THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(in thousands, except share and per share data, or as otherwise
noted)
Note (1) Basis of
Financial Statement Preparation
The accompanying
consolidated financial information of The Titan Corporation and its
subsidiaries ("Titan" or the "Company") should be read in
conjunction with the Notes to Consolidated Financial Statements
contained in the Company's Annual Report on Form 10-K/A Amendments
No. 1 and No. 2to the Securities and Exchange
Commission for the year ended December 31, 2001. The
accompanying financial information includes substantially all
subsidiaries on a consolidated basis and all normal recurring
adjustments which are considered necessary by the Company's
management for a fair presentation of the financial position,
results of operations and cash flows for the periods
presented. However, these results are not necessarily
indicative of results for a full fiscal year. Additionally,
certain prior period amounts have been reclassified to conform to
the current period presentation.
The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
In
August 2001, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to (a) all entities and
(b) legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and/or normal operation of long-lived assets, except
for certain obligations of lessees. This statement amends
SFAS No. 19, "Financial Accounting and Reporting by Oil and
Gas Producing Companies," and is effective for financial statements
issued for fiscal years beginning after June 15, 2002.
Management does not believe that the adoption of this statement
will have a material impact on its consolidated financial position
or results of operations.
Also in August 2001, the
FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal
of long-lived assets and supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of
Operations—Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a
business (as previously defined in that Opinion). The
provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after
December 15, 2001. The Company adopted SFAS No. 144 in
the first quarter of 2002. The Company has reported the
discontinuance of its SureBeam segment under the provisions of APB
No. 30 and the discontinuance of certain components discussed
below in accordance with SFAS No. 144.
During the first quarter
of 2002, the Company made the decision (see Note 6) to sell certain
of its commercial information technology operations within its
Cayenta segment and the AverCom business within the Titan
Technologies segment in order to allow management to focus on
operations with the most near term growth opportunities. As a
result, Cayenta’s federal government operations are being
reported in Titan Systems, and Cayenta’s remaining continuing
operations are being reported in Titan Technologies, formerly
Titan’s Emerging Technologies and Businesses segment.
In accordance with SFAS No. 144, all commercial operations
that are held for sale have been reflected as discontinued
operations for all periods presented in Titan’s consolidated
financial statements. All prior period financial information
has been restated to reflect the new segments.
On
July 11, 2002, Titan announced that it would exit its international
telecommunications business through a combination of selling and
winding down its operation within its Titan Wireless segment.
Titan began implementing these actions immediately and expects to
complete the majority of these actions by the end of 2002.
Titan is in the process of determining the impact these actions
will have to the carrying value of the assets of these businesses,
as well as exit costs associated with infrastructure reductions
including costs for employee terminations and excess
facilities. Such amounts will be recorded as a non-recurring
charge in the third quarter of 2002. Titan estimates that
this after tax charge will not exceed $200 million.
The FASB issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections as of April 2002,
which is effective for fiscal years beginning after May 15, 2002.
SFAS 145 rescinds SFAS 4 and SFAS 64, which required that all gains
and losses from extinguishment of debt be aggregated, and if
material, classified as an extraordinary item. As a result, gains
and losses from debt extinguishment are to be classified as
extraordinary only if they meet the criteria set forth in
Accounting Principles Board Opinion No. 30, Reporting the Results
of Operations—Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 145 also requires that
sale-leaseback accounting be used for capital lease modifications
with economic effects similar to sale-leaseback transactions. The
Company does not expect implementation to have a significant effect
on its results of operations, except for the reclassification of
the losses from the current extinguishment of the Company’s
credit facility.
In July
2002, the FASB issued SFAS No. 146, Accounting for Restructuring
Costs. SFAS 146 applies to costs associated with an exit
activity (including restructuring) or with a disposal of long-lived
assets. Those activities can include eliminating or reducing
product lines, terminating employees and contracts, and relocating
plant facilities or personnel. Under SFAS 146, a company will
record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be measured at
fair value. SFAS 146 will require a company to disclose information
about its exit and disposal activities, the related costs, and
changes in those costs in the notes to the interim and annual
financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the
activity is completed. SFAS 146 is effective prospectively for exit
or disposal activities initiated after December 31, 2002, with
earlier adoption encouraged. Under SFAS 146, a company may not
restate its previously issued financial statements and the new
Statement grandfathers the accounting for liabilities that a
company had previously recorded under Emerging Issues Task Force
Issue 94-3.
Note (2)
Acquisitions and Investment
On
March 21, 2002, Titan completed the acquisition of GlobalNet, Inc.
("GlobalNet"), a provider of international voice, data, and
Internet services to further Titan’s goal of building a
global telecommunications network. Titan issued approximately
1,452,800 shares of common stock for all the common stock of
GlobalNet at an aggregate value of $28.6 million, based on
$19.67 per Titan share, the average trading price ending
March 15, 2002, the date on which the formula for
consideration became fixed, and assumed stock options and warrants
representing approximately 77,900 shares of Titan common stock
at an aggregate value of $0.8 million, based on an exchange ratio
of 0.3853 shares of Titan common stock for each share of
GlobalNet common stock. GlobalNet's operations are reported
in our Titan Wireless segment from March 22, 2002. The
transaction was accounted for as a purchase. The excess of
the purchase price of $29.4 million over the estimated fair
market value of the net liabilities acquired of approximately
$21.4 million was approximately $50.8 million. In
April 2002, the Company had an independent valuation completed by
independent valuation specialists KPMG Consulting
(“KCI”) to assist management in its purchase price
allocation of the GlobalNet acquisition. The independent
valuation supported the Company’s allocation in which the
determination was made to allocate $50.8 million to goodwill
and $0 to intangible assets.
On
March 21, 2002, Titan completed the acquisition of Jaycor, Inc.
("Jaycor"), a San Diego, California, based provider of information
technology services and specialized communications and sensor
products to further Titan’s goal of acquiring government
information technology companies which fit strategically with Titan
Systems. Titan issued approximately 4,919,500 shares of Titan
common stock for all the outstanding shares of common stock of
Jaycor, based on an exchange ratio of 0.50160 shares of Titan
common stock for each share of Jaycor common stock at an aggregate
value of $99.6 million, based on $20.24 per Titan share, the
average trading price ending March 20, 2002, the date on which the
formula for the purchase consideration became fixed. Jaycor's
operations are reported in our Titan Systems segment from March 22,
2002. The excess of the purchase price of $99.6 million over
the estimated fair market value of the net assets acquired of
approximately $56.8 million was approximately $42.8 million.
The transaction was accounted for as a purchase. In
April 2002, the Company had an independent valuation completed
by KCI to assist management in its purchase price allocation for
the Jaycor acquisition. The independent valuation supported
the Company’s allocation of $38.9 million to goodwill and
$3.9 million to intangible assets. The intangible assets
consist of backlog, customer relationships and trade name of $0.7
million, $1.3 million, and $1.9 million, respectively, which
will be amortized over the estimated useful lives of 1 year, 1 to 3
years and 5 years, respectively. The transaction value
was increased by approximately $3.9 million to an aggregate
total of $103.5 million to reflect an additional 173,099
shares issued in July to cover certain costs of the shareholders of
Jaycor, and an additional 20,948 shares issued in July and August
2002 related to certain working capital adjustments. The
additional purchase price of $3.9 million was accounted for as
an increase to goodwill resulting in a final allocation to goodwill
of $46.7 million.
On
February 23, 2002, and as amended on July 3, 2002, Titan entered
into a definitive agreement to acquire Science and Engineering
Associates, Inc. ("SEA"), a New Mexico based privately-held
provider of engineering and information technology services and
specialized laser, sensor, and imaging products for approximately
$78.1 million in Titan common stock less a $3.9 million
holdback, which is subject to the satisfaction of certain
indemnification obligations for approximately a one year period
following the closing date. In addition, a potential
$3.9 million earn-out may be paid to the SEA shareholders upon
the attainment of certain operating performance targets during the
period from July 1, 2002 through June 30, 2003. The
exchange ratio and the number of shares of Titan stock will be
determined based upon the average closing sale prices of Titan
common stock over the 20 consecutive trading days ending on the day
prior to the closing date. Following regulatory approval for
the registration of the shares anticipated to be issued in the
merger, a proxy will be mailed to the SEA shareholders and a
special meeting of the SEA shareholders will take place
approximately twenty (20) business days following the proxy mailing
to vote on the merger transaction. The special meeting has
not yet been scheduled, but is expected to be held in the third
quarter of 2002, and the transaction is expected to close shortly
thereafter.
