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MILBERG WEISS BERSHADHYNES & LERACH LLP
WILLIAM S . LERACH (68581)TRAVIS E . DOWNS III (148274)DOUGLAS R . BRITTON (188769)BRIAN 0 . O'MARA (229737)401 B Street, Suite 1700San Diego, CA 92101Telephone: 619/231-1058619/231-7423 (fax)
SCHATZ & NOBEL, P .C .ANDREW M . SCHATZJEFFREY S. NOBELNANCY A. KULESA330 Main StreetHartford, CT 06106Telephone : 860/493-6292860/493-6290 (fax)
Co-Lead Counsel for Lead Plaintiffs
ORIGI NFILED
MAR 2 4 2004
SOUTHERN C OFCLERK . ST `TU~ IA
41
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNI A
In re SUREBEAM CORPORATION ) Master File No. 03-CV-01721-JM(POR)SECURITIES LITIGATION )
CLASS ACTION
This Document Relates To : ) CONSOLIDATED COMPLAINT FOR} VIOLATION OF THE FEDERAL
ALL ACTIONS . } SECURITIES LAWS}
DEMAND FOR JURY TRIAL
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BRIEF OVERVIEW
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1 . This is a class action on behalf of all persons who purchased SureBeam Corporation
("S ureBeam" or the "Company") common stock between March 16, 2001 and August 27, 2003 (the
"Class Period") . Plaintiffs bring this action against defendants for violating the Securities Act of
1933 (the "33 Act") and the Securities Exchange Act of 1934 (the "34 Act") by causing SureBeam to
improperly recognize more than $40 million in revenues (including $15.5 million that Titan and
SureBeam emphasized to ensure SureBeam's successful public offering) from off-shore joint
ventures that, they claimed, were successfully implementing food irradiation facilities using
SureBeam's irradiation systems (ventures that purportedly would generate more than $100 million
in revenue for SureBeam going forward) and by misleading investors about the state of expected
demand for SureBeam's services in the United States . After defendants flooded the market for over
two years with positive statements about SureBeam's revenues and its operations (and raised nearly
$100 million from investors in two separate offerings), defendants shocked the market when they
announced that SureBeam's auditors were challenging its accounting and that it was seeking to
liquidate its assets under Chapter 7 of the Bankruptcy Code to preserve a "couple of million"dollars
for unsecured creditors (i .e., stockholders) . Defendants' statements have wiped out investors who
purchased millions of dollars of SureBeam during the Class Period .
2 . SureBeam provides electronic irradiation systems and services for the food industry ,
and, at the beginning of the Class Period, was a wholly owned subsidiary of defendant Titan
Corporation ("Titan") . Titan took SureBeam public on March 16, 2001, in an Initial Public Offering
(the "IPO"), pursuant to a Registration Statement and Prospectus (the "Prospectus") filed with the
Securities and Exchange Commission (the "SEC") . Defendants told investors that SureBeam and
Titan had entered into a joint venture with Tech Ion Industrial Brazil ("Tech Ion") to irradiate (i.e.,
electronically pasteurize) food throughout Brazil and that the venture had generated $15 .5 million in
revenue for SureBeam in 2000 (more than 61 % of its revenuesfor the year) and would generate
$55 million in revenue (more revenue than the Company had generated in its entire existence)
over three years . These positive statements (and other statements about the venture pleaded at%24,
38, 40, 81-82, 84) generated excitement about SureBeam and allowed defendants to complet e
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SureBeam's IPO -- selling 6 .7 million shares of SureBeam stock at $10 per share for net proceeds o f
1$62 million .
3 . Defendants continued to emphasize the Tech Ion joint venture (and recognize revenu e
from the venture ) after the IPO . They caused SureBeam to recognize from the venture $4.7 million
in Q1-01, $864,000 in Q2-01, $ 1 .3 million in Q3-01, and a total of $6 .8 million for the year. They
also claimed that "`[t]he joint venture between SureBeam Corporation and Tech Ion . . . expands our
revolutionary, patented SureBeam(R) technology into one of the largest and most diversified food
markets in the world"' and even went so far as to claim that "the SureBeam Brazil network is
expected to be the world's largest, most comprehensive system dedicated to enhancing food safety
and preservation ." These positive but untrue and misleading statements propelled the trading price
of SureBeam common stock to a Class Period high of $19 .45 per share .
4 . Unfortunately for investors, defendants' statements about the Tech Ion joint venture
and the revenue recognized (and to be generated) from the venture were untrue . Contrary to
defendants' statements, the Tech Ion joint venture had not generated revenue for SureBeam before
the IPO and could not (and would not) generate revenue for SureBeam after the IPO because neithe r
the joint venture entity (SureBeam Brasil),nor Tech Ion (which had only $418,000 of current asset s
and $1,753 of "available" assets prior to the IPO) had the ability to pay for SureBeam's system s
without substantial outside funding - which fell through four days before the IPO .
5 . Internal documents show that defendants Lawrence A . Oberkfell ("Oberkfell") and
Kevin A. Claudio ("Claudio") knew as early as November 21, 2000, nearly three months before the
[P0, that the Tech Ion joint venture would not be able to secure funding to pay for SureBeam's
systems from the World Bank (the venture's primary source of funding) because its "customer base
JwasJ not well-defined and established enough to provide comfort ." In fact, they knew by
December 2000, that funding from the World Bank was virtually impossible because, as Jose
Francisco Medeiros ("Medeiros") - the head of Tech Ion and President of SureBeam Brasil - put it
in a letter to defendants Oberkfell and Claudio, SureBeam's systems were "financially inadequate"
to service Brazil's distribution facilities ("X-rays and E-beams are financially inadequate for
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generic work such as the CEASAs') and because the entire venture was flawed in "the concept and
numbers" :
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I am sending this email to both of you in advance of that phone call becauseDelphos' material needs enormous rewriting and deep changes in the concept andnumbers. There are problems of discrepancy of numbers, etc. As it is now, Ibelieve that it will not be approved, and if World Bank asks for outside experts toexamine the technical aspects, they will certainly locate our weak spots." I amready with my team to rewrite the document in order to meet Delphos's schedulles[sic] . We are ready to work overnight, etc ., if we agree on the changes of concept ."
Indeed, the World Bank never provided funding and the Tech Ion joint venture saw
its last chance for funding (and for payment for SureBeam's systems) end four days before the 1PO
when SUDAM (an Amazonian developmental agency that Tech Ion approached after its World Bank
failure) collapsed amid a political scandal . SureBeam's Prospectus, which omitted these material
facts, and its representations about the amount of revenue that the venture had generated (and would
generate) were, therefore, untrue and/or materially misleading when made .
7 . SureBeam's recognition of revenue from the Brazilian joint venture after the IPO wa s
also improper. In fact, the venture was a complete scam because Tech Ion took a $3 .5 million
purported line of credit from Titan and did virtually nothing to construct the facility in Brazil, which
was necessary before SureBeam could begin operations (and generate the profits that the venture
would need to pay for SureBeam's systems) . Lead Plaintiffs' investigation reveals that defendants
Oberkfell and Claudio knew or were deliberately reckless in disregarding that throughout 2001 the
facility was up to 12 months behind schedule and that SureBeam's systems, which SureBeam
shipped to Brazil in February 2001 for purposes of securing funding from SUDAM, were being
stored in a warehouse in Manaus, Brazil . SureBeam was eventually forced to buy-out Tech Ion's
interest in the facility, hire a different construction company to complete the facility, and ship brand
new systems to Brazil because the Brazilian government had taken control of the original shipment.
These facts demonstrate the falsity of defendants' statements about the status of the Tech Ion joint
venture and the impropriety of SureBeam's revenue recognition from the venture after the IPO .
Defendants also caused SureBeam to enter into a similar venture in Saudi Arabia .
Three months after the IPO, defendants announced that SureBeam had formed a joint venture with
RESAL - a Saudi Arabian sole proprietor engaged in the business of investing and construction in
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Saudi Arabia . Defendants claimed that the joint venture would generate $53 million in revenue for
SureBeam through the sale of 10 SureBeam systems . Following the announcement, SureBeam
improperly recognized $18 .3 million in revenue from the venture, despite the fact that RESAL could
not secure funding from the Saudi Arabian government to construct the irradiation facilities - which
was necessary for the joint venture to generate the income to pay for SureBeam's systems . Lead
Plaintiffs' investigation has revealed that RESAL's construction was severely delayed because it
could not secure the necessary funding - a significant fact that caused defendant David A . Rane
("Rane") to repeatedly renegotiate the payment schedule under which the joint venture would pay
for the systems . In fact, RESAL did not complete even the first of four planned facilities until
August or September 2003 - more than two years after SureBeam announced the venture.
SureBeam ended up manufacturing all 10 systems for RESAL (and recognized revenue from the
"sale" of those systems) despite the fact that it had no place to ship the systems because of RESAL's
delays. In the end, SureBeam received only $7 .5 million from RESAL despite the fact that it had
recognized over $21 million from the venture during the Class Period .
9. The effect of SureBeam and Titan's revenue recognition from Tech Ion and RESAL
during the Class Period is reflected in the following chart :
SureBeam Revenue AnalysisActual vs . Reported Revenues
(Exclud.s Non-Food I rradiation Revenue for Sales to Than)
$30
$20
13 .9
$11.7 12.2
-- -------------- -------. . . . . . . . . . . . . . . . . . . -------------- -------- .
. . . . . . . -------------
55-5 $5.8
$3-9 $4 .2
$2.3 $25 $? 8 $25 $3.0524 $3.1
$0.0 $0.9 $14
$1 0
$0
FY00 01 -01 02-01 3041 04-01 FY01 01-02 02-02 03 -02 04-02 FY02 01 -0 3
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10. Aside from its off-shore joint ventures with RESAL and Tech Ion , which contributed2
negligible revenues for SureBeam , defendants also made positive but untrue statements about the3
level of customer demand for SureBeam's services and its alleged need for extra operating capacity4
in the U . S . Throughout the Class Period , defendants emphasized the growth in demand for5
irradiated meat (and SureBeam 's services ) and that its new service centers would "provide6
SureBeam with p as teu rization capacity to process in excess of one billion pounds annually."7
1 1 . Inte rnally, however , defendants knew that demand for SureBeam's services w as8
negligible and that its service centers had ve ry few paying customers and were operating at an9
anemic rate (only 1.6% of capacity throughout the Class Period ) . They knew that SureBeam's10
Chicago facility was irradiating meat for Excel Corporation ("Excel") and IBP (large meatII
producers ) free of charge, that its Vernon, Californ ia facility had only one paying customer (United12
Foods), and that large producers had rejected i rradiated meat because advertising that irradiated meat13
was safe would imply that all other meat was unsafe . This lack of demand in 2000 and 2001 has14
been con firmed by an independent respected source - Consumer Repo rt s . According to an August15
2003 Consumer Reports art icle , irradiated meat "ha[d] barely been used on foods in the U .S ." and16
grocery retailers withdrew a roll-out of irradiated meat "three years ago" "because of poor sales" :17
Until the recent marketing blitz for irradiated meat, irradiated food was a non-18 issue for consumers . For decades the government has allowed certain foods to be
irradiated , including wheat and flour , to control insects , and white potatoes, to inhibi t19 sprouting. Since 1985, the government has approved i rradiation of spices , fruits,
vegetables , pork , and poultry . In 1997 irradiation was OK ' d for beef, and in 2000 for20 fresh eggs.
21 But it has rarely been used on foods in the U.S., in part because of concernsthat consumers wouldn't buy irradiated products . Indeed, when irradiated beef
22 was introduced three years ago in groceries, it was withdrawn because of poorsales.
2312. After three years of emphasizing the success of its off-shore joint ventures,
24improperly recognizing revenue of $40.8 million, and emphasizing the growing demand for
25irradiated meat , SureBeam shocked the market when it announced two delays of its SEC filings,
26terminated Deloitte & Touche LLP ("Deloitte") because it "ha[d] raised issues of conce rn regarding
27accounting treatment used by SureBeam for certain transactions beginning in 2000," (i.e., Tech Ion)
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11 and then filed bankruptcy (Chapter 7 liquidation) to preserve "a couple of million" dollars fo r
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unsecured creditors .
Background
SUMMARY OF THE CAS E
13. Titan is a diversified technology company that purports to create, build, and launch
technology-based businesses primarily from technology developed for the government . Titan was
founded in 1981 as a government information technology company and operates primarily through
its Titan Systems subsidiary . Titan describes that subsidiary as its "core government business" and
its engine for forming commercial technology applications and new businesses based on
government-funded research and development activities .
14 . Titan developed SureBeam out of this process . The SureBeam system, which Titan j
developed using technology created under government contracts related to strategic defense
initiatives during the 1980s, is comprised of a linear accelerator that produces a beam of electrons
traveling at the speed of light . The system scans electron beams (which can be converted into x-ray
beams at significant expense) across various products, including fruits, vegetables, and meat
purportedly to destroy or prevent the reproduction of organisms that cause infestation,
contamination, spoilage, or food-borne diseases .
15. Consistent with its stated business strategy, Titan started planning to take SureBeam
public in late 2000 to early 2001 . Titan could no longer afford to keep funding SureBeam's business
as it had incurred extraordinary (and increasing) losses beginning in the first quarter of 2000 and had
dramatically increased its debt levels . In fact, Titan's non-operating debt had increased from
$15 million to nearly $590 million between January 1996 and March 2001 and it had only one
quarter of positive earnings in the 18 months preceding the IPO . As a result, an IPO was the only
way that Titan could keep SureBeam viable .
16. To successfully complete an offering, however, Titan had to give SureBeam an
appearance of economic substance . Beginning in November 1999, Titan started forming joint
ventures with off-shore entities whereby SureBeam would sell its equipment to these entities an d
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Titan would obtain an equity interest therein (typically less than 20%) and the right to obtain a
majority interest in the venture in return for a large capital advance . For example ,
• SureBeam recognized $3 .8 million in revenue from Hawaii Pride in November 1999after Titan loaned Hawaii Pride $3 .4 million to start the venture ; and
• SureBeam recognized $15 .5 million in revenue from Tech Ion Brasil in 2000 afterTitan loaned Tech Ion $5 million to start the venture .
17 . By recognizing revenue in this manner, Titan made SureBeam appear to be
generating significant revenue beginning in late 1999 - revenue that it would need to convince the
public to invest in SureBeam's planned IPO .
Titan's Joint Venture with Tech Io n
18. Titan 's relationship with Tech Ion began on April 4, 2000 at the Intertech Food
Irradiation conference in Washington D.C. At a meeting over dinner that night between defend an t
Oberkfell and Tom Allen ofTitan and executives of Tech Ion , including Jose Francisco Medeiros,
Titan and Tech Ion agreed to pursue a joint venture designed to irradiate food in Brazil . Time was
apparently of the essence for Titan as it arranged a team meeting between Titan executives and Tech
Ion executives just three days later on April 7, 2000 at Titan's headquarters in San Diego .
19. At that meeting , which was attended by Dr. Gene W . Ray ("Dr . Ray") (then
Chairman of Titan ), Eric de Marco (then executive Vice President of Finance at Titan), defendant
Oberkfell (then Sr . Vice P resident of Titan and chief executive of Titan' s SureBeam subsidiary),
defendant Claudio (then Vice President of Finance of Titan), Gary Loda (then Vice President o f
Titan), and executives of Tech Ion, including Medeiros, Titan proposed a "term sheet" that outlined
Titan's proposal for a joint venture. The "term sheet" outlined several key provisions governing the
proposed venture, which involved "the irradiation of food and food products utilizing Titan
SureBeam's patented electron beam and x-ray technology ." According to the "term sheet," Titan
and Tech Ion would form various entities to effectuate the venture, including Titan SureBeam (a
wholly owned venture of Titan), Titan SureBeam Brasil (a wholly owned subsidiary of Titan
SureBeam), and SureBeam Brasil (the joint venture entity between Tech Ion and Titan SureBea m
Brasil) :
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1 . "Titan SureBeam, a wholly owned subsidiary of the Titan Corporation, willestablish a wholly owned subsidiary, Titan SureBeam Brasil ("TSB"), or somesimilar named organization . "
2 . TSB and [Tech Ion] will jointly establish a Brazilian company, SureBeamBrasil ("SB") which [had] the following capital and ownership structure :
• [Tech Ion] 80 .1 % of voting common stock
• [Titan SureBeam] 19.9% of voting common stock
• [Titan SureBeam] warrant to increase voting common stock position up to50%, exercisable at any time for $1 .00, fully vested upon issuance, 20 yearlife.
Thus, the joint venture was between Titan's second tier Titan SureBeam Brasil subsidiary (created
by Titan solely for this venture) and Tech Ion -- an organization headed exclusively by Medeiros .
20. The "term sheet" also outlined the financial parameters of the venture, which
contemplated having SureBeam Brasil (the joint venture entity) purchase from Titan SureBeam
"electron beam and x-ray systems, equipment and services" at prices that were "at most market
value." Payment for the systems, equipment, and services was designed to be made from SureBeam
Brasil at "[t]he higher of 75% of profit or a fixed payment based on a 5 year amortization with a
10% interest rate." The parties agreed that this division of profits would exist until "all electron
beam or x-ray systems, equipment or services provided by [Titan SureBeam] to [SureBeam Brasil,]
including any financing costs, [had] been paid back in full" and that any net profits thereafter would
be split "50150" between Titan SureBeam and Tech Ion even if Titan SureBeam did not exercise an
option "to increase its ownership position in SB from 19 .9% to 50%."
21 . Titan also gave its subsidiary the right to "obtain financing for the equipment an d
systems sold to [SureBeam Brasil]" and insisted that Tech Ion and SureBeam Brasil agree to assist
Titan SureBeam in obtaining that financing. In fact, the agreement provided that SureBeam Brasil
would be required to service Titan/SureBeam's funding if it elected to secure funding to pay for
SureBeam's systems - a condition that would inevitably arise because neither Tech Ion nor
SureBeam Brasil were in a financial position to pay for SureBeam's systems .
22. Both Titan SureBeam and Tech Ion were new operations, and Tech Ion, even more
than Titan SureBeam, was in dire financial straits . According to SureBeam Brasil's business plan
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dated November 2000 (which was not available to public investors), Tech Ion's financial position
had eroded considerably between 1998 and 1999 . Its current assets had collapsed from $3 .9 million
to just $418,000, its "Available" assets had plummeted from $3 .6 million to just $1,753.00 and its
current liabilities had skyrocketed from $579,000 to an extraordinary $2 .2 million in a single year .
Indeed, "Techlon Brazil S/A . . . [had] no recorded historical revenues or profits that could be
displayed at this time" as it had "just opened it [sic] first cobalt irradiation facility in Manaus" and an
entity that was conducting due diligence on Tech Ion at the same time (for a competing irradiation
venture with Tech Ion) concluded on June 30, 2000 that "[w]e were able to verify that TECH ION is
a company that is not in full operation yet ." Given that Titan's partner essentially had no assets,
Titan contributed $5 million to Tech Ion as part of the venture and made no provision - either in the
"term sheet" or in the Joint Venture and Strategic Partnering Agreement that Titan and Tech Ion
executed on May 18, 2000 - for having Tech Ion or SureBeam Brasil pay the contribution back .
23 . The very foundation of the venture, therefore, was based on entities that had no
proven (or pre-existing) track record or customer base . In the words of Delphos International (the
agency that Tech Ion and SureBeam hired to secure funding for the venture), in an e-mail to
Medeiros, Oberkfell and Claudio, the joint venture was based on "a high technology service that is
currently underutilized (or non -existent) in Brazil." Payment for SureBeam's irradiators was,
therefore, highly speculative .
24 . Despite these facts, and armed with their agreement, Titan issued a press release on
May 30, 2000, heralding the venture . Titan's release stated that Titan expected the venture to be the
largest, most comprehensive food safety and preservation system in the world and that it expected
"in excess of $50 million in sales revenue to Titan" from the venture :
When completed, the network is expected to be the world's largest, mostcomprehensive system dedicated to enhancing food safety and preservation . Thetotal value of this initial network is expected to be in excess of $50 million in salesrevenues to Titan over the next three years - in addition to recurring processingrevenues .
