As filed with the Securities and Exchange Commission on October 16, 2009

Registration No. 333-161329

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Amendment No. 1

to

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

MIRION TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

3000 Executive Parkway, Suite 222

San Ramon, CA 94583

(925) 543-0800

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

 

Jack A. Pacheco

Vice President and Chief Financial Officer

Mirion Technologies, Inc.

3000 Executive Parkway, Suite 222

San Ramon, CA 94583

(925) 543-0800

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

 

 

Copies to:

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED OCTOBER 16, 2009

 

 

           Shares

 

Mirion Technologies, Inc.

 

Common Stock

 

 

 

This is an initial public offering of shares of common stock of Mirion Technologies, Inc.

 

We are selling           shares of common stock.

 

Prior to this offering, there has been no public market for our common stock. We expect the initial public offering price to be between $      and $      per share. We will apply to list our common stock for quotation on the NASDAQ Global Market under the symbol “MION.”

 

We have granted the underwriters an option to purchase a maximum of          additional shares of common stock. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Investing in our common stock involves risks. See “Risk Factors” on page 8.

 

 

Delivery of the shares of common stock in book-entry form only will be made on or about          , 2009.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

 

 

Robert W. Baird & Co.

 

 

The date of this prospectus is          , 2009.

 

TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us. Neither we nor the underwriters have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

“Mirion Technologies,” “Mirion,” “GDS,” “Global Dosimetry Solutions,” “HandFoot-Fibre,” “Imaging and Sensing Technology,” “IST,” “MGP Instruments,” “MGPI,” “SPIR Ident,” “Synodys,” “TwoStep-Exit” and any corresponding logos, are our common law and registered trademarks. Solely for convenience, we refer to our trademarks in this prospectus without the ^tm and ^® symbols, but such references are not intended to indicate that we will not assert our rights to our trademarks. Other service marks, trademarks and trade names referred to in this prospectus are the property of their owners.

 

References to “fiscal” before any year refer to our fiscal year ending on June 30th of the year referenced.

 

Dealer Prospectus Delivery Obligation

 

Until and including          , 2009 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriter and with respect to unsold allotments or subscriptions.

 

PROSPECTUS SUMMARY

Fiscal 2009 Revenue by End Markets		Fiscal 2009 Revenue by Geography
Fiscal 2009 Revenue: $207.6 Million

	•	Exploit under-penetrated market opportunities.

	•	Expand addressable market.

	•	Geographic expansion.  We believe we can increase our presence in the international market. For example, we intend to leverage our relationships with leading reactor design firms to capitalize on the opening of India’s nuclear end market to U.S. firms due to a recent treaty ratification.

	•	Customer outsourcing.  Some NPP operators have recently outsourced their dosimetry services in order to reduce costs. We have been able to benefit from economies of scale as well as advantages in materials procurement and processing technology to provide enhanced dosimetry services to many of these NPPs at a lower cost.

	•	Service privatization.  In some regions outside the United States, dosimetry services have historically been provided by government agencies. However, privatization of dosimetry services is accelerating in some regions, such as Europe, as providers seek to reduce costs and benefit from enhanced service offerings, providing an opportunity to leverage our expertise and North American service experience.

	•	New applications for existing technologies.

	•	Develop new products and services.

	•	Continuously improve our cost structure and productivity.

	•	Pursue strategic acquisitions.

	•	the long and unpredictable nature of our sales cycle;

	•	fluctuations in our financial performance;

	•	our short operating history as a consolidated entity;

	•	the highly competitive nature of our markets and the resources of our competitors;

	•	the uncertain fulfillment of our backlog;

	•	the effect of the current global financial crisis and worldwide economic conditions; and

	•	changes in our customers’ budgets for radiation detection products and services and the timing of their purchasing decisions.

Common stock offered by us		shares
Common stock to be outstanding after this offering		shares
Over-allotment option		We have granted the underwriters a 30-day option to purchase from us up to an additional           shares of our common stock to cover over-allotments.
Dividend policy		We do not anticipate paying any dividends on our common stock in the foreseeable future. See “Dividend Policy.”
Risk factors		Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 9 of this prospectus for a discussion of factors you should carefully consider before investing in our common stock.
Use of proceeds		We estimate that the net proceeds from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $      million, assuming the shares are offered at $      per share, the midpoint of the price range set forth on the cover page of this prospectus. We intend to use $      million of the net proceeds from the shares that we sell in this offering to repay borrowings from ACAS and its affiliates. We also intend to use net proceeds from this offering to make a one-time payment of $8.0 million to American Capital Financial Services, Inc., or ACFS, a subsidiary of ACAS, to terminate an investment banking services agreement between us and ACFS. We will use the balance of the net proceeds for working capital and general corporate purposes. See “Use of Proceeds.”
Proposed NASDAQ symbol		MION

	•	113,288 shares subject to outstanding options as of June 30, 2009 at a weighted average exercise price of $122.77 per share;

	•	5,402 additional shares reserved for issuance under our existing stock option plan, all of which are expected to be granted to our employees, including our executive officers, immediately following the pricing of this offering at an exercise price equal to the initial public offering price;

	•	106,160 shares to be reserved for issuance under our amended and restated stock plan to become effective upon the pricing of this offering; and

	•	402,428 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $0.00152 per share.

	•	a          -for-           split of our common stock will occur prior to the consummation of this offering;
	•	all of the outstanding shares of our convertible preferred stock will be converted into shares of our common stock;

	•	all of the outstanding shares of our Class A Voting Common Stock and Class B Non-Voting Common Stock will be converted into shares of our common stock on a one-to-one basis;

	•	we will file our amended and restated Certificate of Incorporation prior to the consummation of this offering;
	•	the underwriters will not exercise their over-allotment option; and
	•	warrants to purchase           shares of our common stock at a weighted average exercise price of $      per share will remain outstanding after the consummation of this offering.

		Year Ended June 30,
		$2007				2008				2009
Consolidated Statements of Operations Data:
Revenue			175,361			$	189,933			$	207,582
Cost of revenue			97,222				102,871				110,761
Gross profit			78,139				87,062				96,821
% of revenue			44.6	%			45.8	%			46.6	%
Operating expenses
Selling, general and administrative expenses			59,792				63,008				66,057
Research and development expenses			11,875				14,865				11,188
Total operating expenses			71,667				77,873				77,245
Income from operations			6,472				9,189				19,576
Interest expense, net			(19,068	)			(20,290	)			(17,787	)
Other income, net			786				1,650				474
(Loss) income before provision for income taxes			(11,810	)			(9,451	)			2,263
Provision for income taxes			6,050				4,546				5,915
Net loss		$	(17,860	)		$	(13,997	)		$	(3,652	)
Paid-in-kind preferred dividends			(8,141	)			(8,993	)			(9,892	)
Net loss attributable to common stockholders		$	(26,001	)		$	(22,990	)		$	(13,544	)
Pro forma loss per common share — basic and diluted(1)										$

		As of June 30, 2009
						Pro Forma
		Actual				as Adjusted(1)
Consolidated Balance Sheet Data:
Cash and cash equivalents(2)		$	5,390
Total assets			317,036
Notes payable to ACAS(3)			170,012
Total stockholders’ equity			10,268

		Year Ended June 30,
		2007				2008				2009
Other Data:
Adjusted EBITDA(4)		$	32,045			$	32,304			$	41,431
Amortization of intangible assets			12,215				10,076				8,114
Capital expenditures			3,897				5,142				6,845

		As of June 30,
		2007				2008				2009
Backlog(5)		$	143,887			$	177,956			$	184,218
Deferred revenue			30,567				38,988				43,419

(1)		On a pro forma as adjusted basis to give effect to the conversion of           shares of our outstanding convertible preferred stock into           shares of our common stock, the conversion of           outstanding shares of our Class A Voting Common Stock and Class B Non-Voting Common Stock into           shares of our common stock on a one-to-one basis, the sale of          shares of our common stock in this offering by us at an assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover page of this prospectus), and the application of the $     estimated net proceeds to be received by us as described in “Use of Proceeds” to effect the repayment and refinancing of $     of our indebtedness and to make a one-time $8 million payment to ACFS, after deducting underwriting discounts and estimated offering expenses of $     .

(2)		As of June 30, 2009, we also had $6.0 million of restricted cash.

(3)		In addition, as of June 30, 2009, we had $7.2 million of outstanding debt held by third parties not affiliated with ACAS.

(4)		We include Adjusted EBITDA in this prospectus because (i) it is a basis upon which our management assesses our operating performance, (ii) it is a factor in the evaluation of the performance of our management in determining compensation and (iii) certain maintenance covenants under our debt agreements are tied to ratios based upon Adjusted EBITDA, as defined. Adjusted EBITDA is calculated as net income (loss) less extraordinary gains (loss) and interest income, plus interest expense, charges against income for taxes, depreciation expense, amortization expense, mark to market (loss) gain, non-recurring charges, management fees paid to ACFS and all non-cash compensation expenses (in accordance with the definitions in our credit facilities with ACAS). Adjusted EBITDA is not a measure of financial performance calculated in accordance with U.S. GAAP, and should be viewed as a supplement to—not a substitute for—our results of operations presented on the basis of U.S. GAAP. Adjusted EBITDA also does not purport to represent cash flow provided by, or used in, operating activities in accordance with U.S. GAAP and should not be used as a measure of liquidity. Our statements of cash flows, included elsewhere in this prospectus, present our cash flow activity in accordance with U.S. GAAP. Furthermore, Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies.
(5)		Represents purchase orders or contracts received by us that have not been shipped. Amounts representing backlog are not recorded in our financial statements.

		Year Ended June 30,
		2007				2008				2009
Net loss		$	(17,860	)		$	(13,997	)		$	(3,652	)
Interest expense, net			19,068				20,290				17,787
Income tax expense			6,050				4,546				5,915
Depreciation			4,072				4,022				4,417
Amortization(a)			12,215				10,076				8,114
ACFS fees			1,625				1,625				1,739
Stock option compensation			244				275				1,161
Mark to market (loss) gain			(14	)			9				83
Other non-recurring charges(b)			6,645				5,458				5,867
Adjusted EBITDA		$	32,045			$	32,304			$	41,431

(a)		Represents the non-cash amortization of intangible assets, such as customer relationships, backlog, qualification, enterprise software, technology, territorial rights, trade names and noncompete agreements. We have included portions of this non-cash amortization expense in cost of revenue, research and development expenses and selling, general and administrative expenses.

(b)		Represents non-recurring expenses, including severance expenses and costs associated with the preparation for our initial public offering, as well as certain professional and legal expenses.

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information contained in this prospectus, before deciding whether to purchase our common stock. If any of the following risks occurs, the trading price of our common stock could decline and you could lose all or part of your investment.

 

Risks Related to Our Business

 

Our sales cycle can be long and unpredictable, and we may be unable to recognize revenue until many months or years after an order is placed. As a result, our revenue can be difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate.

 

Our sales efforts for many of our products involve substantial discussion with customers regarding product customization and deployment. This process can be extremely lengthy and time consuming and typically involves a significant product evaluation process. The typical sales cycle for products whose procurement relates to the construction of new, or the refurbishment of existing, NPPs ranges from 12 to 36 months and has, in some cases, extended up to 60 months. In addition, these customers generally make a significant commitment of resources to test and evaluate our products prior to purchase. As a result, our sales process is often subject to delays associated with the lengthy approval processes that typically accompany the design, testing and adoption of new, technologically complex products. This results in our investing significant resources prior to orders being placed for our products, with no assurances that we will secure a sale.

 

In addition, a significant amount of time can pass before we recognize the revenue associated with an order once it has been placed. We may not recognize revenue for sales of certain of our products until the customer certifies the successful installation and operation of the product, which can be many months or, particularly with regard to our Sensing Systems and Radiation Monitoring Systems products, years following the receipt of a customer order. The installation of our systems are also subject to construction or scheduled outage delays unrelated to our products, which can further defer the recognition of revenue.

 

Our long and uncertain sales cycle and the unpredictable period of time between the placement of an order and our ability to recognize the revenue associated with the order makes revenue predictions difficult, particularly on a quarterly basis, and can cause our operating results to fluctuate significantly.

 

Our financial performance is unpredictable.

