethical, immoral or other practices deemed to be damaging to the
Company's reputation. The remaining balance of the advance represents a note
receivable bearing interest at 10%, with interest payments due to the Company
monthly. In June 2000, Hawaii Pride obtained a 15-year loan of approximately
$6.8 million from the USDA. If Hawaii Pride defaults on its loan obligations, or
fails to comply with USDA requirements, SureBeam has the right to acquire 100%
of the equity of Hawaii Pride for a nominal amount. Titan has agreed that upon
SureBeam's acquisition of any equity interest in Hawaii Pride, it will guarantee
a percentage amount of the USDA loan equal to the percentage of SureBeam's
equity interest in Hawaii Pride. Under the terms of the agreement, the Company
will receive a management fee based on the facility's net revenues over the term
of the USDA loan.
NOTE 4. INTANGIBLE ASSETS
On January 26, 2000, the Company entered into an agreement to acquire
certain assets and assume certain liabilities of Electron Ventures Limited.
Specifically, the Company acquired a linear accelerator system and all ancillary
equipment for $2.5 million and assumed a long-term capital lease on the
accelerator. The assets acquired and liabilities assumed were recorded at their
estimated fair
F-18
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INTANGIBLE ASSETS (CONTINUED)
value at the date of acquisition. The excess of the purchase price over the net
assets acquired of approximately $1.2 million is being amortized over five
years. In connection with the contribution by Titan to SureBeam in August 2000,
the net book value of these assets of $1,060 was retained by Titan.
In May 2000, the Company entered into a non-compete agreement with Applied
Power Associates, Inc. ("APA") and paid APA $5.0 million in cash and issued it a
warrant to acquire 372,670 shares of SureBeam common stock at an exercise price
per share of $0.1438. The warrant expires on the earliest of: (a) May 1, 2003;
(b) an initial public offering of the Company or (c) the date the Company is
sold. The consideration of $5.5 million, which includes $508,000 related to the
fair market value of the warrant, is being amortized on a straight-line basis
over the two year term of the non-compete agreement included as part of this
transaction. The fair value of the warrant was computed on the date the
non-compete agreement was entered into using the Black-Scholes option-pricing
model.
The Company capitalizes certain costs related to patent applications.
Accumulated costs are amortized over seven years using the straight-line method,
commencing at the time the patents are issued.
Accumulated amortization related to intangible assets was $1.8 million and
$2,000 as of December 31, 2000 and December 31, 1999.
The Company periodically re-evaluates the original assumptions and rationale
utilized in the establishment of the carrying value and estimated lives of its
intangibles. The criteria used for these evaluations include management's
estimate of the asset's continuing ability to generate positive income from
operations and positive cash flow in future periods as well as the strategic
significance of the intangible asset to the Company's business objectives.
NOTE 5. OTHER FINANCIAL DATA
Following are details concerning certain balance sheet accounts as of
December 31, 1999 and 2000:
DECEMBER 31,
------------------------
1999 2000
---------- -----------
Accounts Receivable:
Billed.................................................... $1,209,000 $ 99,000
Unbilled.................................................. 6,381,000 17,829,000
---------- -----------
7,590,000 17,928,000
Less allowance for doubtful accounts........................ (350,000) (250,000)
---------- -----------
Accounts receivable, net.................................... $7,240,000 $17,678,000
========== ===========
Unbilled receivables primarily represent work-in-process that will be billed
in accordance with contract terms and delivery schedules. Also included in
unbilled receivables are amounts billable upon
F-19
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. OTHER FINANCIAL DATA (CONTINUED)
final execution of contracts, contract completion or milestones. Generally,
unbilled receivables are expected to be collected within one year.