On
February 22, 2002, Titan completed the acquisition of International
Systems, LLC, which designs and builds low-cost combat systems for
the Department of Defense (DoD) and agencies of the DoD, to further
Titan’s goal of acquiring government information technology
companies which fit strategically with Titan Systems. The
purchase price, which aggregated approximately $1.8 million,
was comprised of approximately 100,000 shares of Titan common
stock, subject to post-closing adjustments and indemnification
obligations. Also, additional consideration may be paid based
on the receipt of certain potential future contract awards and the
achievement of defined earnings levels on all contracts generated
by International Systems, which consideration may be satisfied with
cash or Titan common stock. In July 2002, 100,000 shares were
issued based on the receipt of certain of these contract
awards. The value of the shares will be recorded as an
increase to goodwill. Up to an aggregate maximum of 350,000
additional shares of common stock may be issued as additional
consideration based on the receipt of future contract awards.
The operations of International Systems are reported in our Titan
Systems segment from February 23, 2002. The transaction was
accounted for as a purchase, and goodwill of $2.4 million was
recorded.
On
November 27, 2001, Titan completed the acquisition of BTG, Inc.
("BTG"), a provider of information technology solutions and
services primarily to the U.S. military and other government
agencies, for $13.35 per BTG share. The acquisition was to
further Titan’s goal of acquiring government information
technology companies which fit strategically with Titan
Systems. Titan issued approximately 4,024,100 shares of its
common stock at an aggregate value of $99.9 million based on
$24.814 per Titan share, the average trading price ending
November 19, 2001, the date on which the formula for consideration
became fixed, and cash of $23.4 million for all the outstanding
shares of BTG common stock and assumed BTG stock options
representing approximately 734,200 shares of Titan common stock at
an aggregate value of $12.2 million, based on an exchange
ratio of approximately 0.5380 shares of Titan stock for each share
of BTG common stock. Titan also paid off $37.1 million of
BTG's outstanding debt as of the closing date. The
transaction was accounted for as a purchase. The excess of
the purchase price of approximately $135.5 million over the
estimated fair market value of the net liabilities acquired of
approximately $13.6 million was approximately
$149.1 million. In connection with the determination of
the fair value of assets acquired and pursuant to the provisions of
SFAS No. 141, the Company has valued contracts in process at
contract price, minus the estimated costs to complete and an
allowance for the normal industry profit on its effort to complete
such contracts which amounted to $9.2 million. This
adjustment has been reflected in the consolidated balance sheet as
additional purchase price allocated to the fair value of the assets
and liabilities acquired by the Company. The Company
recognized approximately $0.3 million and $0.6 million in
the three and six months ended June 30, 2002, respectively, as a
reduction of costs, with the remaining $8.1 million to be
recorded as a reduction of costs in future periods as work on
certain contracts is performed, which is estimated to continue
through fiscal 2016.
In
February 2002, an independent valuation performed by KCI was
completed to assist management in its purchase price allocation for
the BTG acquisition. This independent valuation supported
the Company’s allocation of $140.4 million to goodwill,
$8.2 million to intangible assets and $0.5 million deferred
compensation related to unvested options assumed. The
intangible assets consist of backlog, customer relationships and a
strategic relationship of $1.7 million, $5.5 million and
$1.0 million, respectively, which will be amortized over the
estimated useful lives of 1 year, 2 to 5 years and 2 years,
respectively. The consolidated balance sheet reflects this
allocation between goodwill and intangible assets. The
amortization expense related to the intangible assets commenced in
the first quarter of 2002.
On
September 28, 2001, Titan completed the acquisition of the
remaining shares of Datron Systems Incorporated ("Datron"), a
provider of radio and satellite-based communication systems and
broadband communication products for government and commercial
markets, that were acquired through a stock for stock exchange
tender offer that closed in August 2001. The acquisition was
to further Titan’s goal of acquiring government information
technology companies which fit strategically with Titan
Systems. Titan issued approximately 2.3 million shares of its
common stock for all the outstanding shares of Datron common stock
at an aggregate value of $44.9 million, based on $19.544 per Titan
share, the average trading price ending July 27, 2001, the date on
which the formula for consideration became fixed, and assumed
Datron stock options representing approximately 437,000 shares of
Titan common stock at an aggregate value of $4.0 million, based on
an exchange ratio of approximately .81919 shares of Titan common
stock for each share of Datron common stock. The transaction
was accounted for as a purchase. The excess of the purchase
price of approximately $48.9 million over the estimated fair market
value of the net assets acquired of approximately $15.9 million was
approximately $33 million. In connection with the
determination of fair value of assets acquired and pursuant to the
provisions of SFAS No. 141, the Company has valued contracts
in process at contract price, minus the estimated costs to complete
and an allowance for the normal industry profit on its effort to
complete such contracts, which amounted to $1.4 million.
This adjustment has been reflected in the accompanying consolidated
balance sheet as additional purchase price allocated to the fair
value of the assets and liabilities acquired by the Company.
The Company recognized approximately $0.1 million and
$0.4 million in the three and six months ended June 30, 2002,
respectively, as a reduction of costs, with the remaining
$0.2 million to be recorded as a reduction of costs in future
periods as work on certain contracts is performed, which is
estimated to continue through fiscal 2002.
In
February 2002, an independent valuation performed by KCI was
completed to assist management in its purchase price allocation for
the Datron acquisition. This independent valuation supported
the Company’s allocation of $27.4 million to goodwill and
$5.6 million to intangible assets. The intangible assets
consist of backlog, customer relationships and trademarks and
patents of $1.0 million, $3.2 million and $1.4 million,
respectively, which will be amortized over the estimated useful
lives of 1 to 2 years, 10 years and 5 years,
respectively. The consolidated balance sheet reflects this
allocation between goodwill and intangible assets. The
amortization expense related to the intangible assets commenced in
the first quarter of 2002.
Following is unaudited
condensed balance sheet information for GlobalNet, Jaycor, Datron
and BTG at the date of their respective acquisition (amounts in
millions):
|
|
|
GlobalNet
|
|
Jaycor
|
|
Datron
|
|
BTG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
0.1
|
|
$
|
35.6
|
|
$
|
3.7
|
|
$
|
1.2
|
|
|
Accounts
receivable
|
|
|
4.8
|
|
|
16.6
|
|
|
12.0
|
|
|
63.8
|
|
|
Other current
assets
|
|
|
0.6
|
|
|
12.5
|
|
|
12.5
|
|
|
1.9
|
|
|
Property, plant and
equipment
|
|
|
9.5
|
|
|
3.9
|
|
|
8.3
|
|
|
4.0
|
|
|
Non-current
assets
|
|
|
1.2
|
|
|
1.1
|
|
|
3.0
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
16.2
|
|
|
69.7
|
|
|
39.5
|
|
|
74.3
|
|
|
Accounts payable
|
|
|
4.8
|
|
|
8.9
|
|
|
2.0
|
|
|
11.5
|
|
|
Current
liabilities
|
|
|
23.0
|
|
|
3.7
|
|
|
18.1
|
|
|
74.1
|
|
|
Non-current
liabilities
|
|
|
9.8
|
|
|
0.3
|
|
|
3.5
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
37.6
|
|
|
12.9
|
|
|
23.6
|
|
|
87.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets (liabilities)
|
|
$
|
(21.4
|
)
|
$
|
56.8
|
|
$
|
15.9
|
|
$
|
(13.6
|
)
|
|
|
|
|
|
|
|
|
|
|
On
June 28, 2000, Titan Wireless Africa, a wholly owned
subsidiary of Titan Wireless, made an investment in Ivoire Telecom
S.A. Holding (Ivoire Telecom), acquiring an 80% interest in Ivoire
Telecom and through such interest acquired a majority equity
interest in each of the principal subsidiaries owned by Ivoire
Telecom. The initial investment consisted of
$5.0 million in cash subject to certain indemnification
obligations, and an initial $5.5 million working capital note,
which was funded shortly after the initial investment, which were
recorded as Other Assets in the Company's consolidated balance
sheet. In addition, Titan committed to provide up to a
maximum of $35.0 million for capital expenditures and other
expenditures necessary to build out the Ivoire Telecom network, and
Titan has provided equipment with an approximate aggregate value of
$4.5 million. This commitment had been substantially funded
for such expenditures as of the end of 2001. Our aggregate
investment in Ivoire Telecom of approximately $50 million is
reflected in Other Assets in the Company's consolidated balance
sheet at December 31, 2001 and June 30, 2002, and has been
reported on the cost method as a result of the Company’s
inability to exercise control and significant influence over Ivoire
Telecom or to receive any reliable or timely financial information
from Ivoire Telecom. Titan has not consolidated the
operations of Ivoire Telecom for a number of reasons, including the
Company’s inability to obtain accurate and reliable financial
information, the Company’s inability to exercise any
influence on the operations of the company due to strong opposition
from the CEO located in Africa, and the Company’s inability
to obtain representation on the board of directors of each of
Ivoire Telecom’s 14 principal subsidiaries. Titan
engaged a global independent public accounting firm to audit the
financial statements of Ivoire Telecom for the year ended December
31, 2001. The independent public accounting firm has been
unable to complete its audit procedures due to significant open
matters. Further, the independent public accounting firm has
reported that there are weaknesses in internal controls, accounting
policies and procedures, and limited management information
systems, posing difficulties in the financial reporting and
consolidation of Ivoire Telecom. Based upon the information
available to management, the Company believes Ivoire Telecom
continues to incur losses and negative cash flows consistent with
its original expectations at the time of investment in this
start-up enterprise. To the extent Ivoire Telecom requires
additional cash in the future to fund operations, Titan has no
obligation nor commitment to fund such cash flow needs. Titan
regularly reviews its investment in Ivoire Telecom for impairment
and believes that as of June 30, 2002 the fair value of this
investment exceeds it costs.