For the next six months, Titan and its SureBeam subsidiary headed toward the public markets -
recognizing revenue every quarter of the way .
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1 25. In November 2000, however, SureBeam's future took a turn for the worse . As
2 mentioned above, Tech Ion and SureBeam had retained Delphos International to assist it with
3 obtaining much needed financing from IIC and IFC (i .e., the World Bank) . Over the six months
4 from the venture's inception, the parties had developed a Business Plan and an Information
5 Memorandum that set forth the project's rationale , its technology, and its projected financial results
6 - descriptions which Titan, SureBeam, and Tech Ion hoped would impress these lenders . An e-mail
7 from Michael Telford at Delphos International to Medeiros at Tech Ion (and copied to defendants
8 Oberkfell and Claudio at Titan) revealed that they certainly were not impressed and were very
9 skeptical about the entire venture because it lacked an established (and well defined) customer
10 base :
11 As we discussed, the meetings at the IIC and IFC went very well . Bothorganizations are genuinely interested but expressed some of the same reservations .
12 Specifically, SureBeam Brasil aims to provide a high technology service that iscurrently under-utilized (or non -existent) in Brazil . Although this is at the heart of
13 its potential for success, lenders secured only by the project's assets need greaterassurances that there will be customers to generate revenue to pay the debt . As
14 presented in the information memorandum, the customer base is not well-definedand established enough to provide comfort .
1526. In addition to outlining these reservations to Oberkfell and Claudio, the e-mail also
16relayed this devastating conclusion - "convincing a lender that clients will line up for a new service
17when the doors are thrown open (what we refer to as the `if you build it, they will come' or `Field of
18Dreams' approach is EXTREMELYdifficult 'and it came to this conclusion without knowing that
19Tech Ion and SureBeam had omitted any reference to the fact that "Tech Ion Brasil S/A . . . [had] no
20recorded historical revenues or profits . . ." and were questioning internally "how [to] defend its
21[Projected Operating and Financial Performance] assumptions ."
2227. As a result, Delphos International continued to press the venture for more specifics on
23December 28, 2000. In an e-mail that day from Alan Beard at Delphos International to defendant
24Claudio at Titan (and copied to others), Delphos International reiterated the need for Titan and
25SureBeam to justify its projected revenues :
26Attached is the information we had sent last week . We have highlighted within the
27 Word document that specific questions and issues that need addressing . To reiteratethem here more broadly , we need to justify the revenues and construct a plausibl e
28 business casefor marketing the SureBeam services (L e., letters of interest from
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potential customers, alliances , etc.) . Additionally, we need as many specifics on theconstruction of the project as possible .
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Titan and SureBeam could not (and in fact did not) deliver as requested- at least not in a way that
would convince World Bank to fund the venture .
28. As Tech Ion and SureBeam continued to press ahead in the face of these problems (by
making arrangements to deliver SureBeam's irradiators to Brazil in early January), defendants
Claudio and Oberkfell were presented with more devastating news from Medeiros . He told them in
a December 2000 letter that SureBeam's systems were inadequate to service the very foundation of
SureBeam Brasil's business plan - Brazil's CEASAs (i.e ., large distribution facilities that distribute
food throughout Brazil) :
X-rays and E-beams are financially inadequate for generic work such as theCEASAs and Juazeiro .
29. This news caused Medeiros, Oberkfell, and Claudio to scramble for a solution .
According to Medeiros's "Fax/Memo" to Claudio and Oberkfell in December 2000, the material
submitted to the World Bank needed to be rewritten because of problems with discrepancy and the
concept behind the entire venture . Medeiros offered to work overnight with his team to rewrite the
entire document in order to secure funding from the World Bank and offered a solution that he
believed would allow SureBeam to display its technology without hurting the venture - establish Rio
de Janeiro ("Rio") as a "Center of Excellence" :
I apologize for my absence in the last conference call . I am sending thisemail to both of you in advance of that phone call because Delphos' material needsenormous rewriting and deep changes in the concept and numbers . There areproblems of discrepancy of numbers, etc . As it is now, I believe that it will not beapproved, and if World Bank asks for outside experts to examine the technicalaspects, they will certainly locate our weak spots . I am ready with my team torewrite the document in order to meet Delphos's schedulles [sic] . We are ready towork overnight, etc ., if we agree on the changes of concept . . . .
The dilema fsicl we face is how to use Xrav and Ebeam in the CEAS Awithout hurtin the JV? The best solution is to establish CEASA as a Center ofExcellence for Food Irradiation . In this manner, we will have government supportand financing for the facility, hopefully at zero interest costs . If we follow thisstrategy, we will have Brazilian federal government support within the WB [i .e .,World Bank], we will push for ICGFI next meeting in June to be in Brazil in ourpremises, transfer the PAHO project from Manaus to Rio, etc . The governor of the
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1 State of Rio is interested in the idea and the Minister of Science and Technology . Ibelieve that we should include this idea in the text .
2
3Overall Conclusion : Let's change the image of Rio to a Center of Excelence
4 [sic] to justify the presence of X-ray and E-beam there, and to enable us to obtaingovernment funds - hopefully grants - to finance the project .
5
630. Medeiros's conclusion struck at the heart of SureBeam Brasil's planned operation,
7which it described as the "RJ CEASA system design concept ." In fact, according to SureBeam
8Brasil's November 2000 Business Plan, Titan was looking to minimize the risk of the operation "by
9locating the facility near the RJ CEASA that provides most of the produce for Rio de Janeiro's
10 ,10 million residents" and was hoping to process "5 to 8% of the total RJ CEASA daily volume ."
IIMedeiros's letter to Claudio and Oberkfell, however, outlined why SureBeam equipment would not
12work for its intended purpose :
13Using Titan's performance and investment data, I did develop the attached table,
14 Comparative Analysis Between Co-60 and Electronic . From there you will verifythat X-rays is very unprofitable, at the prices established in the [Information
15 Memorandum] . It will need 261- 24 hr working days just to cover interest andoperating costs . E-beams, are much better, but the production estimates were
16 produced with a conveyor speed of 50 fpm, which will not allow goodoperations -conveyors will jam, etc. And e-beams estimates were also based on the
17 most favorable product for e-beams: de-boned meat (I believe that you should askyour technical team to be more careful in passing on information which is
18 questionable) . The problem with a-beam is that if the product is not adequate, then itcannot be processed .
1931 . Medeiros concluded with the following "quick summary" - "if we use only X-rays,
20the facility will surely go bankrupt (according to the investment amounts and interest rates in the
21report), if we go E-beams, numbers will improve but the market will be limited ."
2232. As a result of these findings and the failure of Titan to secure funding from the World
23Bank, Medeiros told Oberkfell and Claudio that SureBeam could try to seek funding from the
24SUDAM (an Amazonian developmental agency) using Tech Ion's facility in Manaus, Brazil .
25Financing from the SUDAM was critical at this stage given that the joint venture agreement required
26SureBeam Brasil (the joint venture entity) to pay for SureBeam's irradiators - for which SureBeam
27had already recognized $15 .5 million in revenue. The SUDAM was the venture's last hope .
28
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33 . Accordingly , Medeiros instructed SureBeam to re-route its equipment from Rio (the
I site of the planned facility and the location of one of the largest CEASAs) to Manaus -where Tec h
Ion's existing facility was located. Re-routing the equipment through Manaus was apparentl y
necessary given that the SUDAM specialized in developing the Amazonian region of Brazil (located
nearly 2,000 miles from Rio) . Only by showing that Medeiros was developing the Amazon coul d
I Tech Ion secure funding from SUDAM - which was now critical to SureBeam getting paid for its
systems. As one project manager working on the Brazilian project put it, "we couldn't get paid
unless Medeiros got paid" (i . e., secured funding) .
34 . Shipping SureBeam's systems through Manaus would accomplish two othe r
important goals for Medeiros and Oberkfell - it would enable Medeiros to avoid taxes on the
funding and would create the appearance for Oberkfell that SureBeam's revenue recognition was
appropriate - if it was done right . In order to secure funding from the SUDAM, Tech Ion and
SureBeam had to create the appearance that Tech Ion had actually paid for the systems (when it had
/lot) . Doing so would enable Medeiros to show that the funding was adding value to the Manaus
facility in the Amazon (and to avoid taxes on the funding, as the Amazon was a tax-free zone in
Brazil), and would also enable SureBeam to justify its revenue recognition if anyone inquired .
Accordingly, Medeiros and Oberkfell agreed to ship the systems and indicate on the invoices that
Tech Ion had paid for the shipment in full . In fact, the invoices themselves state that the system s
were "prepaid," despite the parties' agreement to have SureBeam pay for the systems out of th e
profits of the venture .
35. As Medeiros was arranging to have SureBeam ship the product to Manaus, however,
Oberkfell faced an objection from one of his project managers. That executive expressed his
concern to Oberkfell in early January 2001 that shipping the equipment would lead to its
deterioration because Tech Ion had not completed the facility that would house the systems .
According to the project manager, he told Oberkfell that shipping the systems in January made no
sense and could actually harm the systems . Oberkfell overruled the objection and shipped six
20 foot containers to Manaus containing two irradiators on January 16, 2001 and January 25, 2001
and designated Tech Ion as the buyer.
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from $5 million per irradiator to $6 .5 million, given that the SUDAM was likely to provide funding
for whatever purchase price appeared on the invoice . Oberkfell signed off on this arrangement on
February 26,2001 - less than four weeks before Titan 's planned IP0 of SureBeam . The following
e-mail exchange reveals that Oberkfell and Claudio agreed to this arrangement :
[From : Jose Medeiros to Larry Oberkfell ; Kevin Claudio ]
SUDAM : all numbers needed to be developed by me will be delivered this week tothem . . . KEVIN [Claudio] : please send me your proforma invoice for US$ 6 .5million ASAP . Otherwise, I will change the numbers to US$ 5 .0 million. If I do nothear from you or receive the amended Proforma invoice, I will use the existing oneof $5 .OMM .
Final documentation one week after . [From Larry Oberkfell to Jose Medeiros, KevinClaudio ]
"We should change the amount to $6.5 definitely. . . . Keep going as fast as you canto get the $ to prove to all that this is as we all claim it to be . . . Thank you .
37. On March 12, 2001 , SureBeam Brasil's chances for funding from the SUDAM cam e
to a halt . According to the Associated Press, Brazil's President was embroiled in a scandal and was
attempting to prevent investigations into allegations of high-level corruption - corruption that
extended to many government agencies, including SUDAM, which was disbanded by the
government that day:
[The President of the Senate Antonio Carlos Magalhaes] also ordered investigationsof possible "irregularities" at some government agencies, and two such agencieswere disbanded by the government Monday. Sudam and Sudene, developmentorganizationsfor the Amazon and Northeast regions, had been mired in corruptionallegations and were mentioned by Magalhaes .
Titan Takes SureBeam Public Based on Incorrect Revenu e
38 . On March 19, 2001, just seven days after SureBeam Brasil saw its last chance fo r
funding disappear (as well as any hope that SureBeam would be paid for its equipment), Titan filed a
Prospectus for the sale of 6.7 million shares of SureBeam stock - 12% of the total number
outstanding . In that Prospectus, Titan attributed $15 .5 million of revenue in 2000 (61 % of total
revenues for the food irradiation division of the subsidiary for that year) to the sale of
11 irradiation systems to Tech Ion and stated that they expected revenues from this sale to total
$55 million over three years - revenues which totaled nearly the entirety of revenues tha t
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I SureBeam (including Titan's medical equipment division) had generated since its inception i n
11996 :
In May 2000, we received purchase orders from Tech Ion Industrial BrasilS .A. for eleven electronic food irradiation systems which we expect to result inapproximately $55.0 million in sales revenues to us over the next three years . Webegan construction of these systems in July 2000, and have recorded revenues of$15.5 million under the percentage-of-completion method for the year endedDecember 31, 2000 .
39. These statements were untrue . As alleged above, payment to SureBeam for its
irradiator systems, by agreement, were to be made out of either the "[t] he higher of 75% ofprofit or
a fixed payment based on a 5 year amortization with a 10% interest rate," or from outside funding
that Titan and SureBeam had the right to obtain . Since neither Tech Ion nor SureBeam Brasil ha d
the ability to pay for the equipment and were instead relying on funding that Titan and SureBeam
knew as of the date of the IPO would not be provided, Titan and SureBeam's recognition of $15 .5
million of revenue was improper and should not have been recorded . In fact, Titan had no
reasonable chance of being paid because the venture's profits depended on Tech Ion constructing the
facility to house the systems (which required external funding), and neither Tech Ion nor SureBeam
Brasil could obtain the funding (to construct the facilities or to pay for the systems). Indeed, in order
for revenue recognition to be proper under the percentage of completion accounting method - whic h
Titan and SureBeam used to justify the revenue recognition - receipt of payment must be reasonably
assured. Given the status of the entities responsible for paying for the equipment, the venture's
flaws in the "concept and numbers," and the fact that the joint venture's chance for funding had been
eliminated, Titan and SureBeam's statements that they had recorded $15 .5 million in revenue and
expected a total of $55 million over three years were untrue .
40. Titan and SureBeam 's untrue statements did not end there . In fact , the Prospectus
proceeded to describe the SureBeam Brasil joint venture with Tech Ion stating that "we acquired a
19 .9% equity interest in SureBeam Brasil without charge at the time of our signing the agreement
to establish SureBeam Brasil" and that SureBeam Brasil was created "with no initial capital
contribution from either party" - an untrue statement given that Titan contributed $5 million to
Tech Ion but made no provision for repayment . Indeed, the Prospectus stated that Titan's $5 millio n
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contribution was a working capital line-of credit that bore interest at 10 % per annum but omitted the
fact that neither Tech Ion nor SureBeam Brasil were obligated to repay (or were in fact repaying) the
line of credit under any specific parameters . In fact, SureBeam filed with its Form 10-K on April 1,
2002, a mate rial contract between SureBeam and Tech Ion which admitted that the amounts
outstanding under the line of credit (which totaled $2 .2 million at December 31, 2000) "remain[]
unpaid ." Even if the Line of Credit Agreement did contain a provision obligating Tech Ion or
SureBeam Brasil to repay the line of credit , however , their failure to pay (and their precarious
financial condition) are material facts that Titan and SureBeam omitted from the Prospectus .
41 . SureBeam's troubles in Brazil continued throughout 2001 (and after the IPO) . By
Apri 13, 2001, defendants knew or were deliberately reckless in disregarding that the venture face d
problems beyond Tech Ion's inability to secure financing . Between April 3, 2001 and April 5, 2001
(less than three weeks after SureBeam received $62 million from investors), Oberkfell traveled wit h
a consultant hired by SureBeam and SureBeam's public information officer to attend a Foo d
Irradiation Conference in Rio . During that trip, Oberkfell traveled extensively with Maderios to
meet government officials and to develop customers . Oberkfell and Medeiros also visite d
SureBeam's irradiation systems that had been sitting in a customs warehouse in Manaus (for which
SureBeam was paying storage charges) since their arrival in February . These irradiators had
remained in Manaus for two months because the plant in Rio - which was the responsibility of Tech
Ion - was six months behind schedule at the time . In fact, Oberkfell knew that the venture was in
trouble as he expressed to the consultant his concern that he could not "liberate" his systems from
Brazilian customs as he literally had no place to put them in Rio .
42 . SureBeam's troubles with the facility continued into July . Between July 9, 2.001 and
July 12, 2001, a SureBeam project manager, a project engineer, and a consultant traveled to Rio to
inspect the status of the project . What they found was devastating - Tech Ion had done very little to
construct the facility - which had to be accomplished before SureBeam's systems (which still
remained warehoused in Manaus) could be installed, tested, and used to generate income for th e
venture to meet its payment obligations to SureBeam . According to the consultant retained by
28 11 SureBeam (who actually visited the facility 's location between July 9, 2001 and July 12, 2001) an d
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another SureBeam project manager (who was in Rio and at the facility at the time), Tech Ion did not
appear to be doing anything on the project . In fact, Tech Ion had done nothing more than secure a
25-year lease on a parcel of land on which it laid a foundation and constructed the ceiling of a
building. According to the project manager, Tech Ion at most had poured a slab, installed structural
steel, and dug "little holes" in the 14 months since Tech Ion and SureBeam formed the venture . The
consultant witnessed SureBeam's executives sending daily c-mails to Claudio and Oberkfel l
explaining these problems and the project manager explained that he sent a photograph of an "empty
field" to Claudio and Oberkfell along with a letter that stated that he did not know what Medeiros
was doing with the monies he had received from Titan/SureBeam but he certainly was not usin g
those monies to build the facility .
43 . By November 2001, Tech Ion had done so little on building the facility that
SureBeam was forced to terminate the venture and retain a separate construction firm to complet e
the project, which - according to a schedule that SureBeam's consultant witnessed on the wall of the
facility, was up to 12 months behind schedule . At the project manager's suggestion, Oberkfell
replaced Tech Ion and retained Marzionna Arquietetos Sao Paolo, Brasil ("Marzionna") to complet e
the construction . At the time that SureBeam retained Marzionna, a construction engineer wh o
worked on the project estimated that the facility was only 40%-50% complete . According to the
engineer, Marzionna did not complete the building until August or September of2002, at which tim e
SureBeam finally installed brand new systems - which were ready for testing but not for commercia l
use . SureBeam's project manager explained that SureBeam had to send new systems (and replace
the systems shipped in January) because the Brazilian government had taken control of the origina l
shipment in Manaus - costing SureBeam an additional $15 million. Tellingly, SureBeam's Form
10-K filed with the SEC on April 1, 2002 admits that the service center in Brazil was not complete d
1 as of that date and was not going to be completed until Q3-02 - almost three years after Tech Io n
and Titan formed the venture :
We are currently in the process of building additional company-owned servicecenters in . . . Rio de Janeiro, Brazil . We expect . . . the Brazil service center to beoperational by the third quarter of 2002 .
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1 44, At no time did SureBeam or Titan disclose these material facts to investors . Instead,
2 they continued to recognize (and report) millions of dollars in revenue from the venture until
3 October 23, 2001 - at which time SureBeam bought out Tech Ion and acquired a total interest of
4 80.1 % in SureBeam Brasil . In its filing with the SEC on April 1, 2002, Titan also stated that it had
5 released Tech Ion from trade receivables totaling $22 .4 million (and forgave another $3 .5 million of
6 the line of credit that Titan had given to Tech Ion) in exchange for the building that Tech Ion was
7 supposed to have completed and the systems that SureBeam had shipped to Manaus .
8 45. Thus, in the end, Titan created a joint venture, contributed $3 .5 million in capital to
9 the venture, sold $22.4 million in equipment to the venture (three systems), recognized $22 .4 million
10 in revenues from those sales, and then forgave all of this to get an incomplete building and the right
11 to equipment that had been seized by the Brazilian government . Revenue recognition under the
12 foregoing scenario was highly inappropriate and violated GAAP .
13 Titan' s Joint Venture with RESA L
14 46. SureBeam's problems were not limited to Tech Ion and Brazil . In fact, they extended
15 to Saudi Arabia where SureBeam formed a similar venture with RESAL - a Saudi Arabian sole
16 proprietorship that was engaged in the construction and investment business in the Kingdom of
17 Saudi Arabia . Pursuant to the terms of the venture, RESAL would build three facilities throughout
18 Saudi Arabia (the first in Riyadh, the second in Jeddah, and the third in Damman) and issue a
19 purchase order for 10 SureBeam irradiator systems - which RESAL intended to payfor through the
20 profits of the venture . According to the terms of the joint venture agreement, the joint venture
21 entity, SureBeam Middle East, LLC ("SureBeam Middle East"), was obligated to enter into a
22 payment agreement for SureBeam's systems and RESAL would transfer its purchase order to
23 SureBeam Middle East "at such time as the Company has received sufficient funding from
24 investors, the Saudi Industrial Development Fund, commercial banks, and/or other individual lenders
25 to finance the first processing facility ." Thus, RESAL needed to secure funding to finance the
26 project .