 

Our business depends on the demand for our radiation detection, measurement, analysis and monitoring products and services in the nuclear, defense and medical end markets. In the past, the demand for our products in these markets has fluctuated due to a variety of factors, many of which are beyond our control. This has caused our financial performance to fluctuate. Among the factors affecting our performance are:

 

 

 

We have a short operating history as a consolidated entity and have incurred net losses since our inception.

 

We were formed in 2005 as a merger of several companies acquired by ACAS but operated separately. Accordingly, we rely on the employees, goodwill, brand strength, product history and qualifications of our legacy acquired companies. In addition, some of our senior executive officers have a limited history with us and no prior experience in the industries in which we compete. Furthermore, we have not achieved positive net income and, as of June 30, 2009, had an accumulated deficit of $98.3 million. We cannot assure you as to when we will achieve positive net income or, if we do so, whether we will continue to do so.

 

We operate in highly competitive markets and in some cases compete against larger companies with greater financial resources.

 

The market for radiation detection, measurement, analysis and monitoring products and services is fragmented, with a variety of small and large competitors, where the degree of fragmentation and the identities of our competitors vary among our target end markets. Some of our competitors have greater financial resources than do we, and they may be able to focus those resources on developing products or services that are more attractive to potential customers than those that we offer, or on lobbying efforts to enhance their prospects of obtaining government contracts. Some of our competitors, for example, are substantially larger and better capitalized than we are and have the ability to combine solutions into an integrated offering at attractive prices. Our competitors may offer these solutions at prices below cost in order to improve their competitive positions. Any of these competitive factors could make it more difficult for us to attract and retain customers, cause us to lower our prices to compete, and reduce our market share and revenue, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

Amounts included in our order backlog may not result in actual revenue or translate into profits.

 

Some of our more profitable services are not reflected in our backlog because they are reflected in deferred revenue. Although the amount of our backlog is based on signed purchase orders or other written contractual commitments, we cannot guarantee that our order backlog will result in actual revenue in the originally anticipated period or at all. In addition, the mix of contracts included in our order backlog can greatly affect our margins in future periods, which may not be comparable to our historical product mix and operating results. Our customers may experience project delays or cancel orders due to factors beyond our control. If our order backlog fails to result in revenue in a timely manner or at all, we could experience a reduction in revenue and liquidity.

 

The current global financial crisis and adverse worldwide economic conditions may have significant effects on our business, financial condition and results of operations.

 

The current global financial crisis—which has included, among other things, significant reductions in available capital and liquidity, substantial reductions and fluctuations in equity and currency values, a reduction in global demand for energy and a worldwide recession, the extent of which is likely to be significant and prolonged—may have a material adverse effect on our business. We have begun to experience some weakening in demand for certain of our products and services, particularly for our high-temperature cameras used as monitoring tools in petrochemical facilities and cement kilns. Factors such as lack of business investment, government spending, the volatility and strength of the capital markets and inflation all affect the business and economic environment and, ultimately, our business, financial condition and results of operations. Continued market disruptions and broader economic downturns may affect our and our customers’ access to capital, lead to lower demand for our products and services, increase our exposure to losses from bad debts or result in our customers ceasing operations, any of which could materially adversely affect our business, financial condition and results of operations.

The credit markets have been experiencing extreme volatility and disruption for more than twelve months, and the volatility and disruption have reached unprecedented levels. In many cases, the markets have limited credit capacity for certain issuers, and lenders have requested shorter terms. The market for new debt financing is extremely limited and in some cases not available at all. In addition, the markets have increased the uncertainty that lenders will be able to comply with their previous commitments. If current levels of market disruption and volatility continue or worsen, we may not be able to refinance our existing debt, or incur additional debt, which may require us to seek alternative funding sources to meet our liquidity needs or to fund planned expansion. Such alternative sources of funding may not be available on acceptable terms or at all.

 

Furthermore, the tightening of credit in financial markets may delay or prevent our customers from securing funding adequate to operate their businesses and purchase our products and services and could lead to an increase in our bad debt levels.

 

Unfavorable currency exchange rate fluctuations could adversely affect our profitability.

 

Our international sales and our operations in foreign countries expose us to risks associated with fluctuating currency values and exchange rates. Most of our sales, costs, assets and liabilities are denominated in foreign currencies. For fiscal 2009, 57.6% and 5.1% of our sales were denominated in euros and pounds sterling. Gains and losses on the conversion of accounts receivable, accounts payable and other monetary assets and liabilities to U.S. dollars may contribute to fluctuations in our results of operations. In addition, increases in the value of the U.S. dollar relative to the euro and the pound sterling could have an adverse effect on our results of operations. We do not currently purchase forward contracts to hedge against the risks associated with fluctuations in exchange rates.

 

We may be less competitive if we fail to develop new or enhanced products and introduce them in a timely manner.

 

The markets in which we compete are subject to technological change, product obsolescence and evolving industry standards. Our ability to successfully compete in these markets and to continue to grow our business depends in significant part upon our ability to develop, introduce and sell new and enhanced products in a timely and cost-effective manner, and to anticipate and respond to changing customer requirements. We have experienced, and may in the future experience, delays in the development and introduction of new products. These delays could provide a competitor a first-to-market advantage and allow a competitor to achieve greater market share. Defects or errors found in our products after commencement of commercial shipment could result in delays in market acceptance of these products. Lack of market acceptance for our new products will jeopardize our ability to recoup research and development expenditures, hurt our reputation and harm our business, financial condition and results of operations. Accordingly, we can not assure you that our future product development efforts will be successful.

 

Our existing and future customers may reduce or halt their spending on radiation detection, measurement, analysis and monitoring products and services.

 

A variety of factors may cause our existing or future customers to reduce or halt their spending on radiation detection, measurement, analysis and monitoring products and services. These factors include:

 

 

Certain of these events could also adversely affect us to the extent that they result in the suspension or reduction of nuclear reactor construction, refurbishment or operation; the reduction of supplies of nuclear raw materials; increased regulation; increased operational costs for us or our customers; or increased liability for actual or threatened property damage or personal injury.

 

If we are unable to obtain adequate supplies in a timely manner, our results of operations would be adversely affected.

 

We are dependent upon certain sole or limited source suppliers for critical raw materials or components of some of our products. For example, we rely on the U.S. government for the enriched uranium used in certain equipment employed in our sensing systems. We also rely on limited source suppliers of certain precious metals used in some of our reactor instrumentation, scintillator materials used in our detection & identification equipment and for analog sensor tubes used in certain of our imaging products. Most of our suppliers are not required to supply us with any minimum quantities, and we cannot assure you that we will receive adequate quantities of components on a timely basis in the future. Our suppliers could have financial or other problems that could cause a disruption in the supply of components to us. In addition, were we to change suppliers of components in some of our products, we may be required to seek new qualifications for such products, which can be a time-consuming and costly process. As a result of interruption of supply, we may not be able to obtain the raw materials or components that we need to fill customer orders. The inability to fill these orders could cause delays, disruptions or reductions in product shipments, require us to negotiate alternate supply arrangements with replacement suppliers where available or require product redesigns which could, in turn, damage relationships with current or prospective customers, increase costs or prices and have a material adverse effect on our business, financial condition and results of operations.

 

We rely on third-party manufacturers to produce non-core components for certain of our products and services. If our manufacturers are unable to meet our demand or requirements, our business could be harmed.

 

We use third-party manufacturers to produce certain non-core components for some of our products. From time to time demand for our products has grown faster than the supply capabilities of these vendors. In many cases, these manufacturers have no obligation to supply products to us for any specific period, in any specific quantity or at any specific price, except as set forth in a particular purchase order. Our requirements represent a small portion of the total production capacities for many of our manufacturers, and our manufacturers may reallocate capacity to other customers, even during periods of high demand for our products or services. We have in the past experienced, and may in the future experience, quality control issues and delivery delays with our manufacturers due to factors such as high industry demand or the inability of our manufacturers to consistently meet our quality or delivery requirements. In addition, third-party manufacturers may have financial difficulties and face the risk of bankruptcy, especially in light of the current worldwide economic downturn. If one of our suppliers was to cancel or materially change a commitment with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, be unable to develop or sell our products or services cost effectively or on a timely basis, if at all, and have significantly decreased revenue, which would harm our business, financial condition and results of operations. We may qualify additional suppliers in the future which would require time and resources. If we do not qualify additional suppliers, we may be exposed to increased risk of capacity shortages due to our dependence on our current suppliers.

 

Some of our suppliers and customers are also our competitors.

 

Some of our competitors are also our suppliers and customers. For example, Canberra, one of our chief competitors in the nuclear and defense end markets, supplies us with some of the detectors employed in the radiation monitoring systems that we supply to the nuclear end market. At the same time, Areva, the controlling shareholder of Canberra, is a customer for our radiation monitoring systems for use in its EPR reactors and in other fuel cycle industry applications. Similarly, Thermo Fisher Scientific both supplies our Dosimetry Services division with TLD crystals used in some of our thermoluminescent dosimeters that we deploy as part of providing dosimetry services to our customers, and sells products competitive with those

offered by our Health Physics division. As with our other suppliers, our competitor suppliers are not required to supply us with any minimum quantities, and we cannot assure you that we will receive adequate quantities of components on a timely basis in the future. The loss of orders stemming from the actions of our supplier or customer competitors could cause delays, disruptions or reductions in product shipments or require product redesigns which could, in turn, damage relationships with current or prospective customers, increase costs or prices and have a material adverse effect on our business, financial condition and results of operations.

 

We could lose money if we fail to accurately estimate our costs or fail to execute within our cost estimates on fixed-price contracts.

 

Many of our contracts are fixed-price contracts which do not provide for price escalation in the event of unanticipated cost overruns. Under these contracts, we perform our services and provide our products at a fixed price. Fixed-price contracts carry inherent risks, including risks of losses from underestimating costs, operational difficulties and other changes that may occur over the contract period. We have in the past experienced unanticipated cost overruns on some of our fixed-price contracts. If our cost estimates for a contract are inaccurate, or if we do not execute the contract within our cost estimates, we may incur losses or the contract may not be as profitable as we expected. In addition, we are sometimes required to incur costs in connection with modifications to a contract that may not be approved by the customer as to scope or price, or to incur unanticipated costs, including costs for customer-caused delays, errors in specifications or designs or contract termination, that we may not be able to recover. These, in turn, could adversely affect our business, financial condition and results of operations. The revenue, cost and gross profit realized on such contracts can vary, sometimes substantially, from the original projections due to changes in a variety of factors, such as:

 

 

Many of our large contracts have penalties for late completion.

 

In some cases, including many of our fixed-price contracts, we have agreed to complete a project by a scheduled date. If we fail to complete the project as scheduled, we may be held responsible for costs associated with the delay, generally in the form of liquidated damages, in some cases up to the full value of the contract. We have in the past incurred penalties associated with late completion on some of our contracts. In the event that a project is delayed, the total costs of the project could exceed our original estimates, and we could experience reduced profits or a loss for that project.

 

Our products and services involve the detection and monitoring of radiation, and the failure of our products or services to perform to specification could adversely affect our business, financial condition or results of operations.

 

Our products and services involve the detection and monitoring of radiation and are crucial components of the safety measures employed with respect to ionizing radiation. The failure of our products to perform to specification could result in personal injury or death and property damage (including environmental contamination). Legal and regulatory actions taken in response to product failure could result in significant costs to us. Additionally, the failure of our products to perform to specification could adversely affect market perception of the quality and effectiveness of our products and services, which would harm our ability to attract new customers and could cause our existing customers to cease doing business with us.

While we have attempted to secure appropriate insurance coverage at a reasonable cost, we do not insure against all risks and a claim can exceed the limits of our policies. We cannot assure you that our insurers will pay a particular claim, or that we will be able to maintain coverage at reasonable rates in the future, or at all. We may also be subject to significant deductibles.

 

Our contracts with customers generally seek to limit our liability in connection with product failure, but we cannot assure you that these contractual limitations on liability will be effective or sufficient in scope in all cases or that our insurance will cover the liabilities we have assumed under these contracts. The costs of defending against a claim arising out of such failure, and any damages awarded as a result of such a claim, could adversely affect our business, financial condition and results of operations.