DECEMBER 31,
-------------------------
1999 2000
----------- -----------
Property and Equipment:
Machinery and equipment................................... $13,359,000 $ 9,978,000
Furniture, fixtures and leasehold improvements............ 3,557,000 1,248,000
----------- -----------
16,916,000 11,226,000
Less accumulated depreciation and amortization.............. (4,376,000) (1,864,000)
----------- -----------
Property and Equipment, net................................. $12,540,000 $ 9,362,000
=========== ===========
DECEMBER 31,
------------------------
1999 2000
---------- -----------
Other Assets:
Texas A&M--other asset.................................... $ -- $ 4,701,000
Advances to Hawaii Pride.................................. 200,000 3,900,000
Advances to Tech Ion...................................... -- 2,225,000
Prepaid rent.............................................. -- 1,177,000
Loan receivable from officer.............................. 375,000 300,000
Other..................................................... 13,000 105,000
---------- -----------
$ 588,000 $12,408,000
========== ===========
NOTE 6. RELATED PARTY TRANSACTIONS
In connection with the contribution agreement with Titan, the Company
entered into a number of other agreements with Titan for such items as corporate
services, facilities, filing of income tax returns and employee benefit plans as
more fully described below. These agreements provide, among other things,
continuation of services which have historically been provided by Titan to
SureBeam while the Company builds its corporate infrastructure on a stand-alone
basis. As consideration for these services, Titan will charge to the Company an
allocation of the cost for these services to the extent that they pertain to
SureBeam. Management believes that these allocations are reasonable.
CORPORATE SERVICES AGREEMENT. Titan provides or makes available to the
Company certain routine corporate services, including financial, insurance,
accounting, employee benefits, payroll, tax and legal services as well as
allocated premises for occupancy. Titan also provides the Company with corporate
planning, government relations and corporate quality assurance services. The
Company shares certain Titan systems, including its accounting system and human
resource system. Because Titan engages in government contracts work, Titan
allocates costs to the Company based upon government cost accounting
requirements. The Company pays Titan for human resources services based upon the
Company's percentage of the total number of Titan group employees. Except for
occupancy costs described below, the Company pays for other corporate services
based upon the average of three percentages: (1) the percentage of the Company's
payroll to the total payroll of the Titan group, (2) the percentage of the
Company's operating revenues to the total operating revenues of the Titan
F-20
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. RELATED PARTY TRANSACTIONS (CONTINUED)
group and (3) the percentage of the Company's average net book value, which is
the sum of the Company's tangible capital assets plus inventories, to the total
average net book value of the tangible capital assets plus inventory of the
Titan group as of the end of the last fiscal year and as of the final day of
each calendar quarter in the current fiscal year. Titan may adjust its fees
based upon its assessment of the Company's relative use of these services.
The initial term of the Corporate Services Agreement extends through
December 31, 2001. This agreement automatically renews annually unless the
Company elects not to renew by giving Titan notice. Amounts aggregating
$913,000, $951,000, and $620,000 are included as part of the Company's selling,
general and administrative expenses in the Company's results of operations in
the accompanying financial statements for the years ended December 31, 1998,
1999 and 2000, respectively. Management believes that these allocations are
reasonable.
FACILITIES ALLOCATION. Titan has allocated approximately 5,600 square feet
of facility space in San Diego, California to the Company. Under the Corporate
Services Agreement, Titan charges the Company for occupancy, maintenance,
property taxes, utilities, landlord pass-through expenses, property insurance,
reception desk services, telephone services, centralized mail and postage and
other services. The Company pays Titan an annual fee determined by the Company's
percentage of Titan's annual costs for this facility. This percentage is based
upon the percentage of the total square feet in the facility that the Company
occupies. Amounts aggregating $74,000, $92,000 and $207,000 are included as part
of the Company's selling, general and administrative expenses in the Company's
results of operations in the accompanying financial statements for the years
ended December 31, 1998, 1999, and 2000, respectively.
TAX ALLOCATION AGREEMENT. As long as Titan maintains beneficial ownership
of at least 80% of the total voting power of the Company's capital stock and 80%
of the total value of the Company's outstanding common stock, the Company will
be included in Titan's consolidated federal income tax returns.
SureBeam and Titan have entered into a Tax Allocation Agreement. Under the
Tax Allocation Agreement, the Company will agree to pay to Titan an amount
generally equal to the tax liability that the Company would have incurred if it
had prepared and filed a separate return. Titan will have broad discretion in
determining the amount of separate taxable income and tax liability that the
Company would realize on such a separate return. In computing this separate tax
liability, the Company's tax attributes, including net operating loss and tax
credit carryovers, will be deemed to be the amount that it would have had had it
always owned the businesses transferred to the Company by Titan.
As a member of the Titan group for purposes of filing consolidated federal
income tax returns, the Company will be liable for the federal income tax of the
Titan group if Titan or any member of the group fails to pay its taxes.
LICENSE AGREEMENT. In connection with the contribution agreement (Note 1)
SureBeam licenses its patents and technology to another subsidiary of Titan to
be used solely for medical equipment sterilization. This license is royalty-free
to Titan. Titan has irrevocably assigned its right, title and interest in any
inventions or discoveries that Titan may make through the use of the technology
the Company licenses to Titan. Titan has also agreed to share one half of the
costs of maintaining and pursuing patent protection for the Company's technology
licensed to Titan under the license agreement.
