**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended March 31, 2002**

 

 

**or**

 
| o | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|-----------------------------------------------------------------------------------------------|

 

**F****or thetransition period from                  to                  **

 

**Commissionfile number 0-31807**

 

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**SureBeamCorporation**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                                                                      |   | **33-0921003**                        |
|-----------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of   incorporation or organization)                  |   | (I.R.S. Employer  Identification No.) |
|                                                                              |   |                                  |
| **3033 Science Park Road**                                                        |
| **San Diego, California 92121-1199**                                              |
| (Address of principal executive offices, zip code)                                |
|                                                                              |   |                                  |
| (Registrant’s telephone number, including area code) **(858) 552-9500** |

 

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(Former name, former address and formerfiscal year, if changed since last report.)

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  ý       No o

 

The number of shares of registrant’s Class A common stock, $.001par value, outstanding as of May 10, 2002, was 16,864,630.

 

The number of shares of registrant’s Class B common stock, $.001par value, outstanding as of May 10, 2002, was 50,000,000.

 

** **

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**SUREBEAMCORPORATION**

**FORM10-Q**

**FORTHE QUARTER ENDED MARCH 31, 2002**

** **

**INDEX**

 
|         |                      |
|--------------|---------------------------|
| **PART I**   | **FINANCIAL INFORMATION** |
|         |                      |   |
|         | **ITEM 1.**               | FINANCIAL STATEMENTS |
|         |                      | Consolidated  Statements of Operations for the three months ended March 31, 2002 and 2001 |
|         |                      | Consolidated Balance Sheets  as of March 31, 2002 and December 31, 2001 |
|         |                      | Consolidated  Statements of Cash Flows for the three months ended March 31, 2002 and 2001 |
|         |                      | Consolidated  Statements of Stockholders' Equity for the three months ended March 31, 2002  and 2001 |
|         |                      | Notes to  Consolidated Financial Statements |
|         |                      |   |
|         | **ITEM  2.**              | MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|         |                      |   |
|         | **ITEM  3.**              | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|         |                      |   |
| **PART  II** | **OTHER  INFORMATION**    |
|         |                      |   |
|         | **ITEM  1.**              | LEGAL  PROCEEDINGS |
|         | **ITEM  2.**              | CHANGES  IN SECURITIES AND USE OF PROCEEDS |
|         | **ITEM 3.**               | DEFAULTS UPON  SENIOR SECURITIES |
|         | **ITEM  4.**              | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|         | **ITEM  5.**              | OTHER  INFORMATION |
|         | **ITEM 6.**               | EXHIBITS  AND REPORTS ON FORM 8-K |
|              |                           |  |  |

 

2

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**PART I-FINANCIALINFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**SureBeamCorporation and Subsidiaries**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

**(in thousands, exceptper share data)**

 
|                                        |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------|--------|------------------------------------|--------|
|                                        |   | **2002**                           |   | **2001** |   |
| Revenues                                    |   | $                                  | 2,514  |   | $ | 5,476 |   |
| Revenues from affiliate                     |   | 4,502                              |   | — |   |
| Total revenues                              |   | 7,016                              |   | 5,476 |   |
| Cost of revenues                            |   | 3,017                              |   | 2,950 |   |
| Cost of revenues from affiliate             |   | 2,831                              |   | — |   |
| Total cost of revenues                      |   | 5,848                              |   | 2,950 |   |
| Gross  profit                          |   | 1,168                              |   | 2,526 |   |
| Selling, general and administrative expense |   | 9,953                              |   | 45,617 |   |
| Research and development                    |   | 315                                |   | 337 |   |
| Loss from operations                        |   | (9,100                             | )      | (43,428 | ) |
| Interest income                             |   | 25                                 |   | 93 |   |
| Interest expense                            |   | (886                               | )      | (1,746 | ) |
| Other income, net                           |   | 982                                |   | — |   |
| Loss before income tax benefit              |   | (8,979                             | )      | (45,081 | ) |
| Income tax benefit                          |   | —                             |   | 4,508 |   |
| Net loss                                    |   | $                                  | (8,979 | ) | $ | (40,573 | ) |
|                                        |   |                               |   |   |   |
| Basic loss per share:                       |   |                               |   |   |   |
| Net loss                                    |   | $                                  | (0.14  | ) | $ | (0.84 | ) |
| Weighted average shares — basic        |   | 62,794                             |   | 48,405 |   |
|                                        |   |                               |   |   |   |
| Diluted loss per share:                     |   |                               |   |   |   |
| Net loss                                    |   | $                                  | (0.14  | ) | $ | (0.84 | ) |
| Weighted average shares — diluted      |   | 62,794                             |   | 48,405 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*.

 

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**SureBeamCorporation and Subsidiaries**

**CONSOLIDATED BALANCESHEETS**

**(inthousands, except share and per share information)**

 
|                                                                                                                                                                                                         |       | **March  31,**  |       | **December  31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|
|                                                                                                                                                                                                         |       | **2002**        |       | **2001**          |       |
|                                                                                                                                                                                                         |       | **(Unaudited)** |       |              |       |
| **Assets**                                                                                                                                                                                                   |       |            |       |              |       |
| Current Assets:                                                                                                                                                                                              |       |            |       |              |       |
| Cash and cash equivalents                                                                                                                                                                                    |       | $               | 10,059     |              | $          | 4,131 |   |
| Investments, available-for-sale                                                                                                                                                                              |       | —          |       | 3,766             |       |
| Accounts receivable-net of allowance of $1,428 at March 31, 2002, and  December 31, 2001                                                                                                                     |       | 13,139          |       | 12,645            |       |
| Receivable from affiliate                                                                                                                                                                                    |       | —          |       | 12,503            |       |
| Inventories                                                                                                                                                                                                  |       | 21,218          |       | 19,764            |       |
| Prepaid expenses and other                                                                                                                                                                                   |       | 5,277           |       | 5,172             |       |
| Total current assets                                                                                                                                                                                         |       | 49,693          |       | 57,981            |       |
| Property and equipment-net                                                                                                                                                                                   |       | 45,270          |       | 41,903            |       |
| Due from affiliate                                                                                                                                                                                           |       | 2,319           |       | 2,319             |       |
| Intangible assets-net                                                                                                                                                                                        |       | 2,910           |       | 3,549             |       |
| Other assets                                                                                                                                                                                                 |       | 12,953          |       | 12,032            |       |
| Total assets                                                                                                                                                                                                 |       | $               | 113,145    |              | $          | 117,784 |   |
|                                                                                                                                                                                                         |       |            |       |              |       |
| **Liabilities and Stockholders' Equity**                                                                                                                                                                     |       |            |       |              |       |
| Current Liabilities:                                                                                                                                                                                         |       |            |       |              |       |
| Accounts payable                                                                                                                                                                                             |       | $               | 4,372      |              | $          | 9,191 |   |
| Accrued compensation and benefits                                                                                                                                                                            |       | 2,089           |       | 2,664             |       |
| Other current liabilities                                                                                                                                                                                    |       | 9,096           |       | 4,756             |       |
| Due to affiliate                                                                                                                                                                                             |       | 556             |       | —            |       |
| Total current liabilities                                                                                                                                                                                    |       | 16,113          |       | 16,611            |       |
| Subordinated promissory note to affiliate                                                                                                                                                                    |       | —          |       | 72,208            |       |
| Other long-term liabilities                                                                                                                                                                                  |       | 794             |       | 613               |       |
| Total liabilities                                                                                                                                                                                            |       | 16,907          |       | 89,432            |       |
|                                                                                                                                                                                                         |       |            |       |              |       |
| Commitments and contingencies                                                                                                                                                                                | ** ** |            | ** ** |              | ** ** |
| Stockholders' equity                                                                                                                                                                                         |       |            |       |              |       |
| 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,  16,827,396 issued and 16,823,867 outstanding at March 31, 2002 and 11,605,440  issued and 11,601,911 outstanding at December 31, 2001 |       | 17              |       | 11                |       |
| Class B common stock, $.001 par value, 50,000,000 shares authorized,  50,000,000 issued and outstanding at March 31, 2002 and 46,774,235 issued and  outstanding at December 31, 2001                        |       | 50              |       | 47                |       |
| Additional paid-in capital                                                                                                                                                                                   |       | 220,710         |       | 147,607           |       |
| Deferred compensation                                                                                                                                                                                        |       | (23,118         | )          | (26,918           | )          |
| Accumulated other comprehensive income                                                                                                                                                                       |       | —          |       | 47                |       |
| Treasury stock, at cost: 3,529 shares at March 31, 2002 and December  31, 2001                                                                                                                               |       | (42             | )          | (42               | )          |
| Accumulated deficit                                                                                                                                                                                          |       | (101,379        | )          | (92,400           | )          |
| Total stockholders' equity                                                                                                                                                                                   |       | 96,238          |       | 28,352            |       |
| Total liabilities and stockholders' equity                                                                                                                                                                   |       | $               | 113,145    |              | $          | 117,784 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*.