 

Certain of our products and technologies for the defense end market may be eligible for designation or certification as “qualified anti-terrorism technologies” under the “SAFETY Act” provisions of The Homeland Security Act of 2002 and its implementing regulations. Under the SAFETY Act, the federal government provides for certain liability limitations and a presumption that the “government contractor” defense applies if the Department of Homeland Security “designates” or “certifies” technologies or products as “qualified anti-terrorism technologies,” and if certain other conditions apply. We may seek to qualify some or all of our products and technologies under the SAFETY Act’s provisions in order to obtain such liability protections, but there is no guarantee that the Department of Homeland Security will designate or certify our products and technologies as qualified anti-terrorism technology. To date, we have not sought such designation or certification, and our products have been sold without such qualification, and we may continue to sell our products and technologies without such qualification. To the extent we do so, we will not be entitled to the benefit of the SAFETY Act’s limitations on tort liability or to any U.S. government indemnification.

 

We and our customers operate in a politically sensitive environment, and the public perception of nuclear power can affect our customers and us.

 

We and our customers operate in a politically sensitive environment. The risks associated with radioactive materials and the public perception of those risks can affect our business. Opposition by third parties can delay or prevent the construction of new NPPs and can limit the operation of nuclear reactors. Adverse public reaction to developments in the use of nuclear power, including incidents involving the discharge of radioactive materials, could directly affect our customers and indirectly affect our business. In the past, adverse public reaction, increased regulatory scrutiny and litigation have contributed to extended construction periods for new nuclear reactors, sometimes delaying construction schedules by decades or more. For example, no new reactor has been ordered in the United States since the 1970s and anti-nuclear groups in Germany successfully lobbied for the adoption of the Nuclear Exit Law in 2002, which requires the shutdown of all German NPPs by 2021. Adverse public reaction could also lead to increased regulation or limitations on the activities of our customers, more onerous operating requirements or other conditions that could have a material adverse impact on our customers and our business.

 

Our operations in foreign countries are subject to political, economic and other risks, which could have a material adverse effect on us.

 

Sales outside of the United States and Canada accounted for approximately 62.8%, 63.8% and 62.6% of our net sales in fiscal 2007, 2008 and 2009. We anticipate that international sales will continue to constitute a material percentage of our total net sales in future periods. As a result, our operations are subject to risks associated with global operations and sales, including:

 

 

 

We are also subject to risks associated with the imposition of legislation and regulations relating to the import or export of radiation detection and monitoring technology. For example, certain export control approvals of our sales, including sales to NPP operators located in Pakistan and India, were granted because of the supervision of customer sites by the International Atomic Energy Agency, or the IAEA. If the IAEA ceases to supervise such sites, our ability to sell to certain customers would be limited and our sales could be adversely affected. Furthermore, the failure to comply with export control regulations and to obtain required approvals could result in loss of the ability to export products, fines and penalties.

 

We cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries. Some of our customers’ purchase orders and agreements are governed by foreign laws, which often differ significantly from the laws of the United States. Therefore, we may be limited in our ability to enforce our rights under such agreements and to collect damages, if awarded. These factors may have a material adverse effect on our business, financial condition and results of operations.

 

Changes in our effective tax rate or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

 

Our effective tax rate could be adversely affected by several factors, many of which are outside of our control, including:

 

 

In addition, we may be subject to examination of our income tax returns by the Internal Revenue Service or other tax authorities. If tax authorities challenge the relative mix of our U.S. and international income, our future effective income tax rates could be adversely affected. While we regularly assess the likelihood of adverse outcomes from such examinations and the adequacy of our provision for income taxes, we cannot assure you that such provision is sufficient and that a determination by a tax authority will not have an adverse effect on our business, financial condition and results of operations.

 

Localization requirements could adversely affect our business.

 

Many emerging markets, including China and South Korea, impose localization requirements which favor locally based component manufacturers in the construction of NPPs and which require some degree of technology transfer to local manufacturers. Over time, such localization requirements could limit our ability to sell into such markets and could affect our ability to maintain our trade secrets. In the past, international development agencies have, as a condition of funding, imposed localization requirements that require the transfer of technology to local manufacturers, and this requirement has affected our ability to monitor and maintain control over our intellectual property. We may be subject to similar requirements as a condition of funding in the future.

 

We must comply with the U.S. Foreign Corrupt Practices Act, or FCPA. Failure to comply with the FCPA could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.

 

We are required to comply with the United States Foreign Corrupt Practices Act, which generally prohibits U.S. companies and their intermediaries from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business and/or other benefits. We operate in a number of jurisdictions that pose a high risk of potential FCPA violations, we have government customers and we utilize a number of third-party sales representatives. Although we have begun to inform our personnel and third-party sales representatives regarding the requirements of the FCPA and have developed and will continue to develop and implement systems for formalizing contracting processes, performing diligence on agents and improving our record-keeping and auditing practices, we cannot assure you that our employees, third-party sales representatives or other agents have not or will not engage in conduct for which we might be held responsible under the FCPA.

 

If our employees, third-party sales representatives or other agents are found to have engaged in such practices, we could suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures (including further changes or enhancements to our procedures, policies and controls, as well as potential personnel changes and disciplinary actions), any of which could have an adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by U.S. or foreign authorities also could have an adverse impact on our business, financial condition and results of operations.

 

Certain foreign companies, including some of our competitors, are not subject to prohibitions as strict as those under the FCPA or, even if subjected to strict prohibitions, such prohibitions may be laxly enforced in practice. If our competitors engage in corruption, extortion, bribery, pay-offs, theft or other fraudulent practices, they may receive preferential treatment, from personnel of some companies, giving our competitors an advantage in securing business, or from government officials, who might give them priority in obtaining new licenses, which would put us at a disadvantage.

 

We may make acquisitions that involve numerous risks. If we are not successful in integrating the technologies, operations and personnel of acquired businesses or fail to realize the anticipated benefits of an acquisition, our operations may be adversely affected.

 

As part of our business and growth strategy, we may acquire or make significant investments in businesses, products or technologies that allow us to complement our existing product offerings, expand our

market coverage, increase our engineering workforce or enhance our technological capabilities. Any future acquisitions or investments would expose us to many risks, including:

 

 

Our inability to overcome problems encountered in connection with any acquisition could divert the attention of management, utilize scarce corporate resources and otherwise harm our business. In addition, we are unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms or realize the anticipated benefits of any acquisitions we do undertake.

 

A failure to expand our manufacturing capacity and scale our capabilities to manufacture new products could constrain our ability to grow our business.

 

We have needed to increase our manufacturing capacity, particularly in our locations in Lamanon, France and Hamburg, Germany to support the fulfillment of certain large contracts and to put us in position to accommodate growth in our business. Accordingly, we have initiated an expansion of our manufacturing facilities in Lamanon and renovated and reorganized our facilities in Hamburg. The future growth of our business depends on our ability to successfully expand our manufacturing capacity. Expansion of our manufacturing capacity may require us to obtain regulatory approvals or additional financing. Delay in the expansion of our manufacturing capacity could constrain our ability to grow our business, which would adversely affect our business, financial condition and results of operations.

 

Similarly, we could have substantial difficulty in dealing with rapid growth in markets for new products that we may introduce. If demand for our new products increases rapidly, we will need to expand internal production capacity or implement additional outsourcing. Success in developing, manufacturing and supporting products manufactured in small volumes does not guarantee comparable success in operations conducted on a larger scale. Manufacturing yields and product quality may decline as production volumes increase. If we are unable to deliver products quickly and cost effectively and in the requisite volumes, our customers may decline to purchase our new products or may purchase substitute products offered by our competitors. The costs associated with implementing new manufacturing technologies, methods, and processes, including the purchase of new equipment, and any resulting delays, inefficiencies and loss of sales, could harm our results of operations.

 

We rely on third-party sales representatives to assist in selling our products and services, and the failure of these representatives to perform as expected could reduce our future sales.

 

We typically derive 25% to 30% of our revenue from sales to our customers through third-party sales representatives. We have established relationships with some of our third-party sales representatives recently, and we are unable to predict the extent to which our third-party sales representatives will be successful in marketing and selling our products and services. Moreover, many of our third-party sales representatives also market and sell competing products and services, which may affect the extent to which our third-party sales

representatives promote our products and services. Even where our relationships are formalized in contracts, our third-party sales representatives often have the right to terminate their relationships with us at any time. Our future performance will also depend, in part, on our ability to attract additional third-party sales representatives who will be able to market and support our products and services effectively, especially in markets in which we have not previously sold our products and services. If we cannot retain our current third-party sales representatives or recruit additional or replacement third-party sales representatives, our business, financial condition and results of operations could be harmed.

 

The elimination or any modification of the Price-Anderson Act’s indemnification authority could have adverse consequences for our business.

 

In the United States, the Atomic Energy Act of 1954, as amended, or the AEA, comprehensively regulates the manufacture, use and storage of radioactive materials. Section 170 of the AEA, which is known as the Price-Anderson Act, supports the nuclear services industry by offering broad indemnification to commercial NPP operators and Department of Energy, or DOE, contractors for liabilities arising out of nuclear incidents at power plants licensed by the Nuclear Regulatory Commission, or NRC, and at DOE nuclear facilities. The indemnification authority of the NRC and DOE under the Price-Anderson Act was extended through 2025 by the Energy Policy Act of 2005. Some of our customers are covered by the indemnification provisions of the Price-Anderson Act. In addition, other jurisdictions have similar indemnification authority. If the indemnification authority in the United States or other countries is eliminated or adversely modified in the future, our business could be adversely affected if the owners and operators of NPPs cancel or delay plans to build new plants or curtail the operations of existing plants.

 

Our ability to provide bid bonds, performance bonds or letters of credit is limited and could negatively affect our ability to bid on or enter into significant contracts.

 

We are sometimes required to provide bid or performance bonds or letters of credit to guarantee performance under contracts across our various divisions. Our ability to obtain such bonds and letters of credit depends upon several factors, including our capitalization, working capital, past performance, management expertise and reputation and external factors beyond our control, including the overall capacity of the surety market. Surety companies consider those factors in relation to the amount of our tangible net worth and other underwriting standards that may change from time to time. Events that affect surety markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly higher cost. Our inability to obtain adequate bonding and, as a result, to bid for, or enter into, significant contracts, could adversely affect our future financial condition and results of operations.

 

As a U.S. government contractor, we are subject to a number of procurement rules and regulations.

 

U.S. government contractors and subcontractors must comply with specific procurement regulations and other requirements and are subject to routine audits and investigations by U.S. government agencies. If we fail to comply with these rules and regulations, we could be subject to reductions in the value of our government contracts, contract modification or termination, the assessment of penalties and fines, and/or suspension or debarment from government contracting or subcontracting for a period of time or permanently.

 

Furthermore, we have bid, and may in the future submit bids, for U.S. government contracts that require our employees to maintain various levels of security clearances and require us or our subsidiaries to maintain certain facility security clearances in compliance with Department of Defense and other government requirements. Obtaining and maintaining security clearances for employees involves a lengthy process, and it can be difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain or retain security clearances, or if our employees who hold security clearances stop working for us, we may face delays in fulfilling contracts, or be unable to fulfill or secure new contracts, with any customer involved in classified work. Any breach of security for which we are responsible could seriously harm our business, damage our reputation and make us ineligible to work on any classified programs.

The classified work that we currently perform at one of our facilities subjects us to the industrial security regulations of the Department of Defense and other federal agencies that are designed to safeguard against unauthorized access by foreigners and others to classified and other sensitive information. We may be subject to penalties for violations of these regulations. If we were to come under foreign ownership, control, or influence, the U.S. government could terminate our contracts with it or decide not to renew them and such a situation could also impair our ability to obtain new contracts and subcontracts. The government may also change its procurement practices or adopt new contracting rules and regulations that could be costly to satisfy or that could impair our ability to obtain new contracts.

 

We are subject to a variety of federal, state and foreign laws and regulatory regimes. Failure to comply with laws and regulations could subject us to, among other things, penalties and legal expenses which could have an adverse effect on our business.