27 47. SureBeam could not ship its systems to Saudi Arabia, therefore, until RESAL had
28 built the facilities that would house SureBeam's systems - which was scheduled to be completed by
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12005 ( i.e ., all three facilities ) with the Riyadh facility scheduled to begin operating in June 2002 .
Under the terms of the agreement, SureBeam had delegated the construction responsibility t o
f RESAL and knew that RESAL intended to secure financing from the Saudi government to fund th e
construction . Since payment for SureBeam's systems depended upon the operations of the venture,
and the venture could not operate without the necessary facilities, defendants knew at the time of the
venture that its success was dependent upon Saudi financing .
48. Nevertheless, defendants caused SureBeam to improperly recognize millions of
dollars in revenue before a single building had been built (and funded) . It recognized $6 .8 million i n
Q2-01, $7 .9 million in Q3-01, and a total of $12 million by December 31, 2001 -just six months
after announcing the venture and six months before the first facility was even scheduled to begin
operating . It also improperly recognized a total of $5 .1 million in fiscal 2002 and another
$1 .1 million in Q1-03 . Defendants based this recognition on the percentage of completion
accounting method but did not calculate the percentage based on the percentage that the parties had
completed the project . Instead, defendants recognized the revenue based on its own manufacturin g
process - and even based on its purchase of "materials handling" equipment . Thus, SureBeam
recognized millions in revenue knowing that the venture's success depended upon RESAL securin g
financing - which it had not accomplished at any time during the Class Period . In fact, a pro gram
manager on the project explained that SureBeam executives knew that the project was being delayed
because RESAL could not secure financing - a fact which demonstrates that RESAL could not fund
the operation (and pay SureBeam $50 million ) on its own .
49. SureBeam's recognition was improper . Since payment was based upon th e
operations of the venture, SureBeam could not be assured that the venture would generate sufficient
profits to pay for the systems. Indeed, significant delays in the construction of the facilities and
RESAL's inability to obtain Saudi financing prohibited SureBeam from shipping a single system to
Saudi Arabia until July 2003 - two years after SureBeam announced the venture and recognized
millions of dollars in revenuefrom the project . According to a SureBeam project manager that
worked on the Saudi project from May 2001 until January 2004, construction of the Riyadh facility
28 11 was significantly delayed throughout 2001 and into 2002 . In fact, the manager explained that at th e
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time that he joined the project in May 2001 "not a significant amount of work [had been] done" on
the project and that it was far from being complete . This account was supported by the account of
SureBeam Director of International Business, who stated that at the time he departed SureBeam in
July 2003, the Riyadh facility was still not up and running .
50 . SureBeam's project manager attributed the delays in the project to RESAL's inability
to obtain funding from the Saudi government . In fact, this manager witnessed defendant Rane re-
negotiating the payment schedule for SureBeam's systems with Ghassan Alandar of RESAL
because RESAL still had not obtained the necessary funding to finance the Saudi facilities . In the
end, RESAL never obtained the funding and SureBeam was left having built all 10 of the system s
(and having recognized $23 .5 million in revenue) without a shipping destination. And while RESAL
did its best to pay SureBeam for its systems, those payments only amounted to $7 .5 million and did
not begin until August or September 2003 -- at which time RESAL paid SureBeam a $3 millio n
"milestone payment" for shipping its first system . SureBeam 's recognition beyond this amount was
improper given that RESAL could not (and did not) have the funds necessary to pay the total invoice
of $53 million (or even the $23 .5 million that SureBeam had recognized to that date) . SureBeam' s
revenue recognition under these circumstances was inappropriate and rendered SureBeam's 2001-
2003 financial results materially false and misleading .
SureBeam's Domestic Operation s
51 . SureBeam also mislead investors about its domestic operations . In contrast t o
SureBeam's offshore business model of selling systems to joint ventures in which it was a joint
venture partner, SureBeam's domestic business model sought to sell its service of irradiating meat to
meat producers on a per pound basis . According to SureBeam's public filings, each SureBeam
service center (of which SureBeam owned three throughout the Class Period) had the capacity to
irradiate 40,000 pounds of meat per hour and could operate on a 24 hour basis. Thus, simple
calculations demonstrate that SureBeam's operating capacity could reach as high as 28 .8 millio n
pounds of meat per month (operating at full capacity 24 hours per day and seven days per week) or
6.4 million pounds per month if SureBeam only operated eight hours per day and five days per week .
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52. Throughout the Class Period, SureBeam emphasized that SureBeam was addin g
I additional capacity through additional service centers to meet strong expected demand :
• When SureBeam announced that it was opening its "Third Electronic PasteurizationCenter," it emphasized the additional capacity it was gaining and how that capacitywould give it "greater flexibility for servicing its customers" ;
• When it announced its Q I-01 results (less than eight weeks after the IPO), defendantssaid that "[w]ith the demand for our pasteurization systems and services expected toincrease, we are accelerating our investments to increasepasteurization capacity tosupport demand" ;
• When SureBeam announced its joint venture with RESAL in Saudi Arabia,defendants stated that "the availability of SureBeam [irradiated] ground beef hadexpanded "rapidly, " reflecting "growing customer demand" ; and
• When SureBeam announced its Q4-02 results, Oberkfell stated that "'[d]riving [anaccelerated roll-out by grocery retailers] was a significant expansion in the overalldistribution of our processor customer sales of SureBeam processed fresh groundbeef to both retail and foodservice customers . Consumer demand is obviouslygrowing, as folks are embracing this as an added measure of food safety in theproducts they purchase for their families ." '
Defendants disseminated these (and other) statements emphasizing the need for excess capacity wel l
into 2002 .
53 . Defendants' statements were materially false and misleading in that they lead
investors to believe that the announced extra capacity (which totaled the ability irradiate nearly 250
million pounds of meat per facility per year) was necessary given increased demand . What
defendants failed to disclose, however, was that SureBeam's operations were failing and that its
service centers were operating at an anemic rate . Former employees at SureBeam's Chicago, Illinois
and Vernon, California facilities explained that SureBeam's existing facilities were operating
nowhere near capacity and that there was virtually no demand for SureBeam's services . In fact, a
project engineer at SureBeam's Chicago, Illinois facility stated that he never witnessed trucks at the
facility and characterized the activity as "oh man, was it slow" - a statement that was confirmed by a
vice president of processor sales and marketing who explained that there was "not that much
business going on in Chicago ." The same was true of SureBeam's Vernon, California facility,
whose operations, according to an office manager at the facility, "were barely going . "
54. The actual capacity at which the facilities were operating supports these accounts .
According to SureBeam's vice president of marketing and processor sales, the Chicago facility wa s
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irradiating only 6,000 to 7,000 pounds per week (or just .1 % of the facilities capacity) throughout the
I Class Period . In fact, the capacity company-wide was not much better - reaching only 2%-3 %
during the Class Period .
55. This lack of capacity resulted from consumer reluctance to accept irradiated meat an d
SureBeam ' s result ant failure with grocery retailers . In fact, a Consumer Reports article in Augus t
12003 explained that "when irradiated beef was introduced three years ago [i.e., in August 2000], it
was withdrawn because of poor sales" :
Until the recent marketing blitz for irradiated meat, irradiated food was a non-issue for consumers . For decades the government has allowed certain foods to beirradiated, including wheat and flour, to control insects, and white potatoes, to inhibitsprouting. Since 1985, the government has approved irradiation of spices, fruits,vegetables, pork, and poultry . In 1997 irradiation was OK'd for beef, and in 2000 forfresh eggs .
But it has rarely been used on foods in the U.S., in part because of concernsthat consumers wouldn't buy irradiated products . Indeed, when irradiated beefwas introduced three years ago in groceries, it was withdrawn because of poorsales.
56. A project engineer at SureBeam explained that SureBeam was encountering these
issues not only in 2000 (as Consumer Reports confirmed) but also well into 2001 . In fact, by
November 2001, SureBeam was experiencing significant difficulties getting its product implemented
1 through grocery chains . For example, SureBeam had arranged in November 2001 to have its client
Excel roll-out irradiated meat through The Kroger Co .("Kroger") - one of the largest grocery
retailers in the United States . Prior to the roll-out, however, Excel stated that they wanted additiona l
testing before they would involve Kroger in the roll-out . SureBeam Senior VP of marketing at its
Chicago facility, Jim Nazarowski, attempted to thwart Excel's request by approaching Kroge r
directly. This event caused SureBeam to lose the roll-out in November and to nearly lose Excel as a
customer. In the end, SureBeam was forced to offer Excel deep discounts and, in fact, processed
thousands of pounds of meat for Excel at no charge . In fact, SureBeam's incremental rate per pound
charged for meat processed between Q 1-02 and Q 1-03 was a mere $.02 per pound - less than half of
the $.05 per pound charge that defendants were telling the market that SureBeam expected to
charge .
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57. A similar situation happened with SureBeam's attempts to secure a contract with
Tyson Foods ("Tyson") - a major poultry producer in Arkansas . Although Tyson did do a test study
on irradiated foods, the relationship ended because Tyson's marketing director could not figure out a
marketing strategy for irradiated foods . If Tyson marketed the irradiated food as "safe," it woul d
directly or indirectly imply that Tyson's other foods were not safe. These issues and other issue s
dealing with consumer acceptance with irradiated food resulted in little to no demand for
SureBeam's services . In fact, the accounts of several SureBeam former employees demonstrate the
difficulties that SureBeam faced and the desperate lengths to which it went just to get irradiated foo d
into the market :
• An administrative assistant at SureBeam's Chicago facility (whose responsibilitiesincluded facility management, vendor relations, and processing vendor bills)explained that SureBeam was pretty desperate and, therefore, continued to servicecustomers that did not pay its bills ;
• A vice president of marketing and processor sales at SureBeam's Chicago facilityexplained that SureBeam serviced Excel and IBP at no charge just to get irradiatedmeat into the market ; and
• An office manager at SureBeam 's Vernon, California facility explained that thefacility had only one paying customer (United Foods) .
58. These facts undermine defendants ' statements about SureBeam 's need for exces s
I capacity and the dem and for SureBeam 's services .
SureBeam Collapses After Titan Completes Spin off of Subsidiary
59. Knowing that it could not support SureBeam much longer, on February 11, 2002,
after reporting its 2001 financial results, Titan announced that it planned to spin-off SureBeam as
soon as it received a tax-free determination from the IRS. A successful spin-off was critical given
that SureBeam was contributing significantly to Titan's losses . In fact, days after Titan announced
its spin-off, it announced that SureBeam had contributed to its $98 .6 million loss for the year. Titan,
which still owned 84% of SureBeam at the time considered it to be a discontinued operation and
attributed an $84 .4 million "loss from discontinued operations, net of tax benefit" to SureBeam's
operations .
60. In order for the spin-off to be successful and ensure that Titan was able to completely
divest itself of SureBeam, however, Titan had to continue to give SureBeam the appearance that i t
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could survive as a viable stand-alone entity . To do so, Titan exchanged $75 million in debt that
SureBeam owed it for SureBeam stock at an average price of $9 .54 - which Oberkfell claimed was
"a major financial benefit" for SureBeam in its final move toward an independent company and
would offer "greater flexibility and financial strength ." Titan also agreed to provide SureBeam with
a $50 million working line of credit to continue operating - in exchange for "a perpetual and
exclusive, non-royalty bearing license to use SureBeam's intellectual property" - and secured the
line of credit by "substantially all of [SureBeam's] assets . "
61 . By May 23, 2002, according to SureBeam 's SEC filings, Titan's plan to spin-off
SureBeam reached an important milestone - it had received the private letter ruling that it neede d
from the IRS to distribute SureBeam stock to Titan stockholders tax-free . Titan completed the spin-
I on August 5, 2002, by distributing 60 million shares of SureBeam to Titan shareholders .
62 . SureBeam's problems began to surface following this spin-off (now that Titan wa s
effectively SureBeam -free) . Without Titan to financially support it, SureBeam was quickly forced to
tap into the capital markets . On December 2, 2002, SureBeam sold 5 .28 million shares in a private
placement to raise $23 .3 million for working capital and general corporate purposes . Only three
months later, on March 6, 2003, CEO Oberkfell announced his resignation as CEO of SureBeam.
63 . Problems with SureBeam's accountants after the first quarter of 2003 began to she d
light on SureBeam's problems . After SureBeam fired KPMG on June 9, 2003, purportedly because
of a fee dispute, Deloitte was hired as a replacement . Not content to merely incorporate SureBeam's
past financial results going forward, Deloitte began looking at SureBeam's past audits . Deloitte
quickly discovered that SureBeam's revenue recognition from Tech Ion and SureBeam Brasil were
improper and refused to sign-off on SureBeam's second quarter financial results . SureBeam's press
release addressing the refusal attributed it to issues involving certain aspects of SureBeam's revenue
recognition policies and certain contracts entered into in 2000 and affecting subsequent periods
which had not been resolved to the satisfaction of Deloitte :
Deloitte & Touche specifically identified a transaction between SureBeam and TechIon Industrial Brasil, S .A. entered into in 2000, which affects 2000 and subsequentperiods, that it believed, absent additional evidence, was not accounted for inaccordance with generally accepted accounting principles . Deloitte & Toucheadvised the Audit Committee that it would not be able to conclude its review of its
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financial statements for the quarter ended June 30, 2003 until this and certain othermatters described below, were satisfactorily resolved . Subsequently; thedocumentation and other evidence provided by SureBeam was considered byDeloitte & Touche to be insufficient for the resolution of this issue to its satisfaction .
64. The completely fraudulent nature of SureBeam's operations came to light on
January 19, 2004 . On that day, SureBeam petitioned the United States Bankruptcy Court for
dissolution under Chapter 7 of the U .S. Bankruptcy Code . To the shock of many, SureBeam made
no attempt to reorganize or sell itself to cut its losses . Instead, it decided to liquidate to preserve a
paltry $2 million for its unsecured creditors . As explained in the San Diego Union-Tribune, "It was
the effort to save ["a couple of million" in cash] for unsecured creditors . . . that led to one of the
most puzzling moves surrounding SureBeam 's bankruptcy - its decision to seek a Chapter 7
liquidation instead of Chapter 11 reorganization . "
65. The unlawful conduct alleged herein devastated thousands of investors . Investors
contributed $67 million to SureBeam in its IPO (of which the underwriters received $4 .7 million) ,
and investors that bought shares in the open market (which reached as high as $19 .45 per share) lost
millions as SureBeam's stock collapsed on these devastating disclosures . SureBeam's stock is now
worthless .
JURISDICTION AND VENU E
66. The claims asserted herein arise under and pursuant to §§11 and 15 of the 33 Act an d
§§10(b) and 20(a) of the 34 Act (15 U .S .C. §§78j(b) and 78t(a)), and Rule lOb-5 promulgated
thereunder by the SEC (17 C .F.R. §240.10b-5) .
67 . Venue is proper in this District pursuant to §27 of the 33 Act and §27 of the 34 Act .
Many of the acts and transactions giving rise to the violations of law complained of herein, including
the preparation and dissemination to the investing public of false and misleading information,
occurred in this District . During the Class Period, SureBeam had its principal executive offices
located at 3033 Science Park Road, San Diego, California, 92121 and then at 9276 Scranton Road,
San Diego, California, 92121 . At all times during the Class Period Titan had its principal
i executives offices located at 3033 Science Park Road, San Diego, California, 92121 .
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68. In connection with the acts, conduct and other wrongs complained of, the defendants,
directly or indirectly, used the means and instrumentalities of interstate commerce, the United States
mail, and the facilities of the national securities markets .
THE PARTIE S
69. (a) Lead Plaintiff FMC Ltd . Pension Plan & Trust purchased shares of SureBeam
publicly-traded stock during the Class Period and was damaged thereby .
(b) Lead Plaintiff Spear Capital Management Inc . purchased shares of SureBeam
publicly-traded stock during the Class Period and was damaged thereby .
(c) Lead Plaintiff Joseph J . Brogan purchased shares of SureBeam publicly-traded
stock during the Class Period and was damaged thereby .
(d) Plaintiff Delaware Charter Gty . Trust Tr. Melvyn Manaster IRA R/O
purchased shares of SureBeam publicly-traded stock during the Class Period, including shares
directly from or traceable to SureBeam's Initial Public Offering and was damaged thereby .
(e) Plaintiff James Janette purchased shares of SureBeam publicly-traded stock
during the Class Period, including shares directly from or traceable to SureBeam's Initial Publi c
Offering and was damaged thereby .
70. Non-Party SureBeam provided electronic irradiation systems for the food industry .
During the Class Period, SureBeam's stock traded in an efficient market on the Nasdaq National
Market System under the symbol SURE .
71 . Defendant Lawrence A. Oberkfell was Chairman, President and Chief Executiv e
Officer of SureBeam during the Class Period . Additionally, he was an officer of Titan prior to
SureBeam 's IPO. Oberkfell assisted in the preparation of the false and misleading statements and
repeated the contents therein to the market . On March 15, 2001, Oberkfell signed the Prospectus for
the IPO .
72 . Defendant Kevin A. Claudio was the Senior Vice President of Global Business
Operations and the former Chief Financial Officer of SureBeam during the Class Period .
Additionally, he was an officer of Titan prior to SureBeam's IPO . Claudio assisted in th e
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preparation of the false and misleading statements and repeated the contents therein to the market .
On March 15, 2001, Claudio signed the false and misleading Prospectus .
73 . Defendant David A . Rane was the Chief Financial Officer of SureBeam. Rane
I assisted in the preparation of the false and misleading statements and repeated the contents therein t o
the market .
74 . Defendants Oberkfell, Rane, and Claudio are the "SureBeam Individual Defendants . "
They are liable for the written false statements pleaded in ¶181-138, as those statements wer e
"group -published" information .
75 . Defendant Dr. Gene W . Ray signed (or autho rized the signing on his behalf)
S ureBeam 's Prospectus and is liable for the untrue statements made therein pursuant to §11 of the 33
Act (15 U.S.C. §77k(a)(1)) . Plaintiffs do not allege that defend an t Dr. Ray has engaged in any
intentional misconduct or fraud and are, therefore, not pursuing any claims against defendan t Dr .
Ray at this time under any provision of the 34 Act .
76. Defendant Susan Golding ("Golding") signed (or autho rized the signing on her
behalf) SureBeam 's Prospectus and is liable for the untrue statements made therein pursuant to § 11
of the 33 Act (15 U .S.C. §77k(a )(1)) . Plaintiffs do not allege that defend ant Golding has engaged in
any intentional misconduct or fraud and are, therefore , not pursuing any claims against defendant
Golding at this time under any provision of the 34 Act .
77. Defendan t The Titan Corporation is a diversified technology comp any that purports to
create , build, and launch technology-based businesses primarily from technology developed for the
government . Titan maintains its headquarters at 3033 Science Park Road , San Diego, Californ ia
92121 . Titan was responsible for untrue statements in SureBeam 's Prospectus and the dissemination
of those statements to the market . Titan is liable for its own acts under § 11 of the 33 Act and as a
control person of SureBeam under § 15 of the 33 Act, and §20(a) of the 34 Act .
78 . Defendant Merrill Lynch, Pierce Fenner & Smith Incorporated ("Merrill Lynch")
acted as an underwriter in SureBeam's March 2001 IPO of 6 .7 million shares of newly issued stock
and received substantial underwriting fees and commissions exceeding $1 .76 million . Merrill Lynch
was responsible for conducting a reasonable due diligence review of SureBeam prior to the IPO .
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I Defend ant Merri ll Lynch also provided analyst coverage of SureBeam du ring the Cl ass Period,
I including at or near times when it was underwriting SureBeam's offering . Merrill Lynch is liable for
its own acts under § 11 of the 33 Act .
79 . Defendant Credit Suisse First Boston Corporation ("CSFB") acted as an underwrite r
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in SureBeam ' s March 2001 IPO of6.7 million shares of newly issued stock and received substantial
underwriting fees and commissions exceeding $1 .55 million . CSFB was responsible for conducting
a reasonable due diligence review of SureBeam prior to the IPO. Defendant CSFB also provided
analyst coverage of SureBeam during the Class Pe riod , including at or near times when it was
underw ri ting SureBeam 's offering. CSFB is liable for its own acts under § 11 of the 33 Act .