 

4

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**SureBeam Corporation and Subsidiaries**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
|                                                                                       |       | **Three  Months Ended  March 31,** |       |
|--------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
|                                                                                       | ** ** | **2002**                           |       | **2001** | ** ** |
| **Cash Flows from Operating Activities:**                                                  | ** ** |                               | ** ** |   | ** ** |
| Net loss                                                                                   |       | $                                  | (8,979     | ) | $ | (40,573 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in)  operating activities: |       |                               |       |   |   |
| Nonmonetary research consideration                                                         |       | (1,168                             | )          | (552 | ) |
| Depreciation and amortization                                                              |       | 1,516                              |       | 902 |   |
| Deferred income taxes                                                                      |       | —                             |       | (4,508 | ) |
| Deferred compensation charge                                                               |       | 3,800                              |       | 38,925 |   |
| Change in operating assets and liabilities:                                                |       |                               |       |   |   |
| Accounts receivable and receivable from affiliate                                          |       | 12,009                             |       | (4,661 | ) |
| Inventories                                                                                |       | (1,454                             | )          | (2,076 | ) |
| Prepaid expenses and other                                                                 |       | 473                                |       | (282 | ) |
| Other assets                                                                               |       | (419                               | )          | 12 |   |
| Accounts payable                                                                           |       | (4,819                             | )          | 2,391 |   |
| Accrued compensation and benefits                                                          |       | (575                               | )          | 665 |   |
| Other accrued liabilities                                                                  |       | 5,077                              |       | (930 | ) |
| Net cash provided by (used in) operating activities                                        |       | 5,461                              |       | (10,687 | ) |
|                                                                                       |       |                               |       |   |   |
| **Cash Flows from Investing Activities:**                                                  | ** ** |                               | ** ** |   | ** ** |
| Sale (purchase) of available-for-sale investments                                          |       | 3,719                              |       | (3,687 | ) |
| Capital expenditures                                                                       |       | (3,961                             | )          | (2,868 | ) |
| Advances to Tech Ion                                                                       |       | —                             |       | (1,820 | ) |
| Advances to Hawaii Pride                                                                   |       | (195                               | )          | (416 | ) |
| Net cash used in investing activities                                                      |       | (437                               | )          | (8,791 | ) |
|                                                                                       | ** ** |                               | ** ** |   | ** ** |
| **Cash Flows from Financing Activities:**                                                  | ** ** |                               | ** ** |   | ** ** |
| Net proceeds from issuance of common stock                                                 |       | —                             |       | 60,831 |   |
| Borrowings on subordinated promissory note                                                 |       | 792                                |       | 12,515 |   |
| Proceeds from exercise of stock options and warrants                                       |       | 112                                |       | — |   |
| Net cash provided by financing activities                                                  |       | 904                                |       | 73,346 |   |
|                                                                                       |       |                               |       |   |   |
| Net change in cash and cash equivalents                                                    |       | 5,928                              |       | 53,868 |   |
| Cash and cash equivalents at beginning of period                                           |       | 4,131                              |       | — |   |
| Cash and cash equivalents at end of period                                                 |       | $                                  | 10,059     |   | $ | 53,868 |   |
|                                                                                       |       |                               |       |   |   |
| **Supplemental Cash Flow Information:**                                                    |       |                               |       |   |   |
| **Non-Cash Investing Activities:**                                                         | ** ** |                               | ** ** |   | ** ** |
| Conversion of subordinated promissory note to common stock                                 |       | $                                  | 73,000     |   | $ | — |   |
| Increase (decrease) in fair value of investments, available-for-sale                       |       | 47                                 |       | (55 | ) |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*.

 

5

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**SureBeam Corporation and Subsidiaries**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

**(Unaudited)**

**(in thousands)**

 
|                                                                                               |   |                         |              |         |   |                       |   |                             |                     |   |                |    |    | **Accumulated  Other  Comprehensive  Income  (Loss)** |      |    |   |   |   |    |   |
|----------------------------------------------------------------------------------------------------|--------|------------------------------|-------------------|--------------|--------|----------------------------|--------|----------------------------------|--------------------------|--------|---------------------|---------|---------|-------------------------------------------------------|-----------|---------|--------|--------|--------|---------|--------|
|                                                                                               |   | **Shares  of  Common Stock** |              |         |   |                       |   | **Additional  Paid-in  Capital** |                     |   |                |    |    |                                                  |      |    |   |   |
|                                                                                               |   |                         | **Common  Stock** |         |   | **Deferred  Compensation** |   |                             | **Accumulated  Deficit** |   | **Treasury  Stock** |    |    |                                                  |
|                                                                                               |   | **Class  A**                 |              | **Class  B** |   | **Class  A**               |   | **Class  B**                     |                     |   |                |    |    |                                                  | **Total** |    |
|                                                                                               |   |                         |              |         |   |                       |   |                             |                     |   |                |    |    |                                                  |      |    |   |   |   |    |   |
| **Three Months Ended March 31, 2002:**                                                             |   |                         |              |         |   |                       |   |                             |                     |   |                |    |    |                                                  |      |    |   |   |   |    |   |
| Balances at December 31, 2001                                                                      |   | 11,602                       |              | 46,774       |   | $                          | 11     |                             | $                        | 47     |                | $       | 147,607 |                                                  | $         | (26,918 | )      | $      | 47     |    | $      | (92,400 | ) | $ | (42 | ) | $ | 28,352 |   |
| Net loss                                                                                           |   | —                       |              | —       |   | —                     |   | —                           |                     | — |                | —  |    | —                                                |      | (8,979  | )      | — |   | (8,979  | )      |
| Issuance of common stock in conjunction with conversion of  subordinated promissory note to equity |   | 4,441                        |              | 3,226        |   | 5                          |   | 3                                |                     | 72,992 |                | —  |    | —                                                |      | —  |   | — |   | 73,000  |   |
| Proceeds from issuance of common stock in conjunction with exercise of  stock options              |   | 781                          |              | —       |   | 1                          |   | —                           |                     | 111    |                | —  |    | —                                                |      | —  |   | — |   | 112     |   |
| Amortization of deferred compensation                                                              |   | —                       |              | —       |   | —                     |   | —                           |                     | — |                | 3,800   |    | —                                                |      | —  |   | — |   | 3,800   |   |
| Unrealized loss on investments                                                                     |   | —                       |              | —       |   | —                     |   | —                           |                     | — |                | —  |    | (47                                                   | )         | —  |   | — |   | (47     | )      |
| Balances at March 31, 2002                                                                         |   | 16,824                       |              | 50,000       |   | $                          | 17     |                             | $                        | 50     |                | $       | 220,710 |                                                  | $         | (23,118 | )      | $      | — |    | $      | (101,379 | ) | $ | (42 | ) | $ | 96,238 |   |
|                                                                                               |   |                         |              |         |   |                       |   |                             |                     |   |                |    |    |                                                  |      |    |   |   |   |    |   |
| **Three Months Ended March 31, 2001:**                                                             |   |                         |              |         |   |                       |   |                             |                     |   |                |    |    |                                                  |      |    |   |   |   |    |   |
| Balances at December 31, 2000                                                                      |   | 233                          |              | 46,584       |   | $                          | — |                             | $                        | 47     |                | $       | 5,687   |                                                  | $         | (2,584  | )      | $      | — |    | $      | (18,025 | ) | $ | — |   | $ | (14,875 | ) |
| Net loss                                                                                           |   | —                       |              | —       |   | —                     |   | —                           |                     | — |                | —  |    | —                                                |      | (40,573 | )      | — |   | (40,573 | )      |
| Issuance of common stock in IPO, net of issuance costs                                             |   | 6,700                        |              | —       |   | 7                          |   | —                           |                     | 59,770 |                | —  |    | —                                                |      | —  |   | — |   | 59,777  |   |
| Proceeds from issuance of common stock in conjunction with exercise of  stock options              |   | 2,236                        |              | —       |   | 2                          |   | —                           |                     | 1,052  |                | —  |    | —                                                |      | —  |   | — |   | 1,054   |   |
| Deferred compensation related to the issuance of stock options                                     |   | —                       |              | —       |   | —                     |   | —                           |                     | 78,604 |                | (78,604 | )       | —                                                |      | —  |   | — |   | —  |   |
| Amortization of deferred compensation                                                              |   | —                       |              | —       |   | —                     |   | —                           |                     | — |                | 38,925  |    | —                                                |      | —  |   | — |   | 38,925  |   |
| Unrealized loss on investments                                                                     |   | —                       |              | —       |   | —                     |   | —                           |                     | — |                | —  |    | (55                                                   | )         | —  |   | — |   | (55     | )      |
| Balances at March 31, 2001                                                                         |   | 9,169                        |              | 46,584       |   | $                          | 9      |                             | $                        | 47     |                | $       | 145,113 |                                                  | $         | (42,263 | )      | $      | (55    | )       | $      | (58,598 | ) | $ | — |   | $ | 44,253 |   |
|                                                                                                    |        |                              |                   |              |        |                            |        |                                  |                          |        |                     |         |         |                                                       |           |         |        |        |        |         |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*.