In
June 2000, e-tenna Corporation was formed to facilitate the
transfer of an antenna technology originally designed for
government and military customers to the commercial wireless
market. Titan's initial investment of approximately $0.6
million in e-tenna in 2000 consisted of its contribution of certain
intellectual property and patents. As of December 31, 2001,
Archery Capital and other investors invested a total of $9.9
million for common and voting preferred stock, and Titan invested
$5.8 million in non-voting preferred stock and $0.4 million in
common stock. During the first quarter of 2002, Titan paid
$1.9 million in satisfaction of its commitment to acquire
additional non-voting preferred stock. As of June 30, 2002,
Titan's investment of approximately $7.6 million is included in the
accompanying consolidated balance sheet in Other Assets, and is
reflected under the cost method. During the first quarter and
most of the second quarter of 2002, Titan's investment in e-tenna
approximated 58.7% of the total equity of e-tenna and approximately
29.1% of the voting power of e-tenna. For a temporary period
of time, the Company’s voting power of e-tenna rose above
20%. For that period, the relevant amounts of gains or losses
were included in the determination of net income and reflected
against the carrying value of Titan’s investment in
e-tenna. As of June 30, 2002, the Company’s voting
interest of e-tenna is 12%.
Unaudited pro forma data
giving effect to the purchase of Jaycor, GlobalNet, BTG and Datron
as if they had been acquired at the beginning of 2001 are shown
below. Pro forma information related to the Maxwell or
International Systems acquisitions are not included, because the
effects are not significant.
|
|
|
Three months ended
June 30,2001
|
|
Six months ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
374,814
|
|
$
|
799,410
|
|
$
|
729,258
|
|
|
|
|
Income (loss) from
continuing operations before extraordinary
loss and cumulative effect of change in
accounting principle
|
|
|
(4,364
|
)
|
|
(679
|
)
|
|
(16,491
|
)
|
|
Net income
(loss)
|
|
|
(14,790
|
)
|
|
(58,273
|
)
|
|
(78,795
|
)
|
|
|
|
Basic earnings (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations before
extraordinary loss
and cumulative effect of change in
accounting
principle
|
|
$
|
(0.09
|
)
|
$
|
(0.01
|
)
|
$
|
(0.38
|
)
|
|
Net income (loss)
|
|
|
(0.29
|
)
|
|
(0.63
|
)
|
|
(1.66
|
)
|
|
|
|
Diluted earnings (loss)
per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations before
extraordinary loss
and cumulative effect of change in
accounting
principle
|
|
$
|
(0.09
|
)
|
$
|
(0.01
|
)
|
$
|
(0.38
|
)
|
|
Net income (loss)
|
|
|
(0.29
|
)
|
|
(0.65
|
)
|
|
(1.66
|
)
|
During the six months
ended June 30, 2002, approximately $2.0 million was paid in
satisfaction of purchase price holdbacks for the SenCom Corporation
acquisition made in 2000, and $3.75 million was paid for the
Sakon investment. In July 2002, approximately
$3.75 million was paid in satisfaction of the remaining
amounts due for Titan’s Sakon investment. Each of these
amounts had been recorded as liabilities in periods prior to
January 1, 2002.
Note (3)
Acquisition and Integration Related Charges and
Other
There have been no
acquisition and integration related charges and other in
2002.
The $28.4 million
acquisition and integration charges in the first six months of 2001
include costs of $12.4 million primarily related to the
integration of ACS and AverStar, and a realignment of the business
to better align the major categories of customers of Titan
Systems. These actions together resulted in a reduction in
employee workforce of approximately 50 employees and the closing of
several facilities. Included in these costs is approximately
$3.3 million of employee termination and retention costs,
$3.5 million of costs to eliminate duplicate and excess
facilities and assets, $1.1 million of duplicate personnel
costs to transition processes and functions, and $1.5 million
of asset impairment costs of certain asset balances. The
recoverability of such balances was impaired due to our exit from a
satellite services business within the Titan Systems segment.
Approximately $3.0 million of the charge was related to another
subsidiary acquired in a prior year for contingencies arising from
matters pre-existing to Titan's acquisition of the business.
That acquisition was accounted for as a purchase, and those matters
were resolved in 2001.
Also included in the
acquisition and integration related charges for the six months of
2001 is a charge of $15.5 million related to the restructuring
of Cayenta’s headquarters office. As a result of
reduced corporate spending on commercial information technology
services and e-business software applications, the Company
developed and approved a plan to restructure the Cayenta
headquarters and network operations center, which included a
reduction in workforce of approximately 40 personnel,
resulting in a charge of $1.7 million, and the elimination of
duplicate and excess facilities, resulting in a charge of
approximately $0.8 million. As a result of management's
evaluation of the recoverability of all the assets of Cayenta, in
accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", management concluded from
this evaluation that the estimated fair value of intangible as well
as long-lived assets was less than the carrying value of the
assets. The resulting impairment charge of $13.0 million
was comprised of the following: $5.5 million for fixed assets
associated with Cayenta's network operations center, $2.0 million
for prepaid advertising costs, $5.3 million for Cayenta's
investment in Soliance, LLC, a joint venture that markets and
delivers information technology systems and solutions to the
utility industry, and $0.2 million for certain other
assets.
Also included in the
acquisition and integration related charges and other in the six
months ended June 30, 2001 is a charge of $0.5 million in
the Titan Wireless segment for employee termination costs related
to certain organizational changes within that business
unit.
As
of June 30, 2002, approximately $1.2 million was
remaining to be paid primarily related to excess facilities which
are expected to be paid during 2002.
Note (4) Exit
Charges and Other
Included in the quarter
and six months ended June 30, 2002 are $1.8 million and
$3.3 million, respectively, of exit charges related to the
shutdown of Cayenta’s headquarters office and network
operations center, which included employee termination costs and
lease commitment costs.
Note (5) Adoption
of SFAS No. 142, “Goodwill and Other Intangible
Assets”
Effective January 1,
2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes financial accounting and
reporting for acquired goodwill and other intangible assets
and supersedes
Accounting Principles Board Opinion No. 17, "Intangible
Assets". Under SFAS No. 142, goodwill and
indefinite-lived intangible assets are no longer amortized but are
reviewed at least annually for impairment. Separable
intangible assets that have finite useful lives will continue to be
amortized over their useful lives.
SFAS No. 142 requires
that goodwill be tested for impairment at the reporting unit level
at adoption and at least annually thereafter, utilizing a two step
methodology. The initial step requires the Company to assess
whether indications of impairment exist. If indications of
impairment are determined to exist, the second step of measuring
impairment is performed, wherein the fair value of the relevant
reporting unit is compared to the carrying value, including
goodwill, of such unit. If the fair value exceeds the
carrying value, no impairment loss is recognized.
However,if the
carrying value of thereporting unit exceeds its fair value, the
goodwill of the reporting unit isimpaired.
In
connection with adopting this standard as of January 1, 2002, during the first quarter the Company’s
independent valuation consultant, KCI, completed step one of the
test for impairment, which indicated that the carrying values of
certain reporting units exceeded their estimated fair values, as
determined utilizing various evaluation techniques including
discounted cash flow and comparative market analysis.
Thereafter, given the indication of a potential impairment, KCI has
substantially completed step two of the test. Based on that
analysis, a transitional impairment loss of $40.1 million, which
was net of a $10.0 million tax benefit, or $0.57 basic
earnings per share and $0.55 diluted earnings per share, was
recognized in the first quarter of 2002 as the cumulative effect of
an accounting change. The impairment charge resulted from a
change in the criteria for themeasurement of the impairment loss from
anundiscounted cash flow method, as required by
SFAS No. 121, "Accounting for theImpairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," toa discounted cash
flow method and comparative market analysis as required by SFAS No.
142. The gross
$50.1 million impairment charge recorded in the first quarter of
2002 was comprised of approximately $27.5 million in certain
components of our Cayenta business, approximately $14.9 million in
our AverCom business, which was reported in our Titan Technologies
segment (previously our Emerging Technologies and Businesses
segment), both attributable to lower valuations and weakened
outlook in commercial IT services, and approximately $7.7 million
in our Titan Wireless business. Approximately $34.0 million
of this charge, net of tax, pertained to businesses that were
discontinued by the Company on March 1, 2002.