80. Defendant First Union Securities, Inc . ("First Union") acted as an underwriter i n
SureBeam's March 2001 IPO of 6 .7 million shares of newly issued stock and received substantial
underwriting fees and commissions exceeding $672,000 . First Union was responsible for
conducting a reasonable due diligence review of SureBeam prior to the IPO . Defendant First Union
also provided analyst coverage of SureBeam during the Class Period, including at or near times
when it was underwriting SureBeam's offering . First Union is liable for its own acts under § I 1 of
the 33 Act .
DEFENDANTS' UNTRUE AND MATERIALLY MISLEADINGCLASS PERIOD STATEMENTS
81 . To create demand for SureBeam stock on the IPO, defendants knew that a campaign
to distribute favorable information to potential investors about the demand for SureBeam's service s
and millions in revenue from the joint ventures was necessary . Thus, on February 13, 2001, Titan
issued a press release that stated that SureBeam's offering was its priority "'first and foremost"' fo r
the upcoming year and heralded SureBeam's growth, which it claimed was "due primarily to
revenues generated by SureBeam's sale of turn-key pasteurization systems to a Brazilian food
pasteurization company which plans on building a network of food pasteurization systems
throughout Brazil" :
Revenues in Titan's food pasteurization subsidiary, SureBeam, increased162% to $9.8 million in the fourth quarter of fiscal 2000 from $3 .7 million in thefourth quarter of fiscal 1999 . The increase was dueprimarily to revenues generatedby SureBeam 's sale of turn-key pasteurization systems to a Brazilian food
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• •pasteurization company which plans on building a network of foodpasteurizationsystems throughout Brazil.
82. Defendants continued to push SureBeam 's IPO throughout February . In or around
February 2001, defendants organized a "roadshow" to take place prior to the IPO where defendants
Oberkfell and Rane traveled to, among other cities, New York and Los Angeles to meet with
institutional investors and money and portfolio managers to making very favorable presentations
about SureBeam . During these roadshow presentations, in connection with SureBeam's IPO,
Oberkfell and Rane stated that :
• Demand for SureBeam processed ground beef was increasing, highlighted by theexpansion of Huisken Meats distribution of SureBeam processed products from 80stores to approximately 2,000 stores in less than one year; and ,
• As a result of the strategic venture with Tech Ion, SureBeam expected to receiveapproximately $55 million in revenue over the next few years - of which $15.5million had already been recognized .
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83 . These representations increased the demand for SureBeam stock and enable d
SureBeam to price the IPO at an artificially inflated price of $10 per share and helped to artificially
inflate SureBeam's stock price in the aftermarket as well . The information disseminated during the
roadshow was part of the total mix of information affecting SureBeam's IPO on March 16, 2001 and
the price at which its shares were first sold and thereafter traded .
84 . On March 15, 2001, the day before Titan issued a press release announcing that
"SureBeam['s] IPO Priced at $10 .00 Per Share," defendants issued SureBeam's Prospectus for the
sale of 6.7 million shares of SureBeam common stock, which was contained in a Prospectus signed
by defendants Oberkfell, Claudio, Golding, and Dr . Ray. Like defendants' roadshow presentations,
SureBeam's Prospectus outlined the importance of SureBeam's relationship with Tech Ion and
represented that SureBeam had entered into a deal to construct 11 electronic food irradiation
systems, with SureBeam expecting to receive $55 million over three years from the venture:
In May 2000, we received purchase orders from Tech Ion Industrial BrasilS .A. for eleven electronic food irradiation systems which we expect to result inapproximately $55 .0 million in sales revenues to us over the next three years . Webegan construction of these systems in July 2000, and have record revenues of$15 .5 million under the percentage-of-completion method for the year endedDecember 31, 2000 .
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85. The Prospectus also specifically added that its financial statements were in
compliance with generally accepted accounting principles :
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No .101, "Revenue Recognition in Financial Statements ." This SAB summarizes theSEC's view in applying generally accepted accounting principles to revenuerecognition in financial statements . Our accounting policies comply with theprovisions of SAB 101 .
86. The Prospectus statements alleged at ¶140, 42 attributing revenue to the Tech Io n
venture were untrue and omitted material facts necessary to make defendants' statements not
misleading. As alleged in detail at ¶1 18-23, 25-39, the very foundation of the joint venture was
based on entities with no proven track record, no customer base, and which had no ability to pay
anywhere near $55 million (or any amount for that matter) for SureBeam's irradiators but were
instead relying on outside funds as a source of capital . Before the IPO, however, Tech Ion had failed
in its attempt to secure funding from the World Bank because SureBeam Brasil's business plan (and
corresponding Information Memorandum) did not satisfy the bank that the venture could be
successful . Indeed, as alleged at ¶125-27 above, Delphos International told defendants that the
World Bank was resisting the venture because it had an ill-defined customer base and did not have a
plausible business plan for marketing SureBeam's services - which were "currently underutilized (or
non-existent) in Brazil ." In fact, defendants ultimately failed in their attempt to secure funding with
the World Bank and saw their last chance for funding (and the resulting source of payment for
SureBeam's irradiators) disappear when the SUDAM collapsed because of political corruption in
Brazil . Defendants did not disclose these highly material facts in the Prospectus .
87 . On April 10, 2001, only three weeks after the IPO became effective, Titan used it s
first opportunity to boost SureBeam's stock price . At the conclusion of the "quiet period" (which
was the period in which SureBeam and/or Titan were restricted from promoting SureBeam's stock) ,
Titan issued a press release revising guidance for its own financial results given SureBeam's status
as a publicly traded company . Titan claimed that its financial results "include[ed] a significant loss
for SureBeam" but added that SureBeam intended to invest substantially in its growth and that
["t]hese investments are expected to result in a significant increase in revenues and profits for
SureBeam in 2002" :
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1 The Titan Corporation (NYSE : TTN) today announced that as a result of thesuccessful initial public offering of its majority owned subsidiary, SureBeam
2 (Nasdaq: SURE), it has revised Titan's financial guidance to reflect the execution ofSureBeam's planned sales, advertising and branding campaign . The announcement
3 of the revised guidance for Titan coincides with the conclusion of the quiet periodsurrounding the SureBeam IPO. Titan had previously indicated that its financia l
4 guidance for 2001 assumed that SureBeam was not yet a public company. Titan alsoindicated that should SureBeam become a public company, SureBeam would
5 aggressively begin their sales, advertising, and branding campaign, which woul dsignificantly increase SureBeam's operating expenses . Total operating expenses for
6 SureBeam excluding deferred compensation are now expected to increase byapproximately $22 million for the year 2001 . These investments are expected t o
7 result in a significant increase in revenues and profits for SureBeam in 2002 and toestablish SureBeam as the industry food safety standard .
888 . On April 10, 2001, just four days after SureBeam emerged form its quiet period, the
9IPO's main underwriters, Merrill Lynch and Goldman Sachs each initiated coverage of SureBeam
10with a "Buy" rating. Underwriter First Union went one step further, issuing a "Strong Buy" and
11made the following statements :
12SureBeam has signed agreements (predominately exclusive in nature) with many of
13 the largest meat and poultry providers and food processors in the [United States] . . .These clients aggregately represent approximately 75% and 57% of the $57 .2 billion
14 beef and $92.5 billion all-meat (including beef, pork, and poultry) U .S. marketsrespectively. . . SureBeam has also signed agreements with companies representing
15 roughly 40% of the U.S. processed foods market (anticipating forthcomingregulatory approval), providing the company with a substantial and incremental
16 market opportunity .
17
18 We believe SureBeam's proprietary technology, exclusive partnerships and jointventures will enable it to capture a growing share of the potentially vast
19 international market for food pasteurization services (roughly $3 .5 billion annually _in the United States and $83 .0 billion annually worldwide) .
2089. The statement by First Union securities analyst Bennett Notman, C .F.A. that
21SureBeam's "joint ventures will enable it to capture a growing share of the potentially vast
22international market for food pasteurization services" were materially false and misleading given the
23problems that SureBeam was facing with its venture in Brazil . Indeed, by the time that First Union
24issued this report, defendants not only knew that Tech Ion and SureBeam Brasil could not secure the
25funding necessary to pay for SureBeam's systems, but they also knew that those systems were sitting
26in a customs warehouse in Brazil because Tech Ion had not completed construction of the facility
27that would house the systems. As a result, SureBeam's largest joint venture would not enable
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SureBeam to capture any share of the international market for irradiated food let alone a growing
share as represented . Had First Union, or any of the other underwriters conducted even the slightest
due diligence on the venture, First Union would have known that its statement (and the statements
about the Brazilian venture) were materially false and misleading when made .
90. Defendants were not only disseminating false financial results, but they also led
investors to believe that demand for irradiated food was increasing or substantially likely to increase
imminently, and that SureBeam needed "flexibility" to service this increased demand through
additional facilities (which would significantly increase SureBeam's operating capacity) . For
example, on April 26, 2001 SureBeam announced that it was opening "Its Third Electronic
Pasteurization Center" in Los Angeles and that it planned to add an additional facility in Chicago,
which would triple the Company's national processing capacity and give it "greater flexibility for
servicing its customers" :
SureBeam Corporation . . . innovator of the nation's first electronicpasteurization system -- today announced that it would be constructing its third newmajor SureBeam electronic pasteurizing service center near Los Angeles . Scheduledto open by the end of 2001 with an annual processing capacity in excess of 250million pounds , SureBeam's new West Coast service center will be used to processmeat and other fresh and frozen food products and spices.
SureBeam recently announced that it is also constructing another regionalcenter near Chicago . The West Coast and Chicago centers will triple the company'snational processing capacity, allowing it greater flexibility for servicing itscustomers . A key innovation within the facility will be the capability to use e-beamand x-ray scanning systems simultaneously, so as to accommodate differences inproduct size and shape . SureBeam's strategic business plan calls for the building ofa nationwide servicing network and to install SureBeam electronic pasteurizingtechnology in-line within the processing plants of major national food processors .
91 . On May 3, 2001, SureBeam announced its financial results for the first quarter o f
2001 - its first earnings release following the Company's IPO. In the release, defendants not only
falsely reported revenues of $5 .5 million (and 34% growth) (which it stated was "due primarily to
revenues generated from the sale of turnkey pasteurization systems"), but they also emphasized its
position in the international market because of Brazil and used the release as an opportunity to
emphasize to investors that SureBeam was increasing its irradiating capacity to support demand for
irradiated food :
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1 SureBeam Corporation . . . today reported revenues of $5 .5 million for the firstquarter of fiscal 2001, an increase of 34% over $4 .1 million in fiscal 2000, which
2 excludes the effect of the medical sterilization and government linear acceleratorbusiness . SureBeam' s gross margin for the first quarter of 2001 was 46% compared
3 to 41 % for the first quarter of 2000. Pro forma* net loss was $3 .2 million or $ .07 pershare, for the first quarter of fiscal 2001 compared to a net loss of $ .5 million or $ .01
4 per share, for the first quarter of 2000 . . . .
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6 In the first quarter, SureBeam embarked on several strategic initiatives thatwill enable the Company to achieve its strategic goals over the next year . In order to
7 meet the anticipated increased demand for food pasteurization services , SureBeamcontinued to build out its service center capacity, establishing two new centers, one
8 in Chicago and one in Southern California . The Chicago facility is planned to b eoperational in the third quarter of 2001 and the southern California facility is planned
9 to be operational in the fourth quarter of 2001 . These two facilities combined withSureBeam 's Sioux City, Iowa facility anda plannedeast coast facility will provide
10 SureBeam with pasteurization capacity to process in excess of one billion poundsannually.
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12Also in the first quarter, SureBeam continued to build its presence in th e
13 international market. The first international location for SureBeam systems is inRio de Janeiro, Brazil where construction continued in thefirst quarter. This site
14 is scheduled to be operational in third quarter of 2001. SureBeam 's technolog ywill reduce spoilage and shipping costs in developing countries and both these
15 factors create tremendous market opportunities not only in Brazil, but also in manyother countries throughout the world .
16"With the demand for our pasteurization systems and services expected to
17 increase, we are accelerating our investments to increase pasteurization capacity tosupport demand," said Larry Oberkfell, President and CEO of SureBeam . "We are
18 also currently working on several in-line system designs to integrate the SureBeamsystem in our customers' production lines . We continue to sign exclusive
19 agreements with new customers expanding our current market position . . . .
20 SureBeam's revenue increase of 34% in the first quarter of fiscal 2001 wasdue primarily to revenues generated from the sale of turnkey pasteurization systems,
21 and to a lesser extent , to revenues generated from providing pasteurization services atthe Company's Sioux City facility .
2292 . SureBeam identified the source of its results on May 15, 2001 when it filed its Form
2310-Q with the SEC. In that filing, SureBeam stated that its "2001 revenue[] [was] primarily related
24to revenues recognized from sales of our electronic food irradiation systems, using the percentage-
25of-completion method of accounting, principally to Tech Ion Industrial Brasil, S.A., a Brazilian
26food irradiation company ."
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during the quarter and in fiscal year 2000 as alleged at ¶91, were materially false and misleading for
the reasons alleged at ¶ 118-23, 25-38. In short, defendants knew that SureBeam's revenue
recognition from its venture in Brazil was improper because neither Tech Ion nor SureBeam Brasi l
had the capacity to pay SureBeam for its systems and had failed in their attempts to secure funding
from the World Bank and from SUDAM as alleged at ¶ 125-38. Under these circumstances, payment
was far from being reasonably assured as required for proper recognition under the percentage of
completion accounting method. Indeed, SureBeam's revenues were overstated by $4 .7 million for
the quarter .
94 . Defendants' statements about the status of construction in Brazil were materiall y
misleading. As alleged at ¶41, defendants knew by April 2001 that construction in Brazil was at
least six months behind schedule at the time and that there was no way that the facility would be
completed by Q3-01 as represented . In fact, Oberkfell himself expressed frustration to a SureBea m
consultant that he could not get SureBeam's systems "liberated" from customs because there was n o
place to locate the systems in Rio . Adding to the impossibility that the project would be completed
in Q3-01 was the fact that the joint venture had failed in its attempts to secure funding - which i t
needed to construct the facilities and pay for the systems . Defendants did not disclose any of these
facts to investors .
95 . Defendants' statements about the demand for SureBeam's processing services and the
need for excess capacity, alleged at 1151-52, 82, 88, 90-92, 96, 99-101, 115, 118, 124, 129, 131
were also materially misleading . As alleged at ¶¶53-58, SureBeam was having considerable trouble s
introducing its services to the market as reflected by the anemic rates at which SureBeam was
utilizing its existing capacity and had seen the roll-out of irradiated meat in grocery stores withdrawn
in 2000 and 2001 because of poor sales . This devastating result had caused executives at
SureBeam's facilities nationwide to engage in desperate measures just to lure meat producers int o
placing irradiated product in grocery stores as alleged at 1153-56 . SureBeam's failure to disclose
these facts render their statements about capacity and demand materially misleading.
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1 96. On June 25, 2001 , defendants announced that SureBeam had formed its off-shore
2 joint venture with RESAL ( as discussed at 1J146-50) and that the venture would generate sales to
3 SureBeam of $50 million . Defendants also used this release as an opportunity to mislead investors
4 about the demand for SureBeam 's se rvices . In fact, the release stated that the availability of
5 SureBeam irradiated ground beef had expanded "rapidly" and that this expansion "reflect[ed]
6 growing customer demand" :
7 SureBeam Corporation . . . innovator of the nation ' s first electronicpasteurization system - today announced that it has entered into a strategic
8 relationship with RESAL Saudi Corporation, a subsidia ry of a private Saud iconglomerate headquartered in Riyadh , Saudi Arabia, to build a network of
9 SureBeam pasteurization facilities within the Kingdom .
10 When completed , the network is expected to be one of the largest, mostcomprehensive systems dedicated to enh ancing food safety and eliminating food-
11 bo rne pests . In addition to the $50 million contract, SureBeam will receive recurringroyalty fees through continuing operations .
12
13Since its introduction in the United States , the availability of SureBeam
14 pasteu rized ground beef products has expanded rapidly, reflecting growingconsumer demand . SureBeam electronically pasteurized products are now sold
15 across the nation in thousands of supermarkets , as well as by home delivery, directmail, and through food se rv ice .
1697. Just three weeks later, on July 13, 2001 , defendants continued to emphasize
17SureBeam 's off shore ventures by announcing that the Tech Ion joint venture "will be supporting the
18new Food Irradiation Center of Excellence being instituted in the State of Rio de J aneiro ." Despite
19the fact that this "Center of Excellence" was the ve ry solution that Medeiros offered to Oberkfell and
20Claudio to solve the problem of the inadequacy of SureBeam 's systems (and represented a dramatic
21depa rture from thejoint venture ' s business plan of serving Brazil 's CEASAs), Oberkfell stated that
22the joint venture "expands our revolutionary , patented SureBeam(R) technology into one of the
23largest and most diversi fi ed food markets in the world" :
24SureBeam Corporation (Nasdaq : SURE) -- innovator of the world 's first
25 electronic pasteurization system that kills harmful food -borne bacte ri a -- and TechIon Industrial Brasil S . A., headquartered in Manaus , Brazil , announced today that
26 their joint venture, SureBeam Brazil , will be supporting the new Food IrradiationCenter of Excellence being instituted in the State of Rio de Janeiro .
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Established by State of Rio de Janeiro government, the Center of Excellenceis another milestone accomplishment between the Brazilian government and privateindustry for advancing food irradiation and food safety in Brazil . . . .
"The joint venture between SureBeam Corporation and Tech Ion not onlysupports the partnership instituted by the State of Rio de Janeiro and Brazil'sunique food safety and preservation needs, but it expands our revolutionary,patented SureBeam(R) technology into one of the largest and most diversified foodmarkets in the world," said Larry Oberkfell , SureBeam 's president and CEO .
98. Defendants' statements about the "Center of Excellence" were materially misleadin g
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in that defendants failed to mention that it represented the failure of the Tech Ion joint venture's
business plan and a last resort way to make use of SureBeam's x-ray technology, which defendants
knew as early as January 2001 was "financially inadequate for generic work such as the CEASAs
and Juazeiro." Indeed, Medeiros told Oberkfell and Claudio that this "Center of Excellence" was the
only way to use "Xray and Ebeam in the CEASA without hurting the [joint venture]" and that doing
so would be the only way for the venture to obtain government funds (which defendants Oberkfell
and Claudio knew by March 2001 would not be obtained) :
The dilema [sic] we face is how to use Xray and Ebeam in the CEASAwithout hurting the JV? The best solution is to establish CEASA as a Center ofExcellence for Food Irradiation . In this manner, we will have government supportand financing for the facility, hopefully at zero interest costs . If we follow thisstrategy, we will have Brazilian federal government support within the WB [i .e .,World Bank], we will push for ICGFI next meeting in June to be in Brazil in ourpremises, transfer the PAHO project from Manaus to Rio, etc . The governor of theState of Rio is interested in the idea and the Minister of Science and Technology. Ibelieve that we should include this idea in the text .
Overall Conclusion : Let's change the image of Rio to a Center of Excelence[sic] to justify the presence of X-ray and E-beam there, and to enable us to obtaingovernment funds - hopefully grants - to finance the project .
99. On August 14, 2001, defendants announced that SureBeam had generated revenues o f
$9.6 million , including $8 . 6 million to unidentified third part ies -an increase of 66% over the second
quarter of 2000 . Despite the fact that Tech Ion had failed in its attempts to secure funding to
purchase SureBeam 's irradiators (which were sitting in a customs warehouse in Brazil) and the
continued failure of RESAL to gain funding from the Saudi government, the release stated that
SureBeam had recognized revenue under the percentage of completion accounting method . The
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release also quoted defendant Oberkfell as stating that "`I am pleased with the progress we have
made in executing our business strategy since our IPO just four months ago ."' And despite
SureBeam's problems domestically and its anemic processing rate, the release emphasized that
SureBeam was continuing to construct the Los Angeles and Chicago facilities "to meet the
anticipated increased demand" for irradiated food :
SureBeam Corporation (Nasdaq: SURE) today reported revenues of $9 .6million for the second quarter of fiscal 2001, an increase of 86% over $5. 2 millionin fiscal2000, excluding the effect of the medical sterilization and government linearaccelerator business . Included in SureBeam's 2001 second quarter revenue of $9 .6million was $1 .0 million of sales to an affiliate . Revenue from third parties was$8.6 million, an increase of 66% over the second quarter of 2000. SureBeam'sgross margin for the second quarter of 2001, excluding affiliate sales, was 39%compared to 32% for the second quarter of 2000 . Pro forma* net loss was $2.5million or $.05 per share, for the second quarter of fiscal 2001 compared to a netloss of $.1 million or $.00 per share, for the second quarter of 2000.