F-21
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. RELATED PARTY TRANSACTIONS (CONTINUED)
EMPLOYEE BENEFIT PLANS. The Company's employees are eligible to participate
in the Titan benefit plans. Those plans include a 401(k) plan, an employee stock
ownership plan, a non-qualified executive deferred compensation plan, an
employee stock purchase plan, and a health and welfare cafeteria plan. The
direct cost of these plans for the Company's employees are charged by Titan to
the Company.
SUBORDINATED PROMISSORY NOTE. In August 2000, in connection with the
contribution by Titan to SureBeam of its electronic food irradiation business,
we assumed the cumulative advances of $58.1 million as of December 31, 2000.
These advances are now evidenced by the subordinated, unsecured promissory note
payable to Titan. Under this note, Titan has agreed to lend us a maximum of
$75.0 million. Amounts not borrowed cannot be canceled by Titan. The promissory
note is due in August 2005 and bears interest, payable quarterly, at the greater
of the rate of 10% per annum or Titan's effective weighted average interest rate
under its senior credit facility. At Titan's option, the Company may repay
amounts outstanding under the promissory note with the net proceeds of any asset
sales the Company makes that are not in the ordinary course of business or if
the Company obtains a credit facility from a third party lender and the lender
and the facility permits the use of proceeds to repay existing indebtedness. The
Company cannot use any of the proceeds of its initial public offering to repay
amounts outstanding under the promissory note or under any indebtedness the
Company incurs to refinance the promissory note.
The Company is a guarantor under Titan's $425.0 million Senior Secured
Credit Facility and is subject to the loan covenants in the facility agreement.
Titan has pledged its equity interest in SureBeam as collateral for borrowings
against the credit facility.
LOAN RECEIVABLE. In October 1999, the Company loaned its President and
Chief Executive Officer $375,000. Pursuant to his employment agreement, the loan
will bear interest at 6.5% and be forgiven over a five year period unless the
employment agreement is voluntarily terminated or he is terminated for cause.
The loan balance is included in other assets on the accompanying balance sheets
as of December 31, 1999 and 2000.
NOTE 7. SIGNIFICANT CUSTOMERS
For the years ended December 31, 1998, 1999, and 2000, revenue from two
customers, three customers and three customers, respectively, represented 51%,
40% and 80% of the revenues in each year. No other single customer accounted for
10% or more of the revenues for these periods.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company periodically is a defendant in cases incidental to its business
activities. Furthermore, providers of products and services to the U.S.
government are generally subject to multiple levels of audit and investigation
by various U.S. government agencies. Any liabilities arising from audits by the
federal government are being retained by Titan as part of the contribution by
Titan to SureBeam. In the opinion of management, the amount of ultimate
liability, if any, with respect to these actions will not materially affect the
financial position or results of operations of the Company.
On January 6, 2000, Ion Beam Applications s.a. ("IBA"), a Belgian
corporation, and certain of its U.S. subsidiaries filed an action for
declaratory judgment in a federal court in Virginia against Titan relating to
its patent for its SureBeam technology. The action attacks the validity of the
Company's principal patent, seeks a declaration that IBA and its customers have
not infringed any of the 62 claims
F-22
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
in our patent, and alleges that the Company has engaged in unfair competition
and that its conduct constitutes patent misuse. On November 22, 2000, IBA filed
an amended complaint alleging, in addition to the original claims, that the
Company has engaged in false advertising, monopolization, restraint on trade and
unfair business practices. The Company intends to vigorously defend its patent
position and defend against all allegations. IBA is not seeking monetary
damages; however, a finding in favor of IBA in this action could materially
adversely affect the Company's business. In the opinion of management, the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position or results of operations of the
Company.
In 1999, SureBeam entered into an agreement with Cloverleaf Cold Storage in
Sioux City, Iowa whereby Cloverleaf constructed and leased to SureBeam an
electron beam food irradiation service center in which SureBeam would install
food irradiation systems and process food for its customers. The facility lease
commenced on February 1, 2000 with an initial term of five years with an option
to extend the lease term for an additional five years. Monthly rental payments
are approximately $25,000 for the first year of the lease and are adjusted
annually based upon fluctuations in the Consumer Price Index. In addition to the
facility lease with Cloverleaf, SureBeam issued a warrant to Cloverleaf to
purchase 465,838 shares of our Class A common stock for a nominal amount.