The adjustment of
previously reported net income (loss) and earnings (loss) per share
below represents the recorded amortization of goodwill and other
purchased intangibles. The impact on net income (loss), and
basic and diluted net earnings (loss) per share for the three and
six months ended June 30, 2002 and 2001 is set forth
below:
Reconciliation of Net
Income (Loss) and Earnings (Loss) Per Share:
Note (6)
Discontinued Operations
2002 Discontinued
Operations
On
March 1, 2002, the Company made the decision to sell certain of its
commercial information technology operations within its Cayenta
segment and the AverCom business within the Titan Technologies
segment in order to allow management to focus on operations with
the most near term growth opportunities. As a result,
Cayenta’s federal government operations have become a part of
Titan Systems, and Cayenta’s remaining continuing operations
are being reported in Titan Technologies, formerly Titan’s
Emerging Technologies and Businesses segment. In accordance
with Statement of Financial Accounting Standard No. 144,
“Accounting for the Impairment or Disposal of Long-lived
Assets and for Long-Lived Assets to be Disposed of,” all
commercial operations that are held for sale have been reflected as
discontinued operations for all periods presented in Titan’s
consolidated financial statements. All prior period financial
information has been restated to reflect the discontinued
operations and the new segments.
Revenues and net loss
generated by Cayenta’s discontinued operations and AverCom in
2002 and 2001 were as follows:
|
|
|
Three
months ended
June 30,
|
|
Six
months ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2001
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,930
|
|
$
|
13,687
|
|
$
|
13,282
|
|
$
|
29,012
|
|
|
Net loss
|
|
|
(1,224
|
)
|
|
(2,765
|
)
|
|
(1,300
|
)
|
|
(13,453
|
)
|
Included in
Cayenta’s net loss for the three and six months ended
June 30, 2001 are charges of $5.0 million related to the
restructuring of Cayenta (which was included in our Software
Systems segment), consisting primarily of a write-off of
$1.3 million of capitalized software designed for B2B
exchanges, a write-off of $2.0 million of accounts receivable
and employee termination and lease termination costs of
approximately $1.7 million.
Employee termination
costs of $0.8 million were recorded in the six months ended
June 30, 2001 related to a reduction in workforce in AverCom
resulting from the same economic conditions which impacted demand
for corporate information technology services at
Cayenta.
In
July 2002, the two information technology businesses of Cayenta
were sold for approximately $3.5 million consideration, in the
form of a promissory note, with $1.0 million due a year from
the date of sale and the remaining balance due in eight equal
quarterly installments with the final payments due within 3 years
from the sale date. The sales price closely approximates the
remaining book value of these businesses. In addition, a
maximum potential earn-out is available for approximately
$7.5 million based on certain future EBITDA
targets.
The Company is currently
in the process of selling its AverCom business. Based upon
the outcome of this process, once the Company has obtained a
reasonable determination of fair value, it will determine if there
is an impairment in value. Management anticipates that it
will have a reasonable determination of fair value during the third
quarter of 2002, based upon this process.
2001 Discontinued
Operations
On
March 16, 2001, SureBeam Corporation, Titan's subsidiary that
provides electronic food irradiation systems and services,
completed its initial public offering ("IPO"). On
October 16, 2001, Titan adopted a definitive plan to spin off
SureBeam in the form of a tax-free dividend to Titan stockholders
within 12 months from that date. The plan involves
filing a letter ruling request with the Internal Revenue Service
seeking approval of the tax-free distribution. Titan received
a favorable ruling in May 2002 and the SureBeam stock was
distributed to Titan stockholders on August 5, 2002.
Titan has historically reported the SureBeam business as a separate
segment. In accordance with Accounting Principles Board
Opinion No. 30, "Reporting the Results of
Operations—Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," the consolidated financial statements of
Titan for all periods presented have been restated to reflect
SureBeam as a discontinued business.
Revenues and net loss
generated by SureBeam in 2002 and 2001 were as
follows:
|
|
|
Three
months ended
June 30,
|
|
Six
months ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2001
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,841
|
|
$
|
8,616
|
|
$
|
5,355
|
|
$
|
14,092
|
|
|
Net loss
|
|
|
(19,846
|
)
|
|
(7,661
|
)
|
|
(30,375
|
)
|
|
(42,137
|
)
|
At
the time the Company adopted the plan to spin-off SureBeam, in
accordance with APB No. 30, the Company recorded a charge of $35.4
million for estimated costs of disposal and for estimated operating
losses up to the date of disposal. This charge was recorded
in the quarter ended September 30, 2001. All losses
incurred by SureBeam since that time have been charged against this
accrual. Losses charged against the accrual in 2002 were
$9.9 million and $20.5 million in the three and six
months ended June 30, 2002, respectively. The remaining
balance of the accrual was utilized in full during the quarter
ended June 30, 2002 and an additional charge of $11.0 million
was taken during the second quarter of 2002 to record the net
losses (in excess of the accrual) incurred by SureBeam during the
second quarter of 2002 as well as estimated operating losses and
spin-off expenses expected to be incurred through the spin-off date
of August 5, 2002. Subsequent to that date, SureBeam will no
longer be included in Titan’s results of operations.
Management will continue to assess the estimated disposal costs and
losses, and may from time to time adjust the allowance for such
costs accordingly.
2000 Discontinued
Operations
In
November 2000, the Company's Board of Directors adopted a plan
to dispose of the Company's commercial information assurance and
network monitoring businesses. Accordingly, the results of
these businesses have been accounted for as discontinued operations
in 2001. In addition, the accompanying consolidated financial
statements reflect operations discontinued by Titan in 2000.
All periods presented reflect the commercial information assurance
and network monitoring businesses as discontinued operations.
Management continues to assess the estimated wind-down and/or
disposal costs associated with the businesses, and may from time to
time adjust the allowance for such costs accordingly.
Following is a table of
all related balance sheet categories for each discontinued
operation:
|
|
|
As
of
June 30,
2002
|
|
As
of
December 31,
2001
|
|
|
|
|
|
|
|
|
Current assets of
discontinued operations:
|
|
|
|
|
|
|
|
|
SureBeam
|
|
$
|
44,421
|
|
$
|
44,940
|
|
|
Commercial information
technologies
|
|
|
17,599
|
|
|
21,209
|
|
|
Other
|
|
|
—
|
|
|
1,692
|
|
|
|
|
|
|
|
|
|
$
|
62,020
|
|
$
|
67,841
|
|
|
|
|
|
|
|
|
|
Non-current assets of
discontinued operations:
|
|
|
|
|
|
|
|
|
SureBeam
|
|
$
|
70,821
|
|
$
|
65,704
|
|
|
Commercial information
technologies
|
|
|
7,659
|
|
|
49,902
|
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
78,480
|
|
$
|
115,606
|
|
|
|
|
|
|
|
|
|
Current liabilities of
discontinued operations:
|
|
|
|
|
|
|
|
|
SureBeam
|
|
$
|
17,383
|
|
$
|
33,470
|
|
|
Commercial information
technologies
|
|
|
5,651
|
|
|
8,952
|
|
|
Other
|
|
|
439
|
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
23,473
|
|
$
|
42,422
|
|
|
|
|
|
|
|
|
|
Non-current liabilities of
discontinued operations:
|
|
|
|
|
|
|
|
|
SureBeam
|
|
$
|
—
|
|
$
|
7,608
|
|
|
Commercial information
technologies
|
|
|
86
|
|
|
562
|
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
86
|
|
$
|
8,170
|
|
|
|
|
|
|
|
|
Note (7)
Debt
On
May 23, 2002, the Company entered into an agreement with Wachovia
Bank, National Association and Wachovia Securities for a $485
million credit facility from a syndicate of commercial banks
including Wachovia Securities acting as Sole Lead Arranger and
Wachovia Bank, National Association, as Administrative Agent, The
Bank of Nova Scotia and Comerica Bank as Co-Syndication Agents and
Branch Banking Trust Company and Toronto Dominion Bank as
Co-Documentation Agents and other financial institutions. The
proceeds of the loan were used to repay outstanding indebtedness on
the Company’s $425 million credit facility arranged by
Credit Suisse First Boston in February 2000. The senior
secured credit facility is secured by substantially all of our and
our subsidiaries’ assets (other than the assets of SureBeam,
LinCom Wireless, Sakon and our foreign operations) and guaranteed
by substantially all of our subsidiaries (except for SureBeam,
LinCom Wireless, Sakon and our foreign subsidiaries). The
$485 million facility is comprised of a seven-year term loan
in an aggregate principal amount of $350 million and a
six-year $135 million revolving credit facility. Loans
made under the term loan amortize at 1.0% per year for years one
through six, with the remaining 94% due in four equal quarterly
payments in year seven of the agreement. Under the term loan
and the revolving facility, the Company has the option to borrow at
the bank’s rate or at adjusted LIBOR plus, in each case, an
applicable margin based on our total debt to EBITDA ratio (earnings
before interest and taxes and depreciation and amortization).