Including depreciation, amortization of goodwill and other purchasedintangibles, and deferred compensation, the net loss, in accordance with generallyaccepted accounting principles, for the second quarter of fiscal 2001 was $9.2million or S. 16 per share, compared to a net loss of $ 6 million, or $.01 per share,for the same period last year .
In the second quarter, SureBeam continued to execute its business strategythat it believes will enable the Company to build the foundation for strong growth forthe remainder of this year and beyond . SureBeam received a purchase order fromRESAL Saudi Corporation to build ten SureBeam systems for the operation of fourservice centers in the Saudi Arabian region for irradiating poultry and disinfestingand prolonging the shelf life of dates .
SureBeam is constructing two new service centers that we will own andoperate . The Chicago service center is scheduled to be operational in the fourthquarter 2001 and the Los Angeles facility is planned to be operational in the firstquarter of 2002 . SureBeam continued to expand its capacity beyond the servicecenters under construction to meet the anticipated increased demand for foodpasteurization services. During the second quarter, SureBeam signed an agreementwith Cargill/Excel to install two in-line systems that we will own and operate . Thesesystems will be located in two Excel plants and are planned to be operational in latefirst or early second quarter of 2002 .
100 . SureBeam identified the components of its results in its Form l0-Q filed concurrentl y
with the SEC, which stated that SureBeam's "2001 revenue[] [was] primarily related to revenu e
recognized from sales of our electronic food irradiation systems, using the percentage-of-completio n
method of accounting, principally to Tech Ion Industrial Brasil, S .A., a Brazilian food irradiatio n
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company, and RESAL Saudi Corporation, a subsidiary of a private Saudi conglomerate
headquartered in Riyadh, Saudi Arabia ." It stated that Tech Ion represented 9% (or approximately
$0.9 million) of Q2-01 revenues, and RESAL represented 71% (or approximately $6 .8 million) of
Q2-01 revenues .
101 . On October 17, 2001, defendants continued to lead investors to believe that demand
for SureBeam irradiated meat was increasing . That day, SureBeam issued a release announcing th e
debut of its Chicago processing facility, which defendant Oberkfell claimed "`doubles SureBeam
processing capacity and gives greater processing flexibility"' :
Tomorrow on October 18, SureBeam Corporation . . . innovator of the electronbeam technology that safely removes dangerous bacteria from food - will debut itsnew Chicago Service Center, the nation's first SureBeam(R) facility capable ofprocessing food simultaneously with SureBeam electron beam and x-ray technology .
"SureBeam 's newest facility doubles SureBeam processing capacity andgives greater processing flexibility," says Larry Oberkfell, SureBeam's presidentand CEO . "A key innovation is its capability to use high-volume e-beam and x-rayscanning systems for eliminating the threat of harmful food borne bacteriasimultaneously, so as to accommodate differences in product size and shape . "
102. The same day, SureBeam issued a release announcing that it had set "recor d
revenues" for the Q3-01 of $14.5 million. Despite the fact that SureBeam generally (and Oberkfell
specifically) was negotiating with Tech Ion to take over the venture (given Tech Ion's failure to
perform under the agreement and SureBeam Brasil's failure to pay for SureBeam's systems) and
RESAL's inability to obtain funding for the Saudi government, the release announced that these
"record" revenues included $11 .7 million recognized under the percentage of completion accounting
method (which SureBeam's Form 10-Q would later disclose came from Tech Ion in Brazil and
RESAL in Saudi Arabia) :
SureBeam Corporation . . . today reported revenues of $14.5 million for thethird quarter of fiscal 2001, an increase of 138% over $6 .1 million in fiscal 2000,excluding the effect of the medical sterilization and government linear acceleratorbusiness . Included in SureBeam's 2001 third quarter revenue of $14 .5 million was$2 .8 million of sales to an affiliate . Revenue from third parties was $11 .7 million, anincrease of 92% over the third quarter of 2000, excluding the effect of the medicalsterilization and government linear accelerator business . SureBeam's gross marginfor the third quarter of 2001, excluding affiliate sales, was 41 % compared to 56% forthe third quarter of 2000, excluding the effect of the medical sterilization andgovernment linear accelerator business . Pro forma* net loss was $1 .5 million or $ .03per share, for the third quarter of fiscal 2001 compared to a proforma net income of$.3 million or $ .01 per share, for the third quarter of 2000.
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l Including depreciation , amortization of goodwill and other purchase dintangibles, and deferred compensation, the net loss , in accordance with generally
2 accepted accounting principles , for the third quarter of fiscal 2001 was $7 .7 millionor $.14 per share, compared to a net loss of $ . 3 million, or $ .01 per share, for the
3 same pe riod last year, excluding the effect of the medical ste ri lization andgove rnment linear accelerator business .
4103 . The release also stated Titan had agreed to "purchase a perpetual and exclusive, non-
5royalty bearing license to use SureBeam's intellectual property on all applications . . . in return for the
6following : 1) to make available to SureBeam a $50 million line of credit , 2) to conve rt the current
7$75 million debt owed Titan to equity via an exchange for SureBeam stock, and 3) a cash payment
8of $8 million ."
9104 . SureBeam identified the components of its results when it filed its Form 10-Q with
10the SEC on November 14, 2001 . In that filing, SureBeam stated that its "2001 revenue[][was]
11p rimarily related to revenue recognized from sales of our electronic food irradiation systems, using
12the percentage -of-completion method of accounting, principally to Tech Ion Indust rial Brasil, S .A ., a
13Brazilian food irradiation comp any, and RESAL Saudi Corporation, a subsidia ry of a p ri vate Saudi
14conglomerate headquartered in Riyadh , Saudi Arabia ." It stated that Tech Ion represented 9% (or
15about $1 . 3 million) of Q3-01 revenues, and RESAL represented 55% (or about $8 .0 million) of
16Q3-01 revenues .
17105 . Defendants ' statements about the amount of revenue that SureBeam recognized
18during the quarter and in fiscal year 2000 from the Brazil joint venture , as alleged at ¶¶99-102, 104,
19were materially false and misleading for the reasons alleged at I¶18-23 .25-38 . In short , defendants
20knew that SureBeam 's revenue recognition from its venture in Brazil was improper because neither
21Tech Ion nor SureBeam Brasil had the capacity to pay SureBeam for its systems and had failed in
22their attempts to secure funding from the World Bank and from SUDAM as alleged at 1125-38 .
23Under these circumstances, payment was far from being reasonably assured as required for proper
24recognition under the percentage of completion accounting method.
25106 . On November 1, 2001, approximately one week after SureBeam executed its
26agreement with Tech Ion to take over the venture , defendant Claudio sold 92,670 shares of
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1 SureBeam stock for proceeds of over $1 .15 million . This sale represented 49 .58% of Claudio's
2 SureBeam common stock holdings .
3 107. Beginning on October 29, 2001, SureBeam announced an apparent change in the
4 direction of its services . That day, it announced that it had been selected to provide its systems to the
5 U.S. Postal Service (through Titan) for eliminating the anthrax threat in U .S. Mail . Under the terms
6 of Titan's agreement with SureBeam, SureBeam was entitled to a 20% margin on sales to Titan for
7 these systems (significantly lower than the 50% margins that SureBeam was purportedly receiving
8 from sales to third parties) . The release confirmed that SureBeam would supply the systems to
9 Titan, which, in turn, would supply them to the U .S. Postal Service:
10 SureBeam Corporation . . . announced today that the U .S. Postal Service woulduse SureBeam's electron beam systems to eliminate the threat of anthrax in the U .S .
11 mail system. SureBeam will be the exclusive provider of electron beam and x-ra yproducts and system integration services to The Titan Corporation, the prime
12 contractor with the U.S . Postal Service . The award to SureBeam by Titan's newlyestablished Office of Homeland Security of approximately $26 million is for eight
13 SureBeam systems.
14 Under the award, SureBeam will be working with several business units ofthe Titan Corporation and Titan's Office of Homeland Security, as well as Titan
15 Systems Corporation and Titan Scan Technologies, in providing a turnkey solution tothe United States Postal Service . SureBeam will be a primary subcontractor to Titan
16 in the execution of this comprehensive contract . The United States Postal Servicehas an option to expand the award with Titan, which if exercised ; SureBeam woul d
17 be a significant participant as the exclusive provider of these products and services toThe Titan Corporation .
18108 . On February 11, 2002, SureBeam announced "record revenues" for the quarter and
19fiscal year end of 2001 . The release disclosed that most of its sales in the fourth quarter were to
20Titan and revealed that SureBeam had abandoned its third party customers in deference to Titan .
21Indeed, SureBeam recognized $12 .5 million in sales to Titan relating to the U.S. Postal Service
22contract and $1 .9 million of "other" sales to Titan but recorded a "negative $2.8 million "in sales to
23third parties "due to component parts that were transferred from third party contracts ." Despite
24this sea change in direction, Oberkfell continued to emphasize a purported growth in demand for
25SureBeam's irradiated meat despite the fact that its service centers continued to operate at an anemic
26rate and were desperately attempting to just get its product to the market :
27SureBeam Corporation (Nasdaq : SURE) today reported revenues of $11 .6
28 million for the fourth quarter of fiscal 2001, an increase of 18% over $9 .9 million in
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1 the comparable quarter of fiscal 2000. Included in SureBeam's 2001 fourth quarterrevenue of $11 .6 million was $12 .5 million of sales to Titan Corporation (Titan),
2 SureBeam's majority owner, related to the United States Postal Service (USPS)subcontract and $1 .9 million of other sales to Titan . Revenue from third parties wa s
3 negative $2.8 million, due to component parts that were transferred from third partycontracts to the USPS subcontract in order to meet the contractual time constraints .
4 SureBeam's gross margin for the fourth quarter of 2001 and 2000 was 25% . Proforma* net loss was $9 .1 million, or $0.16 per share, for the fourth quarter of fiscal
5 2001 compared to a pro forma* net income of $631,000, or $0 .01 per share, for thefourth quarter of 2000.
6Including depreciation, amortization of goodwill and other purchased
7 intangibles, and deferred compensation, the net loss, in accordance with generallyaccepted accounting principles, for the fourth quarter of fiscal 2001 was $16 . 9
8 million, or $0.29 per share, compared to net income of $44,000, or $0.00 per share,for the same period last year .
9"Almost one year ago . . . consumer acceptance grew, and just this month we
10 rolled out fresh hamburger with large grocery retailers, significantly expandeddistribution overall of SureBeam processed products, and gained momentu m
11 internationally. Additionally, the military has placed its first orders with itssuppliers," Oberkfell concluded .
12109. SureBeam identified the components of its results when it filed its Form 10-K with
13the SEC on April 1, 2002 . In that filing, SureBeam stated that its "2001 system sales revenues from
14sales of our electronic food irradiation systems, were derived using the percentage-of-completion
15method of accounting, principally to Tech Ion, a Brazilian food irradiation company, prior to the
16execution of the stock purchase agreement between Tech Ion and us, and RESAL Saudi Corporation,
17a subsidiary of a private Saudi conglomerate headquartered in Riyadh, Saudi Arabia ." It stated that
18$6.8 million was recognized in fiscal year 2001 relating to Tech Ion, and that $12 .2 million of
19revenue had been recognized through December 31, 2001 for RESAL .
20110. Between March 4, 2002 and March 8, 2002, defendants Oberkfell and Claudio sold
21380,000 shares of common stock . Defendant Oberkfell sold 350,000 SureBeam shares at $5 .70-
22$5 .78 per share for proceeds of over $2 million, while Claudio sold 30,000 SureBeam shares at
23$6.20 for proceeds of over $186,000 . Oberkfell sold approximately 37 .5% of his SureBeam
24holdings while Claudio's sales represented 31 .8% of his holdings .
25111 . On April 25, 2002, the Company issued a press release entitled "SureBeam Reports
26Record First Quarter Revenues ; Quarter Highlighted by Fresh Ground Beef Rollout at Retail and
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I Restaurant Locations ," results which it confirmed in its Form i0-Q filed with the SEC on May 5 ,
2002. The press release stated in part :
SureBeam Corporation (Nasdaq: SURE) today reported record revenues of$7.0 million for the first quarter of fiscal 2002, an increase of 28% over $5.5million in the comparable quarter of fiscal 2001. SureBeam 's 2002 first quarterrevenue of $7.0 million was comprised of $2. 5 million of third party revenue, and$2.3 million related to the United States Postal Service subcontract and $2.2 millionrelated to medical sterilization subcontracts, both with The Titan Corporation (Titan),SureBeam's majority owner . Including depreciation, amortization of otherpurchased intangibles, and deferred compensation, the net loss, in accordance withgenerally accepted accounting principles, for the first quarter of fiscal 2002 was$9.0 million, or ($0.14) per share, compared to a net loss of $40. 6 million, or($0.84) per share, for the same period last year. Pro forma* net loss was $3.8million , or ($0.06) per share, for the first quarter of fiscal 2002 compared to a pro
forma * net loss of $3.2 million, or ($0.07) per share, for the first quarter of 2001.
112. The same day, defendants Oberkfell and Rane held a conference call with securities
analysts and investors to discuss SureBeam's results . During prepared remarks and in response to
questions posed by analysts, defendants Oberkfell and Rane repeated the false financial results
identified in SureBeam's release, and emphasized the success that SureBeam was having introducing
its irradiated meat to the market (by referencing agreements with large grocery retailers and meat
processors). Astonishingly, defendant Rane also stated on the call that SureBeam anticipated
"collect[ing]" all $58 million in unbilled receivables that it was owed (which would include
payments from the Saudi Arabia venture) in 2003 - an extraordinary statement given that its venture
with Tech Ion in Brazil had failed and that its venture in Saudi Arabia had been unable to secure
funding from the Saudi government :
UNIDENTIFIED : OK, because I said, if it was sent out, I just want to say I didn't getit . What's your unbilled receivables currently?
DAVID RANE : Receivables are $13 million and they are prima ri ly all unbilled asyou are aware , we are on the percentage of completing the contract accounting .Payments were made upon milestones and usually bills go out and are paid within avery short period of time of meeting those milestones , so as of the end of the thirdquarter it's 13 million .
UNIDENTIFIED : OK sir . Now you saidyou had 58 million in-signed contacts, isthat - did 1 understand that correctly ?
DAVID RANE : That 's correct.
UNIDENTIFIED : When do you expect those contracts to be collected ?
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DAVID RANE : All of those should be by the end of 2003. So many of thosecontracts are portions of them that go into 2003 , but they should all be completedby the end of 2003.
UNIDENTIFIED : And those are all without side parties ?
4 DAVID RANE : That's correct .
113 . Defendants identified the components of its results when it filed its Form 10-Q wit h
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the SEC on May 15, 2002 . In that filing, SureBeam stated that "[f]or the three months ended
March 31, 2001, 96%, or $5 .3 million, of the $5 .5 million of revenue, was derived from sales of
electronic food irradiation systems primarily to two customers and 4%, or $219,000, was derived
from food processing services ." SureBeam, under the percentage-of-completion method of
accounting, had recognized $13 .3 million in revenue from its joint venture with RESAL in Saudi
Arabia through March 31, 2002, of which $1 .1 million was recognized during the three months
ended March 31, 2002 .
114, On July 29, 2002, the Company issued a press release entitled "SureBeam Reports
Record Second Quarter Sales and Earnings and Gives Guidance for Fiscal 2002 and 2003 ." The
press release stated in part :
SureBeam Corporation . . . today reported record second quarter revenues of$10.8 million for fiscal 2002, an increase of 12% over $9 .6 million in the secondquarter of 2001 . SureBeam's gross margin was 35% for the second quarter of 2002and 2001 . The net loss, in accordance with generally accepted accounting principles,for the second quarter of fiscal 2002 was $5 .1 million, or $0.08 per share, comparedto a net loss of $9 .2 million, or $0 .16 per share, for the same period last year, a pershare improvement of 50% . Pro forma* net loss was $276,000, or $0 .00 per share,for the second quarter of fiscal 2002 compared to a pro forma* net loss of $2 .5million, or $0 .05 per share, for the second quarter of 2001 .
Revenues for the six month period ended June 30, 2002 were $17 .8 million,an increase of 18% over $15 .1 million for the same period in 2001 . SureBeam'sgross margin for the six month period ended June 30, 2002 was 28% compared to39% for the six month period ended June 30, 2001 . The net loss, in accordance withgenerally accepted accounting p rinciples, for the six month period ended June 30,2002 was $14.1 million, or $0.22 per share, compared to a net loss of $49 .8 million,or $0.95 per share, for the same period last year . Pro forma* net loss was $4.1million, or $0.06 per share, for the six month period ended June 30, 2002 comparedto a pro forma* net loss of $5 .7 million, or $0.11 per share, for the six month periodended June 30, 2001 .
115, The same day, defendants Oberkfell and Rane held a conference call for securitie s
analysts and investors. During the call, defendants repeated the false and misleading financia l
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1 results contained in SureBeam's press release and falsely attributed the delays in the Rio project to
2 "the time needed to obtain regulatory permits and licensing." Defendants also told analysts that they
3 were forecasting revenue from irradiating meat to $14 to $18 million, which conveyed to analysts
4 that SureBeam would be processing at 20% of its capacity - more than 10 times the capacity that
5 SureBeam was achieving up to that point in time :
6 UNKNOWN SPEAKER : In your projection of revenues from your processingcenters for next year, I think you said $14 to $18 million -- is that right? It looks like
7 that implies a utilization rate in those centers of roughly 20 percent, give or take alittle bit, and I think you said earlier your breakeven utilization was 30 to 35 percent,
8 which was a level you had anticipated reaching in 2003 . I'm wondering, first of all,why that is now being projected at a lower-level? Secondly, could you discussed
9 what your -- what the Brazilian revenue contribution is this year base and next yearand what kind of margins that business is hitting?
10MR. DAVID RANE : Yes. Thanks for being on the call, Tony . I know it's awfully
11 early for you.
12 UNKNOWN SPEAKER : It's normal time.
13 MR. DAVID BANE : Actually, we have projected breakeven on our processingcenters at different levels and as we become more experienced in those facilities,
14 those numbers tend to move around a bit . At the 14 to $18 million, we will bebreakeven or slightly positive on gross margin as it relates to our processing centers,
15 which is a little different than the general guidance that we've given before at 30 to40 percent and slightly better.
16116. SureBeam identified the components of its results when it filed its Form 10-Q with
17the SEC on August 14, 2002 . In that filing, SureBeam stated that its "2002 revenue[] [was]
18primarily related to revenue recognized from sales of our electronic food irradiation systems, using
19the percentage-of-completion method of accounting, principally to . . . RESAL Saudi Corporation, or
20RESAL, a subsidiary of a private Saudi conglomerate headquartered in Riyadh, Saudi Arabia ." It
21stated that $300,000 in sales revenue was recognized in the second quarter of 2002 related to
22RESAL .
23117 . On August 6, 2002, Titan finalized its plan to dispose of SureBeam and to minimize
24any risk that it faced in connection with investing in SureBeam . That day, Titan announced that it
25had completed its tax-free spin-off of SureBeam :
26The Titan Corporation . . . today announced that it has completed the tax-free
27 distribution of SureBeam . . . shares owned by Titan to Titan common stockholders asof the Record Date of July 26, 2002 . For Titan stockholders who traded Titan
28 common shares after the Record Date and before the Distribution Date of August 5 ,
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the right to receive the dividend traded with the Titan shares . The ratio used for thepurposes of determining the SureBeam dividend to be received by Titan commonstockholders in connection with the tax-free spin-off of SureBeam was 0 .6986 . As aresult of the distribution, Titan's historical stock price has been adjusted to reflect thevalue of the dividend based on SureBeam's closing price on August 5, theDistribution Date . Titan has filed an Information Statement on Form 8-K furtherdescribing the details of the transaction .