 

6

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**SureBeamCorporation and Subsidiaries**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH31, 2002**

**(Unaudited)**

 

**Note (1) Basisof Financial Statement Preparation**

 

The accompanying consolidated financial information of SureBeamCorporation (“SureBeam” or the “Company”) should be read in conjunction withthe Company’s audited consolidated financial statements and notes thereto forthe year ended December 31, 2001 included in its Form 10-K filed with theSecurities and Exchange Commission on April 1, 2002. The information as ofMarch 31, 2002, and for the three months ended March 31, 2002 and 2001 isunaudited. The accompanying consolidated financial information includes allnormal recurring adjustments, which are considered necessary by the Company’smanagement for a fair presentation of the consolidated financial position,results of operations and cash flows for the periods presented. However, theseresults are not necessarily indicative of results for a full fiscal year.

 

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

 

OnOctober 16, 2001, The Titan Corporation, or Titan, adopted a definitiveplan to spin-off its ownership interest in SureBeam in the form of a tax-freedividend to Titan’s stockholders. Titan has filed a letter ruling request withthe Internal Revenue Service seeking confirmation that the distribution can bemade on a tax-free basis and Titan has stated it intends to execute thespin-off as soon as practical following the receipt of a favorable ruling onthat request, subject to obtaining all required third party consents.

 

Also on October 16, 2001, Titan purchased a perpetual and exclusive,non-royalty bearing license to use the Company’s intellectual property for allapplications and fields other than the food, animal hide and flower markets inconsideration of the following: 1) to make available to the Company a$50.0 million senior secured line of credit, subject to the consent of therequisite percentage of its syndicate of senior lenders, with customaryfinancial and affirmative and negative covenants, 2) to exchange theoutstanding $75.0 million debt owed by the Company to Titan for additionalshares of the Company’s Class B common stock and Class A commonstock, and 3) a cash payment of $8.0 million, with a$4.0 million payment on September 30, 2001 and four installments of$1.0 million payable on each of March 31, 2002, June 30, 2002,September 30, 2002 and December 31, 2002. The Company recognized$1.0 million of the cash payments related to the license agreement asother income in the three months ended March 31, 2002.  The Company will recognize$1.0 million as other income each quarter through September 30, 2003.

 

Theaccompanying consolidated financial statements contemplate the realization ofassets and the satisfaction of liabilities in the normal course of business.During the three months ended March 31, 2002, consistent with its businessplan, the Company has incurred substantial losses from operations. Managementbelieves it will continue to incur losses for the next several quarters, as theCompany will continue to make significant investments in infrastructure, salesand marketing. Additionally, the Company’s construction and implementationperiod for systems sales to strategic alliances as well as Company-ownedservice centers and systems require a substantial use of cash for at least 12to 18 months. The Company’s arrangements to sell food irradiation systemsto strategic alliances typically contain milestone provisions for payment,which are typically based upon time, stage of completion and other factorswhere no material uncertainties exist. Also in connection with the Company’sagreements with its customers, it has advanced funds aggregating$5.3 million to Hawaii Pride LLC, or Hawaii Pride. Management does notexpect significant repayments of the advances to Hawaii Pride until late 2003.The Company has also entered into a number of commitments to lease land,facilities and equipment in connection with 

 

7

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construction of two servicecenters for which the Company has and will continue to expend significant fundsfor construction of the facilities and food irradiation systems. The Companyalso expects to expend approximately $695,000 to complete and deliver thesystem for Texas A&M University, or Texas A&M. In addition, the Companyexpects to construct and install two in-line systems for Cargill Incorporated’sExcel subsidiary that the Company will own and operate.

 

Inaddition to management’s current operating plans which focus on increasing cashflow from operations, the Company is also evaluating a number of alternativeplans to meet its future operating cash needs. These plans include raisingadditional funds from the capital markets and drawing down the Company’s lineof credit with Titan. If these funds are not sufficient for the Company or ifit is unable to generate sufficient cash flow from operations, management mayneed to consider additional actions, including reducing or deferring capitalexpenditures, reducing or deferring research and development projects, reducingconstruction of systems for customers in advance of payment and reducingmarketing expenditures. The deferral or cancellation of these projects may havea material adverse impact on the Company’s ability to meet its businessobjectives.

 

A variety of currently unanticipated events could require additionalcapital resources such as the acquisition of complementary businesses ortechnologies or increased working capital requirements to fund, among otherthings, construction of systems for its strategic alliances in advance ofpayment.

** **

**Note (2) InitialPublic Offering**

 

On March 16, 2001, the Company consummated its initial publicoffering and issued 6,700,000 shares of Class A common stock at a price of$10 per share. The Company received proceeds of approximately$59.8 million, net of underwriting discounts, fees and other initialpublic offering costs. Concurrent with the closing of the offering, warrantsaggregating 2,236,023 shares of the Company’s Class A common stock wereexercised for proceeds of approximately $1.1 million.

 

Also in connection with the completion of the Company’s initial publicoffering, stock options granted under the Nonstatutory Stock Option Plan wereconverted from variable plan options to fixed plan options. Accordingly,deferred compensation of $78.6 million was recorded, representing theextent to which the $10 per share offering price exceeded the exercise price ofthe options. Additionally, since a substantial portion of these options wasvested at the time of completion of the offering, approximately $38.7 millionwas recognized as compensation expense at that time. Included in selling,general and administrative expense for the three months ended March 31, 2002and 2001, is $3.6 million and $38.7 million, respectively, of compensationexpense associated with these options.

 

The remaining deferred compensation balance related to these optionswill be recognized as compensation expense over the remaining three-yearvesting period of the options. Included in selling, general and administrativeexpense for the three months ended March 31, 2002 and 2001, is $202,000 ofcompensation expense related to options granted prior to completion of theCompany’s initial public offering under the 2000 Stock Option and IncentivePlan for which the fair market value on the date of grant exceeded the exerciseprice.

 

8

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**Note (3) OtherFinancial Information**

 

During the quarter ended March 31, 2002, the Company had no elements ofcomprehensive income. The Company had comprehensive income resulting fromunrealized losses on investments in available-for-sale securities of $55,000,which are reflected in the statement of stockholders’ equity for the threemonths ended March 31, 2001.

 

The following data summarize information relating to the per sharecomputation (in thousands, except per share data):

 

|                                                |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------------------------|--------|------------------------------------|--------|
|                                                |   | **2002**                           |   | **2001** |   |
|                                                |   |                               |   |   |   |
| Net loss                                            |   | $                                  | (8,979 | ) | $ | (40,573 | ) |
|                                                |   |                               |   |   |   |
| Weighted average shares outstanding                 |   |                               |   |   |   |
| Basic                                               |   | 62,794                             |   | 48,405 |   |
| Effective dilutive securities:   stock options |   | —                             |   | — |   |
| Dilutive                                            |   | 62,794                             |   | 48,405 |   |
|                                                |   |                               |   |   |   |
| Net loss per common share - basic                   |   | $                                  | (0.14  | ) | $ | (0.84 | ) |
|                                                |   |                               |   |   |   |
| Net loss per common share - dilutive                |   | $                                  | (0.14  | ) | $ | (0.84 | ) |

 

In the three months ended March 31, 2002, the weighted average numberof options to purchase approximately 5,106,000 shares of common stock at pricesranging from $0.14 to $7.51 per share was not included in the computation ofdiluted loss per share, as the effect would have been anti-dilutive due to theloss from continuing operations. Similarly, the weighted average number ofoptions and warrants to purchase approximately 5,933,000 shares of common stockat prices ranging from less than $0.01 to $0.71 per share was not included inthe computation of diluted loss per share for the three-month period endedMarch 31, 2001.

 

Following are details concerning certain balance sheet data as of March31, 2002 and December 31, 2001:

 

|                                                |   | **March  31,  2002** |   | **December  31,  2001** |   |
|-----------------------------------------------------|--------|----------------------|--------|-------------------------|--------|
|                                                |   | **(Unaudited)**      |   |                    |   |
|                                                |   |                 |   |                    |   |
| **Investments, available-for-sale (in thousands)**: |   | $                    | — |                    | $      | 3,766 |   |
|                                                     |        |                      |        |                         |        |  |  |

 

TheCompany invests its excess cash primarily in mortgage-backed securities. TheCompany has established guidelines relative to diversification and maturitiesthat maintain safety and liquidity. These guidelines are periodically reviewedand modified to take advantage of trends in yields and interest rates. Cashequivalents are short-term, highly liquid investments with original maturitiesof less than three months. Cash and cash equivalents of $10.1 million and$4.1 million at March 31, 2002 and December 31, 2001,respectively, are primarily invested in commercial paper and money marketfunds.

 

9

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TheCompany classifies its marketable securities as available-for-sale and recordsthe unrealized holding gains or losses as a separate component of stockholders’equity. Realized losses for the three months ended March 31, 2002, were$18,000. There were no realized gains or losses recorded in the three monthsended March 31, 2001.