The agreement contains financial covenants, which were comprised of
the following at June 30, 2002: a maximum debt to EBITDA (as
defined) limit of 3.50 to 1, a minimum interest coverage ratio of
2.75 to 1, a minimum fixed charge ratio of 1.20 to 1 and a
minimum net worth (as defined) of $445 million. At
June 30, 2002, the Company was in compliance with all
financial covenants. No funds were drawn initially on the
revolver, which will be available to the Company for general
corporate needs, including strategic acquisitions.
Additionally, the new facility excludes Titan’s ownership of
SureBeam stock as collateral, which enabled Titan to spin-off
SureBeam in accordance with Titan’s plans to do
so.
Related to Titan's
extinguishment of its prior credit facility of $425 million with
Credit Suisse First Boston, all deferred financing costs related to
that agreement were written off during the quarter ended June 30,
2002, resulting in an extraordinary loss in the amount of $5.4
million including the effects of a tax benefit of
$3.9 million, which has been reflected as an extraordinary
item in the accompanying consolidated statements of
operations.
At
June 30, 2002, total borrowings outstanding under the Company's
primary credit facility were $350 million at a weighted
average interest rate of 4.84%. Commitments under letters of
credit were $9.7 million at June 30, 2002, $8.7 million
of which reduce availability of the working capital line. Of
the total borrowings, $3.5 million was short-term. At
June 30, 2002, the Company was in compliance with all
financial covenants under its various debt agreements.
Note (8) Other
Financial Information
The Company has
historically reported SureBeam as a separate operating
segment. On October 16, 2001, the Company adopted a
definitive plan to spin off SureBeam in the form of a tax-free
dividend to Titan stockholders. In accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of
Operations—Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," all current and prior year data have been
restated to reflect SureBeam as a discontinued business, and it is
no longer reported as a separate segment.
On
March 1, 2002, the Company adopted a plan to eliminate and hold for
sale certain of its commercial information technology operations
within Cayenta and Titan Technologies in order to allow management
to focus on operations with the most near term growth
opportunities. As a result, Cayenta’s federal
government operations are now reported as a part of Titan Systems,
and Cayenta’s remaining operations are being reported in
Titan Technologies, which was formerly named Emerging Technologies
and Businesses. In accordance with Statement of Financial
Accounting Standards No. 144, all current and prior year data have
been restated to reflect the operations of Cayenta which have been
eliminated and held for sale as discontinued operations, and the
segment of Cayenta (Software Systems) is no longer reported as a
separate segment. Further, all prior period data have been
restated to reflect the change in Titan’s segment reporting
for the components previously reported as Cayenta that will be
continued in Titan Systems and Titan Technologies.
The following tables
summarize revenues and operating profit (loss) by operating segment
for the three and six month periods ended June 30, 2002 and
2001. All segment operating profit and loss data reported on
an historical basis and for the current year have been reported
before Corporate overhead costs.
|
|
|
Three
months ended
June 30,
|
|
Six
months ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2001
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titan Systems
|
|
$
|
334,952
|
|
$
|
224,388
|
|
$
|
639,804
|
|
$
|
435,931
|
|
|
Titan Wireless
|
|
|
48,730
|
|
|
23,002
|
|
|
69,552
|
|
|
44,016
|
|
|
Titan
Technologies
|
|
|
16,255
|
|
|
10,274
|
|
|
31,126
|
|
|
17,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
399,937
|
|
$
|
257,664
|
|
$
|
740,482
|
|
$
|
496,976
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit
(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titan Systems
|
|
$
|
27,396
|
|
$
|
18,748
|
|
$
|
51,464
|
|
$
|
23,438
|
|
|
Titan Wireless
|
|
|
(4,186
|
)
|
|
1,402
|
|
|
(5,083
|
)
|
|
1,328
|
|
|
Titan
Technologies
|
|
|
129
|
|
|
1,757
|
|
|
2,758
|
|
|
1,198
|
|
|
Cayenta headquarters
costs
|
|
|
—
|
|
|
(2,915
|
)
|
|
—
|
|
|
(20,022
|
)
|
|
Exit charges and
other
|
|
|
(1,833
|
)
|
|
—
|
|
|
(3,319
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit
before Corporate
|
|
|
21,506
|
|
|
18,992
|
|
|
45,820
|
|
|
5,942
|
|
|
Corporate
|
|
|
(5,372
|
)
|
|
(4,503
|
)
|
|
(10,037
|
)
|
|
(9,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,134
|
|
$
|
14,489
|
|
$
|
35,783
|
|
$
|
(3,066
|
)
|
|
|
|
|
|
|
|
|
|
|
The operating income of
the Titan Systems segment for the three and six month periods ended
June 30, 2001 includes a planned $0.2 million and
$12.2 million, respectively, restructuring charge related
primarily to the integration of ACS and AverStar, acquired in 2000,
and a realignment of business around its major categories of
customers, which together resulted in personnel reductions and the
closing of certain facilities (see Note 3). Also in the
Titan Systems segment, deferred profit of $2.0 million and
$1.1 million related to acquisitions in 2001, 2000 and 1999
was recognized in the three months ended June 30, 2002 and 2001,
respectively, and $1.0 million and $1.8 million was
recognized related to the same acquisitions in the six months ended
June 30, 2002 and 2001, respectively.
Operating income in the
Titan Wireless segment in the three and six month periods ended
June 30, 2001, includes restructuring charges of $0.5 million,
as discussed in Note 3.
Included in the
acquisition and integration related charges is a charge of
$15.5 million related to the restructuring of Cayenta’s
headquarters office. As a result of reduced corporate
spending on commercial information technology services and
e-business software applications, the Company developed and
approved a plan to restructure the Cayenta headquarters and network
operations center, which included a reduction in workforce of
approximately 40 personnel, resulting in a charge of
$1.7 million, and the elimination of duplicate and excess
facilities, resulting in a charge of approximately
$0.8 million. As a result of management's evaluation of
the recoverability of all the assets of Cayenta, in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", management concluded from this evaluation that
a significant impairment of intangible as well as long-lived assets
had occurred. An impairment charge was required because the
estimated fair value was less than the carrying value of the
assets. The impairment charge of $13.0 million was
comprised of the following: $5.5 million for fixed assets
associated with Cayenta's network operations center, $2.0 million
for prepaid advertising costs, $5.3 million for Cayenta's
investment in Soliance, LLC, a joint venture that markets and
delivers information technology systems and solutions to the
utility industry, and $0.2 million for certain other
assets.
The Company's only
element of other comprehensive income resulted from foreign
currency translation adjustments in all periods reported, which is
reflected in the Consolidated Statements of Stockholders'
Equity.
The following data
summarize information relating to the per share computations for
income (loss) before extraordinary item:
The effect of the
minority interests primarily represents the dilutive effect of
outstanding stock options of Titan’s subsidiaries, notably
Titan Systems.
In
the three months ended June 30, 2002, options and warrants to
purchase approximately 1,214,800 shares of common stock at
prices ranging from $21.35 to $40.00 per share were not included in
the computation of diluted EPS, as the effect would have been
anti-dilutive due to the exercise price. Similarly, options
to purchase approximately 1,361,400 shares of common stock at
prices ranging from $20.04 to $47.50 per share, were not
included in the computation of diluted EPS for the three month
period ended June 30, 2001.
In
the six months ended June 30, 2002, options and warrants to
purchase approximately 1,224,300 shares of common stock at
prices ranging from $20.94 to $40.00 per share were not
included in the computation of diluted EPS, as the effect would
have been anti-dilutive due to the exercise price. Options to
purchase approximately 3,595,000 shares of common stock at
prices ranging from $1.12 to $47.50 per share were not
included in the computation of diluted EPS for the six month period
ended June 30, 2001, due to the loss from continuing
operations and/or the exercise price.
Approximately 5,038,000
shares in 2002 and 2001 from the potential conversion of
remarketable term income deferrable equity securities were not
included in the computations as their effect was
anti-dilutive. Approximately 460,000 shares of common stock
in 2002 and 2001 that could result from the conversion of
cumulative convertible preferred stock were not included in the
computations of diluted EPS, as the effect would have been
anti-dilutive.