118 . By late 2002, and without the benefit of Titan as a fin ancial support (which it lost on
August 6, 2002 when Titan completed its tax-free spin-off of SureBeam), SureBeam operations
started to long for cash . In fact, its balance sheet demonstrates that SureBeam had burned through its
cash significantly since the IPO . SureBeam, which had $53 million in cash or cash equivalent at
March 31, 2001 had, by September 31, 2002, less than $5 million . As a result, defendants knew that
SureBeam had to pursue external financing in order to remain viable - a private placement (the value
of which was directly tied to the price of SureBeam stock) was an option that would subject
SureBcam to the least amount of scrutiny. Accordingly, SureBeam announced strong financial
results on October 31, 2002 and made strong positive statements about the demand for its products :
SureBeam Corporation (Nasdaq : SURE) today reported third quarterrevenues of $7 .0 million for fiscal 2002, and a loss per share of $0 .16, consistentwith the First Call consensus estimate of a loss per share of $0 .16. Third quarterrevenues of $7 .0 million represented a decrease of 52% over $14 .5 million in thethird quarter of 2001 . The net loss, in accordance with generally acceptedaccounting principles, for the third quarter of fiscal 2002 was $11 .0 million, or $0 .16per share, compared to a net loss of $7 .7 million, or $0 .14 per share, for the sameperiod last year.
In the third quarter, SureBeam continued to implement its strategy of meetingthe future retail demand for SureBeam processed fresh ground beef . In anticipationof rollouts across the country with retail partners, the Company opened its west coastservice center during the quarter, which is now available to begin processing . By themiddle of November, SureBeam processed fresh ground beef will be offered in overone thousand stores in the U.S. and frozen hamburger patties are offered in over threethousand stores .
Revenue for the third quarter of 2002 of $7.0 million was comprised of $0 .8million from Non-affiliated parties, $2 .2 million from an Investee, SureBeam MiddleEast, and $4.0 million from The Titan Corporation . Included in Non-affiliatedparties revenue of $0 .8 million was revenue of $0 .3 million related to processing .During the third quarter, the company processed 3 .4 million pounds, a 35% increasefrom the third quarter of 2001 .
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1 For the quarter ended September 30, 2002, gross pro fit as a percentage o fsales on Non -affiliated and Investee system sales was 43% and on Titan system sales
2 was 19%. Gross profit on processing revenue was negative $ 1 .8 million, due toexcess capacity built in an ticipation of future growth .
3119 . SureBeam identified the components of its results when it filed its Form 10-Q with
4the SEC on November 15, 2002 . In that filing , SureBeam stated that "2001 revenues from non-
5affiliated part ies were primari ly related to revenue recognized from sales of our electronic food
6irradiation systems, using the percentage -of-completion method of accounting, principally to . . . Tech
7Ion Indust rial Brasil , S .A., a Brazilian food irradiation comp any," and that "revenues from investee
8are related to revenue recognized from sales of our electronic food irradiation systems, using the
9percentage-of-completion method of accounting from RESAL Saudi Corp ., or RESAL, a subsidiary
10of a p rivate Saudi conglomerate headqua rtered in Riyadh, Saudi Arabia ." It stated that $2 .2 million
11in revenue was recognized in the third quarter of 2002 related to RESAL .
12120. Defendan ts ' statements about the amount of revenue that SureBeam recogn ized
13during the quarter and in fiscal year 2002, as alleged at ¶¶99-100 , 104,109 , 113-114,116,119 were
14materially false and misleading for the reasons alleged at 1146-50 . In sho rt , defendants knew that
15SureBeam 's revenue recognition from its venture in Saudi Arabia was improper because RESAL
16could not secure funding from the Saudi Arabian government as alleged at ¶50, SureBeam financial
17statements were , therefore, materially false and misleading . Indeed , SureBeam 's revenues were
18overstated by $600 ,000 for the quarter .
19121 . Defendants ' statements about the expected demand for SureBeam's processing
20services and the need for excess capacity , alleged at 1¶51-52, 82, 88, 90 -92, 96 , 99-101, 115, 118,
21124, 129 , 131 were also materially misleading. As alleged at ¶¶53-58, SureBeam was having
22considerable troubles introducing its services to the market as reflected by the anemic rates at which
23SureBeam was utilizing its existing capacity and had seen the roll-out of irradiated meat in grocery
24stores withdrawn because of .poor sales . This devastating result had caused executives at
25SureBeam 's facilities nationwide to engage in desperate measures just to compel meat producers to
26place irradiated product in grocery stores . SureBeam ' s failure to disclose these facts render their
27statements about capacity and dem and materially misleading .
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122 . Defendants' false statements had their intended effect . They drove SureBeam's stock
from a near Class Period low of $3 .89 on October 25, 2002 to almost $6 .00 by mid-November ( a
54% increase) .
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123 . On December 3, 2002 , defendants secured additional financing for SureBeam' s
operations - funding that was directly tied to the value of SureBeam's stock . That day, SureBeam
I announced a private placement of 5 .3 million shares of its common stock that generated $25 millio n
in proceeds which it intended to use to "finance future business needs" :
SureBeam Corporation . . . today announced that it has entered into definitivepurchase agreements, subject to certain closing conditions and the receipt ofrequiredconsents, with respect to the private placement of approximately 5,276,315 shares ofSureBeam's common stock at $4 .75 per share to seven institutional investorsresulting in gross proceeds to SureBeam of approximately $25,062,500 . As part ofthe transaction, the Company will issue to the investors warrants to purchase anaggregate of approximately 1,319,079 additional shares of SureBeam's commonstock at an exercise price of $6 .00 per share for a period of five years . Aftercommissions and expenses, the net proceeds to the Company will be approximately$23,308,125 . The proceeds will be used for working capital needs and generalcorporate purposes .
124 . On February 20, 2003, SureBeam announced fourth quarter and fiscal year end results
for SureBeam . The release announced revenues for the quarter of $12.1 million, $5.6 million of
which camefrom RESAL (which still had not secured funding to construct the facilities as planned) .
Despite the fact that SureBeam facilities were operating at an anemic rate, and its facilities were
desperately attempting to secure customers, Oberkfell also lead investors to believe that demand for
SureBeam's service was strong by stating that "[c]onsumer demand is obviously growing" :
SureBeam Corporation (Nasdaq : SURE . . . ) today reported revenues of $12 .1million for the fourth quarter of fiscal 2002, an increase of 4% over $11 .6 million inthe comparable quarter of fiscal 2001 . Included in SureBeam's 2002 fourth quarterrevenue of $12 .1 million was $5.6 million of revenue from investee (Saudi ArabiaRESAL contract), $3 .4 million of revenue from non-affiliated parties and $3 .1million of revenue on contracts for The Titan Corporation clients . Food revenue,which includes revenue from non-affiliated parties and investee, represents anincrease of $8 .5 million over the same period in 2001 . Revenue from non-affiliatedparties was comprised of $3 .1 million for system sales and $0 .3 million of revenuefrom processing. SureBeam's gross margin for the fourth quarter of 2002 was 5 .7%,as compared to the same period in 2001 of 25%. The net loss, in accordance withgenerally accepted accounting principles, for the fourth quarter of fiscal 2002 was$10.0 million, or $0,14 per share, compared to a net loss of $16 .9 million, or $0 .29per share, for the same period last year . . . .
"Throughout 2002 the effectiveness and safety of the SureBeam technologywas demonstrated for all to see as grocery store retailers accelerated their rollouts o f
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SureBeam processed fresh ground beef," said Larry Oberkfell, President and CEO ofSureBeam. "Driving this was a significant expansion in the overall distribution ofour processor customer sales of SureBeam processed fresh ground beef to both retailand foodservice customers . Consumer demand is obviously growing, as folks areembracing this as an added measure of food safety in the products they purchasefor their families . As recently as September 2002, SureBeam processed freshground beef products could be found in less than 100 stores and that number has nowgrown to over 3,300 . Just this month alone we rolled out fresh ground beef to over1,000 new stores," Oberkfell continued .
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Although not all of the revenue will be recognized in 2003, the company hadexisting orders for system sales at December 31, 2002 of $46 .7 million .
125 . On the conference call that day, defendants Oberkfell and Rane repeated the financia l
results announced in SureBeam 's press rele ase that day and stated that demand was so strong that
consumers were demanding that retailers supply irradiated products :
And the last question goes to the heart of the irradiation food story . How would theconsumer look at irradiated food? Would they be afraid and not buy it? And wouldthey pay the premium for it? You can see that the retailers have given theseirradiated food products valuable shelf space . The consumer is buying them and, infact, demanding that the retailer supply irradiated products . And the consumer ispaying a premium for it . This all works because the consumer wants it and theretailer supplies what their customer demands . The processor supplies it becausethey are being a valuable partner to the retailer .
126 . Defendants also discussed SureBeam contract with RESAL in Saudi Arabia. In fact,
despite the fact that the Saudi Arabia project was severely behind schedule because of RESAL's
inability to obtain financing, defendant Oberkfell and Rane told analysts that they expected to make
a shipment every quarter until the end of the contract (which meant that all facilities in Saudi Arabia
i would be completed by the middle of 2004) :
MARK JORDAN: Okay. What is -- you mentioned you got a couple of milliondollars payment from Saudi Arabia in the fourth quarter . What is the unbilled or dueon, you know, I guess, what was it, $23m that was yet to or that has been bookedunder that contract to date? And what is expected cash flow from that over thequarters of the year?
DAVID RANE : The unbilled port ion on that contract is $16m . . We began shippingthe equipment . And the most significant payments on that contract have always beenupon shipment and upon installation . So as we begin to ship and as we begin toinstall , that unbilled plus the additional work performed will become due .
And so I can't give it to you by quarter, but the contract is supposed to be completelyfinished by the middle of `04, at which time there would be zero unbilled .
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MARK JORDAN: Okay . And you mentioned -- when would be, you know, theshipment dates, rough shipment dates and installation dates?
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LARRY OBERKFELL : Speaking off the top of my head, I believe we're scheduledto make a shipment , as I said , in the first quarter, a shipment in the second quarter .And then I believe there's probably a shipment each quarter through the end of thecontract .
127. SureBeam identified the components of its results when it filed its Form 10-K wit h
the SEC on March 31, 2003 . In that filing, SureBeam stated that it's "[r]evenues from investee
represent electronic food irradiation system sales generated from RESAL" and that "[t]o date, all of
the revenues from investee relate to our $53 .0 million RESAL purchase order contract ." It stated
that over $9 . 1 million of revenue was recognized in 2002 related to investee (RESAL) .
128 . Defendants' statements about the amount of revenue that SureBearn recognize d
during the quarter and in fiscal year 2002, as alleged at ¶1124-125, were materially false and
misleading for the reasons alleged at ¶146-50. In short, defendants knew that SureBeam's revenue
recognition from its venture in Saudi Arabia was improper because RESAL could not secure funding
from the Saudi Arabian government as alleged at ¶50 . SureBeam financial statements were,
therefore, materially false and misleading .
SureBeam Starts to Unrave l
129 . By March 6, 2003, SureBeam began to unravel . That day, defendant Oberkfel l
announced his resignation from SureBeam. Despite the fact that SureBeam operations had eroded to
the point where bankruptcy was a viable option, defendant Oberkfell stated in a press release that he
had accomplished his goal at SureBeam of bringing the Company from "`an excellent idea to
building a business foundation"' and explained that he was "`excited"' about SureBeam's success :
SureBeam Corporation (Nasdaq : SURE) announced today that LarryOberkfell, Chairman, President and CEO, will resign effective March 31 . Oberkfellis leaving to accept a position with the Schwan Food Company as President andCOO of their Food Service Group .
"My goal of moving SureBeam from an excellent idea to building a businessfoundation for its continued growth has been realized," said Larry Oberkfell . "I amexcited by the success we've had - going from ground zero to having over 5,000retail supermarkets offering SureBeam processed ground beef in less than two yearsand trending upward . I leave knowing that a solid leadership team is in place thatwill take it to the next phase . SureBeam's future is far brighter today than when Ijoined the company and I am proud to have played a role in achieving that . This
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I oppo rtunity at Schwan's , one of the world 's largest privately owned food comp anies,is a natural progression for me . "
2130. SureBeam 's shares collapsed on this news . The day following the announcement,
3SureBeam 's stock closed at $3 .20 - down 27 .62% from it previous day close .
4131 . Only two months later, on May 7, 2003 , SureBeam reported horrific first quarter
5results ( which were incorporated in its Form 10 -Q filed with the SEC on May 15 , 2003 ) and lowered
6the market 's guidance for its future results . That day, SureBeam reported that it had generated only
7$6.1 million in revenue for the quarter, including $2 .3 million in sales to Saudi Arabia and only $1 .6
8million in sales to Titan . Defend an t Rane added that the quarter was very difficult for SureBeam and
9that SureBeam was lowe ring guidance for fiscal year 2003 to re flect a net loss for the year:
10SureBeam Corporation (Nasdaq : SURE) today reported revenues of $6.1
11 million for the first quarter of fiscal 2003, a decrease of 13% over $7.0 million inthe comparable quarter of fiscal 2002. The components of 2003 first quarter
12 revenue compared to the first quarter of 2002 were : non-affiliated party systemsales and support of $1 .9 million versus $1 .2 million, an increase of b0 %; investee
13 system sales and support of $2.3 million versus $1 .1 million, an increase of 113% ;The Titan Corporation systems sales and suppo rt of $1 .6 million versus $4.5 million,
14 a decrease of 64%; and food processing services revenue of $309,000 versus$263,000, an increase of 17% . The decrease in The Titan Corporation system sales
15 and suppo rt is p rimari ly related to the decrease in work performed on the U . S. PostalService contract du ring the first quarter of 2002 . The net loss, in accordance with
16 generally accepted accounting principles,for the first quarter of fiscal 2003 was$6.7 million, or $0. 09 per share, compared to a net loss of $9.0 million, or $0.14
17 per share, for the same period last year . The net loss for the first quarter of fiscal2003 was positively impacted by the reversal of stock -based compensation on
18 unvested options related to employee terminations of $2 .6 million , or $0.03 pershare .
19"The first quarter of 2003 was a very difficult qua rter for the Comp any .
20 However, we continued to make progress in our core food businesses ," said DavidRane, SureBeam Corporation 's Chief Financial Officer . "As compared to the firs t
21 quarter of 2002 , food system sales and suppo rt from non-affiliated parties andinvestee grew 86% and food processing services revenue grew 17% . Pounds
22 processed increased by 62% to 4 .9 million pounds offset by a decrease in the averag efee per pound charged . Also on the positive side, we expect to make the delayed
23 shipment to Saudi du ring the second quarter and our engineers have sta rted to retu rnto Vietnam to resume installation on the Vietnam contract ," Rane continued .
24Gross profit (loss) for the quarter ended March 31, 2003 was ($989,000)
25 compared to $1 .2 million for the three months ended March 31, 2002 . Thisdecrease in gross profit ( loss) is primari ly related to the loss on food processin g
26 services of ($2.3 ) million, as compared to a loss of ($898,000) . The increased loss infood processing services is primarily due to excess capacity built in an ticipation of
27 future growth . Gross profit (loss) was also negatively impacted by lower margin onrevenue from The Titan Corporation .
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1 Although not all of the revenue will be recognized in 2003 , the company hadunrecorded revenue on existing orders for system sales at March 31, 2003 of $41 .4
2 million.
3 132. On the conference call that day with analysts and investors, defendants Oberkfell and
4 Rane repeated the financial results announced in SureBeam's press release and revealed that they
5 were lowe ring guidance because, they claimed , the war in Iraq had delayed their shipment to Saudi
6 Arabia and because "of a slower - than-expected increase in pounds processed " at SureBeam's
7 service centers . In fact, when one analyst asked why processing demand was down , Rane had no
8 explanation other than "we don't see it happening as fast as we had earlier expected" :
9 TONY BRENNER , ANALYST, ROTH CAPITAL PARTNERS : Thanks . I have acouple questions . First of all, the number of pounds that you are processing seems to
10 be falling a little sho rt of the increase in the number of accounts . You have indicatedthat you expect that to continue to be the case . Could you expand a little on why that
11 is so?
12 KEVIN CLAUDIO : We have a couple initiatives that we are working ondomestically. We are currently talking with several of the key retailers and offering
13 more variety of product - that means different lean points , different products, mapand chops , and to increase the SKUs within the store . We're trying to get more shelf
14 space within the stores that would help d rive the pounds . In addition to that we arefocusing more on advert ising and promotional activity and the-point-of-sale
15 information that we have in the stores with the grilling season approaching us .
16 TONY BRENNER : But, I think you said you expect the number of pounds tocontinue to be below pl an for the balance of the year . Why would that be so in the
17 face of these initiatives ?
18 DAVID BANE : The initial ramp that we believed would be the ramp as we discussed- based on the pounds being taken away from the stores now and the amount of work
19 that we believe is necessary to work with the retailers to increase the SKUs and th evolume per store - right now management does not see it ramping as fast as we had
20 earlier anticipated . We are working on initiatives, but as we schedule meetings andthey are scheduled out two or three weeks and those types of things , we can 't see
21 getting to where we thought we were going to get to before as we go into thesummer . Right now we don't see it happening as fast as we had earlier expected.
22133 . On June 3, 2003, SureBeam started what would ultimately result in its demise . That
23day, SureBeam notified the SEC in a Form 8-K filing that it had terminated KPMG as its outside
24auditor (purportedly over fees ) and retained Deloitte as its new independent accountan t . The Form
258-K addressed the lack of any dispute with its auditor at length and stated that it had terminated
26Arthur Andersen as its accountant back on April 9, 2002 .
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1 134. Two months later, on July 30, 2003, SureBeam announced further problems . That
2 day, SureBeam explained that it had to delay the release of its second quarter results because
3 Deloitte was in the process of reviewing specific contracts entered into in fiscal 2000 - which had
4 prevented defendants from preparing the results :
5 SureBeam Corporation . . . announced today that it is delaying the release of itssecond quarter earnings from its planned date of July 31, 2003. As previously
6 reported by the Company in its Current Report on Form 8-K/A filed on June 11 ,2003, on June 9, 2003, Deloitte & Touche LLP ("Deloitte & Touche") was named as
7 the Company's independent auditor for the year ending December 31, 2003,replacing KPMG LLP . The Company's management has not completed preparatio n
8 of the financial statements for the second quarter and Deloitte & Touche has not yetcompleted its review of those statements . In particular, Deloitte & Touche has not
9 completed their analysis on particular contracts and the Company's accountingtreatment used for such contracts .
10"We regret that this reporting delay is occurring," said SureBeam Chairman
I 1 and Chief Executive Officer John C . Arnie . "We intend to work hard to complete theprocess and we anticipate that our earnings will be released by August 12 . "
12135 . On August 12, 2003, the Company issued another press release entitled "SureBearn to
13Delay Earnings Announcement ." SureBeam attributed the delay to the same resistance by Deloitte
14to sign off on contracts that SureBeam entered into in 2000 :
15SureBeam Corporation . . . announced today that it is further delaying the
16 release of its second quarter earnings from its planned release date of August 12,2003. The Company plans to file a Form 12b-25 with the Securities and Exchang e
17 Commission in connection with the Company's Form 10-Q for the second quarter of2003 and the announcement of the Company's results for the second quarter of 2003
18 will be delayed until after the Company's Form 10-Q for the second quarter has beenfiled .
19Deloitte & Touch LLP ("Deloitte & Touche') has not completed its reviews
20 of the Company's financial statements. In particular, Deloitte & Touche has notcompleted its analysis on the accounting for specific contracts in prior years and
21 the Company's accounting treatment used for its contracts.
22 As previously announced by the Company in its Current Report on Form 8-K/A filed on June 11, 2003, on June 9, 2003, Deloitte & Touche LLP was named as
23 the Company's independent auditor for the year ending December 31, 2003,replacing KPMG LLP .