 

|                                    |   | **March  31,  2002** |   | **December  31,  2001** |   |
|-----------------------------------------|--------|----------------------|--------|-------------------------|--------|
|                                    |   | **(Unaudited)**      |   |                    |   |
|                                    |   |                 |   |                    |   |
| **Accounts receivable (in thousands):** |   |                 |   |                    |   |
| Billed                                  |   | $                    | 137    |                    | $      | 12,556 |   |
| Unbilled                                |   | 14,430               |   | 14,020                  |   |
| Less allowance for doubtful accounts    |   | (1,428               | )      | (1,428                  | )      |
|                                    |   | $                    | 13,139 |                    | $      | 25,148 |   |

 

Unbilled receivables primarily represent work-in-process that will bebilled in accordance with contract terms and delivery schedules.  Also included in unbilled receivables areamounts billable upon final execution of contracts, contract completion ormilestones. Generally, unbilled receivables are expected to be collected withinone year.

 

|                            |   | **March  31,  2002** |   | **December  31,  2001** |   |
|---------------------------------|--------|----------------------|--------|-------------------------|--------|
|                            |   | **(Unaudited)**      |   |                    |   |
|                            |   |                 |   |                    |   |
| **Inventories (in thousands):** |   |                 |   |                    |   |
| Materials                       |   | $                    | 16,186 |                    | $      | 15,510 |   |
| Work-in-process                 |   | 5,032                |   | 4,254                   |   |
|                            |   | $                    | 21,218 |                    | $      | 19,764 |   |

 

Generally, the Company’s systems are customized and are produced on amade-to-order basis.  The Company does,however, maintain a stock of long lead-time and general stock items.Inventories include the cost of material, labor and overhead, and are stated atthe lower of cost, determined on the first-in, first-out (FIFO) method, ormarket. The Company periodically evaluates its on-hand stock and makesappropriate disposition of any stock deemed excess or obsolete.

 

|                                           |   | **March  31,  2002** |   | **December  31,  2001** |   |
|------------------------------------------------|--------|----------------------|--------|-------------------------|--------|
|                                           |   | **(Unaudited)**      |   |                    |   |
|                                           |   |                 |   |                    |   |
| **Property and equipment (in thousands):**     |   |                 |   |                    |   |
| Machinery and equipment                        |   | $                    | 18,609 |                    | $      | 9,937 |   |
| Furniture, fixtures and leasehold improvements |   | 8,796                |   | 1,252                   |   |
| Construction in progress                       |   | 21,135               |   | 33,390                  |   |
|                                           |   | 48,540               |   | 44,579                  |   |
| Less accumulated depreciation and amortization |   | (3,270               | )      | (2,676                  | )      |
| Property and equipment, net                    |   | $                    | 45,270 |                    | $      | 41,903 |   |

 

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Construction in progress primarily represents costs incurred for theconstruction of two food irradiation service center facilities. Such costs willremain in construction in progress until the facilities are completed andplaced in service.

 

|                             |   | **March  31,  2002** |   | **December  31,  2001** |   |
|----------------------------------|--------|----------------------|--------|-------------------------|--------|
|                             |   | **(Unaudited)**      |   |                    |   |
|                             |   |                 |   |                    |   |
| **Other assets (in thousands):** |   |                 |   |                    |   |
| Texas A&M                    |   | $                    | 7,862  |                    | $      | 7,210 |   |
| Advances to Hawaii Pride - net   |   | 3,770                |   | 3,674                   |   |
| Prepaid rent                     |   | 918                  |   | 796                     |   |
| Loan receivable from officer     |   | 206                  |   | 225                     |   |
| Other                            |   | 197                  |   | 127                     |   |
|                             |   | $                    | 12,953 |                    | $      | 12,032 |   |

 

The long-term asset arising from the transaction with Texas A&Mrepresents the long-term portion of the cumulative revenues recognized relatedto the design, construction, installation, integration and delivery of thesystem for Texas A&M, net of amortization related to discountedservices received.  See Note (5).

 

The Company has advanced $5.3 million to Hawaii Pride which is includedin the accompanying balance sheet as other assets, net of impairment charges of$1.5 million.  The impairment chargesreflect the Company’s estimate of any erosion of the collateral basis in HawaiiPride.  The monies advanced in 1999 and2000 were utilized for costs relating to the acquisition of land, constructionof the building and infrastructure, equipment (excluding the SureBeam system)and other start-up costs.  Monies advancedduring 2002 and 2001 have been used primarily for working capitalpurposes.  The Company advanced HawaiiPride $195,000 and $416,000 for the three months ended March 31, 2002 and 2001,respectively.  Management does notexpect significant repayments of the advances to Hawaii Pride until late 2003.

 

|                                          |   | **March  31,  2002** |       | **December  31,  2001** |       |
|-----------------------------------------------|--------|----------------------|------------|-------------------------|------------|
| **Other current liabilities (in thousands):** |   |                 | ** ** |                    | ** ** |
| Deferred revenue                              |   | $                    | 3,000      |                    | $          | 3,000 |   |
| Customer deposits                             |   | 4,733                |       | —                  |       |
| Other                                         |   | 1,363                |       | 1,756                   |       |
|                                          |   | $                    | 9,096      |                    | $          | 4,756 |   |

 

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**Note (4) RecentAccounting Pronouncements**

 

In June 2001, the Financial Accounting Standards Board, or FASB, issuedSFAS No. 141, “Business Combinations” (“SFAS No. 141”). This statementaddresses financial accounting and reporting for business combinations andsupersedes APB Opinion No. 16, “Business Combinations,” and FASB StatementNo. 38, “Accounting for Preacquisition Contingencies of PurchasedEnterprises.” All business combinations in the scope of this Statement are tobe accounted for using one method, the purchase method. The Company is adoptingthe provisions of SFAS No. 141 for all business combinations initiatedafter June 30, 2001. As of March 31, 2002 this statement had no effect onthe Company’s consolidated financial statements.

 

In June 2001, the FASB issued SFAS No. 142 “Goodwill andOther Intangible Assets” (“SFAS No. 142”). This Statement addressesfinancial accounting and reporting for acquired goodwill and other intangibleassets and supersedes APB Opinion No. 17, “Intangible Assets.” SFASNo. 142 addresses how intangible assets that are acquired individually orwith a group of other assets (but not those acquired in a business combination)should be accounted for in financial statements upon their acquisition. Thisstatement also addresses how goodwill and other intangible assets should beaccounted for after they have been initially recognized in the financialstatements. Upon adoption of SFAS No. 142, goodwill is no longer subjectto amortization over its estimated useful life. Rather, goodwill will besubject to at least an annual assessment for impairment by applying a fairvalue test. The Company adopted SFAS No. 142 during the three months endedMarch 31, 2002, and the adoption did not have an impact on the consolidatedfinancial statements as all of the Company’s intangible assets are separatelyidentifiable, and the Company continues to amortize these assets.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting forAsset Retirement Obligations” (“SFAS No. 143”). This statement addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts. It applies to (a) all entities and (b) legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development and/or normal operation of long-livedassets, except for certain obligations of lessees. This statement amends FASBStatement No. 19, “Financial Accounting and Reporting by Oil and GasProducing Companies,” and is effective for financial statements issued forfiscal years beginning after June 15, 2002. Management does not believethat the adoption of this statement will have a material impact on itsfinancial position or results of operations.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFASNo. 144 addresses financial accounting and reporting for the impairment ordisposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30,“Reporting the Results of Operations-Reporting the Effects of Disposal of aSegment of a Business, and Note (4)****Extraordinary,Unusual and Infrequently Occurring Events and Transactions,” for the disposalof a segment of a business (as previously defined in that Opinion). Theprovisions of SFAS No. 144 are effective for financial statements issuedfor fiscal years beginning after December 15, 2001, with early adoptionencouraged and generally are to be applied prospectively. The Company adoptedSFAS No. 144 during the three months ended March 31, 2002, and the adoption didnot have a material impact on the Company's consolidated financial statements.

 

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**Note (5)Strategic Transactions**

 

In connection with the Company’s agreement with Texas A&M, SureBeamagreed to provide three electronic food irradiation systems, which are referredto collectively as the system, pursuant to a ten-year lease with title passingto Texas A&M at the end of the ten-year term. The agreement provides theCompany access to Texas A&M employees for a variety of free or discountedservices, as well as rights to use the system for performing irradiationservices for its customers.  The Companyis currently working with Texas A&M on several research projects whichinclude studies on shelf life extension, food products application testing, andthe effectiveness of SureBeam’s technology versus other technologies.  Since the Company retains the right to use thesystem through the end of the term of the arrangement, it has accounted forthis transaction as a sale-leaseback.

 

As the consideration in this lease is nonmonetary, the Company hasaccounted for this element of the agreement in accordance with APB No. 29,“Accounting for Nonmonetary Transactions.” Sales are recorded on apercentage-of completion basis at the fair market value of the electronic foodirradiation system sold to Texas A&M and total system profits ofapproximately $500,000 will be deferred and recognized ratably over the remainingterm of the arrangement commencing upon delivery of the system.