Following are details
concerning certain balance sheet data:
|
|
|
June
30,
2002
|
|
December 31,
2001
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
Materials
|
|
$
|
17,528
|
|
$
|
15,720
|
|
Work-in-process
|
|
|
12,101
|
|
|
9,466
|
|
Finished goods
|
|
|
3,381
|
|
|
3,926
|
|
|
|
|
|
|
|
|
$
|
33,010
|
|
$
|
29,112
|
|
|
|
|
|
Supplemental disclosure
of cash flow information:
|
|
|
Six
months ended
June 30,
|
|
|
|
|
|
|
2002
|
|
2001
|
|
|
|
|
|
|
Noncash investing and
financing activities:
|
|
|
|
|
|
|
|
Issuance of stock for
acquisitions
|
|
$
|
134,611
|
|
$
|
—
|
|
Extraordinary loss on
early extinguishment of debt
|
|
|
5,408
|
|
|
—
|
|
Gain related to issuance
of stock in subsidiary
|
|
|
—
|
|
|
52,025
|
|
Notes receivable in
connection with sale of buildings
|
|
|
5,417
|
|
|
—
|
|
Shares contributed to
employee benefit plans
|
|
|
3,605
|
|
|
324
|
|
Write-off of deferred
compensation related to discontinued
operations
|
|
|
629
|
|
|
—
|
|
Deferred compensation
related to the issuance of stock
options
|
|
|
133
|
|
|
—
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
19,242
|
|
$
|
19,150
|
|
Cash paid for (provided
by) income tax
|
|
|
1,128
|
|
|
1,335
|
Note (9)
Commitments and Contingencies
On
January 6, 2000, Ion Beam Applications s.a., a Belgian corporation,
and some of its U.S. subsidiaries ("IBA") filed an action for
declaratory judgment in a federal court in Virginia against Titan
and the SureBeam Corporation ("SureBeam") relating to SureBeam's
patents for SureBeam systems. The action attacked the
validity of SureBeam's core patent, sought a declaration that IBA
and its customers had not infringed any of the 62 claims in
SureBeam's patent, and alleged that Titan and SureBeam engaged in
unfair competition and that Titan and SureBeam's conduct
constituted patent misuse. The case was moved to the federal
court in San Diego. On November 22, 2000, IBA filed an
amended complaint alleging, in addition to the original claims,
that Titan and SureBeam engaged in false advertising,
monopolization, restraint on trade and unfair business
practices.
On
January 25, 2002, Titan and SureBeam announced that they settled
the litigation with IBA. Under the settlement, IBA dropped
all the claims it made against Titan and SureBeam in the
litigation, including IBA's challenge to the validity and
enforceability of SureBeam's core patent. Titan and SureBeam
agreed that IBA and its customers may continue to operate or use
IBA's electronic irradiation facility in Bridgeport, New
Jersey. The settlement terms include, among other things,
that IBA will purchase its requirements in the United States for
e-beam and x-ray systems for use for processing food and sanitizing
mail from Titan and SureBeam during the next four years, provided
Titan and SureBeam offer competitive terms. Titan and
SureBeam also agreed to purchase their requirements of accelerators
with above 150 kilowatts of power from IBA during the same
four-year period, provided IBA offers competitive terms.
Other terms of the settlement agreement are immaterial and were not
discloseable.
We
are involved in legal actions in the normal course of our business,
including audits and investigations by various governmental
agencies that result from our work as a defense contractor.
We and our subsidiaries are named as defendants in legal
proceedings from time to time and we or our subsidiaries may assert
claims from time to time. In addition, we acquire companies
from time to time that have legal actions pending against them at
the time of acquisition. Based upon current information and
review, we believe the ultimate liability or recovery with respect
to pending actions would not materially affect our consolidated
financial position or results of operations. However, our
evaluation of the likely impact of these actions could change in
the future and an unfavorable outcome, depending upon the amount
and timing, could have a material adverse effect on the
Company’s results of operations or cash flows in a future
period.
Note (10) Related Party
Transactions
In
connection with our SureBeam business, we have entered into a
number of agreements with SureBeam, including a corporate services
agreement pursuant to which we provided general corporate
administrative support, facility space and related maintenance and
occupancy services through a facilities allocation and a tax
allocation agreement whereby in the event Titan offsets its taxable
gains with SureBeam losses, Titan will compensate SureBeam in cash
for the benefit it receives for use of SureBeam losses, when
SureBeam demonstrates that it is able to utilize those losses or
the losses would have otherwise expired. The corporate
services agreement terminated effective as of the spin-off
distribution of SureBeam on August 5, 2002, and we will no longer
provide these services to SureBeam.
In
September 2001, Titan purchased a world-wide perpetual and
exclusive, non-royalty bearing license to use SureBeam's
intellectual property for all applications and fields other than
the food, animal hide and flower markets, for the following
consideration: 1) a $50 million senior secured line of credit, with
customary financial, affirmative and negative covenants, 2) the
exchange of the $75 million debt owed by SureBeam to Titan for
additional shares of Class B and Class A common stock of SureBeam,
and 3) a cash payment of $8 million, with $4 million paid at
September 30, 2001 and four installments of $1 million each
payable on March 31, 2002, June 30, 2002, September 30, 2002 and
December 31, 2002.
On
August 5, 2002, as part of our commitment to extend a $50.0 million
line of credit to SureBeam, Titan extended a $50 million senior
secured revolving loan commitment to SureBeam that allows SureBeam
to borrow up to $12.5 million in the second quarter of 2002, up to
$17 million in the third quarter of 2002 and up to $12.5 million
per quarter beginning in the fourth quarter of 2002 (of which
$10 million was borrowed during the second quarter) through
the fourth quarter of 2003, subject to the $50 million limitation
on borrowing. The amount available for borrowing in the
second, third and fourth quarters of 2003 is based upon certain
minimum ratios of SureBeam’s earnings before interest, taxes,
depreciation and amortization (EBITDA) as a percentage compared to
target EBITDA amounts in SureBeam’s financial plan submitted
to Titan, but subject to a maximum of $12.5 million per quarter in
2003. As of August 11, 2002, SureBeam has borrowed $15
million under the credit facility.
In
addition, we have guaranteed certain lease obligations of SureBeam,
and SureBeam is obligated to reimburse us for any payments we make
under these guarantees. Any guarantee payments we make
reduces amounts available for future borrowing under the credit
agreement. SureBeam will pay us a monthly fee of 10% of the
guaranteed monthly payments. Some of the guaranteed leases
have longer terms than the credit facility. If Titan remains
a guarantor at the maturity date for the credit facility, then
SureBeam will enter into a reimbursement agreement with Titan
covering the outstanding guarantees.
SureBeam is obligated to
make quarterly principal payments on the credit facility as
follows: 13.75% of the outstanding principal balance as of
December 31, 2003 during each quarter in 2004; 25% of the
outstanding principal balance as of December 31, 2004 during each
quarter in 2005; and all remaining principal by December 31,
2005. In addition, with some exceptions, SureBeam is
obligated to use net proceeds from the sale of assets and its
securities to repay amounts advanced under this facility.
Interest is payable monthly beginning in January 2003. The
credit agreement contains affirmative and negative covenants,
including covenants limiting SureBeam’s incurrence of debt,
capital expenditures, operating expenses, investments, declaration
of dividends and other restricted payments, sale of stock of
subsidiaries and consolidations and mergers. The credit
agreement, however, does not contain any financial covenants
requiring SureBeam to maintain specific financial ratios. The
credit agreement is secured by a first priority lien on all of
SureBeam’s assets. We are required to collaterally
assign our rights under this credit agreement and our security as
well as the License Agreement to our senior lenders under our
senior credit facility.
Related to the exchange
of the $75 million debt owed by SureBeam to us, we exchanged
$2 million of the balance on December 31, 2001 for
190,385 Class B common shares of SureBeam, and exchanged the
remaining $73 million of the balance on February 13, 2002
for 4,441,496 Class A and 3,225,765 Class B
common shares of SureBeam.
We
have entered into subcontract agreements with SureBeam for them to
build, design and integrate linear accelerators we are providing
for our customers in our Scan Technologies business to provide
medical sterilization electron beam accelerators as well as mail
sanitization systems for the United States Postal Service
("USPS"). All appropriate intercompany eliminations have been
made in our consolidated financial statements.
Titan has also committed
to utilize SureBeam as its exclusive supplier, provided SureBeam
offers competitive terms, for all e-beam and x-ray accelerator
systems owned and operated by Titan or sold to a third party
through at least December 31, 2003. In addition, Titan has
also committed to utilize SureBeam exclusively for all integration
services related to accelerator systems until at least
December 31, 2002.
In
relation to SureBeam's strategic alliance with Hawaii Pride, Titan
has guaranteed up to the greater of SureBeam's equity interest in
Hawaii Pride or 19.9% of Hawaii Pride's $6.8 million, 15-year
loan from its lender, Web Bank. As of June 30, 2002,
Titan has guaranteed approximately $1.3 million, or 19.9% of
the loan balance.
Wehavesubleasedto SureBeam approximately 70,522
square feet used for its service center in Los Angeles and several
other operating facilities undersubleases that expire beyond the maturity date of the
Credit Facility. Generally, SureBeam is paying us sublease
payments equal to our monthly expense under these leases plus a 10%
markup. SureBeam will continue to seek to have itself
substituted as the direct lessee under each master lease so that
the sublease can be terminated.