24136 . On August 21, 2003, SureBeam finally dismissed Deloitte as its auditor and revealed
25that the accounting issues facing SureBeam related to contracts entered into in 2000 (i .e ., the joint
26venture with Tech Ion) . Despite Deloitte's apparent view that SureBeam improperly recognized
27revenue from its joint venture with Tech Ion, defendants claimed that SureBeam was interviewing
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1 other national accounting firms for the purpose of conducting an "independent review" - which sent
2 SureBeam's shares tumbling to $1 .55 per share (13 .89% from its previous days close) :
3 SureBeam Corporation. . . announced today that it is dismissing its independentpublic auditor Deloitte & Touche LLP ("Deloitte & Touche") . On June 9, 2003,
4 Deloitte & Touche was named as SureBeam's independent auditor for the yea rending December 31, 2003, replacing KPMG LLP . Deloitte & Touche has raised
5 issues of concern regarding accounting treatment used by SureBeam for certaintransactions beginning in 2000 . The Audit Committee and the Board ofDirectors o f
6 SureBeam have discussed these issues of concern with Deloitte & Touche and withSureBeam management .
7The Company believes that its financial statements which were audited by
8 national accounting firms and filed with the Securities and Exchange Commission,were appropriate based on the facts and circumstances that existed at the time .
9 However, the Board of Directors has determined that the issues raised by Deloitte &Touche are sufficiently important [and] that it wants these issues to be definitively
10 resolved. Accordingly, the Board's Audit Committee is interviewing other nationalaccounting firms for the purpose of conducting an independent review of these
11 issues.
12 The primary issues which had not been resolved to the satisfaction ofDeloitte & Touche involve certain aspects of SureBeam's revenue recognition
13 policies and certain contracts entered into in 2000 and affecting subsequen tperiods, all of which have been disclosed in various filings with the SEC, including
14 SureBeam's Registration Statement on Form S-l, declared effective by the Securitiesand Exchange Commission on March 15, 2001, and SureBeam's Forms 10-K for th e
15 years ended December 31, 2001 and 2002 . Each of these filings contained financialstatements which had been audited by national accounting firms .
16137. Defendants revealed for the first time on August 27, 2003 that Deloitte was
17challenging SureBeam's accounting for its contracts with Tech Ion .
18138 . Then, on January 12, 2004, after announcing the closing of its Los Angeles irradiation
19facility (open less than a year) and the resignation of the chairman of its audit committee and after
20seeing the Nasdaq delist its stock, SureBeam announced that it would file bankruptcy and seek
21liquidation under Chapter 7 of the United State Bankruptcy Code - a move that has been described
22as "one of the most puzzling moves surrounding SureBeam's bankruptcy."
23DEFENDANTS' KNOWLEDGE OR DELIBERATELY RECKLESS
24 DISREGARD OF THE COMPANY'S FALSE STATEMENT S
25 139. The Individual SureBeam Defendants were SureBeam's top officers and, because of
26 their respective positions in the Company, were each involved in the day-to-day management of
27 SureBeam's business. Each also had inside knowledge of the Company's adverse financial
28 performance, and the means and ability to circumvent SureBeam's financial controls and Generall y
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Accepted Accounting Principles ("GAAP") requirements, which were in fact circumvented . The
Individual SureBeam Defendants were SureBeam's top operating officers and managers and had
constant contact with each other and regularly discussed the critical issues facing SureBeam during
the Class Period, including: (a) sales to Tech Ion, its largest customer at the time of the IPO ; (b)
Tech Ion's dependence on external funding to pay for SureBeam's systems ; (c) Tech Ion's failure to
obtain funding from the World Bank and from SUDAM; (d) Tech Ion's and SureBeam Brasil's
inability to pay for SureBeam's systems ; (e) Tech Ion's failure to make progress constructing the Rio
facility ; (f) Tech Ion's failure to repay the line of credit that Titan established to form the venture ;
(g) SureBeam's acquisition of 80.1% of SureBeam Brasil and its need to retain a separate
construction firm to complete the facility; (h) the need for SureBeam to deliver new systems to Rio
due to the Brazilian government taking control of the original shipment ; (i) SureBeam's relationship
with RESAL; (j) RESAL's dependence on funding to construct the facilities to house the systems ;
(k) RESAL's failure to obtain that funding ; (1) the lack of demand for SureBeam's services ; (m) the
processing capacity in SureBeam's domestic service centers ; (n) the anemic rate at which SureBeam
was operating throughout the Class Period; and (o) the desperate lengths to which SureBeam went to
introduce its products to the market . Thus, each SureBeam Individual Defendant actually knew or
recklessly disregarded that the public statements about SureBeam pleaded herein were false or
misleading when made .
140 . Through attending regular management meetings, which typically started at 7 :30 a.m.
in Claudio's office, and through their direct involvement with SureBeam Brasil, Tech Ion, and
RESAL, as evidenced by the account of former SureBeam employees and by regular e-mail
correspondence alleged herein, defendants Oberkfell, Claudio, and Rane knew : (a) that payment for
SureBeam's irradiators shipped to Brazil were to be paid out of the profits of the joint venture entity
or through loans secured by Tech Ion and SureBeam Brasil ; (b) that neither Tech Ion nor SureBeam
Brasil had the financial capacity to pay for SureBeam systems without external funding ; (c) that
Tech Ion and SureBeam Brasil had failed to secure additional financing and had seen its last attempt
to secure funding fail when SUDAM collapsed amid political corruption in Brazil ; (d) that
SureBeam's revenue recognition from its SureBeam Brasil joint venture was improper and violate d
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GAAP ; (e) that SureBeam's Prospectus was untrue in that it represented that SureBeam had
recognized $15 .5 million in revenue from its Brazilian joint venture and expected $55 million over
three years; (f) that the irradiators ordered from RESAL were to be paid for by the joint venture
entity; (g) that RESAL intended to secure funding from the Saudi government to build the facilities
that would house SureBeam's systems; (h) that RESAL was unable to secure the necessary
financing; (i) that SureBeam's financial results were false and misleading to the extent that they
recognized revenue from the Saudi Arabian joint venture ; (j) that SureBeam was suffering from a
significant lack of demand for its services throughout the Class Period ; (k) that grocery chains had
withdrawn their roll-out of irradiated food in late 2000 because of poor sales ; (1) that SureBeam's
facilities were operating at an anemic rate throughout the Class Period and, on average, less than 3%
of its total monthly operating capacity ; and (m) that SureBeam had very few paying customers and
were going to desperate lengths just to get irradiated meat into the market .
141 . Defendant Oberkfell knew, or was deliberately reckless in disregarding, that
SureBeam's Prospectus continued disseminating untrue statements and omitted material information
necessary to make the Prospectus not misleading and that after the IPO, defendants made false
and/or misleading statement about the demand for SureBeam's services and the capacity needed to
meet that demand . Oberkfell, who signed the Prospectus, had direct knowledge of details and
problems facing the Brazilian venture from the outset . He attended the April 7, 2000 kick-off
meeting in San Diego, he negotiated the terms of the "term sheet" with executives from Tech Ion
(negotiations that tied the payments for SureBeam's systems to the profits of the venture), and
executed the "term sheet" after these negotiations . He was also directly involved in corresponding
with Medeiros and other executives who were developing the venture and seeking to obtain
financing . He was copied on the e-mail from Delphos International to Medeiros on November 2000
that described the skepticism from the World Bank, he received the SureBeam Brasil Business Plan
and Information Memorandum, and he received Medeiros's letter in late December or early January
identifying serious problems in the venture and in the documents submitted to the World Bank .
Oberkfell also agreed with Medeiros to send the first shipment of SureBeam systems to Manaus to
obtain funding from SUDAM, to indicate that Tech Ion had paid for those systems in full, and t o
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increase the invoice from $5 million per system to $6 .5 million because the funding was coming
from SUDAM . He also knew that Tech Ion's last ch ance for funding ended on March 12, 200 1
I when SUDAM closed because of political corruption . As a result of this knowledge , Oberkfell knew
that payment was not reasonably assured and that SureBeam's revenue recognition , as outlined in the
SureBeam Prospectus (which Oberkfell signed), was improper .
142. Oberkfell also knew that SureBeam ' s statements about its Brazili an venture after the
IPO were materially false and misleading . He knew that the venture was in trouble and significantly
behind schedule by, at the latest, April 2001 . During a trip to Brazil, he visited a customs warehouse
in Brazil with Medeiros to view the systems that Oberkfell had shipped to Manaus in late January
(over his project managers' objection), and expressed frustration to executives traveling with him on
that trip that he could not get his systems "liberated" from Brazilian customs because he had n o
place to put them. In July 2001, Oberkfell received daily e-mails from his project managers
explaining that Tech Ion had done very little to build the facility in Rio. He also received a
photograph of an "empty field" and letter sent by a SureBeam project manager that questioned what
Medeiros was doing with SureBeam's capital advance, which had reached as high as $3 .5 million by
December 23, 2000 . Oberkfell was directly involved in the decision to acquire 80% ofthe venture in
October 2001 to rescue it from Tech Ion, which was at least one year behind schedule . Oberkfel l
approved the hiring of Marzionna to finish the construction in November 2001 - which it completed
in late August 2002 or early September 2002 .
143 . Oberkfell's knowledge of when and how revenue was improperly recognized is also
demonstrated by his attendance at daily 7 :30 a.m. meetings with defendants Claudio and Rane in
Claudio's office . The topics discussed included the recognition of revenue, and Claudio, Rane, and
Oberkfell decided when SureBeam would recognize revenue on projects utilizing the percentage-of-
completion method . Thus, Oberkfell actually knew or recklessly disregarded that SureBeam was
improperly recognizing revenue .
144 . Defendant Claudio knew, or was deliberately reckless in disregarding, that SureBea m
was disseminating false financial results and making false and/or misleading statement about the
demand for SureBeam's services and the capacity needed to meet that demand . Claudio, who signed
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the Prospectus, had direct knowledge of details and problems facing the Brazilian venture from the
outset . He attended the April 7, 2000 kick-off meeting in San Diego and he negotiated the terms of
the "term sheet" with executives from Tech Ion (negotiations that tied the payments for SureBeam's
systems to the profits of the venture) . He was also directly involved in corresponding with Medeiros
and other executives who were developing the venture and seeking to obtain financing . He was
copied on the e-mail from Delphos International to Medeiros in November 2000 that described the
skepticism from the World Bank, he received the SureBeam Brasil Business Plan and Information
Memorandum, and he received Medeiros letter in late January or early February identifying serious
problems in the venture and in the documents submitted to the World Bank . Claudio also agreed
with Medeiros to send the first shipment of SureBeam systems to Manaus to obtain funding from
SUDAM, to indicate that Tech Ion had paid for those systems in full, and to increase the invoice
from $5 million per system to $6 .5 million because the funding was coming from SUDAM . He also
knew that Tech Ion's last chance for funding ended on March 12, 2001 when SUDAM closed
because of political corruption . As a result of this knowledge, Claudio knew that payment was not
reasonably assured and that SureBeam's revenue recognition, as outlined in the SureBeam
Prospectus (which Claudio signed), was improper .
145 . Claudio also knew that SureBeam's statements about its Brazilian venture after th e
IPO were materially false and misleading . He knew that the venture was in trouble and significantly
behind schedule by, at the latest, March 2001 when he discussed the delays in the project and the
location of SureBeam's systems with Oberkfell . In July 2001, Claudio received daily e-mails from
his project managers explaining that Tech Ion had done very little on building the facility in Rio . He
also received a photograph of an "empty field" and a letter sent by a SureBeam project manager that
questioned what Medeiros was doing with SureBeam's capital advance, which had reached as high
as $3.5 million by December 31, 2000 . Claudio was also directly involved in the decision to acquire
80% of the venture in October 2001 to rescue it from Tech Ion, which was at least one year behind
schedule .
146 . Claudio's knowledge of when and how revenue was improperly recognized is als o
demonstrated by his attendance at daily 7 : 30 a .m . meetings with defendants Oberkfell and Rane in
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Claudio's office. The topics discussed included the recognition of revenue, and Claudio, Rane, and
Oberkfell decided when SureBeam would recognize revenue on projects utilizing the percentage-of-
completion method . Claudio was responsible for "manufacturing decisions" as to when inventory
would be transitioned from work-in-progress to finished goods, which was important in makin g
revenue recognition determinations using the Percentage of Completion method . Thus, Claudio
actually knew or recklessly disregarded that SureBeam was improperly recognizing revenue .
147 . Defendant Rane was aware of the almost complete lack of demand for SureBeam' s
I services throughout the Class Period . He received a weekly report prepared by Jeff Boeger,
SureBeam's Marketing Director, who compiled weekly sales reports stating the volume of produc t
being handled by the various facilities . In fact, Rane effectively confirmed this knowledge on a
conference call with analysts on April 25, 2002 where he refused to answer questions about the
amount of tonnage that SureBeam had processed for payment, not out of ignorance, but becaus e
doing so would violate an ostensible Company "policy" :
UNIDENTIFIED : . . . How long was the tonnage, where was the tonnage processedthis year and at what rate per pound w as it processed ? (Inaudible ) you do it for me.
DAVID RANE : We have tried to be consistently not to answer that question fromthe standpoint that there is a lot of testing that goes on and some is paid for an someis not, so we t ry to focus on revenue which is the number that we can comparequarter to qua rter.
UNIDENTIFED : So, what was paid? What did it go through (inaudible)? Howmuch per pound did you charge and what was - on the amount of tonnage that wentthrough the system that you charged the fee for . Can you tell us what the averageprice was?
DAVID RANE: We charged - I prefer not to answer that question right now. Wehave tried to make a policy to try to avoid giving that information (inaudible) .
148 . Defendant Rane's knowledge or reckless disregard of when and how revenue was
improperly recognized is demonstrated by his position as Chief Financial Officer and his attendance
at a daily 7 :30 a.m. meeting with defendants Oberkfell and Claudio in Claudio's office . The topics
discussed included the recognition of revenue, and Rane, Claudio and Oberkfell decided whe n
SureBeam would recognize revenue on projects utilizing the percentage-of-completion method.
Rane , as Chief Financial Officer actually made the decision on when to recognize the revenue .
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I Thus, Rane actually knew or recklessly disregarded that SureBeam was improperly recognizin g
revenue .
SUREBEAM 'S FALSE FINANCIAL REPORTINGDURING THE CLASS PERIOD
149. In order to inflate the price of SureBeam's stock and make its $67 million 1P O
successful, defendants caused the Company to report its results for 2000, 2001, 2002 and the first
quarter of 2003 through improper revenue recognition on deals for which the Company would never
be paid, because the customers were unable to pay SureBeam .
150 . The 2000 results were included in the Prospectus and the 2001, 2002 and first quarter
2003 results were included in the Form I0-Qs and Form 10-Ks filed with the SEC . The results were
also included in press releases disseminated to the public .
151 . Defendants caused SureBeam to inappropriately record transactions included in its
2000-2003 results, such that its financial statements were not a fair presentation of SureBeam' s
results and were presented in violation of GAAP and SEC rules .
152. GAAP are those principles recognized by the accounting profession as the
conventions , rules, and procedures necessary to define accepted accounting practice at a particular
time. SEC Regulation S-X (17 C .F.R. §210.4-01 (a)(1)) states that financial statements filed with the
SEC, which are not prepared in compliance with GAAP, are presumed to be misleading and
inaccurate , despite footnote or other disclosure . Regulation S-X requires that interim financial
statements must also comply with GAAP, with the exception that interim financial statements need
not include disclosure which would be duplicative of disclosures accompanying annual financial
statements . 17 C.F.R. §210.10-01(a) .
153. In the IPO Prospectus, the Company expressly represented its financial statements
were presented in conformity with GAAP and, among other things, that its revenue recognition
complied with SEC Staff Accounting Bulletin ("SAB") No. 101 Revenue Recognition in Financial
Statements . In SureBeam 's 2001 Form 10-K, it represented that it recognized revenue in accordance
with GAAP . These representations were false .
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154. Pursuant to GAAP, which describes the accounting for revenues , revenue cannot b e
recognized until it is realizable and ea rned . Financial Accounting Standards Board ("FASB")
Statement of Concepts ("CON") No . 5 ¶83 . GAAP also sets forth in American Institute of Certified
I Public Account ants ("AICPA") Statement of Position ("SOP") No . 81-1, that revenue for
construction projects may sometimes be recognized under an incomplete contract , but if and only i f
certain conditions are met .
155 . SOP No . 81-1 ¶23 states in part :
The use of the percentage-of-completion method depends on the ability tomake reasonably dependable estimates. For the purposes of this statement, "theability to make reasonably dependable estimates" relates to estimates of the extent ofprogress toward completion, contract revenues, and contract costs . The divisionbelieves that the percentage-of-completion method is preferable as an accountingpolicy in circumstances in which reasonably dependable estimates can be made andin which all the following conditions exist :
• Contracts executed by the parties normally include provisionsthat clearly specify the enforceable rights regarding good orservices to be provided and received by the parties, theconsideration to be exchanged, and the manner and terms ofsettlement .
• The buyer can be expected to satisfy his obligations underthe contract .
• The contractor can be expected to perform his contractualobligations .
156. SOP No . 81-1 and AICPA Accounting Research Bulletin No. 45 also explicitly state
that an entity using the percentage-of-completion method as its basic accounting policy must instead
use the completed-contract method (the method in which revenue is not recognized until the contract
is substantially complete) for contracts for which reasonably dependable estimates of revenue, costs,
or completion cannot be made or for which "inherent hazards" make estimates doubtful . Id. at ¶¶25,
'32 . Inherent hazards relate to contract conditions or external factors that raise questions about the
"ability of. . .the customer to perform his obligations under the contract," such as "contracts whose
validity is seriously in question (that is, which are less than fully enforceable) ." Id . at ¶¶28-29. The
bottom line is that revenue cannot be recognized when reasonably dependable estimates cannot be
made for a contract because of unrealistic or ill-defined terms, or for a contract between unreliabl e
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parties . In such instances the percentage-of-completion method must not be used for revenu e
recognition . ¶29 .
157 . The SEC , in SAB No . 101 Revenue Recognition in Financial Statements , reiterates
and makes quite clear that revenue cannot be recognized unless there is persuasive evidence of a n
agreement, collection is "reasonably assured," the seller's price to the buyer is fixed or determinable,
and delivery has occurred or services have been rendered .
158 . During the Class Period, defendants caused SureBeam to improperly recogniz e
I revenue even though all of the above conditions necessary for revenue recognition did not exist .
Payment for the work done by SureBeam for Tech Ion was contingent upon Tech Ion obtaining
additional funding from outside sources . To make matters worse , SureBeam had not completed th e
"earnings process" at the time it improperly recognized revenue, because SureBeam's continuing,
significant involvement was required to help Tech Ion obtain the very funding necessary to get paid .
Defendants knew that Tech Ion was an undercapitalized, unreliable party, clearly unable to pay
without being capitalized and funded . Despite this, defendants recognized revenue anyway and
continued to do so even after they knew attempts to obtain funding from World Bank had clearly
failed. Moreover, in a desperate attempt to make revenue recognition appear legitimate in hopes of
obtaining funding from another source (SUDAM), defendants shipped machines to a warehouse in
Manaus even though Tech Ion had not even begun construction on the facility in Rio that was
supposed to eventually house the systems . Underscoring the fact that Tech Ion never took custody
of the systems, the prematurely shipped machines sat abandoned in a warehouse for many month s
while SureBeam paid the storage charges, until they were eventually seized by the Brazilian
government . Ultimately, Tech Ion did not pay SureBeam and all SureBeam was left with was an
incomplete building shell, the wo rthless rights to the systems which were seized by the Brazili an
government, and a huge uncollectible receivable . Tech Ion was an unreliable party and the funding
contingency was an inherent hazard that clearly precluded any revenue recognition under the
percentage-of-completion method or any other method under GAAP . It was improper to record
revenue of $22 .4 million in 2000 and 2001 and the related receivable as the buyer (Tech Ion) clearly
could not be expected to satisfy its obligations and collectibility was not probable .