SureBeam also granted an additional warrant to Cloverleaf to purchase 1,397,515
shares of SureBeam common stock at an exercise price of $0.7156 per share. The
fair value of the warrants of $1,911,000 was computed using the Black-Scholes
option-pricing model and has been recorded as prepaid rent in the accompanying
financial statements and will be amortized over the initial five-year lease
term. In accordance with EITF 96-18, "Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services," the fair value of the warrants was valued at the date the
warrants were issued and immediately exercisable by Cloverleaf. Both warrants
expire on the earliest of: (a) May 23, 2003; (b) an initial public offering of
the Company or (c) the date the Company is sold. The facility lease with
Cloverleaf was amended on February 21, 2001, as described in Note 13 hereto.
The Company leases space from unrelated third parties under noncancelable
operating leases. Rent expense for these leases amounted to $488,000, $514,000
and $1,400,000 for the years ended December 31, 1998, 1999, and 2000,
respectively. The related future minimum lease payments as of December 31, 2000
are as follows:
YEAR ENDING
DECEMBER 31,
------------
2001........................................................ $ 1,164,000
2002........................................................ 1,222,000
2003........................................................ 1,201,000
2004........................................................ 1,193,000
2005........................................................ 770,000
Thereafter.................................................. 4,814,000
-----------
$10,364,000
===========
The Company has also guaranteed certain obligations of Titan (see Note 6).
F-23
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
1998 1999 2000
--------- -------- -----------
Current:
Federal.................................. $(285,000) $(83,000) $ 147,000
State.................................... (25,000) (7,000) 26,000
--------- -------- -----------
(310,000) (90,000) 173,000
Deferred................................... 26,000 211,000 (1,303,000)
--------- -------- -----------
$(284,000) $121,000 $(1,130,000)
========= ======== ===========
Following is a reconciliation of the income tax provision (benefit) expected
(based on the United States federal income tax rate applicable in each year) to
the actual tax provision on income:
1998 1999 2000
--------- -------- -----------
Expected federal income tax provision
(benefit)................................ $(266,000) $105,000 $(1,003,000)
State income taxes, net of federal income
tax benefits............................. (25,000) 9,000 (177,000)
Other...................................... 7,000 7,000 50,000
--------- -------- -----------
Actual income tax provision (benefit)...... $(284,000) $121,000 $(1,130,000)
========= ======== ===========
The net deferred tax asset (liability) as of December 31, 1999 and 2000,
resulted from the following temporary differences:
1999 2000
----------- ---------
Accrued payroll and employee benefits................ $ 73,000 $ 288,000
Deferred compensation................................ 6,000 272,000
Reserves............................................. 233,000 490,000
Depreciation......................................... (1,799,000) (349,000)
Other................................................ -- 112,000
----------- ---------
Deferred tax asset (liability)....................... $(1,487,000) $ 813,000
=========== =========
Included in prepaid expenses and other at December 31, 2000, is
approximately $1.6 million of deferred tax assets. In connection with the
contribution by Titan to SureBeam in August 2000, approximately $997,000 of
deferred tax liabilities related to the medical equipment sterilization business
and the linear accelerator business were retained by Titan.
NOTE 10. STOCKHOLDERS' EQUITY
The Company has two classes of authorized common stock, Class A common stock
and Class B common stock. The rights of the holders of Class A common stock and
Class B common stock are identical, except with respect to voting and
conversion. Each share of Class A common stock is entitled to one vote per
share. Each share of Class B common stock is entitled to ten votes per share and
is convertible into one share of Class A common stock. As of December 31, 2000
Titan owns 100% of the
F-24
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED)
issued and outstanding Class B common stock. One officer of Titan owns 232,919
shares of Class A common stock resulting from the exercise of stock options in
1999.
The Company's certificate of incorporation also allows for issuance of
preferred stock upon approval by the board of directors. The board of directors
has the authority, without further action by stockholders, to designate up to
5,000,000 shares of preferred stock, in one or more series and to fix the
rights, preferences, privileges, qualifications and restrictions granted to or
imposed upon the preferred stock. As of December 31, 2000, the board has not
approved nor has the Company issued any preferred stock.