 

Our business is subject to regulation by various federal and state governmental agencies. Such regulation includes the radioactive material and exposure regulatory activities of the NRC, the anti-trust regulatory activities of the Federal Trade Commission and Department of Justice, the import/export regulatory activities of the Department of Commerce, the Department of State and the Department of Treasury, the regulatory activities of the Occupational Safety and Health Administration, the environmental regulatory activities of the Environmental Protection Agency, the labor regulatory activities of the Equal Employment Opportunity Commission and tax and other regulations by a variety of regulatory authorities in each of the areas in which we conduct business. We are also subject to regulation in other countries where we conduct business. In certain jurisdictions, such regulatory requirements may be more stringent than in the United States. We are also subject to a variety of U.S. federal and state employment and labor laws and regulations, including the Americans with Disabilities Act, the Federal Fair Labor Standards Act, the Worker Adjustment and Restructuring Notification Act, which requires employers to give affected employees at least 60 days’ notice of a plant closing or mass layoff, and other regulations related to working conditions, wage-hour pay, overtime pay, employee benefits, anti-discrimination and termination of employment. We are also subject to the employment and labor laws and regulations of the foreign jurisdictions, including France and Germany, where the majority of our employees are located.

 

Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. In addition, from time to time we have received, and may in the future receive, correspondence from former employees terminated by us who threaten to bring claims against us alleging that we have violated one or more labor or employment regulations. An adverse outcome in any such litigation could require us to pay damages.

 

Governmental enforcement actions could harm our business, financial condition and results of operations. If any governmental sanctions are imposed, or if we do not prevail in any civil or criminal litigation, our business, financial condition and results of operations could be materially adversely affected. In addition, responding to any action could be costly and result in a significant diversion of management’s attention and resources.

 

We and our customers operate in highly regulated industries that require us and them to obtain, and to comply with, national, state and local government permits and approvals.

 

We and our customers operate in a highly regulated environment. Many of our products and services must comply with various domestic and international standards that are used by regulatory and accreditation bodies for approving such services and products. Many of our products, particularly those offered by our Radiation Monitoring Systems and Sensing Systems divisions, are subject to an array of product testing under extreme temperature, pressure, radiation and seismic conditions, known collectively as a qualification, for any given nuclear reactor design. The qualification is typically owned by the party who pays for the testing and so, in certain cases, we license such qualifications from a third party. In addition, many of our products and services, particularly those offered by our Dosimetry Services division, must be certified by the National Voluntary Laboratory Accreditation Program in the United States and by other governmental agencies in international markets. The termination of any such accreditation or our failure to obtain and maintain required qualification or accreditation for our products and services may adversely affect our revenue and results of operations.

Changes in these standards and accreditation requirements may also result in our having to incur substantial costs to adapt our products. Such adaptations may introduce quality assurance issues during transition as new features and products may not perform as expected. Additionally, changes affecting radiation protection practices, including new understandings of the hazards of radiation exposure and corresponding changes in regulations, may impact how our services are used by our customers and may, in some circumstances, cause us to alter our products and services.

 

In addition, our customers are required to obtain, and to comply with, national, state and local government licenses, permits and approvals with respect to their facilities. Any of these licenses, permits or approvals may be subject to denial, revocation or modification under various circumstances. Failure to obtain or comply with the conditions of licenses, permits or approvals may adversely affect our customers’ operations by suspending their activities and may subject them to penalties and other sanctions. Although existing licenses, permits or approvals are routinely renewed by various regulators, renewal could be denied or jeopardized by various factors, including:

 

 

Furthermore, if new environmental legislation or regulations are enacted or existing laws or regulations are amended or are interpreted or enforced differently, our customers may be required to obtain additional operating licenses, permits or approvals. Regulatory issues experienced by our customers may lead to delay or cancellation of their orders for our products and services or the discontinuance of future orders. We cannot assure you that we or our customers will be able to meet all potential regulatory challenges.

 

We could incur substantial costs as a result of violations of or liabilities under environmental laws.

 

Our operations and properties are subject to a variety of U.S. and foreign environmental laws and regulations governing, among other things, air emissions, wastewater discharges, management and disposal of hazardous and non-hazardous materials and waste and remediation of releases of hazardous materials. Our failure to comply with present and future requirements, or the identification of contamination, could cause us to incur substantial costs, including clean-up costs, fines and penalties, investments to upgrade our facilities or curtailment of operations. The future identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more stringent laws and regulations or other unanticipated events may arise in the future and give rise to material environmental liabilities and related costs which could have a material adverse effect on our business, financial condition and results of operations.

 

A European Union, or EU, directive relating to the restriction of hazardous substances, or RoHS, in electrical and electronic equipment and a directive relating to waste electrical and electronic equipment, or WEEE, have been and are being implemented in EU member states. Among other things, the RoHS directive restricts the use of certain hazardous substances in the manufacture of electrical and electronic equipment and the WEEE directive requires producers of electrical goods to be responsible for the collection, recycling, treatment and disposal of these goods. In addition, laws similar to RoHS and WEEE were passed in China in 2006 and South Korea in 2007. Governments in other countries, including the United States, are considering implementing similar laws or regulations.

 

In addition, a new regulation regarding the registration, authorization and restriction of chemical substances in industrial products, or REACH, became effective in the EU in 2007. Over time this regulation, as well as other regulations, may require us to substitute certain chemicals contained in our products with substances the EU considers less dangerous. We have not yet assessed the impact this legislation may have on our operations.

 

The costs associated with complying with this legislation could include costs associated with modifying our products, recycling and other waste processing costs, legal and regulatory costs and insurance costs. We

have recorded in the past and may be required to record in the future additional expenses for costs associated with compliance with these regulations. The costs of complying with these new laws, or with current and future environmental and worker health and safety laws, could a material adverse effect on our business, financial condition and results of operations.

 

Our future success is dependent on our ability to retain key personnel, including our executive officers, and attract qualified personnel. If we lose the services of these individuals or are unable to attract new talent, our business will be adversely affected.

 

Our future operating results depend in significant part upon the continued contributions of our key technical and senior management personnel, many of whom would be difficult to replace. We are particularly dependent on the continued service of Thomas D. Logan, our President, Chief Executive Officer and Chairman of the Board, W. Antony Besso, our Regional Vice President, EMEA, and President, Health Physics Division, Iain F. Wilson, our Regional Vice President, Asia, and President, Sensing Systems Division, and Jean-Louis Gouronc, our President, Radiation Monitoring Systems.

 

Our future operating results also depend in significant part upon our ability to attract, train and retain qualified management, manufacturing and quality assurance, engineering, marketing, sales and support personnel. In particular, engineers skilled in the analog technologies used in certain of our products are in high demand and competition to attract such personnel is intense. In addition, the expected increase in construction of new NPPs may exacerbate the shortage of radiation engineers and other qualified personnel. We are continually recruiting such personnel; however, we cannot assure you that we will be successful in attracting, training or retaining such personnel now or in the future. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for us to hire such persons over time. The high demand for such personnel may increase the costs to us to recruit and retain employees.

 

The loss of any key employee, the failure of any key employee to perform in his or her current position, our inability to attract, train and retain skilled employees as needed or the inability of our officers and key employees to expand, train and manage our employee base could materially and adversely affect our business, financial condition and results of operations.

 

Our ability to compete successfully and achieve future growth will depend on our ability to protect our intellectual property and to operate without infringing the intellectual property of others.

 

Our business is largely dependent upon our design, engineering, manufacturing and testing know-how. We attempt to protect our intellectual property rights through trade secret laws, non-disclosure agreements, confidentiality procedures and employee disclosure and invention assignment agreements. To a lesser extent, we may also seek to protect our intellectual property through patents, trademarks and copyrights. We rely upon unpatented proprietary radiation detection expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position, some of which is licensed from third parties. Confidentiality agreements with our employees and third parties are often limited in duration and could be breached, and therefore they may not provide meaningful protection for our trade secrets or proprietary radiation detection expertise. Adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets. Others may obtain knowledge of our trade secrets through independent development or other access by legal means. It is possible that our efforts to protect our intellectual property rights may not:

 

 

 

The laws of foreign countries also may not adequately protect our intellectual property rights. Many U.S. companies have encountered substantial infringement problems in foreign countries. Because we conduct a substantial portion of our operations and a majority of our sales have been outside of the United States, we have significant exposure to foreign intellectual property risks.

 

Others have in the past attempted, and may in the future attempt, to copy or otherwise obtain and use our intellectual property without our consent. Monitoring the unauthorized use of our intellectual property is difficult. There is a risk that our customers or their end users’ customers may attempt to copy or otherwise obtain and use our intellectual property without our consent. It may be necessary, from time to time, to initiate litigation against one or more third parties, including our customers or companies with whom we have manufacturing relationships, to preserve our intellectual property rights or to challenge the validity and scope of proprietary rights asserted by others, and we could face counterclaims. Legal disputes with our customers or companies with whom we have manufacturing relationships could substantially harm our relationships and sales. Litigation is expensive and time consuming, and an adverse outcome could subject us to significant liability for damages or invalidate our proprietary rights.

 

From time to time, third parties may claim that we have infringed upon, misappropriated or misused other parties’ proprietary rights, and we may already be infringing without knowing it. Any of these events or claims could result in litigation. Such litigation, whether as plaintiff or defendant, could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is ultimately determined in our favor. In the event of an adverse result in such litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of certain products, expend significant resources to develop or acquire non-infringing technology, discontinue the use of certain processes, obtain licenses to use the infringed technology, or indemnify our customers. Product development or license negotiating would likely result in significant expense to us and divert the efforts of our technical and management personnel. We cannot assure you that we would be successful in such development or acquisition or that such licenses would be available on reasonable terms, or at all.

 

Our obligations to indemnify our customers for the infringement by our products of the intellectual property rights of others could require us to pay substantial damages.

 

We currently have in effect a number of agreements in which we have agreed to defend, indemnify and hold harmless our customers and suppliers from damages and costs that may arise from the infringement by our products of third-party patents, trademarks or other proprietary rights. We may periodically have to respond to claims and initiate or participate in litigation in connection with these indemnification obligations, which may result in our paying substantial damages. Our insurance does not cover intellectual property infringement.

 

Some of our workforce is represented by labor unions in the United States and by works councils and trade unions in the EU, which may lead to work stoppages that could adversely affect our business.

 

As of June 30, 2009, approximately 34, or 12%, of our U.S. employees were unionized, and the majority of our EU employees are members of, or are represented by, works councils or trade unions. Since 1988, we have experienced only two work stoppages, at our facility in Lamanon, France. We may experience work stoppages or other labor problems in the future, which could adversely affect our business. We cannot predict how stable our relationships will be or whether we will be able to satisfy union or works council requirements without impacting our operating results and financial condition. Union and works council rules may limit our flexibility to respond to changing market conditions and the application of these rules could harm our business. The unions and works councils may also limit our flexibility in dealing with our workforce. Work stoppages and instability in our relationships could negatively impact the timely production of our products,

which could strain relationships with customers and cause a loss of revenue that would adversely affect our results of operations.

 

Our operations could be subject to natural disasters and other business disruptions, which could materially adversely affect our business and increase our expenses.

 

Our operations could be subject to natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses. For example, our corporate headquarters in San Ramon, California and the center of operations of our Dosimetry Services division in Irvine, California are located near major earthquake fault lines. In the event of a major earthquake or other natural or manmade disaster, we could experience business interruptions, destruction of or damage to facilities and/or loss of life, any of which could have a material adverse effect on our business and increase our expenses.

 

Risks Related to this Offering and Our Common Stock

 

If we cannot generate sufficient operating cash flow and obtain external financing, we may be unable to make all of our planned capital expenditures and other expenses.

 

Our ability to fund anticipated capital expenditures and other expenses depends on generating sufficient cash flow from operations and the availability of external financing. Since our inception in 2005, ACAS and its affiliates have provided us with the capital and debt financing that we have used to fund our growth and operations. Although ACAS will continue to be a controlling stockholder in our company upon completion of this offering, ACAS is under no obligation to continue making capital investments in us or to provide debt financing to us.

 

Our debt service obligations and our capital expenditures, together with on-going operating expenses, will be a substantial drain on our cash flow and may decrease our cash balances. The timing and amount of our capital requirements cannot be precisely determined at this moment and will depend on a number of factors, including demand for our products, product mix, changes in industry conditions and market competition. We intend to regularly assess markets for external financing opportunities, including debt and equity. Such financing may not be available when needed or, if available, may not be available on satisfactory terms, particularly in light of the limited financing available as a result of the current global financial crisis. Any equity financing would cause further dilution to our stockholders. See “Dilution.” Our inability to obtain needed financing or to generate sufficient cash from operations may require us to abandon projects or curtail capital expenditures, and we could be materially adversely affected. If we are not able to independently generate excess free cash flow and obtain third party debt or equity financing, our ability to grow our business may be materially adversely affected.