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159. During the Class Period, defendants also caused SureBeam to improperly recogniz e
revenue on the RESAL deal . Similar to the Tech Ion transaction, payment from RESAL was clearly
contingent upon RESAL obtaining necessary funding for the joint venture . For example, in the
Financial Requirements section of the joint venture agreement between SureBeam and RESAL, the
parties acknowledged and agreed that "additional capital contributions and financing w[ould] be
necessary to develop and establish the Processing Facilities" including the systems and that both
parties were to seek financing. Thus, SureBeam and RESAL both- knew that the buyer (RESAL)
could not satisfy its obligation to pay SureBeam without first obtaining adequate financing and
collectibility was not probable . GAAP, specifically SOP No. 81-1, CON No . 5 and SAB No. 101 ,
prohibit revenue recognition in such circumstances . To make matters worse, certain elements of the
joint venture agreement with RESAL were subject to an execution of a "Payment Agreement . "
However, throughout 2003, two years after the joint venture agreement was first entered into ,
defendan ts were still negotiating the payment schedule . Above and beyond the fact that coliectibility
was not reasonably assured as required by GAAP, the fact that payment schedule negotiations wer e
still ongoing illustrates that SureBeam did not have the necessary fixed or determinable pric e
established at the time of the agreement and during the periods of time when revenue was bein g
recognized , also required by GAAP and SAB No . 101 . The contract terms were ill-defined and the
contract was not fully enforceable - these conditions precluded the usage of the percentage-of-
. completion method of revenue recognition or any other method under GAAP . As such, any revenue
recognition, including the percentage-of-completion method during the Class Period, was improper.
Despite this, defendants caused SureBeam to improperly recognize $12 .2 million of revenue and a
related receivable in 2001, $5 .2 million' in 2002 and $1 .1 million in the first quarter of 2003 for
RESAL .
160 . By improperly recognizing revenue for the Tech Ion and RESAL deals, SureBeam' s
I reported food irradiation revenues were inflated by 53%, 83%, 30% and 26% in 2000, 2001, 200 2
Adjustments were made to give credit for cash payments actually received, totaling about$4.05 million in 2002 and $1 .25 million in Q1-03 .
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• •and Q1-03, respectively . To illustrate this, the following table depicts reported revenues versu s
revenue excluding that attributable to Tech Ion and RESAL . The chart also excludes revenu e
attributed to Titan for sales wholly unrelated to food irradiation (SureBeam's core operations) .
SureBeam Revenue Analysi s(in $ millions)
FY FY2000 Q1-01 Q2-01 Q3 -01 Q4 -01 2001
Reported Revenue (excluding Titan) 29.4 5.5 8.6 11 .7 (2.8) 23. 0Reported Tech Ion Revenue . 15.5 4.7 0.9 1 .3 0.0 6. 9Reported RESAL Revenue - - 6 .8 8.0 (2.7) 12. 2Adjusted Revenue 13.9 0.8 0.9 2.3 (0.1) 3.9% Reported Revenue was Inflated 53% 86% 89% 80% -97% 83%
FYQ1 -02 02-02 03-02 Q4 -02' 2002 Q1 -03
Reported Revenue (excluding Titan) 2 .5 2.8 3.0 8.9 17.3 4.2Reported Tech Ion Revenue - - - - - -Reported RESAL Revenue 1 .1 0.3 2.2 5.6 9.2 2 . 3Cash Payment Rec'd from RESALZ - - 1 .6 2.5 4.1 1 . 3Adjusted Revenue 1.4 2.5 2.4 5.8 12.2 3 . 1% Reported Revenue was Inflated 44% 11% 21% 35% 30% 26%
161 . Due to these accounting improprieties, the Company presented its financial result s
and statements in a manner which violated GAAP, including the following fundamental accountin g
principles :
(a) The principle that interim financial reporting should be based upon the same
accounting principles and practices used to prepare annual financial statements was violated (APB
Nos . 10, 28) ;
(b) The p rinciple that financial repo rting should provide information that is useful
to present and potential investors and creditors and other users in making rational investment , credit
and similar decisions was violated (FASB CON Nos . 1, 34) ;
2 Cash payment of approximately $1 .55 million received from RESAL between Q1-02 andQ3-02 is reflected in the Q3-02 column .
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(c) The principle that financial reporting should provide information about th e
economic resources of an enterprise, the claims to those resources, and effects of transactions, event s
I and circumstances that change resources and claims to those resources was violated (FASB CON
Nos. 1, 40) ;
(d) The principle that financial reporting should provide information about how
management of an enterprise has discharged its stewardship responsibility to owners (stockholders)
for the use of enterprise resources entrusted to it was violated . To the extent that management offers
securities of the enterprise to the public, it voluntarily accepts wider responsibilities fo r
accountability to prospective investors and to the public in general (FASB CON Nos. 1, 50) ;
(e) The p rinciple that fin ancial repo rt ing should provide information about an
enterprise's financial performance during a period was violated . Investors and creditors often use
information about the past to help in assessing the prospects of an enterprise . Thus, although
investment and credit decisions reflect investors' expectations about future enterprise performance,
those expectations are commonly based at least partly on evaluations of past enterprise performance
(FASB CON Nos. 1, 42) ;
(#) The principle that financial reporting should be reliable in that it represent s
what it purports to represent was violated . That information should be reliable as well as relevant i s
a notion that is central to accounting (FASB CON Nos. 2, 58-59) ;
(g) The principle of completeness , which means that nothing is left out of the
information that may be necessary to insure that it validly represents underlying events and
conditions was violated (FASB CON Nos . 2, 79) ; and
(h) The principle that conservatism be used as a prudent reaction to uncertainty to
try to ensure that uncertainties and risks inherent in business situations are adequately considere d
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I was violated . The best way to avoid injury to investors is to try to ensure that what is reporte d
I represents what it purpo rts to represent (FASB CON Nos. 2, 95, 97).
162 . Further, the undisclosed adverse information concealed by defendants during the
Class Period is the type of information which, because of SEC regulations, regulations of the
national stock exchanges and customary business practice, is expected by investors and securities
analysts to be disclosed and is known by corporate officials and their legal and financial advisors to
be the type of information which is expected to be and must be disclosed .
FAILURE OF THE UNDERWRITER DEFENDANTS TOCONDUCT ADEQUATE DUE DILIGENC E
163 . In connection with the registration process of SureBeam, the underwriter defendants
were obligated to perform reasonable investigations into the Company's business and operations and
ensure that the statements in the March 2001 Prospectus was not materially false and misleading . In
the process of conducting their "due diligence" investigations, the underwriter defendants should
have exercised a high degree of care and sought to independently verify the Company's
representations . Given the high percentage of revenue attributed to SureBeam venture in Brazil,
each Underwriter Defendant had a duty to conduct its own due diligence and to view the financial
results with the appropriate degree of skepticism .
164. The allegations contained herein are replete with examples of the failure of the
underwriter defendants to fulfill their duty of reasonable investigations in connection wit h
SureBeam 's March 2001 IPO .
165, For example, the underwriter defendants failed to perform a reasonable investigation
in connection with their duty to fully understand SureBeam's policies with respect to revenue
recognition . For example, as alleged herein, from 2000 through the IPO, SureBeam inflated its
revenues by over $15 .5 million by improperly recognizing revenue attributed to SureBeam's joint
venture without Tech Ion . Had the underwriter defendants performed a diligent customary
investigation into the sources of SureBeam's revenue, they would have discovered these erroneou s
entries .
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166 . The underwriter defendants failed to conduct any due diligence to determine whether
SureBeam's Tech Ion venture had the intent or ability to pay for the irradiation systems for which
SureBeam was recognizing revenue . Had the underwriter defendants conducted proper due
diligence, they would have learned that the Brazilian venture was incapable of paying for the
irradiation equipment for which the Company was recognizing revenue .
NO SAFE HARBOR
167. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements plead in this complaint . Many
of the specific statements pleaded herein were not identified as "forward-looking statements" when
made. To the extent there were any forward-looking statements, there was no meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from those
in the purported forward-looking statements . Alternatively, to the extent that the statutory safe
harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those
false forward-looking statements because at the time each of those forward-looking statements wa s
made, the particular speaker knew that the particular forward-looking statement was false, and/or the
forward-looking statement was authorized and/or approved by an executive officer of SureBeam
and/or Titan who knew that those statements were false when made .
SOURCE OF LEAD PLAINTIFFS' ALLEGATION S
168. The facts alleged herein were based upon numerous sources, including : (i) interviews
with former SureBeam, Titan, and Tech Ion employees, managers, and/or consultants who were
privy to details regarding (1) SureBeam's joint venture with Tech Ion Brasil, (2) SureBeam's joint
venture with RESAL, and (3) the demand and processing rates of the three SureBeam facilities ; (ii)
interviews with consultants who were involved in SureBeam's joint venture with Tech Ion Brasil ;
(iii) documents filed with the SEC ; (iv) press releases, media reports, conference call transcripts with
analysts, and analyst reports that either quoted or repeated information provided by defendants ; and
(v) internal documents regarding SureBeam's joint venture with Tech Ion Brasil .
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CLASS ACTION ALLEGATION S
169. Lead Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal
Rules of Civil Procedure on behalf of all persons who purchased or otherwise acquired SureBeam
common stock (the "Class") during the Class Period. Excluded from the Class are defendants,
directors and officers of SureBeam and their families and affiliates .
170. The members of the Class are so numerous that joinder of all members i s
impracticable . The disposition of their claims in a class action will provide substantial benefits to
the parties and the Court . During the Class Period SureBeam had more than 75 million shares of
stock outstanding, owned by thousands of persons .
171 . There is a well-defined community of interest in the questions of law and fac t
involved in this case . Questions of law and fact common to the members of the Class whic h
predominate over questions which may affect individual Class members include :
(a) Whether the 33 Act was violated by defendants ;
(b) Whether the 34 Act was violated by defendants ;
(c) Whether defendants omitted and/or misstated material facts ;
(d) Whether defendants' statements omitted material facts necessary to make the
statements made, in light of the circumstances under which they were made, not misleading ;
(e) For claims arising under the 34 Act, whether defendants knew or recklessly
disregarded that their statements were false and misleading;
(f) Whether the price of SureBeam stock was artificially inflated ; and
(g) The extent of damage sustained by Class members and the appropriat e
I measure of damages .
172. Lead Plaintiffs' claims are typical of those of the Class because Lead Plaintiffs and
the Class sustained damages from defendants' wrongful conduct .
173 . Lead Plaintiffs will adequately protect the interests of the Class and have retained
counsel who are experienced in class action securities litigation . Lead Plaintiffs have no interests
which conflict with those of the Class .
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174. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy .
FIRST CLAIM FOR RELIE F
(For Violation of §11 of the 33 Act )(Against Defendants Titan , Oberkfell, Claudio, Golding, Dr. Ray and
the Underwriter Defendants)
175 . Lead Plaintiffs repeat and reallege ¶11-174 .
176 . This Claim is brought pursuant to §11 of the 33 Act, 15 U.S .C. §77k, on behalf ofthe
Class, against defendants and is based upon defendants' negligence or theories of strict liability . For
purposes of this Claim, Lead Plaintiffs expressly exclude and disclaim any allegations that could be
construed as alleging intentional or reckless misconduct or fraud . Lead Plaintiffs assert only strict
liability and negligence claims in this cause of action .
177 . The Prospectus for SureBeam's March 16, 2001 IPO was inaccurate and misleading,
contained untrue statements of material facts, omitted to state other facts necessary to make the
statements made not misleading, and failed to adequately disclose material facts, as described above .
178 . SureBeam-is the issuer of the stock sold via the Prospectus . The underwriter
defendants underwrote the IPO and lent their name to the Prospectus . Defendants Oberkfell,
Claudio, Golding and Dr . Ray signed the Prospectus filed with the SEC as of March 16, 2001 . None
of these defendants made a reasonable investigation or possessed reasonable grounds for the belie f
that the statements contained in the Prospectus were true, did not omit any material fact, and wer e
not misleading .
179 . Each of the defendants identified in this Claim issued, caused to be issued and
participated in the issuance of materially false and misleading written statements to the investin g
public, which were contained in the Prospectus, which misrepresented or failed to disclose, inter
alia, the facts set forth above . As a direct and proximate result of defendants' acts and omissions in
violation of the 33 Act, the market price of SureBeam stock was artificially inflated in the IPO, and
Lead Plaintiffs and the Class suffered substantial damage in connection with their purchase o f
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SureBeam common stock . By reasons of the conduct herein alleged, each defendant identified in
this Claim violated, and/or controlled a person who violated, §11 of the 33 Act .
180 . The underwriter defendants named in this Claim underwrote the SureBeam securities
sold in the offering as defined in §1 l(a)(5) of the 33 Act . As underwriters of the offering, these
defendants were obligated to make reasonable and diligent investigations ofthe statements contained
in the Prospectus at the time they were filed with the SEC or became effective, to ensure that the
statements were not misleading and that there was no omission to state a material fact required to be
stated to make the statements contained therein not misleading . The underwriters did not make a
reasonable and diligent investigation, nor did they possess reasonable grounds for the belief that the
statements contained in the Prospectus at the time they became effective were true and that there was
no omission to state a material fact required to be stated to make the statements contained therein not
misleading . As such, the underwriter defendants named in this claim are liable as detailed herein .
181 . At the time they purchased SureBeam shares, Lead Plaintiffs and other members of
the Class were without knowledge of the facts concerning the false or misleading statements or
omissions alleged herein . Less than one year has elapsed from the time that plaintiffs discovered, or
reasonably could have discovered, the facts upon which this complaint is based, to the time that
plaintiffs filed their complaint . Less than three years have elapsed from the time that the securities
upon which this claim is brought have been offered to the public, to the time plaintiffs filed their
complaint .
SECOND CLAIM FOR RELIEF
(For Violations of §15 of the 33 Act )(Against Defendant Titan)
182. Lead Plaintiffs repeat and reallege $11-174 .
183 . This Claim is brought pursuant to §15 of the 33 Act, 15 U .S .C. §77o, against
defendant Titan .
184 . Titan, by reason of its stock ownership and control of SureBeam, was a controlling
person of SureBeam and had the power and influence, and exercised its power and influence, t o
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cause defendants to engage in the violations of law complained of herein . Titan is, therefore, liable
I under § 15 of the 33 Act .
THIRD CLAIM FOR RELIEF
(For Violation of §10(b) of the 34 Act and Rule 10b-5)(Against Defendants Oberkfell, Claudio and Rane)
185 . Lead Plaintiffs repeat and reallege ¶111-174 .
186 . During the Class Period, defendants Oberkfell, Claudio and Rane disseminated or
approved the false statements specified above, which they knew were misleading in that they
contained misrepresentations and failed to disclose material facts necessary in order to make the
statements made, in light of the circumstances under which they were made, not misleading .
187. Defendants Oberkfell, Claudio and Rane violated § 10(b) of the 34 Act and Rule l Ob-
1 5 in that they :
(a) Employed devices, schemes, and artifices to defraud ;
(b) Made untrue statements of material facts or omitted to state material facts
necessary in order to make statements made, in light of the circumstances under which they wer e
made, not misleading ; or
(c) Engaged in acts, practices, and a course of business that operated as a fraud or
deceit upon plaintiffs and others similarly situated in connection with their purchases of SureBeam
common stock during the Class Period .
188 . Lead Plaintiffs and the Class have suffered damages in that, in reliance on the
integrity of the market, they paid artificially inflated prices for SureBeam stock . Lead Plaintiffs and
the Class would not have purchased SureBeam stock at the prices they paid, or at all, if they had
been aware that the market prices had been artificially and falsely inflated by defendants' misleading
statements .
189 . As a direct and proximate result of these defendants' wrongful conduct, Lead
Plaintiffs and the other members of the Class suffered damages in connection with their purchases o f
SureBeam common stock during the Class Period .
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FOURTH CLAIM FOR RELIEF
(For Violation of §20(a) of the 34 Act)(Against Defendant Titan)
190 . Lead Plaintiffs repeat and reallege 1 1¶1-175 .
191 . Defendant Titan acted as a controlling person of SureBeam within the meaning of
§20(a) of the 34 Act . By reason of its control of SureBeam stock, Titan had the power and authority
to cause SureBeam to engage in the wrongful conduct complained of herein . SureBeam controlled
each of the defendants and all of SureBeam's employees . By reason of such conduct, Titan is liable
pursuant to §20(a) of the 34 Act .
PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiffs on behalf of themselves and the Class, pray for judgment a s
follows :
A. Declaring this action to be a class action properly maintained pursuant to Rule 23 of
the Federal Rules of Civil Procedure ;
B . Awarding Lead Plaintiffs and the other members of the Class compensatory damages ;
and
C . Awarding Lead Plaintiffs and the other members of the Class pre judgment and post-
judgment interest, as well as attorneys' fees including interest, and such equitable/injunctive or other
relief as the Court may deem proper .
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JURY DEMAND
Lead Plaintiffs demand a trial by jury .
DATED: Marcal, 2004 MILBERG WEISS BERSHADHYNES & LERACH LLP
WILLIAM S . LERACHTRAVIS DOWNS IIIDOUGLA R. BRITTONBRIAN Q. 'MARA
•~ D~'UGLAS R. BRI7
401 B Street , Suite 170 0San Diego, CA 92101Telephone : 619/231-1058619/231-7423 (fax)
SCHATZ & NOBEL, P .C .ANDREW M . SCHATZJEFFREY S . NOBELSETH KLEIN330 Main StreetHart ford , CT 06106Telephone : 860/493-6292860/493-6290 (fax )
Co-Lead Counsel for Lead Plaintiffs
S :1Cp1Draft'Securities\Cp1 Surebeam Consolidated Amended .doc
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DECLARATION OF SERVICE BY MAIL
1, the undersigned, declare :
1 . That declarant is and was, at all times herein mentioned, a citizen of the United States
and a resident of the County of San Diego, over the age of 18 years , and not a party to or interest in
the within action ; that declarant' s business address is 401 B Street, Suite 1700, San Diego , California
92101 .
2. That on March 24, 2004, declarant served the CONSOL IDATED COMPLAINT FOR
VIOLATION OF THE FEDERAL SECURITIES LAWS by depositing a true copy thereof in a
United States mailbox at San Diego, California in .a sealed envelope with postage thereon fully
prepaid and addressed to the parties listed on the attached Service List .
3 . That there is a regular communication by mail between the place of mailing and the
places so addressed .
I declare under penalty of perjury that the foregoing is true and correct . Executed this 24th
day of March, 2004, at San Diego, California .
SHARON E . FORD
03-CV-01721-JM(POR)
•
SureBeam (S .D . Cal .) (LEAD)
Service List - 3/24/2004 (03-0294 )
Page 1 of 1
Counsel For Defendant(s )
Marshall B . GrossmanBruce A . FriedmanJeremy E . PendreyAlschuler Grossman Stein & Kahan LLP1620 26th Street, 4th Floo rSanta Monica, CA 90404-4060
310/907-1000310/907-2000(Fax )
Shirli Fabbri WeissGray Cary Ware & Freidenrich LLP4365 Executive Drive, Suite 1100San Diego, CA 92121-2133
858/677-1400858/677-1477 (Fax)
Counsel For Plaintiff(s )
William S. LerachTravis E. Downs I I IDouglas R . Britton
Milberg Weiss Bershad Hynes & Lerach LLP401 B Street, Suite 170 0San Diego, CA 92101-4297
619/231-1058619/231-7423(Fax)
•
Michael C . TuClifford Chance US LLP *601 South Figueroa StreetLos Angeles , CA 90017-5704
213/312-9400213/312-9401 (Fax )
Timothy R. PestotnikRussell A . GoldLuce, Forward, Hamilton & Scripps, LLP*600 West Broadway, Suite 260 0San Diego, CA 92101-3391
619/236-1414619/232-8311 (Fax)
Andrew M. SchatzJeffrey S. NobelNancy A. KulesaSchatz & Nobel330 Main StreetHartford, CT 0610 6
860/493-62928601493-6290 (Fax )
* Denotes service via overnight delivery