 

Under the percentage-of-completion method, the Company recordedrevenues of $1.2 million and $552,000 for the three months ended March 31, 2002and 2001, respectively, on the Texas A&M contract. The receivable arisingfrom the total cumulative revenues of $9.3 million has been recorded as ashort-term and long-term asset at March 31, 2002, and no profit has beenrecognized. As of March 31, 2002, the Company had deferred profits amounting to$456,000, which are included as other short-term and long-term liabilities inthe accompanying consolidated balance sheet. These deferred profits will beamortized ratably to reduce cost of sales over the remaining term of theten-year term of the arrangement commencing upon delivery of the system toTexas A&M. The long-term asset arising from this transaction represents thecumulative revenues recognized related to the design, construction,installation, integration and delivery of the system for Texas A&M. InAugust 2001, the Company agreed to purchase research and development servicesfrom Texas A&M for approximately $200,000, reflecting a discount ofapproximately $300,000. The discount will be amortized against the long-termasset arising from the cumulative revenues recorded under this agreement over aperiod of approximately ten months. During the three months ended March 31,2002, the Company has recorded $90,000 of amortization expense related to theresearch and development services it has received to date. The deferred profitof $456,000 as of March 31, 2002, represents the difference between thecumulative costs incurred and the cumulative revenues recognized. As of March31, 2002, none of the deferred profit had been amortized to income since finaldelivery of the system had not yet taken place.

 

With respect to the impact of the transaction with Texas A&M on theCompany’s liquidity, the Company has expended funds of approximately$8.8 million related to the construction of the system through March 31,2002. These costs have been incurred primarily related to the design of thesystem, construction of and modification to the physical structure, which willhouse the system, and for the manufacture of the linear accelerators and x-raycomponents as well as the material handling and conveyor systems. The Companyestimates that there will be approximately $695,000 of additional costs to beincurred to complete and deliver the system. The Company expects that all ofthe remaining costs will be incurred in the remainder of 2002.

 

InOctober 2001, the Company contracted to manufacture eight SureBeam systems foran aggregate of $26.0 million for Titan in connection with Titan’sagreement with the United States Postal Service. Under this agreement, Titanhas arranged to provide electron beam systems and services to sanitize mail byeliminating the threat of anthrax. The Company will be working with Titan andTitan’s business units, in providing the systems to the United States PostalService. The Company is a principal subcontractor to build systems for Titanunder Titan’s prime contract. For the three months ended March 31, 2002,the Company recognized $2.3 million as revenues from 

 

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affiliate under this contract.In accordance with the milestone payments of the contract, the Company received$19.5 million in cash from Titan during the three months ended March 31,2002, of which $4.7 million is an advance against future manufacturing costsand services. The monies received were used to offset the $14.8 million billedreceivable on the contract and the remaining $4.7 million was classified ascustomer deposits in other current liabilities.

 

InJune 2001, the Company received a purchase order with an aggregate valueof $50.0 million from RESAL Saudi Corporation, or RESAL, for tenelectronic food irradiation systems to operate in four service centers in theSaudi Arabia region for irradiating poultry and disinfesting and prolongingshelf life of dates. The Company commenced construction of these systems forRESAL and has recognized, under the percentage-of-completion method ofaccounting, $1.1 million in sales revenue for the three months endedMarch 31, 2002. Three electronic food irradiation systems are scheduled tobe shipped in 2002, with the remainder in 2003.

 

**Note (6) Subordinated Promissory Note**

 

InAugust 2000, in connection with the contribution by Titan to SureBeam ofits electronic food irradiation business, the Company assumed the cumulativeadvances of $39.0 million and due to additional advances the balance was$72.2 million as of December 31, 2001. These advances were evidencedby the subordinated promissory note payable to Titan. On February 13,2002, the Company exchanged the outstanding balance, including principal andaccrued interest, of $73.0 million, under its subordinated promissory notepayable to Titan for 3,225,765 and 4,441,496 shares of Class B andClass A common stock, respectively, of the Company.

 

OnMarch 29, 2002, Titan, as a part of its commitment to extend a$50.0 million line of credit to the Company, executed a $25.0 millionirrevocable funding commitment to the Company. The terms of the$25.0 million credit facility are anticipated to be under Titan’s seniorcredit agreement as follows: the interest rate will be equal to Titan’seffective weighted average debt rate plus 300 basis points; the credit facilitywill be secured by all assets of SureBeam; and the credit facility will maturethe earlier of (i) December 31, 2005, (ii) the date on whichTitan’s lenders accelerate the date for payment by Titan of amounts outstandingunder Titan’s senior credit agreement, (iii) the date of termination ofTitan’s senior credit agreement with its lenders, and (iv) the date theCompany enters into a $50 million credit facility with Titan.

 

**Note (7)Commitments and Contingencies**

 

The Company periodically is a defendant in cases incidental to itsbusiness activities. Furthermore, providers of products and services to theU.S. government are generally subject to multiple levels of audit andinvestigation by various U.S. government agencies. Any liabilities arising fromaudits by the federal government are being retained by Titan as part of thecontribution by Titan to SureBeam. In the opinion of management, the amount ofultimate liability, if any, with respect to these actions will not materiallyaffect the financial position or results of operations of the Company.

 

On January 6, 2000, Ion Beam Applications S.A., a Belgian corporation,and some of its U.S. subsidiaries, or IBA, filed an action for declaratoryjudgment in a federal court in Virginia against Titan and SureBeam relating toSureBeam’s patents for its systems.  Theaction attacked the validity of SureBeam’s core patent, sought a declaration thatIBA and its customers had not infringed any of the 62 claims in SureBeam’spatent, and alleged that Titan and SureBeam engaged in unfair competition andthat Titan and SureBeam’s conduct constituted patent misuse.  The case was moved to the federal court inSan Diego.  On November 22, 2000, IBAfiled an amended complaint alleging, in addition to the original claims thatTitan and SureBeam engaged in false advertising, monopolization, restraint ontrade and unfair business practices.

 

14

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On January 25, 2002, Titan and SureBeam announced a settlement of thelitigation with IBA.  Under thesettlement, IBA dropped all the claims it made against Titan and SureBeam inthe litigation, including IBA’s challenge to the validity and enforceability ofSureBeam’s core patent. Titan and SureBeam agreed that IBA and its customersmay continue to operate or use IBA’s electronic irradiation facility inBridgeport, New Jersey. The settlement terms include, among other things, thatIBA will purchase its requirement in the United States for e-beam and x-raysystems for use for processing food and sanitizing mail from Titan and SureBeamduring the next four years, provided Titan and SureBeam offer competitiveterms. Titan and SureBeam also agreed to purchase their requirements of linearaccelerators with above 150 kilowatts of power from IBA during the samefour-year period, provided IBA offers competitive terms. Other terms of thesettlement agreement were not disclosed.

 

**Note (8) RelatedParty Transactions**

 

In connection with the contribution agreement with Titan, the Companyentered into a number of other agreements with Titan for such items ascorporate services, facilities, filing of income tax returns and employeebenefit plans. These agreements provide, among other things, continuation ofservices which have historically been provided by Titan to SureBeam while theCompany builds its corporate infrastructure on a stand-alone basis. Asconsideration for these services, Titan charged to the Company an allocation ofthe cost for these services to the extent that they pertained to SureBeam.During the three months ended March 31, 2002 and 2001, the Company recorded anallocation for general and administrative expense of $1.1 million and $464,000,respectively.

 

Titanhas subcontracted the Company to design and construct SureBeam systems forTitan’s various contracts with third parties. These systems are designed forapplications other than the food, animal hide and flower markets. Revenuesderived from sales to Titan are recognized under cost plus 20% or fixed pricecontracts and were $4.5 million for the three months ended March 31,2002.  Of the revenue from affiliate,$2.3 million related to the subcontract the Company has with Titan on theUnited States Postal Service contract and the remaining $2.2 million wasrecorded in relation to Titan’s medical sterilization business.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion of the financial condition and results ofoperations of SureBeam Corporation should be read in conjunction with theunaudited financial statements and the related notes thereto included elsewherein this Form 10-Q, the audited financial statements and notes thereto andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in the Company’s Form 10-K for the year endedDecember 31, 2001.

 

When you read this section of this Form 10-Q, it is important thatyou also read the financial statements and related notes included elsewhere inthis Form 10-Q. This section of this Form 10-Q containsforward-looking statements that involve risks and uncertainties, such asstatements of our plans, objectives, expectations and intentions. We use wordssuch as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,”“believe,” “estimate,” “predict,” “potential,” or “continue,” the negative ofsuch terms or other terminology to identify forward-looking statements. Ouractual results could differ materially from those anticipated in theseforward-looking statements for many reasons. These forward-looking statementsinvolve risks and uncertainties including, but not limited to, those referredto in the Company’s public filings with the SEC, including the Company’s annualreport on Form 10-K for the year ended December 31, 2001, regarding the risk ofgaining consumer acceptance, risks relating to the Company’s history of lossesand liquidity and risks of international operations.