In
March 2002, our Board of Directors adopted a stock option
relinquishment program, the primary purpose of which is to align
the interests of our directors and senior executives more closely
with our stockholders' interests by allowing directors and senior
executives to participate in the appreciation in our equity
value:
|
|
•
|
without requiring our
directors and executive officers to trade shares of our common
stock obtained through the exercise of options on the open market;
and
|
|
|
|
|
|
|
•
|
without the dilutive and
potentially stock-price depressive effects associated with the
exercise and subsequent sale of stock option shares.
|
The program also assists
our directors and executive officers with their individual
financial planning. Under the program, a participant can
relinquish eligible, in-the-money stock options in exchange for a
loan, the principal amount of which is 150% of the difference
between the aggregate exercise price of the options and the product
of (i) the number of shares issuable upon exercise of the
options and (ii) a 20 day trailing average of the daily
high and low sales price of our common stock prior to
relinquishment. The loans will bear interest at a rate equal
to the applicable federal rate as published by the Internal Revenue
Service for the month in which the loan is made. The loans
are contingent upon the participant's, within 90 days,
utilizing a portion of the loan proceeds to purchase a life
insurance policy with a death benefit sufficient to repay the loan
and accrued interest thereon upon maturity. The deadline for
notice from directors and executive officers of their intent to
participate in the current program was March 29,
2002.
If, subsequent to the
individual's notice to participate and within 90 days (or such
longer period agreed to by the Company in compliance with the
Sarbanes-Oxley Act) after receiving the loan proceeds, the
individual elects not to participate in the program or no life
insurance policy is obtained, the loans are repaid with accrued
interest thereon and the options are returned to the
individual. The loans mature on the death of the second to
die of the participant and his/her spouse. Under the program,
to date the following conditional transactions have occurred, each
still within the noted period for the individual to withdraw from
the program and repay the loans:
|
|
•
|
Dr. Ray, Chairman of
the Board and Chief Executive Officer: 222,380 options
conditionally relinquished, $3,985,725 principal amount of loan,
5.48% interest per annum;
|
|
|
|
|
|
|
•
|
Mr. Fink, director:
15,000 options conditionally relinquished, $336,337.50 principal
amount of loan, 5.48% interest per annum;
|
|
|
|
|
|
|
•
|
Mr. Alexander,
director: 19,972 options conditionally relinquished, $499,999
principal amount of loan, 5.48% interest per annum.
|
In
connection with the same program, loans were conditionally made to
Mr. Costanza, Senior Vice President, General Counsel and Secretary
in the amount of $614,400, and Mr. Hanisee, director, in the amount
of $220,184. In June 2002, Mr. Costanza and Mr. Hanisee
repaid the outstanding balance of their loans in full. At
June 30, 2002, the Company had other loans receivable from
three officers of two of the Company's subsidiaries totaling
$0.2 million.
Note (11)
Subsequent Events
On
July 11, 2002, Titan announced that it would exit its international
telecommunications business through a combination of selling and
winding down its operation within its Titan Wireless segment.
Titan began implementing these actions immediately and expects to
complete the majority of these actions by the end of 2002.
Titan is in the process of determining the impact these actions
will have to the carrying value of the assets of these businesses,
as well as exit costs associated with infrastructure reductions
including costs for employee terminations and excess
facilities. Such amounts will be recorded as a non-recurring
charge in the third quarter of 2002. Titan estimates that
this after tax charge will not exceed $200 million.
THE TITAN CORPORATION
Item 2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar
amounts in thousands, except share and per share data, or as
otherwise noted)
Results of
Operations
During the first quarter
of 2002, the Company made the decision to sell certain of its
commercial information technology operations in order to allow
management to focus on those operations with the most near term
growth opportunities. As a result, Cayenta’s federal
government operations have become a part of Titan Systems and
Cayenta’s remaining operations are being reported in Titan
Technologies, formerly Titan’s Emerging Technologies and
Businesses segment. All commercial operations that are held
for sale have been reflected as discontinued operations for all
periods presented in Titan’s consolidated financial
statements. All prior period financial information has been
restated to reflect the new segments.
Consolidated. Our consolidated revenues increased from
$257.7 million and $497.0 million in the second quarter and
first six months of 2001, respectively, to $400.0 million and
$740.5 million in the second quarter and first six months of
2002, respectively. Increased revenues were reported in our
Titan Systems segment, primarily attributable to the acquisitions
of BTG, Inc. in the fourth quarter of 2001, Datron in the third
quarter of 2001 and Jaycor in the first quarter of 2002.
Increased revenues were also reported in our Titan Wireless
segment, primarily attributable to the acquisition of GlobalNet,
Inc. in March 2002 and in our Titan Technologies segment, primarily
as a result of revenues generated on Titan’s contract with
the United States Postal Service (USPS) to provide mail
sanitization systems.
Revenues:
Three Months Ended
June 30, 2002 and 2001:
Titan
Systems. Titan Systems’
revenues increased from $224.4 million in the second quarter of
2001 to $334.9 million in the second quarter of 2002. The
acquisitions of BTG, Datron and Jaycor contributed approximately
$97.0 million of the revenues in the second quarter of 2002,
with the remaining increase in revenues driven by internal revenue
growth generated in part from the start up of Titan’s
enterprise information technology contract with the Special
Operations Command, as well as several new contracts with the Air
Force’s Electronic Systems Center, increased demand by the
Naval Air Warfare Center, and increased demand for cryptology
products, mini-DAMA terminals and continued work on the Prophet
Program (the Army’s next generation signals intelligence
system). Comparable revenues for the second quarter of 2001
for BTG, Datron and Jaycor (which were not acquired until the
fourth quarter of 2001, the third quarter of 2001 and the first
quarter of 2002, respectively), were approximately
$93.3 million.
Titan
Wireless. Titan
Wireless’ revenues increased from $23.0 million in the second
quarter of 2001 to $48.7 million in the second quarter of
2002. The acquisition of GlobalNet contributed approximately
$28.2 million of the revenues in the second quarter of
2002. Increased service revenues of approximately
$3.3 million from Titan’s wholesale long distance
business generated by Titan’s consolidated joint venture,
Sakon LLC, were offset by a $5.7 million decrease in revenues
generated by the systems integration business, primarily a result
of decreased revenues recorded on Titan Wireless’ project in
Benin to build a telecommunications system for its customer, the
Office of Post and Telecommunication of Benin
(“OPT”).
Titan
Technologies. Titan
Technologies revenues increased from $10.3 million in the second
quarter of 2001 to $16.3 million in the second quarter of
2002. The increase in 2002 is related primarily to revenues
of approximately $6.6 million generated on Titan’s contract
with the U.S. Postal Service to provide mail sanitization
systems.
Six
Months Ended June 30, 2002 and 2001:
Titan
Systems. Titan Systems’
revenues increased from $435.9 million in the first six months of
2001 to $639.8 million in the first six months of 2002. The
acquisitions of BTG, Datron and Jaycor contributed approximately
$177.3 million of the revenues in the first six months of
2002, with the remaining increase in revenues driven by internal
revenue growth generated by strong demand from the Naval Air
Warfare Center and the Air Force’s Electronic Systems Center
and increased demand for cryptology products and mini-DAMA
terminals and continued work on the Prophet Program.
Comparable revenues for the first six months of 2001 for BTG,
Datron and Jaycor, were approximately
$189.7 million.
Titan
Wireless. Titan
Wireless’ revenues increased from $44.0 million in the
first six months of 2001 to $69.6 million in the first six
months of 2002. The acquisition of GlobalNet contributed
approximately $28.2 million of the revenues in the first six
months of 2002. Increased service revenues of approximately
$7.7 million from Titan’s wholesale long distance
business generated by Titan’s consolidated joint venture,
Sakon LLC, were offset by a $10.3 million decrease in revenues
generated by the systems integration business, primarily a result
of decreased revenues recorded on Titan Wireless’ project in
Benin to build a telecommunications system for its customer, the
OPT.
Titan
Technologies. Titan
Technologies revenues increased from $17.0 million in the first six
months of 2001 to $31.1 million in the first six months of
2002. The increase in 2002 is related primarily to revenues
of approximately $11.6 million generated on Titan’s
contract with the U.S. Postal Service to provide mail sanitization
systems.
Selling,
General and Administrative
Our SG&A expenses
increased from $42.1 million in the second quarter of 2001 to
$54.2 million in the second quarter of 2002. SG&A,
as a percentage of revenues, decreased from 16.3% in the second
quarter of 2001 to 13.6% in the second quarter of 2002.