 

Upon completion of the offering, ACAS will continue to have an effective veto over matters determined by our Board of Directors and will be in a position to determine the outcome of all matters submitted to a stockholder vote as long as it continues to hold a majority of our outstanding common stock, which will limit your ability to influence corporate actions and may adversely affect the market price of our common stock.

 

Upon completion of this offering, ACAS and its affiliates will collectively hold approximately     % of our outstanding common stock, or approximately     % if the underwriters exercise in full their over-allotment option to purchase additional shares of common stock. As a result, ACAS will continue to determine the outcome of votes on all matters requiring approval by our stockholders, including the election of directors, the adoption of amendments to our Certificate of Incorporation and Bylaws and approval of significant corporate transactions, as long as it continues to hold a majority of our outstanding common stock. In addition, a provision of the Bylaws that we will adopt prior to the consummation of this offering will provide that at least one of the directors designated by ACAS must be part of the majority in any action taken by our Board of Directors so long as ACAS and its affiliated funds hold at least 50.1% of our outstanding common stock, other than on matters in which ACAS has a conflict of interest (as it would if it appointed a majority of our directors). Our Bylaws will also provide that ACAS will have the right to designate three of our seven directors so long as ACAS and its affiliated funds hold at least 50.1% of our outstanding common stock, two directors so long as

they hold at least 25% but less than 50.1% and one director so long as they hold at least 10% but less than 25%. ACAS will also be able to take actions that have the effect of delaying or preventing a change in control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them. In addition, this significant concentration of stock ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. This concentration of control could be disadvantageous to other stockholders with interests different from those of our principal stockholder and the trading price of our common stock could be adversely affected. See “Principal Stockholders” for a more detailed description of the ownership of our common stock.

 

Conflicts of interest may arise because some of our directors are principals of ACAS.

 

Three persons designated by ACAS will serve on our Board of Directors upon completion of this offering. ACAS and its affiliates may invest in entities that directly or indirectly compete with us, or companies in which they currently invest may begin competing with us. As a result of these relationships, when conflicts between the interests of ACAS and the interests of our other stockholders arise, these directors may not be disinterested.

 

Although our directors and officers will have a duty of loyalty to us under Delaware law and the Certificate of Incorporation that we will adopt prior to the consummation of this offering, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our Board of Directors and a majority of our disinterested directors, or a committee consisting solely of disinterested directors, approves the transaction.

 

ACAS and its affiliates do not have any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business that we do.

 

Under the Certificate of Incorporation that we will adopt prior to the consummation of this offering, none of ACAS or its affiliates and investment funds, or any other ACAS entity, nor any director, officer, stockholder, member, manager and/or employee of an ACAS entity, has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business that we do. In the event that any ACAS entity acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both itself and us, the ACAS entity will not have any duty to communicate or offer the corporate opportunity to us and may pursue or acquire the corporate opportunity for itself or offer the opportunity to another person. In addition, none of ACAS’s designees on our Board of Directors will be required to offer to us any transaction opportunity of which he or she becomes aware and could take any such opportunity for him or herself or offer it to other companies (including ACAS and its other portfolio companies) in which they have an investment, unless such opportunity is expressly offered to him or her solely in his or her capacity as a director of us.

 

As a “controlled company,” as defined in the NASDAQ Marketplace Rules, we qualify for, and rely on, exemptions from certain corporate governance requirements.

 

ACAS owns, and will continue to own immediately after the completion of this offering, common stock representing more than a majority of the voting power in the election of our directors. As a result, we are considered a “controlled company” within the meaning of the corporate governance standards of the NASDAQ Marketplace Rules. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements, including the requirement that a majority of its board of directors consist of independent directors, the requirement that it have a nominating/corporate governance committee that is composed entirely of independent directors and the requirement that it have a compensation committee that is composed entirely of independent directors. We have elected to be treated as a controlled company and will rely on these exemptions. As a result, we do not have a majority of independent directors and our compensation and nominating and corporate governance committees do not consist entirely of independent directors. Furthermore, until one year following the offering, as permitted by applicable rules, we do not anticipate having an audit committee consisting solely of independent directors. Accordingly, you do not have the same protection afforded to stockholders of companies that are subject to all of the NASDAQ Marketplace corporate governance requirements.

The price of our common stock may be volatile and subject to wide fluctuations.

 

The market price of our common stock may be subject to wide fluctuations due to a number of factors. We may experience significant period-to-period fluctuations in our backlog, revenue and operating results in the future and any such variations may cause our stock price to fluctuate. It is likely that in some future period our operating results will be below the expectations of securities analysts or investors. If this occurs, our stock price could drop significantly. A number of factors, in addition to those cited in other risk factors applicable to our business, may contribute to fluctuations in our backlog, sales and operating results, including:

 

 

Broad market and industry factors may also adversely affect the market price of our common stock, regardless of our actual operating performance. Market and industry factors that could cause fluctuations in our stock price may include, among other things:

 

 

The market price of our common stock also might decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. The initial public offering price of our common stock will be determined through negotiations between the representatives of the underwriters, ACAS and us and may not be representative of the price that will prevail in the open market. You might be unable to resell your shares at or above the offering price. In the past, companies that have experienced volatility in the market price of their stock have been the subjects of securities class action litigation. If we were to become the subject of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources.

 

We have and will continue to incur increased costs as a result of becoming a reporting company.

 

We have and will continue to face increased legal, accounting, administrative and other costs as a result of becoming a reporting company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and the Public Company Accounting Oversight Board, have required changes in the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make legal, accounting and administrative activities more time consuming and costly. For example, prior to consummation of this offering we will add independent directors, create additional committees of our Board of Directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect to incur substantially higher costs to obtain directors and officers’ insurance.

In addition, as we gain experience with the costs associated with being a reporting company, we may identify and incur additional overhead costs.

 

Our independent registered public accounting firm reported to us that, at each of June 30, 2008 and June 30, 2009, we had material weaknesses and significant deficiencies in our internal controls over financial reporting that, if not remediated, could result in material misstatements in our financial statements in future periods and impair our ability to comply with the accounting and reporting requirements applicable to public companies.

 

Our independent registered public accounting firm reported to us that at each of June 30, 2008 and June 30, 2009, we had material weaknesses and a significant deficiency in our internal controls over financial reporting. Under standards established by the Public Company Accounting Oversight Board, or PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis, and a “significant deficiency” is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. The material weaknesses identified were with respect to our controls in our financial accounting and reporting functions, which are necessary in order to produce PCAOB compliant financial statements. These weaknesses related to a lack of sufficient accounting personnel and depth of knowledge, formal policies and procedures to ensure that subsidiary financial information reflect accounting under U.S. generally accepted accounting principles, account reconciliation procedures and appropriate review and approval procedures are performed in a timely manner. A significant number of audit adjustments were also required to appropriately reflect account balances in accordance with U.S. GAAP. In connection with these weaknesses, we were required to restate our consolidated financial statements for fiscal 2007 and 2008 as a result of the reclassification of paid-in-kind dividends on our Convertible Participating Preferred Stock as additional paid-in capital rather than accrued liabilities. We determined that such dividends should not have been recorded as liabilities as they do not involve an obligation to make future sacrifices of assets. The significant deficiencies identified were with respect to inadequate systems and recordkeeping processes resulting in the need for manual intervention. As we prepare for the completion of this offering, we are in the process of addressing the issues raised by our independent registered public accounting firm by hiring additional finance personnel and documenting and enhancing formalized information technology policies and procedures, and through the implementation of software upgrades throughout our operations. However, these and other remediation efforts may not enable us to remedy the material weaknesses and significant deficiency or avoid other material weaknesses or significant deficiencies in the future. Because of these material weaknesses, there is heightened risk that a material misstatement of our annual or quarterly financial statements will not be prevented or detected. In the event that we have not adequately remedied these material weaknesses, and if we fail to maintain proper and effective internal controls in future periods, it could adversely affect our operating results, financial condition, ability to run our business effectively and our ability to timely meet our reporting requirements and could cause investors to lose confidence in our financial reporting. In addition, these and any other material weaknesses and significant deficiencies will need to be addressed as part of the evaluation of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and may impair our ability to comply with Section 404.

 

Our internal control over financial reporting does not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on us.

 

Our internal control over financial reporting does not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act, standards that we will be required to meet in the course of preparing our fiscal 2011 financial statements. We do not currently have comprehensive documentation of our internal controls, nor do we document or test our compliance with these controls on a periodic basis in accordance with Section 404 of the Sarbanes-Oxley Act. Furthermore, we have not tested our internal controls in

accordance with Section 404 and, due to our lack of documentation, such a test would not be possible to perform at this time.

 

We are in the early stages of addressing our internal control procedures to satisfy the requirements of Section 404, which requires an annual management assessment of the effectiveness of our internal control over financial reporting. If, as a public company, we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to attest to the effectiveness of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we may be unable to report our financial information on a timely basis, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules and may breach the covenants under our credit facilities. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.

 

Future sales of shares could depress our stock price.

 

If our existing stockholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline. Based on shares outstanding as of June 30, 2009, upon completion of this offering we will have outstanding approximately           shares of common stock. Of these shares, only the           shares of common stock sold in this offering will be freely tradable, without restriction, in the public market. After the lock-up agreements pertaining to this offering expire, our existing stockholders will be able to sell their shares in the public market, subject to legal restrictions on transfer. Prior to consummation of this offering, we will enter into a registration rights agreement that provides for registration rights with respect to the          shares of our common stock that will be held by ACAS and its affiliates, Thomas D. Logan, W. Antony Besso and certain other stockholders following this offering. Registration of the sale of the common stock would permit their sale into the market immediately. If for any reason ACAS sells a large number of shares, the market price of our common stock could decline, as these sales may, among other things, be viewed by the public as an indication of an upcoming or recently occurring shortfall in the financial performance of our company. Moreover, the perception in the public market that these investors might sell our common stock could depress the market price of the common stock. See “Shares Eligible for Future Sale” for more detailed information. Additionally, we may sell or issue additional shares of common stock in subsequent public offerings or in connection with acquisitions, which will result in additional dilution and may adversely affect market prices for our common stock.

 

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock or if our results of operations do not meet their expectations, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. In addition, it is likely that in some future period our operating results will be below the expectations of securities analysts or investors. If one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.

 

Some provisions of our Certificate of Incorporation and Bylaws may deter third parties from acquiring us and diminish the value of our common stock.

 

The Certificate of Incorporation and Bylaws that we will adopt prior to consummation of this offering will provide for, among other things:

 

 

 

These provisions may discourage, delay or prevent a transaction involving a change in control of our company that is in the best interest of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts.

 

We do not anticipate paying any cash dividends for the foreseeable future.

 

We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development and growth of our business. We do not intend to pay any dividends to holders of our common stock and the agreements governing our debt significantly restrict our ability to pay dividends. As a result, capital appreciation in the price of our common stock, if any, will be your only source of gain on an investment in our common stock. See “Dividend Policy.”

 

New investors in our common stock will experience immediate and substantial book value dilution after this offering.

 

The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of the outstanding common stock immediately after the offering. Based on an assumed initial public offering price of $      per share (the midpoint of the price range set forth on the cover of this prospectus) and our net tangible book value as of June 30, 2009, if you purchase our common stock in this offering, you will suffer immediate dilution in net tangible book value per share of approximately $      per share. See “Dilution.”

 

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

 

The forward-looking statements contained in this prospectus are based on assumptions that we have made in light of our industry experience and on our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this prospectus, you should understand that these statements are not guarantees of performance or results. They involve assumptions as well as risks and uncertainties, some of which are beyond our control. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. We believe these factors include, but are not limited to, those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

 

Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

We estimate that the net proceeds from this offering, after deducting underwriting discounts and estimated offering expenses will be approximately $      million, assuming the shares are offered at $      per share (the midpoint of the price range set forth on the cover page of this prospectus). We intend to use $      million of the net proceeds from this offering to repay certain borrowings from ACAS and its affiliates. We also intend to use net proceeds from this offering to make a one-time payment of $8.0 million to ACFS, a subsidiary of ACAS, to terminate an investment banking services agreement between us and ACFS. See “Certain Relationships and Related Party Transactions.” We will use the balance of the net proceeds for working capital and general corporate purposes. We may also use a portion of the net proceeds to make strategic acquisitions of other companies or businesses, although no agreements or understandings exist with respect to any such acquisitions. Pending their application we intend to invest the net proceeds in short-term interest-bearing obligations.