 

**Overview**

 

We are a leading provider of electronic irradiation systems andservices for the food industry. We were formed in August 2000 inconnection with the contribution by Titan of the assets, liabilities andoperations related to its electronic food irradiation business. Titan’selectronic food irradiation business had previously been operated as part of adivision of Titan, together with Titan’s medical equipment sterilization businessand its government linear electron beam accelerator business. References toSureBeam, the Company or us in this discussion and analysis section and in thehistorical financial statements refer to this division of Titan prior to thedate of the contribution of the electronic food irradiation business to us byTitan.

 

**Results of Operations**

* *

*Revenues*

 

Our total revenues increased from $5.5 million in the three monthsended March 31, 2001, to $7.0 million in the three months ended March 31,2002. For the three months ended March 31, 2002 and 2001, we had electronicfood irradiation system sales and food processing revenues from third partiesof $2.5 million or 36% of total revenues and $5.5 million or 100.0% of totalrevenues, respectively.  For the threemonths ended March 31, 2002, 89%, or $2.2 million, of the $2.5 million ofrevenue from electronic food irradiation system sales and food processingservices, was derived from sales of electronic food irradiation systems to twocustomers and 11%, or $263,000, was derived from food processing services.  For the three months ended March 31, 2001,96%, or $5.3 million, of the $5.5 million of revenue, was derived from sales ofelectronic food irradiation systems primarily to two customers and 4%, or$219,000, was derived from food processing services.  In addition, for the three months ended March 31, 2002, we hadaffiliate revenues of $4.5 million, or 64% of total revenues. We did not haveany affiliate revenue for the three months ended March 31, 2001. For the threemonths ended March 31, 2002, $2.3 million, or 51% of the revenuesfrom affiliate, were from sales of our electronic irradiation systems using thepercentage of completion method of accounting, in support of Titan’s UnitedStates Postal Service contract for which we are the main sub-contractor. Theremaining $2.2 million of revenues from affiliate are from Titan’s medicalequipment sterilization business, Titan Scan Technologies, for the sale ofequipment and services related to Titan Scan Technologies’ medicalsterilization business.

 

In connection with our agreement with Texas A&M, we agreed toprovide three electronic food irradiation systems, which we refer tocollectively as the system, pursuant to a ten-year lease with title passing toTexas A&M at the end of the ten-year term. The agreement provides us accessto Texas A&M employees for a variety of free or discounted services, aswell as rights to use the system for performing irradiation services for our 

 

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customers. We are currentlyworking with Texas A&M on several research projects which include studieson shelf life extension, food products application testing, and theeffectiveness of SureBeam’s technology versus other technologies. Since we retainthe right to use the system through the end of the term of the arrangement, wehave accounted for this transaction as a sale-leaseback.

 

As the consideration in this lease is nonmonetary, we have accountedfor this element of the agreement in accordance with APB No. 29,“Accounting for Nonmonetary Transactions.” Sales are recorded on apercentage-of-completion basis at the fair market value of the electronic foodirradiation system sold to Texas A&M and total system profits ofapproximately $500,000 will be deferred and recognized ratably over theremaining term of the arrangement commencing upon delivery of the system.

 

Under the percentage-of-completion method for the Texas A&Mcontract, we recorded revenues of $1.2 million for the three-month periodended March 31, 2002, and recorded $552,000 for the three-month period endedMarch 31, 2001. The receivable arising from the total cumulative revenues of$9.3 million has been recorded as a short-term and long-term asset atMarch 31, 2002, and no profit has been recognized. As of March 31, 2002, we haddeferred profits amounting to $456,000, which are included as other short-termand long-term liabilities in the accompanying consolidated balance sheet. Thesedeferred profits will be amortized ratably to reduce cost of sales over theremaining term of the ten-year term of the arrangement commencing upon deliveryof the system to Texas A&M. The short-term and long-term assets arisingfrom this transaction represents the cumulative revenues recognized related tothe design, construction, installation, integration and delivery of the systemfor Texas A&M. In August 2001, we agreed to purchase research anddevelopment services from Texas A&M for approximately $200,000,reflecting a discount of approximately $300,000. The discount will be amortizedover a period of approximately ten months from the long-term asset arising fromthe cumulative revenues recorded under this agreement. For the three monthsended March 31, 2002, we have recorded $90,000 of amortization expense relatedto the research and development services we have received to date. The deferredprofit of $456,000 as of March 31, 2002, represents the differencebetween the cumulative costs incurred and the cumulative revenues recognized.As of March 31, 2002, none of the deferred profit had been amortizedto 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 ourliquidity, we have expended funds of approximately $8.8 million related tothe construction of the system through March 31, 2002, which includes $900,000expended during the three months ended March 31, 2002. These costs have beenincurred primarily in relation to the design of the system, construction of andmodification to the physical structure which will house the system, and for themanufacture of the linear accelerators and x-ray components as well as thematerial handling and conveyor systems. We estimate that there will beapproximately $695,000 of additional costs incurred to complete and deliver thesystem. We expect that all of the remaining costs will be incurred in 2002.

 

Our cost of revenues consists primarily of the components and materialsassociated with the linear accelerator, material handling system and controlsand direct labor to assemble, install and integrate the medical equipmentsterilization and electronic food irradiation systems, as well as overhead suchas travel, indirect labor and fringe benefits related to the production of thesystems and the manufacturing of linear electron beam accelerators. Alsoincluded in cost of revenues are all direct and indirect costs associated withproviding medical equipment sterilization and electronic food irradiationservices. These costs are comprised of direct and indirect labor, depreciation,rent, dosimetry supplies, maintenance and utilities as well as other relatedcosts to operate a service center.

 

Our gross margins decreased from 46% for the three months ended March31, 2001 to 17% for the three months ended March 31, 2002. The decrease from46% to 17% is primarily attributed to added fixed operating costs associatedwith the new service center in Chicago, the higher percentage of Texas A&Mrevenue with a zero margin and higher revenues from affiliate which have alower gross margin from revenues from sales of systems to third parties. Weanticipate that our gross margins will increase as the Texas A&M contractis completed and the production volume at the service centers increases.

 

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*Selling, General and Administrative*

 

Our selling, general and administrative expense decreased from$45.6 million in the three months ended March 31, 2001 to$10.0 million in the three months ended March 31, 2002. Thedecrease was primarily attributable to the decreased amortization of deferredcompensation expense, which decreased from $38.9 million in the three monthsended March 31, 2001, to $3.8 million in the three months ended March 31,2002. See the discussion of stock-based compensation below. To a lesser extent,selling, general and administrative expense decreased in the three months endedMarch 31, 2002, due to lower sales and marketing expenses and lower legalexpenses.

 

*Stock-based Compensation*

 

In connection with the completion of our initial public offering, stockoptions granted under our Nonstatutory Stock Option Plan were converted fromvariable plan options to fixed plan options. Accordingly, deferred compensationof $78.6 million was recorded, representing the extent to which the $10per share offering price exceeded the exercise price of the options.Additionally, since a substantial portion of these options were vested at thetime of completion of the offering, $38.7 million were recognized as compensationexpense and included in selling, general and administrative expense in theaccompanying consolidated statement of operations for the three months endedMarch 31, 2001. For the three months ended March 31, 2002, $3.6 million wasrecognized as compensation expense and included in selling, general andadministrative expense. The remaining deferred compensation balance related tothese options will be recognized as expense over the remaining four-yearvesting period of the options. Additional deferred compensation expense isincluded in selling, general and administrative expense related to optionsgranted prior to the completion of the Company’s initial public offering underthe 2000 Stock Option and Incentive Plan for which the fair market value on thedate of grant exceeded the exercise price. Deferred compensation expenserelated to these options was $202,000 for each of the three months ended March31, 2001 and March 31, 2002.

 

*Research and Development*

 

Ourresearch and development expenses decreased from $337,000 in the three monthsended March 31, 2001 to $315,000 in the three months ended March 31,2002.  Our current research anddevelopment activities are focused on increasing the capability and efficiencyof our existing technology, minimizing the space occupied by our SureBeamsystems, and developing new food product applications. We have assembled a teamof experts in our industry to enhance and drive our research and developmentefforts. Our research and development experts have many years of experience inthe area of enhancing food safety and extending shelf life using irradiation inaddition to their broad experience with linear accelerators and chargedparticle beams. In addition, we have an agreement with Texas A&M Universityand the Texas Agricultural Experiment Station for the purpose of researchingand developing product applications for our technology. We are currentlyworking with Texas A&M on several research projects which include studieson shelf life extension, food products application testing, and theeffectiveness of SureBeam’s technology versus other technologies. In addition,we often benefit from the research and development efforts of ourcomponent suppliers.

 

*Interest Income*

 

Our interest income decreased from $93,000 inthe three months ended March 31, 2001 to $25,000 in the three months endedMarch 31, 2002. The decrease is due to the reduced cash on hand for the threemonths ended March 31, 2002. The cash balance at March 31, 2001 was highdue to our initial public offering on March 16, 2001.  See Note (2) in Notes to Consolidated Financial Statements.