NOTE 11. STOCK-BASED AND OTHER COMPENSATION PLANS
The Company provides stock-based compensation to officers, directors and key
employees through stock option plans. Prior to the contribution to SureBeam from
Titan in August 2000, the Company had one employee stock option plan, the 1998
Stock Option Plan (the "1998 Plan"). Total options authorized for grant under
the 1998 Stock Option Plan were 11,180,124. Under the 1998 Plan, an option's
maximum term is ten years, and the exercise price of each option must equal the
fair market value of the Company's stock on the date of grant. All options vest
in four equal annual increments beginning one year after the grant date.
On August 11, 1999, the Company issued 116,460 options at $0.14 per share to
employees under the 1998 Plan. On this date the deemed fair value of a share of
common stock was $0.29 per share. Accordingly, the Company has recognized
deferred compensation related to these grants of $16,750 on August 11, 1999. On
February 1, 2000, the Company issued 46,584 shares under the 1998 Plan. On this
date the fair value of a share of common stock was $13.95 per share.
Accordingly, the Company has recognized deferred compensation related to these
grants of $643,000 on February 1, 2000. On May 1, 2000 and June 1, 2000, the
Company issued 93,168 and 93,168 options, respectively, at $0.14 per share to
employees under the 1998 Plan. On these dates, the deemed fair value of a share
of common stock was $13.95 per share. Accordingly, the Company has recognized
deferred compensation related to these grants of $2,574,000. This deferred
charge will be amortized to expense over the four year vesting period of these
options, $2,000 and $648,000 of such expense was recognized in 1999 and 2000,
respectively. The fair value of these option grants were estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1999 and 2000: zero
dividend yield; expected volatility of 0%; a risk-free interest rate of 5.5%;
and an expected life of five years.
In August 2000, in connection with the contribution by Titan to the Company,
the Company adopted a Nonstatutory Stock Option Plan through which the Company
substituted all options under the 1998 Plan.
The Company's Nonstatutory Stock Option Plan has 7,975,137 shares of
Class A common stock authorized for issuance. The plan provides for grants of
nonstatutory stock options to the Company's officers and directors and the
officers and directors of Titan. The Company has the right to repurchase shares
received on the exercise of an option at the book value of those shares if the
purchaser terminates service prior to the completion of the initial public
offering. This constitutes a variable plan under APB No. 25. Accordingly,
deferred compensation has been recorded to the extent that book value exceeds
the exercise price of the options at the date of grant. Deferred compensation is
also recorded for changes in book value occurring subsequent to the initial
grant date. Compensation
F-25
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. STOCK-BASED AND OTHER COMPENSATION PLANS (CONTINUED)
expense related to these grants is recognized as these options vest. The Company
has not recognized compensation expense related to these options, as the
exercise price per share has exceeded the book value per share since the date of
grant and for all periods presented. However, upon a liquidity event such as an
initial public offering of the Company's stock, deferred compensation will be
recorded to the extent that the fair market value of the stock exceeds the
exercise price which will also result in a significant charge to recognize
compensation expense to the extent that such options are vested on the date of
the liquidity event. There were 6,055,901 and 7,714,269 options outstanding at
December 31, 1999 and 2000, respectively, subject to the buyback provision noted
above. After the completion of the offering, the exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the common stock on the date of grant. The term of the stock options may not
exceed February 19, 2008, the plan termination date. As of December 31, 2000,
options to purchase a total of 7,714,269 shares of the Class A common stock were
held by participants and 260,868 shares remained available for grant.
In August 2000, the Company adopted and the stockholders approved the 2000
Stock Option and Incentive Plan. Outstanding options will continue to be
governed by the original terms of those options granted under the 1998 Plan. The
Company has reserved an aggregate 2,170,800 shares of common stock for issuance
upon the exercise of stock awards granted to employees, directors, and
consultants under the plan. The exercise price of an option cannot be less than
100% of the fair market value of the common stock on the date of grant. The
maximum term of options granted is 10 years. The plan will terminate in August
2010, unless sooner terminated by the board.
In August 2000, the Company also adopted an Employee Stock Purchase Plan
covering an aggregate of 250,000 shares of common stock. Under the Purchase
Plan, the board may authorize participation by eligible employees, including
officers, in periodic offerings following the commencement of the Purchase Plan.
The initial offering under the Purchase Plan will commence on the effective date
of this offering. Employees who participate in an offering may have up to 15% of
their earnings withheld under the Purchase Plan. The amount withheld will then
be used to purchase shares of the common stock on specified dates determined by
the board. The price of common stock purchased under the Purchase Plan will be
equal to 85% of the lower of the fair market value of the common stock at the
commencement date of each offering period or the relevant purchase date.