 

We intend to enter into arrangements to refinance, prior to the consummation of this offering, or to repay with a portion of the proceeds of this offering, the debt of our subsidiaries that is held by our principal stockholder, ACAS, or its affiliates. For purposes of this section, EURIBOR means the Euro Interbank Offered Rate and LIBOR means the London Interbank Offered Rate. All amounts are as of June 30, 2009, but reflect amendments to extend maturity that were entered into subsequent to that date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us.

 

We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development and growth of our business. We do not intend to pay dividends to holders of our common stock and the agreements governing our debt significantly restrict our ability to pay dividends.

 

The following table sets forth our consolidated capitalization as of June 30, 2009:

 

 

 

You should read this table along with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

 

 

 

The table above excludes, as of June 30, 2009:

 

 

 

 

 

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of common stock initially upon completion of this offering.

 

Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. After giving effect to the sale of shares of common stock offered in this offering and after deducting the underwriting discounts and estimated offering expenses, our pro forma net tangible book value as of June 30, 2009 would have equaled $      per share of common stock. This represents an immediate increase in net tangible book value of $      per share to our existing stockholders and an immediate dilution in net tangible book value of $      per share to new stockholders of common stock in this offering. If the initial public offering price is higher or lower, the dilution to new stockholders will be greater or less. The following table summarizes this per share dilution:

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease, as applicable, our pro forma net tangible book value by $      million, the pro forma net tangible book value per share by $      per share, and the dilution in pro forma net tangible book value per share to new stockholders by $      per share.

 

If the underwriters exercise their over-allotment in full, pro forma net tangible book value per share after the offering will be $     , and dilution in pro forma net tangible book value per share to new stockholders will be $     .

 

The following table summarizes on a pro forma basis, as of June 30, 2009, the differences between our existing stockholders and new stockholders with respect to the number of shares of common stock issued by us, the total consideration paid and the average price per share paid:

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease, as applicable, total consideration paid by new stockholders and total consideration paid by all stockholders by $      million.

 

If the underwriters exercise their over-allotment option in full, the following will occur: (1) the number of shares of common stock held by existing stockholders will represent approximately     % of the total number of shares of common stock outstanding after this offering; and (2) the number of shares of common stock held by new public stockholders will be increased to          , or approximately     % of the total number of shares of common stock outstanding after this offering.

 

The number of shares of common stock to be outstanding after this offering is based on 1,197,094 shares outstanding as of June 30, 2009 and excludes:

 

 

 

 

 

To the extent that the options or warrants are exercised, there may be further dilution to new stockholders.

 

You should read the following selected consolidated historical financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The selected financial data in this section is not intended to replace the consolidated financial statements and related notes included elsewhere in this prospectus.

 

The selected consolidated statements of operations data for each of the three fiscal years ending June 30, 2007, 2008 and 2009 and the consolidated balance sheet data as of June 30, 2008 and 2009 are derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The consolidated statements of operations data for the fiscal year ended June 30, 2006 and the consolidated balance sheet data as of June 30, 2007 are derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the fiscal year ending June 30, 2005 and the consolidated balance sheet data as of June 30, 2005 and 2006 are derived from our unaudited financial statements not included in this prospectus. Until their merger in December 2005 resulting in the formation of Mirion, we were comprised of GDS, IST and Synodys, entities which were under the common control of ACAS. Our historical results are not necessarily indicative of the results that should be expected in the future. The amounts below are in thousands, except percentages and per share data.

 

 

 

 

 

 

 

The following is a reconciliation of net loss to Adjusted EBITDA:

 

 

 

 

 

The following discussion and analysis of the financial condition and results of our operations should be read together with “Selected Consolidated Financial Data” and the consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements, based on current expectations related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We are a leading global provider of radiation detection, measurement, analysis and monitoring products and services to the nuclear, defense and medical end markets. Our customers rely on our solutions to protect people, property and the environment from nuclear and radiological hazards. Our products and services include: dosimeters; contamination & clearance monitors; detection & identification instruments; radiation monitoring systems; electrical penetrations; instrumentation & control equipment and systems; dosimetry services; imaging systems; and related accessories, software and services.

 

We provide our products and services through five segments: Health Physics, Radiation Monitoring Systems, Sensing Systems, Dosimetry Services and Imaging Systems. Our Health Physics segment derives revenue from the nuclear, defense and medical end markets. We provide our Health Physics customers, which include power and utility companies, military organizations, engineering companies as well as governmental agencies, with dosimeters, contamination & clearance monitors as well as equipment that detects and identifies radioactive isotopes. Our Radiation Monitoring Systems segment offers systems that provide process and post-event radiation monitoring to the nuclear end market. Our Radiation Monitoring Systems customers include power and utility companies, engineering companies, research laboratories, universities, as well as governmental agencies. Our Sensing Systems segment supplies electrical penetrations as well as reactor instrumentation & control equipment and systems to the builders and operators of nuclear reactors. Our Sensing Systems customers include power and utility companies, the U.S. Navy, as well as engineering companies. Our Dosimetry Services segment provides analytical services to determine occupational and environmental radiation exposure to employers of radiation workers in the nuclear and medical end markets. Our Dosimetry Services customers include power and utility companies, hospitals, governmental agencies, medical professionals, dentists and veterinarians. Our Imaging Systems segment provides specialized closed circuit camera systems used for inspection and surveillance in difficult and hazardous environments to the nuclear and other end markets. We provide these systems to power and utility companies, operators of waste management facilities, cement kilns and petrochemical facilities.

 

Of the $207.6 million in total revenue we generated in fiscal 2009, $71.4 million, or 34.4%, was attributable to our Health Physics segment, $44.6 million, or 21.5%, was attributable to our Radiation Monitoring Systems segment, $45.0 million, or 21.7%, was attributable to our Sensing Systems segment, $29.5 million, or 14.2%, was attributable to our Dosimetry Services segment and $17.1 million, or 8.2%, was attributable to our Imaging Systems segment. Please see Note 15 of our consolidated financial statements for additional financial information about our segments.

 

Despite achieving positive operating income in fiscal 2007, 2008 and 2009, we have not achieved positive net income, due in large part to our leverage, in any fiscal year since our inception in 2005. As of June 30, 2009, we had an accumulated deficit of $98.3 million. We expect to reduce our leverage through the repayment of certain of our indebtedness with a portion of the net proceeds from the offering. See “Use of Proceeds.”

 

We incorporated in Delaware in October 2005 as Global Monitoring Services, Inc. Our business was formed through a series of transactions in December 2005 resulting in the combination of three companies, all owned by ACAS, our principal stockholder, and its affiliates. The three companies were GDS, a provider of dosimetry services to the nuclear and medical industries, IST, a manufacturer of electrical penetrations, reactor

instrumentation & control equipment and systems and imaging systems for the nuclear, defense and other industries and Synodys, a designer and manufacturer of radiation detection, measurement, analysis and monitoring equipment for the nuclear, defense and medical industries. Following these transactions, we changed our name in January 2006 to Mirion Technologies, Inc.

 

We are a global company with operations in Canada, China, Finland, France, Germany, the United Kingdom and the United States. Accordingly, currency exchange rates can impact our reported results of operations. Revenue outside of the United States and Canada accounted for 63.8% and 62.6% of total revenue for fiscal 2008 and 2009. Please see Note 15 to our consolidated financial statements for additional financial information about geographic areas.

 

References to “fiscal” before any year refer to our fiscal year ending on June 30th of the year referenced.

 

Key Indicators of Performance

 

In evaluating our business, our management considers Adjusted EBITDA as a key indicator of operating performance. We include Adjusted EBITDA in this prospectus because (i) it is a basis upon which our management assesses our operating performance, (ii) it is a factor in the evaluation of the performance of our management in determining compensation and (iii) certain maintenance covenants under our debt agreements are tied to ratios based upon Adjusted EBITDA, as defined. We define Adjusted EBITDA as net income (loss) less extraordinary gains (loss) and interest income, plus interest expense, charges against income for taxes, depreciation expense, amortization expense, mark to market (loss) gain, non-recurring charges, management fees paid to ACFS and all non-cash compensation expenses.

 

We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the impact of depreciation and amortization expense on definite lived intangible assets. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes, to incentivize and compensate our management personnel, in measuring our performance relative to that of our competitors and in evaluating acquisition opportunities.

 

In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties as a measure of financial performance and debt-service capabilities. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

 

 

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally. We carefully review our operating income at a segment level, which is discussed in detail in our period-to-period comparison of operating results.

 

Components of Revenue and Expenses

 

Revenue and Cost of Revenue

 

Health Physics

 

We generate revenue in our Health Physics segment primarily from the sale of dosimeters, both active and passive, which measure ionizing radiation dose; contamination & clearance monitors, which detect alpha, beta, gamma and/or neutron contamination of objects of various sizes and types, from tools to trucks; and devices that detect, locate and identify radioactive isotopes. We sell our equipment either pursuant to written agreements or contracts requiring delivery of products or services over a specified time period or one-time purchase orders depending on the nature of the product and the dollar value of the sale. We typically use contracts for large installations of our equipment to power and utility companies as well as military organizations. These contracts are typically fixed price, where we bear the risk for changes in material costs as well as currency movements. The time period from receipt of a contract to the recognition of revenue generally ranges from a few months to a year. We typically use purchase orders for the sale of replacement components as well as small dollar value orders. We typically do not recognize revenue and the related cost of revenue until our customer has installed the equipment and certified that it is operating correctly or until we have otherwise determined that all customer-specific acceptance criteria have been met. Furthermore, customers may delay delivery or acceptance of equipment, causing postponement of revenue recognition even though we may have received payment. We record payments received from customers prior to the time we recognize revenue for associated sales as deferred revenue.

 

Revenue in our Health Physics segment has been primarily driven by product sales for new nuclear power reactor construction in Asia, replacement product sales for NPPs in the Americas and Europe, as well as replacement product sales for the defense end market.

 

Cost of revenue in our Health Physics segment primarily consists of cost of goods purchased for the manufacture of our equipment, facility costs, compensation and benefits to manufacturing employees and outsourcing costs for subcontractor services for the manufacture of various material sub-components.

 

Radiation Monitoring Systems

 

We generate revenue in our Radiation Monitoring Systems segment from the sale of radiation monitoring systems and services to engineering firms that design and construct nuclear reactors, power and utility companies that operate NPPs and, to a lesser extent, research laboratories and universities. We generate most of the revenue in our Radiation Monitoring Systems segment from contracts with a duration greater than one year. These contracts are typically fixed price, where we bear the risk for changes in material cost as well as currency movements.

 

Revenue in our Radiation Monitoring Systems segment can fluctuate significantly from period to period because of customer requirements, which depend upon the operating schedules of nuclear reactors. The operating schedules of nuclear reactors are affected by, among other things, seasonality in the demand for electricity and reactor refueling and maintenance. Power and utility companies typically schedule refueling and maintenance to coincide with periods of reduced power demand, typically in the spring and fall. Therefore, our revenue may be higher during these periods when equipment is typically installed. Revenue may also fluctuate from period to period as our equipment is installed in newly constructed nuclear reactors. We typically do not recognize revenue and the related cost of revenue until our customer has installed the equipment and certified that it is operating correctly, which generally can extend to 12 months from shipment, although in some cases can be longer or until we have otherwise determined that all customer-specific

acceptance criteria have been met. Furthermore, customers may delay delivery or acceptance of equipment, causing postponement of revenue recognition, even though we may have received payment. In each of the preceding circumstances, we record payments received from customers prior to the time we recognize revenue for associated sales as deferred revenue.

 

Revenue in our Radiation Monitoring Systems segment has been primarily driven by new nuclear power reactor construction in Asia and Europe, as well as the retrofitting of existing reactors. Revenue in the Americas region has been primarily driven by renewed sales for the retrofitting of existing reactors.

 

Cost of revenue in our Radiation Monitoring Systems segment primarily consists of cost of goods purchased for the manufacture of our equipment, facility costs, compensation and benefits to employees and outsourcing costs for subcontractor services for the manufacture of various material sub-components.