 

*Interest Expense*

 

Our interest expense decreased from $1.7 million in the threemonths ended March 31, 2001 to $886,000 in the three months ended March 31,2002. The decrease is due to the exchange of $73.0 million of our subordinatedpromissory note payable to Titan for our common stock.  See Note (6) in Notes to Consolidated Financial Statements.

 

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*Other Income (Expense), Net*

 

Duringthe three months ended March 31, 2002, we recorded $982,000 of other income.This amount represents $1.0 million of license fee income from Titan thatwas reduced by $18,000 of realized losses from the sale of available-for-salemarketable securities. During the fourth quarter of 2001, Titan agreed topurchase a perpetual and exclusive, non-royalty bearing license to use ourintellectual property for all applications and fields other than food, animalhide and flower markets for $8.0 million. As part of this agreement, wewill be recording $1.0 million of license fee income in each quarter foreight quarters, which began in the fourth quarter of 2001.  There was no other income, net for the threemonths ended March 31, 2001.

 

*Income Taxes*

 

Incometaxes reflect an effective rate of 0% and 10% for the three months ended March31, 2002 and 2001, respectively. Pursuant to our tax sharing agreement with Titan, Titan will compensateus for any tax benefit received by Titan from the use of our losses in Titan’s consolidatedreturn. The compensation is payable on the earlier of when we could have usedthe loss or when the losses expire (20 years). We had an operating lossduring 2001 and expect to continue to incur losses during 2002. Our tax benefitis dependent upon the usage of our losses by Titan. Titan was not able to useour tax benefits in 2001, so we did not benefit from this agreement and we donot know when, or if, Titan will be able to use our losses. If the spin-offoccurs, we will be deconsolidated from Titan and Titan will no longer have theright to use our losses. Accordingly, we have not recorded any benefit forincome taxes for the three months ended March 31, 2002.

 

*Net Income (Loss)*

 

Our net loss decreased from $40.6 million in the three months endedMarch 31, 2001 to $9.0 million in the three months ended March 31, 2002.The decrease primarily related to reduced deferred compensation amortizationexpense of approximately $35.1 million for the three months ended March31, 2002, from the three months ended March 31, 2001.

 

**Liquidity and CapitalResources**

 

Wehave used cash principally to construct systems for our strategic alliances andfund working capital advances for these strategic alliances, to constructcompany-owned service centers and systems, to construct systems for TexasA&M, to expand our manufacturing capacity and to fund our working capitalrequirements. We also are spending significant funds to construct newcompany-owned service centers and systems. At March 31, 2002, we hadavailable cash, cash equivalents and investments available for sale of$10.1 million.  Our future cashobligations consist primarily of current liabilities and our fixed lease costsassociated with the operation of our service centers.  As of March 31, 2002, we expect to pay approximately $2.4 millionin lease expenses during the next 12 months.

 

Sinceour initial public offering on March 16, 2001, our cash requirements have beenmet primarily through proceeds of approximately $59.8 million, net ofunderwriting commissions, fees and other offering costs, from our initialpublic offering, advances under the $75.0 million credit facility withTitan discussed below, payments from Titan for work performed on medicalsterilization, $19.5 million associated with mail sanitation system sales andpayments totaling $5.0 million from Titan associated with the perpetuallicense related to non-food items. In connection with the contribution by Titanto SureBeam in August 2000, we assumed the cumulative advances of approximately$39.0 million, as evidenced by the subordinated, unsecured promissory notepayable to Titan. Under this note, Titan agreed to lend us a maximum amount of$75.0 million, including accrued interest, and we borrowed$75.0 million. The promissory note was due in August 2005 and boreinterest at the greater of the rate of 10% per annum or Titan’s effectiveweighted average interest rate under its senior credit facility. OnDecember 31, 2001, $2.0 million of our subordinated note payable wasexchanged for 190,385 shares of our Class B common stock. Additionally,the remaining $73.0 million of our subordinated note payable to Titan wasexchanged on February 13, 2002 for 4,441,496 shares of our Class Acommon stock and 3,225,765 shares of our Class B common stock. Titancommitted to extend us a new $50.0 million senior credit facility to besecured by all of our assets. This facility will be subject to limits in theamounts that can be drawn each quarter, and subject to customary financialcovenants and

 

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affirmative and negativecovenants. Titan lenders have approved Titan’s extension of up to$25.0 million under this credit facility, but the remaining$25.0 million is subject to approval by Titan’s lenders, which Titan hasinformed us it expects to obtain prior to our spin-off. We cannot assure youthat Titan will extend additional funding to us under this credit facility orotherwise. If we are unable to receive funds as anticipated under this creditfacility or if our capital requirements vary from our current plans, we mayrequire additional financing sooner than we anticipate. An inability in suchcircumstance to obtain additional financing on terms reasonable to us, or atall, could have a material adverse effect on our results of operations andfinancial condition. To date we have not drawn down any money against theanticipated new senior credit facility.

 

Ouroperating activities provided cash of $5.5 million for the three monthsended March 31, 2002, primarily due to a decrease in accountsreceivable and receivable from affilate of $12.0 million, which was offsetby an increase in inventories of $1.5 million, as well as personnel costsand other expenditures associated with the development of the electronic foodirradiation business. The decrease in accounts receivable principally relatesto collection of $19.5 million from Titan related to the United States PostalService during the three months ended March 31, 2002.  The $19.5 million was received in accordance with the milestonepayments of the contract of which $4.7 million is an advance against futuremanufacturing cost and services.  Themonies received were used to offset the $14.8 million billed receivable on thecontract and the remaining $4.7 million was classified as customer deposits inother current liabilities.

 

Ourinvesting activities used cash of $437,000 for the three months endedMarch 31, 2002, primarily due to the sale of available-for-saleinvestments of $3.7 million, offset by capital expenditures of$4.0 million primarily related to our service centers under construction.Also included in cash used for investing activities for the three months endedMarch 31, 2002 were advances to the Hawaii Pride LLC, or Hawaii Pride,aggregating $195,000 for working capital requirements.

 

InJune 2001, we received an order in the aggregate amount of$50.0 million from RESAL Saudi Corporation, or RESAL, for ten electronicfood irradiation systems to operate in four service centers in the Saudi Arabiaregion for irradiating poultry and disinfesting and prolonging shelf life ofdates. We commenced construction on six of these systems for RESAL and haverecognized, under the percentage-of-completion method of accounting,$13.3 million in revenue which has been recorded on this contract throughMarch 31, 2002, of which $1.1 million was recognized during the threemonths ended March 31, 2002. Three electronic food irradiationsystems are scheduled to be shipped in 2002, with the remainder to be shippedin 2003. We are in the process of negotiating a processing agreement, whichwill govern our strategic relationship with the operator of these systems,including royalty and management fees and a minority equity ownership of theoperator that will operate the service centers. We expect to have thisagreement finalized by the end of the second quarter of 2002. We expect toreceive payments on this contract beginning in the second quarter of 2002 andexpect to continue to receive milestone payments as they become due and payableuntil the contract is complete.

 

InOctober 2001, we contracted to manufacture eight SureBeam systems for$26.0 million for Titan in connection with Titan’s agreement with theUnited States Postal Service. Under this agreement, Titan has arranged toprovide electron beam systems and services to sanitize mail by eliminating thethreat of anthrax. We will be working with Titan and Titan’s business units inproviding the systems to the United States Postal Service. We are a principalsubcontractor to Titan under its prime contract. In accordance with themilestone payments of the contract, we received $19.5 million in cash fromTitan during the three months ended March 31, 2002, of which $4.7 millionis an advance against future manufacturing cost and services.

 

Theaccompanying consolidated financial statements contemplate the realization ofassets and the satisfaction of liabilities in the normal course of business.During the three months ended March 31, 2002, we have incurred substantiallosses from operations and investments in infrastructure. Management believeswe will continue to do so for the next several quarters as we continue to makesignificant investments in infrastructure, sales and marketing.

 

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Additionally, ourconstruction and implementation period for systems sales to strategic alliancesas well as our service centers and systems require a substantial use of cashfor at least 12 to 18 months. Our arrangements to sell food irradiation systemsto strategic alliances typically contain milestone provisions for payment,which are typically based upon time, stage of completion, and other factors,where no material uncertainties exist. As a result, our unbilled receivablesfrom our customers have increased $410,000 during the three months ended March31, 2002. Also in connection with our agreements with our customers, we haveadvanced funds aggregating $5.3 million to Hawaii Pride, which was usedprimarily for land acquisition and for working capital purposes. We do notexpect significant repayments of the advances from Hawaii Pride until late2003. We also have entered into a number of commitments to lease land,facilities and equipment in connection with construction of two service centersfor which we have and will continue to expend significant funds forconstruction of the facilities and food irradiation systems. We also expect toexpend approximately $695,000 to complete and deliver the system for TexasA&M. In addition, in 2002, we expect to begin to construct and install twoin-line systems for Cargill Incorporated's Excel subsidiary that we will ownand operate. The plans for these two systems have not been finalized. We expectto expend approximately $8.0 million on these two systems once the plans arefinalized with installation and cash expenditures occurring over a 12 monthperiod.