A summary of the status of the Company's stock-based compensation plans as
of December 31, 1998, 1999 and 2000 and changes during the periods ended on
those dates is presented below:
1998 1999 2000
-------------------------- --------------------------- --------------------------
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
OPTIONS --------- -------------- ---------- -------------- --------- --------------
Outstanding at beginning of period........ -- $0.14 4,639,751 $0.14 6,451,863 $0.14
Granted................................... 4,639,751 $0.14 3,237,578 $0.14 2,124,216 $0.14
Exercised................................. -- (232,919) $0.14 -- $0.14
Terminated................................ -- (1,192,547) $0.14 (512,436) $0.14
--------- ---------- ---------
Outstanding at end of period.............. 4,639,751 $0.14 6,451,863 $0.14 8,063,643 $0.14
========= ========== =========
Options exercisable at end of period...... -- 838,509 $0.14 2,102,096 $0.14
========= ========== =========
F-26
SUREBEAM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. STOCK-BASED AND OTHER COMPENSATION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING
---------------------------------
OUTSTANDING AT WEIGHTED-AVERAGE
EXERCISE DECEMBER 31, REMAINING
PRICE 2000 CONTRACTUAL LIFE
-------- -------------- ----------------
$0.14 8,063,643 8.41
As permitted, the Company has adopted the disclosure only provisions of
SFAS 123. Accordingly, no compensation expense, except as specifically described
above, has been recognized for the stock option plans. Had compensation expense
been determined based on the fair value at the date of the grant for the years
ended December 31, 1998, 1999 and 2000 consistent with the provisions of
SFAS 123, the Company's net income (loss) and net income (loss) per share would
have been reported as the pro forma amounts indicated below:
YEAR ENDED
DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
Net income (loss)--as reported......... $ (662,000) $ 205,000 $(1,799,000)
Net income (loss)--pro forma........... (714,000) 153,000 (1,427,000)
Basic earnings per share--as
reported............................. $ (0.01) $ 0.00 $ (0.04)
Basic earnings per share--pro forma.... (0.02) 0.00 (0.03)
Diluted earnings per share--as
reported............................. $ (0.01) $ 0.00 $ (0.04)
Diluted earnings per share--pro
forma................................ (0.02) 0.00 (0.03)
Certain officers and key employees participate in the Titan non-qualified
executive deferred compensation plan. The Company also has performance bonus
plans for certain of its employees. Related expense for these two plans amounted
to approximately $47,000, $300,000 and $22,000 in the years ended December 31,
1998, 1999 and 2000, respectively.
NOTE 12. GEOGRAPHIC OPERATIONS
The Company has historically operated in one business segment related to its
electron beam technology, principally in the United States and South America.
NOTE 13. SUBSEQUENT EVENTS
In January 2001, the Company amended the facility lease agreement with
Cloverleaf Cold Storage in Sioux City, Iowa. The amended facility lease
commenced on February 1, 2001 and has an initial term of twenty years with an
option to terminate the lease after ten years. The related future minimum lease
payments have been included in the table in Note 8.
THE FOLLOWING INFORMATION IS UNAUDITED. At the time the Company's fiscal
2000 financial statements were issued, management of the Company had concluded
that no bonuses would be paid related to the 2000 fiscal year. However, Titan's
compensation committee met on March 6, 2001 (subsequent to issuance of the
Company's financial statements) and approved bonuses to certain officers and key
employees amounting to approximately $530,000. As such bonuses were determined
subsequent to issuance of the 2000 fiscal year financial statements, the Company
will account for these bonuses in the first quarter of the 2001 fiscal year.
F-27
[Graphic depicting images of people eating food and stating "SureBeam Safe--When
you see the SureBeam name on your food, you know that your food has been
SureBeam processed for an added measure of safety and quality. Ask your grocer
for SureBeam Safe Foods" with the caption "Food-borne illness is a national
problem. Help keep your family safe with SureBeam."]
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Through and including April 9, 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
6,700,000 SHARES
[SUREBEAM LOGO]
CLASS A COMMON STOCK
--------------
P R O S P E C T U S
------------------
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
FIRST UNION SECURITIES, INC.
A.G. EDWARDS & SONS, INC.
MARCH 15, 2001
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