13 January 2004--SureBeam Corp. (San Diego, Calif.), a leading maker of electronic irradiation systems and services, was on its way to making a killing in the food irradiation market once the U.S. Food and Drug Administration (FDA) approved irradiation for ready-to-eat foods like hot dogs, deli meats, and frozen entrees [see ”Irradiation Nation,” IEEE Spectrum, August 2003.
But a funny thing happened on the way to the profit margin: nothing. FDA approval was expected last February. Then last July. Then last October. There's still no word from the FDA, but Surebeam's creditors couldn't wait any longer. The company failed to reach a restructuring agreement with its lender and could not raise enough funds to stay in business. Surebeam plans to file for Chapter 7 bankruptcy and cease operations on 16 January.
SureBeam had been teetering on the verge of collapse for weeks, thanks to a Securities and Exchange Commission investigation; the firing in the last year of two auditors, KPMG and Deloitte Touche Tohmatsu; a delisting from the NASDAQ Stock Market; and a raft of class action lawsuits on behalf of irate investors.
Throughout the last two years, SureBeam investors had been repeatedly reassured by the company during quarterly earnings calls and in press releases that things were going swimmingly, despite the delayed FDA approval, and that plants were opening up all over the world, including Brazil. (Reporters, including this one, were allowed to tour SureBeam's new Vernon, Calif., facility, which opened in 2002 in anticipation of FDA approval, which the company assured IEEE Spectrum was imminent. The company announced in September that it would close the Vernon plant.)
But things were not, in fact, going well at all. And many of those same investors who were banking on the company quickly expanding to fill the anticipated demand for irradiation equipment are now signed on to several class action lawsuits filed over the last few months. These allege, among other things, that SureBeam was improperly recognizing revenue by including funds that the company knew would not be paid; that SureBeam lacked adequate internal controls to ascertain its true financial condition; and that, as a result, SureBeam's reported earnings, net income, and earnings per share were overstated.
One class action suit, filed by Pomerantz Haudek Block Grossman & Gross LLP (New York City), charges that the company reported inflated revenues and earnings for 2000 and 2001. It also points out that in May 2000, SureBeam entered into a contract with Tech Ion Industrial Brasil SA (Manaus, Brazil) for the sale of 11 electronic food irradiation systems worth approximately $55 million over three years. The complaint says that Surebeam recognized $22.4 million from the contract even though the company's executives knew ”or for their recklessness would have known” that Tech Ion would not pay this amount.
In addition, the suit notes that the irradiator fired its auditor Deloitte Touche Tohmatsu LLP (New York City) last summer when that firm challenged the appropriateness of SureBeam's improper revenue recognition practices. Deloitte specifically questioned the company's recognition of revenues from Tech Ion. Deloitte had replaced KPMG LLP, which Surebeam dismissed earlier in the year.
Surebeam was a wholly owned subsidiary of San Diego defense contractor Titan Corp. until it was spun off in March 2001 in a US $67-million initial public offering. Titan shareholders still held a stake in the company until August 2002, and at least one class action suit names Titan as a defendant. Titan is to be purchased by Lockheed Martin Corp. (Bethesda, Md.) for $2.4 billion in early 2004.
The Securities and Exchange Commission has begun an informal inquiry into past accounting practices at SureBeam. Prior to its bankruptcy announcement, SureBeam's stock had lost 95 percent of its value over the last year, going from a high of $4.99 to a 52-week low of $0.20. Due to its failure to file quarterly earnings reports with the Securities and Exchange Commission, the company was delisted from the NASDAQ Stock Market on 27 October 2003.
Click here for the previous article,"Surebeam No Longer a Sure Thing"