 

Inaddition to management’s current operating plans, which focus on increasingcash flow from operations, we are also evaluating a number of alternative plansto meet our future operating cash needs. We agreed to sell Titan a perpetualand exclusive, non-royalty bearing license to use our intellectual property forall applications and fields other than the food, animal hide and flower marketin consideration of the following: 1) to make available to us a$50.0 million senior secured line of credit, subject to the consent of therequisite percentage of its syndicate of senior lenders, with customaryfinancial and affirmative and negative covenants, 2) to exchange theoutstanding $75.0 million debt owed by us to Titan for additional sharesof our Class B and Class A common stock, which occurred inDecember 2001 and February 2002, and 3) a cash payment of$8.0 million, with a $4.0 million payment on September 30, 2001and four installments of $1.0 million payable on each of March 31,2002, June 30, 2002, September 30, 2002 and December 31, 2002,with the first two installments having been made. On December 31, 2001,$2.0 million of our subordinated note payable was exchanged for 190,385shares of our Class B common stock. Additionally, the remaining$73.0 million of our subordinated note payable to Titan was exchanged onFebruary 13, 2002 for 4,441,496 shares of our Class A commonstock and 3,225,765 shares of our Class B common stock.

 

OnOctober 16, 2001, Titan adopted a definitive plan to spin-off itsownership interest in SureBeam in the form of a tax-free dividend to Titan’sstockholders. Titan has filed a letter ruling request with the Internal RevenueService seeking confirmation that the distribution can be made on a tax freebasis and Titan has stated it intends to execute the spin-off as soon aspractical following the receipt of a favorable ruling on that request, subjectto obtaining all required third party consents.  Weare negotiating other agreements with Titan in connection with our plannedspin-off including a tax sharing and disaffiliation agreement that will subjectus to liability if we sell our equity or equity linked securities in a mannerthat causes a change in our ownership of 50% or more in voting power or valueas part of Titan’s spin-off plan. This risk could limit our ability to accesspublic equity markets.  In addition, therecent downturn in the capital markets may limit our ability to raise capitalthrough public equity or debt offerings. If funds from Titan or other sources are not sufficient to us and/or ifwe are unable to generate sufficient cash flow from operations, we may need toconsider additional actions, including reducing or deferring capitalexpenditures, reducing or deferring research and development projects, reducingconstruction of systems for customers in advance of payment and reducingmarketing expenditures. The deferral or cancellation of these projects may havea material adverse impact on our ability to meet our short-term businessobjectives.

 

AtMarch 31, 2002, we had $10.1 million of cash, cash equivalentsand investments available-for-sale. We believe that this balance along with theanticipated $50.0 million credit facility from Titan will be sufficient to meetour 2002 cash needs. However, a variety of currently unanticipated events couldrequire additional capital resources such as the acquisition of complementarybusinesses or technologies or increased working capital requirements to fund,among other things, construction of systems for our strategic alliances inadvance of payment. Additionally, if we are unable to receive funds under thecredit facility with Titan or if our requirements vary from our current plans,we may require additional financing sooner than we anticipate. An inability insuch circumstance to obtain additional financing on terms reasonable to us, orat all, could have a material adverse effect on our results of operations andfinancial condition.

 

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**Item 3. Qualitative and QuantitativeDisclosures about Market Risk**

 

We currently are exposed to market risks related to changes in interestrates. We invest some of our cash in short-term, interest-bearing, investmentgrade securities. The value of these securities is subject to interest raterisk and could fall in value if interest rates rise. Titan has committed toextend us a new $50.0 million senior credit facility which bears interest equalto Titan’s effective weighted average debt rate plus 300 basis points.  To date we have not drawn down any moneyagainst the anticipated new senior credit facility.   See Note (6) in Notesto Consolidated Financial Statements. Currently we have no borrowingsagainst this anticipated credit facility. We anticipate our future borrowingswill have a variable component that will fluctuate as interest rates change. Ifmarket interest rates were to increase immediately and uniformly by 10%, therewould not be a material impact on our financial condition or results ofoperations.

 

**Recent Accounting Pronouncements**

 

In June 2001, the FASB issued SFAS No. 143, “Accounting forAsset Retirement Obligations” (“SFAS No. 143”). This statement addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts. It applies to (a) all entities and (b) legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development and/or normal operation of a long-livedassets, except for certain obligations of lessees. This statement amends FASBStatement No. 19, “Financial Accounting and Reporting by Oil and GasProducing Companies,” and is effective for financial statements issued forfiscal years beginning after June 15, 2002. Management does not believethat the adoption of this statement will have a material impact on itsfinancial position or results of operations.

 

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**PART II-OTHERINFORMATION**

 

**Item 1. Legal Proceedings**

 

Periodically,we are a defendant in cases incidental to our business activities. Furthermore,providers of products and services to the U.S. government are generally subjectto multiple levels of audit and investigation by various U.S. governmentagencies. Any liabilities arising from audits by the federal government arebeing retained by Titan as part of the contribution by Titan to SureBeam. Inthe opinion of management, the amount of ultimate liability, if any, withrespect to these actions will not materially affect the financial position orresults of operations.

 

OnJanuary 6, 2000, Ion Beam Applications S.A., a Belgian corporation, andsome of its U.S. subsidiaries, or IBA, filed an action for declaratory judgmentin a federal court in Virginia against Titan and us relating to our patents forits systems. The action attacked the validity of our core patent, sought adeclaration that IBA and its customers had not infringed any of the 62 claimsin our patent, and alleged that Titan and we engaged in unfair competition andthat Titan and our conduct constituted patent misuse. The case was moved to thefederal court in San Diego. On November 22, 2000, IBA filed an amendedcomplaint alleging, in addition to the original claims that Titan and weengaged in false advertising, monopolization, restraint on trade and unfairbusiness practices.

 

OnJanuary 25, 2002, Titan and we announced a settlement of the litigation withIBA. Under the settlement, IBA dropped all the claims it made against Titan andus in the litigation, including IBA’s challenge to the validity andenforceability of our core patent. Titan and we agreed that IBA and itscustomers may continue to operate or use IBA’s electronic irradiation facilityin Bridgeport, New Jersey. The settlement terms include, among other things,that IBA will purchase its requirements in the United States for e-beam andx-ray systems for use for processing food and sanitizing mail from Titan and usduring the next four years, provided Titan and we offer competitive terms.Titan and we also agreed to purchase their requirements of linear acceleratorswith above 150 kilowatts of power from IBA during the same four-year period, providedIBA offers competitive terms. Other terms of the settlement agreement were notdisclosed.

** **

**Item 2. Changes in Securities and Use ofProceeds**

 

On February 13, 2002, we exchanged $73.0million, in principal and accrued and unpaid interest owed to Titan under asubordinated promissory note, for 3,225,765 shares of Class B common stock and4,441,496 shares of Class A common stock, at a price of $9.521 per share, basedupon the twenty day trading average of our Class A common stock ending onFebruary 12, 2002. The issuance of these securities was made pursuant toSections 3 (a) (9) and/or 4 (2) of the Securities Act of 1933, as amended.  Each share of Class B common stock isconvertible into a share of Class A common stock at the option of theholder.  Titan currently holds50,000,000 shares of our Class B common stock and 4,441,496 shares of our ClassA common stock and has informed us that it intends to convert its Class Bcommon stock into Class A common stock and spin-off all of its Class A commonstock to its stockholders during 2002.

 

**Item 3. Defaults Upon Senior Securities**

 

Not applicable.

 

**Item 4. Submmission of Matters to a Vote ofSecurity Holders**

 

Not applicable.

 

**Item 5. Other Information**

 

Not applicable.

 

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**Item 6. Exhibits and Reports on Form 8-K**

 
| (a)    | Exhibits:                                                                               |
|--------|-----------------------------------------------------------------------------------------|
|   | None                                                                                    |
|   |                                                                                    |
| (b)    | Reports on Form 8-K:                                                               |
|   | The Company filed no reports on Form 8-K during the quarter  ended March 31, 2002. |

 

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| Dated: | May 15, 2002          |                                    |   |
|--------|-----------------------|-----------------------------------------|--------|
|   |                  |
|   |                  |
|   | SUREBEAM  CORPORATION |
|   |                  |
|   |                  |
|   | By:                   | /s/  Lawrence A. Oberkfell              |
|   |                  | Lawrence  A. Oberkfell                  |
|   |                  | *President and Chief Executive Officer* |
|   |                  |                                    |
|   |                  |                                    |
|   | By:                   | /s/  David A. Rane                      |
|   |                  | David  A. Rane                          |
|   |                  | *Senior Vice President,*                |
|   |                  | *Chief Financial Officer*               |
|   |                  | *(Principal Accounting Officer)*        |

 

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