 

Sensing Systems

 

We generate revenue in our Sensing Systems segment primarily through sales of our electrical penetrations which are conduits through a nuclear reactor containment structure, as well as sales of our reactor instrumentation & control detectors, which are used in nuclear facilities to monitor radiation and temperature within a nuclear reactor core (“in-core” detectors) and in surrounding areas (“ex-core” detectors). Our Sensing Systems segment sells primarily through contracts with engineering firms that design and construct nuclear reactors as well as power and utility companies that operate NPPs. These contracts are typically fixed price, where we bear the risk for changes in material costs as well as currency movements. We have generated the majority of the revenue in our Sensing Systems segment from contracts with a duration greater than one year.

 

Revenue in our Sensing Systems segment has been primarily driven by new nuclear power reactor construction in Asia and Europe for our electrical penetrations as well as by the replacement of reactor instrumentation & control equipment and systems for existing reactors in Asia, Europe and the Americas.

 

Cost of revenue in our Sensing Systems segment primarily consists of cost of goods purchased for the manufacture of our equipment, facility costs, compensation and benefits to employees and outsourcing costs for subcontractor services for the manufacture of various material sub-components.

 

Dosimetry Services

 

Revenue from our Dosimetry Services segment is of a subscription nature. We provide these services to customers on an agreed-upon recurring monthly, quarterly or annual basis. Badge production, badge analysis and report preparation are all integral to the service that we provide to our customers, and therefore, we define the service period to include the provision of all of those services. We recognize revenue and related costs on a straight-line basis over the service period as the service is continuous.

 

Revenue in our Dosimetry Services segment has been primarily driven by the increased use of our dosimetry services in hospitals and other medical facilities resulting from increases in the incidence of radiological medical procedures, along with the increased use of our services by dental and veterinary offices in the United States.

 

Cost of revenue in our Dosimetry Services segment primarily consists of compensation and benefits to employees, outsourcing costs for subcontractor services and cost of goods purchased for use in our badges.

 

Imaging Systems

 

We generate revenue in our Imaging Systems segment through the sale of highly specialized closed circuit camera systems used for inspection and surveillance in difficult and hazardous environments through contracts with engineering firms that design and construct nuclear reactors, power and utility companies that operate NPPs, waste management facilities, as well as companies that operate pulp and paper recovery boilers, gas or coal-fired power boilers and cement kilns. These contracts are typically fixed price, where we bear the risk of changes in material cost and currency movements.

Revenue in our Imaging Systems segment has been primarily driven by increased demand in Asia for high radiation-tolerant cameras for use in new NPP construction, and for use in radioactive waste management and nuclear facility decommissioning projects globally.

 

Cost of revenue in our Imaging Systems segment primarily consists of cost of goods purchased for the manufacture of our equipment, facility costs, compensation and benefits to employees, and outsourcing costs for subcontractor services for the manufacture of various material sub-components.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative, or SG&A, expenses consist primarily of personnel costs (including salaries, performance-based bonuses, commissions and employee benefits), facilities and equipment costs, costs related to advertising and marketing and other general corporate and support costs including utilities, insurance and professional fees. SG&A expenses also include $1.6 million per year in management fees we have paid to ACFS under an investment banking services agreement. We intend to use a portion of the net proceeds from this offering to make a one-time payment of $8.0 million to ACFS upon completion of this offering to terminate the agreement related to these payments. This $8.0 million payment will be included in SG&A expenses in the period paid. See “Certain Relationships and Related Party Transactions.”

 

Research and Development Expenses

 

Research and development expenses consist primarily of the costs associated with the design and testing of new products, as well as the upgrading of existing products. These costs relate primarily to compensation of personnel involved with our product development efforts, materials and outside design and testing services. Our customers sometimes compensate us separately for design and engineering work involved in developing our products for them. However, in most cases we expense product development efforts for our customers and we do not receive reimbursement.

 

Interest Expense, Net

 

Interest expense, net includes both cash and accrued interest expense and income and amortization of financing costs as well as paid-in-kind interest on our long-term debt.

 

Other Income, Net

 

Other income, net includes gains and losses on the sale of assets, mark-to-market gains and losses on our interest rate swap agreements and foreign exchange windows.

 

Paid-In-Kind Preferred Dividends

 

Paid-in-kind, or PIK, dividends expense consists of expenses attributable to dividends on our convertible preferred stock payable in additional shares of such convertible preferred stock. Our preferred stock will convert into common stock upon the completion of this offering. As a result, following the completion of this offering, we will no longer pay any additional PIK dividends.

 

Provision for Income Taxes

 

Provision for income taxes represents our estimated income tax expense for the period presented. Despite historical net losses, we have incurred income tax expense for each of the past three fiscal years, as we incur income taxes in various jurisdictions as a result of the global nature of our business and operations.

 

Off-Balance Sheet Arrangements

 

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, nor do we have any undisclosed material transactions or commitments involving related persons or entities.

Critical Accounting Policies

 

This management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions about matters that are uncertain. These estimates and assumptions are often based on judgments that we believe to be reasonable under the circumstances, but all such estimates and assumptions are inherently uncertain and unpredictable. Actual results may differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition.

 

Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex or subjective estimates and assumptions. Our critical accounting policies are discussed below.

 

Revenue Recognition

 

We record revenue and the related costs of revenue when all of the following conditions exist:

 

 

Revenue from certain of our fixed-price contracts in our Sensing Systems segment is recognized on the percentage-of-completion method, measured by the cost-to-cost method to determine revenue. A cost-to-cost approach accurately reflects our obligations and performance on these contracts, as this is the best available measure of our progress as well as meeting our customers’ expectations of the production being performed. Therefore, we believe that input measures used to measure progress toward completion on certain fixed-price projects provide a reasonable surrogate for output measures.

 

Revisions to revenue, cost and profit estimates, or measurements of the extent of progress toward completion are changes in accounting estimates accounted for in the period of change (using the cumulative catch-up method). Contracts typically provide for periodic billings on a monthly basis or based on contract milestones. Costs and estimated earnings in excess of billings on uncompleted contracts represent amounts recognized as revenue that has not been billed. Billings in excess of costs represent amounts billed and collected for which revenue has not been recognized and is recorded as deferred revenue.

 

We derive most of our revenue in our Dosimetry Services segment from subscriptions and such revenue is continuous. We recognize revenue on a straight-line basis over a set service period that includes badge production, badge wearing, badge analysis and report preparation as the service is continuous and no other discernable pattern of recognition is evident. We provide these services to customers on an agreed-upon monthly, quarterly or annual basis that our customers choose for their wear period, payable in advance or in arrears. The amounts recorded as deferred contract revenue on our balance sheets represent customer deposits invoiced in advance for services to be rendered over the service period, net of a reserve for estimated cancellations and net of services recognized through the balance sheet date.

 

In our Radiation Monitoring Systems and Health Physics segments, revenue recognition is sometimes delayed until customer acceptance and certification of the product. As a result, revenue recognition can be delayed, sometimes materially, following delivery of the product by us to the customer. Funds received from the customer in advance of revenue recognition are recorded on our balance sheets as deferred revenue.

Recoverability of Long-Lived Assets, Including Goodwill

 

Goodwill represents the excess of costs over the fair value of net assets of businesses acquired. Goodwill is tested at the reporting unit level at least annually for impairment and is reviewed for impairment more frequently if events and circumstances indicate that the asset might be impaired. FAS No. 142, Goodwill and Other Intangible Assets, requires a two-step impairment test. In the first step, we determine the fair value of the reporting unit using a discounted cash flow valuation model and compare the fair value to the reporting unit’s carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired, and no further testing is required. If the fair value does not exceed the carrying value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. In the second step of the goodwill impairment test, we compare the implied fair value of the reporting unit’s goodwill to the carrying value. We determine the implied fair value of the reporting unit’s goodwill as if the reporting unit had been acquired in a business combination. If the carrying value of the reporting unit’s goodwill exceeds the implied value, we recognize an impairment loss in an amount equal to the excess.

 

We estimate future cash flows at the reporting unit level using a discounted cash flow methodology by assessing each major existing contract and projecting the earnings that will be recognized in future periods. We also make estimates for earnings from new contracts that we anticipate based on our evaluation of future business prospects. The valuation of goodwill could be affected if actual results differ substantially from our estimates. Circumstances that could affect the valuation of goodwill include a significant change in our business climate, decisions by our customers to terminate our existing contracts and decisions by our customers to award to our competitors new contracts that we anticipated to be awarded to us.

 

We measure intangible assets acquired in a business combination at fair value at the date of acquisition. We assess the useful lives of other intangible assets to determine whether events or circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life is changed, we amortize the remaining carrying amount of the intangible asset prospectively over the revised remaining useful life. We review intangible assets for impairment whenever events or circumstances indicate that the carrying value of such assets may not be recoverable. As of June 30, 2009, we had $139.0 million of goodwill and $23.8 million of intangible assets with estimable useful lives on our consolidated balance sheets. We do not have any intangible assets with indefinite useful lives.

 

Intangible assets subject to amortization consist of customer relationships, backlog, qualifications, software, territorial rights, trade names, technology and non-compete agreements. We evaluate customer relationships and territorial rights, which include the fair value of acquired customer contracts, using a discounted cash flow methodology, and amortize them over a term of 5.2 to 17 years. We derive estimated future cash flows based on detailed budgets and projections prepared by management. We amortize backlog over a term of one to three years based on the estimated delivery of the backlog. We prepare the valuation of order backlog based on a discounted cash flow methodology. We evaluate qualifications using a discounted cash flow methodology and amortize them over six years. We derive estimated future cash flows based on projections prepared by management. We amortize software over a five year life and derive it by estimating the replacement cost of the software. We amortize trade names over a period of four to 13 years and derive it based on the relief from royalty method, which tries to estimate a royalty stream for the trade names derived from a benchmark for similar industrial products. We evaluate technology and non-compete agreements using a discounted cash flow methodology. We amortize intangible technology assets over a term of eight years, and non-compete agreements over a term of five years. We derive estimated future cash flows for each technology and non-compete agreement based on detailed budgets and projections prepared by management.

 

We review long-lived assets such as property, plant and equipment annually for impairment and whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by comparing the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge by the amount of excess carrying value over fair value.

Stock-Based Compensation Expense

 

Pursuant to FASB Statement No. 123(R), Share-Based Payment (“FAS No. 123(R)”), we account for equity-based compensation payments, including grants of employee stock options, based on the fair values of the equity instruments issued. We determine fair value of our equity instruments based on a valuation using an option pricing model which takes into account various assumptions that are subjective. Key assumptions used in the valuation included the expected term of the equity award taking into account both the contractual term of the award, the effects of employees’ expected exercise and post-vesting termination behavior, expected volatility, expected dividends and the risk-free interest rate for the expected term of the award. The exercise prices of our options were set at values for us consistent with those reported in ACAS’s publicly filed financial statements.

 

Prior to July 1, 2005, we measured compensation expense for our employee stock-based compensation plans using the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. As the exercise price of all options granted under this plan was at or above the estimated market price of the underlying common stock on the date of grant, no stock-based compensation cost was recognized in the consolidated statements of operations under APB 25.

 

We adopted FAS No. 123(R) using the prospective transition method. This method requires the recognition of compensation cost for all share-based payments that are unvested as of July 1, 2005. The cost related to stock-based compensation included in the determination of consolidation net loss for the twelve months ended June 30, 2007, 2008 and 2009 includes all awards outstanding that vested during those periods. In connection with the reorganization of our three predecessor companies into Mirion on January 1, 2006, we exchanged stock options of the three predecessor companies for stock options in the newly formed company. Under FAS No. 123(R), the exchange was deemed a modification, resulting in incremental compensation expense of $932,000 recorded at January 1, 2006 for those options that were vested as of January 1, 2006. For the unvested options at January 1, 2006, we are expensing incremental compensation expense of $767,000 over the remaining vesting period of approximately two years.

 

In order to determine the fair value of options granted, the fair value of the underlying stock must first be determined. Following is a discussion of the methodology used in the valuation of the Company’s stock on dates where options were granted.

 

The valuation of our common stock was determined in accordance with the guidance set forth in the AICPA Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation. We considered three methods for the allocation of value among our various classes of equity: the Current Value Method, the Probability Weighted Expected Return Method, or PWERM, and the Option-Pricing Method. The Current Value Method is useful for early stage companies or when a liquidation is imminent. PWERM is useful when there are several potential future scenarios for a company to achieve a return on investment for its investors; it is future looking and incorporates future economic events and outcomes into the determination of value as of the present. The Option-Pricing Method is useful when the range of possible future outcomes is difficult to predict.

 

We did not use the Current Value Method in our valuation since we have not been an early stage company nor have we been near liquidation. Since our inception there have been several potential alternatives for changes in our ownership structure, including an initial public offering, a sale or merger, and retention in our current form as a private company. For most of the time since the Company’s inception, the range of possible future outcomes has been difficult to predict, and PWERM could not be used. Therefore, we used the Option-Pricing Method. However, as of the most recent valuation which was performed for June 2009, we believe that the range of possible future outcomes could be reasonably predicted, and as such used PWERM for this period.

 

Following is a description of the Option Pricing Method, which we used to allocate value among the various classes of equity for the period from January 2006 through December 2008.

 

The first step in determining the valuation of our common stock was to determine the value of our total equity. The second step was to allocate the total equity among the different classes of stock. In determining

the fair value of our total equity, we considered the three traditional approaches to valuation: the cost approach, the market approach and the income approach. The cost approach was not utilized, while the market approach and income approach were.

 

The market approach is based on the assumption that the value of an asset (including a company) is equal to the value of a substitute asset with the same or similar characteristics. Therefore, the value of an asset can be determined by finding similar assets (or interest in similar assets) that have been sold in recent arms-length transactions.

 

One methodology in the market approach is the Guideline Company Method, which compares the subject company with guideline publicly-traded companies. Valuation multiples are calculated from selected guideline companies to provide an indication of how much a current investor in the marketplace would be willing to pay for a company with similar characteristics to the subject company. The Guideline Company Method is most appropriate when public companies that are reasonably similar to the subject company can be found.

 

Another methodology in the market approach is the Guideline Transaction Method. This method relies on data of actual transactions (such as mergers and acquisitions) that have occurred in the subject company’s industry or in related industries. As in the Guideline Company Method, valuation multiples are developed and applied to the subject company’s operating data to estimate fair value.

 

The income approach seeks to measure the future benefits that can be quantified in monetary terms. The income approach typically involves two general step: the first step is to make a projection of the total cash flows expected to accrue to an investor in the asset; the second step involves discounting these cash flows to present value at a discount rate that considers the degree of risk (or uncertainty) associated with the realization of the projected monetary benefits. The discounted cash flow method is a form of the income approach often used in the valuation of entire businesses, major segments of a business or intangible property.

 

Once we determined our valuation using each of the various methods, we then weighted the results to arrive at a single valuation of our equity. The market approach Guideline Company Method, the market approach Guideline Transaction Method and the income approach were weighted 25%, 25% and 50%.

 

We then allocated this total value to the different classes of our equity using the Option-Pricing Method. As disclosed in Note 12 to our consolidated financial statements, we have issued Series A-1 and A-2 preferred stock, Class A and Class B common stock, stock options and warrants, over which to allocate the total value of equity. Stock options and warrants are assumed to be converted if they are in-the-money.

 

The Option-Pricing method treats the preferred and common stock as call options that give their owner the right but not the obligation to buy the underlying total equity at a predetermined price. This is done by creating a series of call options with exercise prices based on the liquidation preference, participation rights and conversion behavior of the preferred stock. The value of each share of preferred and common stock can then be inferred by analyzing these options. Based on the seniority of the classes of equity in liquidation, three call options were created and valued. The first option uses an exercise price in which Series A-1 and A-2 preferred stock begin to receive values in liquidation. Since these are the most senior classes of equity, the exercise price is $0. The second option uses an exercise price in which Series A-1 and A-2 preferred stock have received their full liquidation preferences. The third option uses an exercise price in which Series A-1 and A-2 preferred stock will convert to common stock to share in the upside gain (the as-converted value is greater than the liquidation preference). Thus, common stock is valued as a call option with a claim on us at an exercise price equal to the remaining value beyond the preferred stock’s liquidation preference.

 

The following is a description of the PWERM Method, which we used to allocate value among the various classes of equity as of June 2009.

 

In PWERM, our total equity valuation was developed for various potential scenarios: an initial public offering, a sale or maintaining current ownership as a private company.

 

In determining the fair value of our equity under each of the scenarios, the three traditional approaches to valuation were considered: the cost approach, the market approach and the income approach. The cost approach was not utilized, while the market approach and income approach were. We used the Guideline

Company Method of the market approach in the valuation of our equity for the initial public offering scenario. We used the Guideline Transaction Method of the market approach to value our equity for the sale scenario. We used the income approach to value our equity in the continuing operations scenario.

 

After we determined the valuation of our common equity using the three methodologies above, the results were then weighted based on our estimate of expected outcomes. The initial public offering scenario, the sale scenario and the current ownership as a private company scenario were weighted 60%, 35% and 5%.

 

During fiscal 2009, we granted options to employees to purchase a total of 45,886 shares of common stock at exercise prices ranging from $138.58 to $144.95 per share. The deemed market value of our common stock on the dates these options were granted ranged from $46.60 to $96.18 per share.

 

We also previously reserved 5,402 additional options for issuance under our existing stock option plan to our employees, including executive officers. The purpose of this option grant will be to incentivize employees to work to increase shareholder value. The options will be valued using the Black-Scholes option pricing model. Key assumptions used to value these options will be determined as of the grant date of the options and are as follows: expected term is           years, risk-free interest rate is     %, dividend yield is 0.0%, volatility is     %, the exercise price is $      and the fair value of our common stock is $     . The aggregate value of these 5,402 options is $      , which will be recognized evenly over their four-year vesting period.

 

Information on employee stock options, granted since the beginning of fiscal 2009 is summarized as follows:

 

 

 

 

We make a number of estimates and assumptions related to FAS No. 123(R). The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, we will record such amounts as an adjustment in the period such estimates are revised. Actual results may differ substantially from these estimates. In valuing share-based awards under FAS No. 123(R), significant judgment is required in determining the expected volatility of our common stock and the expected term individuals will hold their share-based awards prior to exercising. We base expected volatility of the stock on our peer group in the industry in which we do business, because we do not have sufficient historical volatility data for our own stock. We determine the expected term of the option based on factors including vesting period, life of option, strike price and fair market value of our common stock on the date of grant. In the future, as we gain historical data for volatility in our own stock and the actual term employees hold our options, expected volatility and expected term may change, which could substantially change the grant date fair value of future awards of stock options and ultimately the expense we record.

 

We recorded non-cash compensation expense of $0.3 million and $1.2 million for fiscal 2008 and 2009.

 

Accounts Receivable

 

We evaluate the collectability of accounts receivable based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance against amounts due and, thereby, reduce the net recognized receivable to the amount we reasonably believe will be collected. We record increases to the allowance for bad debt as a component of general and administrative expenses.

 

Income Taxes

 

The determination of our tax provision is subject to judgments and estimates due to the complexity of the tax law that we are subject to in several tax jurisdictions. Earnings derived from our international business are generally taxed at rates that are different than U.S. rates, resulting in an effective tax rate different than the U.S. statutory tax rate of 34.0%. The ability to maintain our current effective tax rate is contingent on existing tax laws in both the United States and the respective countries in which our international subsidiaries are located. In addition, a decrease in the percentage of our total earnings from international business or a change in the mix of international business among particular tax jurisdictions could alter our overall effective tax rate.

 

Income taxes are accounted for under the asset and liability method in accordance with Statement of Financial Accounting Standards (“FAS No. 109”), “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their financial statement carrying amounts, and consideration is given to operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. We have provided a valuation allowance of $31.4 million as of June 30, 2009, compared to $27.6 million as of June 30, 2008 on primarily our U.S. jurisdiction deferred tax assets. The $3.8 million increase in valuation allowance in fiscal 2009 is the result of fiscal 2009 taxable losses in the United States.

 

On July 1, 2007, we adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result of the implementation of FIN No. 48, we recognize the tax liability for uncertain income tax positions on the income tax return based on the two-step process prescribed in the interpretation. The first step is to determine whether it is more likely than not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Estimating these amounts requires us to determine the probability of various possible outcomes. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors, including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit, and new exposures. If we later determine that our exposure is lower or that the liability is not sufficient to cover our revised expectations, we adjust the liability and effect a related change in our tax provision during the period in which we make such determination.

 

Inventory Valuation

 

At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by products. Among other factors, we consider historical demand and forecasted demand in relation to the inventory on hand, product life cycles and the number of facilities using our products when determining obsolescence and net realizable value. We adjust remaining balances to approximate the lower of our manufacturing cost or market value. We determine inventory cost on a first-in, first-out basis and include material, labor and manufacturing overhead costs. We may be required to write-down inventory for reasons such as obsolescence, excess quantities and declines in market value below our costs.

Outlook

 

We expect the following factors to affect our results of operation in future periods. In addition to these factors, please refer to “Risk Factors” for additional information on what could cause our actual results to differ from our expectations.

 

Industry growth trends.  Our performance depends on the timing and level of spending for our products by each of our customers in each of our five segments. Our success is dependent upon the continued increase in construction activity for new NPPs in Asia and Europe, as well as the operating life extension of plants in Europe, Asia and the United States. We expect defense spending to detect and prevent radiological threats to continue, as well as spending in connection with large-scale public events. The expansion of radiological medical procedures is also providing us with opportunities for continued growth. For discussion of the factors that influence spending on our products, see “Industry.”

 

Research and development expenses.  We expect our research and development expenses as a percentage of revenue to decrease as we grow our business, focus our engineering activities on customer driven initiatives and benefit from the reduced engineering costs associated with optimized product lines.

 

SG&A expenses.  We expect our SG&A expenses as a percentage of revenue to decrease as our business grows and we continue to manage expenses and reduce our amortization expense on an annual basis. The majority of our amortization expenses are in SG&A expenses. We have incurred expenses in the past in connection with the integration of the legacy businesses of which we are comprised, in addition to severance costs associated with our cost reduction efforts. We do not expect these expenses to recur. We also expect to eliminate $1.6 million per year in annual management fees we have paid to ACFS pursuant to an investment banking services agreement that we intend to terminate by making a one-time payment of $8.0 million to ACFS upon completion of this offering. We expect any reduction in our SG&A expenses to be partially offset by expenses we will incur as a result of becoming a reporting company following this offering.

 

Interest expenses.  We expect that our interest expenses will be reduced in periods following the completion of this offering reflecting the reduced level of our outstanding indebtedness.

 

Foreign exchange impact.  We are a global company with operations in Canada, China, Finland, France, Germany, the United Kingdom and the United States. Accordingly, currency exchange rates can impact our reported results of operations.

 

Unamortized debt issuance costs.  We expect to record a non-cash charge associated with the repayment of certain of our indebtedness with a portion of the net proceeds of this offering. This charge will consist of the write-off of unamortized debt issuance costs.

 

Income taxes.  Despite historical net losses, we have incurred income tax expense for each of the past three fiscal years. In any given period, the jurisdictional mix of our income can vary significantly as a result of the global nature of our business and operations. The income tax rates, available deductions and credits vary significantly in the jurisdictions we do business. Accordingly, the income tax expense in any given period is a function of the effective tax rate and related income secured in a particular jurisdiction. Although the Company has reported historic consolidated losses, the company recognized income in foreign jurisdictions and losses in the United States for the past three years. The Company has incurred tax expense in the foreign jurisdictions due to the taxable income position. The Company has provided a valuation allowance on its United States based tax attributes and as a result, no tax benefit is recognized for the United States operating losses.

 

We have subsidiary net operating loss carryforwards (“NOLs”) which we can use to reduce our United States tax expense in future periods. These NOLs are subject to elimination or reduction in the event of a change of control. We do not expect such a change of control to occur in connection with this offering. However, a future sale of our common stock by ACAS could result in such a change of control.

 

Amortization costs related to intangible assets.  Our non-cash amortization costs related to intangible assets were $12.2 million, $10.1 million and $8.1 million for fiscal 2007, 2008 and 2009. Our future amortization expense at the current foreign exchange rate is as follows (in thousands):

 

 

Consolidated Results of Operations

 

The following table summarizes certain items for our consolidated results of operations for fiscal 2007, 2008 and 2009 (in thousands, except percentages):