SG&A increased from $88.1 million in the first six months
of 2001 to $97.0 million for the same period in 2002,
reflecting a decrease as a percentage of revenues from 17.7% in the
first six months of 2001 to 13.1% in the first six months of
2002. Included in SG&A was amortization of goodwill of
$3.9 million and $7.6 million for the three months and
six months ended June 30, 2001, and amortization of purchased
intangibles of $1.3 million and $2.7 million for the
three months and six months ended June 30, 2002, and deferred
compensation of $1.1 million and $2.1 million in the
quarter and six months ended June 30, 2001 and
$1.4 million and $2.4 million in the quarter and six
months ended June 30, 2002. Excluding the amortization
of goodwill and purchased intangibles and deferred compensation,
SG&A decreased from 14.4% in the quarter ended June 30, 2001 to
12.9% in the quarter ended June 30, 2002, and from 15.8% in
the six months of 2001 to 12.4% in the six months of 2002.
The decreases in 2002 are in part attributable to certain cost
reductions that were made during 2001, as well as due to a
difference in the methodology of the classification of operating
costs reported as costs of sales versus sales, general &
administrative costs, as defined by the acquired company
BTG’s stated disclosure statement with its appropriate
government customers. We expect to conform BTG’s
disclosure statement and classification of operating costs to those
classifications used by Titan by the end of 2002.
Research and
Development
Our R&D expenses
increased from $3.4 million and $6.8 million in the second
quarter and first six months of 2001, respectively, to $5.7 million
and $10.6 million in the second quarter and first six months of
2002, respectively. The increase in 2002 is primarily
attributable to increased development expenses of approximately
$4.3 million for the six months ended June 30, 2002, incurred
in LinCom Wireless. As a percentage of revenues,
R&D expenses remained fairly flat at approximately 1.4% for all
periods in 2001 versus the comparable periods in 2002.
Acquisition and
Integration Related Charges and Other
Fiscal 2001
Charges
Acquisition and
integration related charges and other of $0.7 million and
$28.4 million in the second quarter and first six months of
2001, respectively, were comprised of costs of $12.4 million
incurred in the six months of 2001 primarily related to the
integration of ACS and AverStar, and a realignment of business
around its major categories of customers, which together resulted
in personnel reductions and the closing of several
facilities. Included in these costs is approximately
$3.3 million of employee termination and retention costs,
$3.5 million of costs to eliminate duplicate and excess
facilities and assets, $1.1 million of duplicate personnel
costs to transition processes and functions, and $1.5 million of
asset impairment costs of certain asset balances for which the
recoverability of such balances was impaired due to the exit of a
satellite services business within the Titan Systems segment.
Approximately $3.0 million of the charge was related to
another subsidiary acquired in a prior year for contingencies
arising from matters pre-existing to Titan’s acquisition of
the business. That acquisition was accounted for as a
purchase, and those matters were resolved in 2001.
Also included in the
acquisition and integration related charges and other for the six
months ended June 30, 2001 is a charge of $0.5 million of employee
termination costs in the Titan Wireless segment related to certain
organizational changes within that business unit and the
elimination of the internal product development
group.
Also included in the
acquisition and integration related charges is a charge of
$0.5 million and $15.5 million for the three and six
months ended June 30, 2001, respectively, related to the
restructuring of Cayenta’s headquarters office. As a
result of reduced corporate spending on commercial information
technology services and e-business software applications, the
Company developed and approved a plan to restructure the Cayenta
headquarters and network operations center, which included a
reduction in workforce of approximately 40 personnel, resulting in
a charge of $1.7 million, and the elimination of duplicate and
excess facilities, resulting in a charge of $0.8 million. As
a result of management’s evaluation of the recoverability of
all of the assets of Cayenta, in accordance with Statement of
Financial Accounting Standards No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of”, management concluded from this evaluation that
a significant impairment of intangible as well as long-lived assets
had occurred. An impairment charge was required because the
estimated fair value was less than the carrying value of the
assets. The impairment charge of $13.0 million was
comprised of the following: $5.5 million for fixed assets
associated with Cayenta’s network operations center, $2.0
million for prepaid advertising costs, $5.3 million for
Cayenta’s investment in Soliance, LLC, a joint venture that
markets and delivers information technology systems and solutions
to the utility industry, and $0.2 million for certain other
assets.
Exit Charges and
Other
Included in the exit
charges and other is a charge of $1.8 million and
$3.3 million for the three and six months ended June 30,
2002, related to the shut-down of Cayenta’s headquarters
office. These charges primarily include employee termination
costs and lease commitment costs.
Operating Profit
(Loss)
Consolidated. Our operating profit improved from operating
profit of $14.5 million in the three months ended June 30, 2001 to
$16.1 million in the three months ended June 30, 2002, and improved
from an operating loss of $3.1 million in the first six months of
2001 to operating income of $35.8 million in the first six
months of 2002. Included in the 2001 operating results is a
charge of $0.7 million and $28.4 million in the three and
six months ended June 30, 2001, respectively, for acquisition and
integration related charges and other, and a charge of $1.8 million
and $3.3 million in the three and six months ended
June 30, 2002, respectively, for certain exit charges related
to the Cayenta headquarters office. In addition, amortization
of goodwill of $3.9 million and $7.6 million for the three and six
months ended June 30, 2001, and amortization of purchased
intangibles of $1.3 million and $2.7 million for the three and
six months ended June 30, 2002, respectively, and deferred
compensation of $1.1 million and $2.1 million in the
three and six months ended June 30, 2001, respectively, and
$1.4 million and $2.4 million for the three and six
months ended June 30, 2002, respectively, are included in
operating profit. Excluding these charges and costs,
operating profit increased from $20.2 million and
$35.1 million in the quarter and first six months ended June
30, 2001, respectively, to $20.7 million and $44.2 million in the
quarter and first six months ended June 30, 2002,
respectively. Increased operating profit was primarily
attributed to the increase in revenues discussed
previously.
Segment Operating
Profit. Operating profit
reported by business segment includes substantially all of the
segment’s costs of operations and administration. The
segment performance is based upon profit or loss before interest
expense, income taxes, and before allocated costs of corporate
overhead. Corporate overhead may include, among other things,
costs for financial accounting, marketing, administrative and legal
activities incurred by Titan. Also included in segment
operating profit for the quarter and six months ended June 30,
2001, are overhead and administrative costs associated with the
previous corporate headquarters and network operations center of
Cayenta, which were eliminated in the first quarter of 2002, when
certain components of Cayenta were discontinued. Included in
these costs for the Cayenta headquarters are certain charges of
$0.5 million and $15.5 million for the three and six months ended
June 30, 2001, respectively, related to the impairment of assets of
Cayenta’s network operations center and the restructuring of
the Cayenta headquarters which are included in the acquisition and
integration related charges for the year ended December 31,
2001. Consequently, the results of operations of the segments
may not be indicative of the actual results that would be shown in
the financial statements of those segments if prepared on a
stand-alone basis. The discussion of segment operating profit
below includes only the operating profits for each of our business
segments and does not include separate discussion of our corporate
overhead.
Segment Operating
Profit:
Three Months Ended
June 30, 2002 and 2001:
Titan
Systems. Titan Systems'
operating profit increased from $18.7 million in the second quarter
of 2001 to $27.4 million in the second quarter of 2002.
Included in the 2001 operating results is an integration and
acquisition related charge of $0.2 million and amortization of
goodwill of $2.5 million. Included in the 2002 operating
results is amortization of purchased intangibles of
$1.3 million and deferred compensation of $0.4 million,
relating to the acquisition of BTG. Excluding the charges and
the amortization of goodwill and purchased intangibles and deferred
compensation, operating profit increased from $21.4 million in
the second quarter of 2001 to $29.2 million in the second
quarter of 2002. The increase in operating profit was
primarily a result of the increased revenues discussed
previously.
Titan
Wireless. Titan
Wireless’ operating performance decreased from operating
income of $1.4 million in the second quarter of 2001 to an
operating loss of $4.2 million in the second quarter of 2002.
Included in the 2001 operating income was $0.4 million amortization
of goodwill. Excluding the amortization of goodwill, operating
profit decreased from operating income of $1.8 million in the
second quarter of 2001 to an operating loss of $4.2 million in the
second quarter of 2002. Although revenues were up over the
prior year, reduced operating margins were caused in large part by
certain competitors of our long distance business that are now in
bankruptcy or undergoing significant reorganizations, that have
sought to generate revenue by reducing pricing, thereby creating
significant margin pressure.
Titan
Technologies. Titan
Technologies operating profit decreased from $1.8 million in
the second quarter of 2001 to $0.1 million in the second quarter of
2002. The operating profits in 2002 were impacted by
increased development expenses in LinCom Wireless. The second
quarter of 2001 operating results include approximately
$1.0 million of amortization of goodwill. Excluding the
impact of the amortization of goodwill in 2001, operating profit
decreased from $2.8 million in the second quarter of 2001 to $0.1
million in the second quarter of 2002.
Six Months Ended
June 30, 2002:
Titan
Systems. Titan Systems'
operating profit increased from $23.4 million in the first six
months of 2001 to $51.5 million in the first six months of
2002. Included in the 2001 operating results is an
integration and acquisition related charge of $12.4 million and
amortization of goodwill of $4.8 million. Included in
the 2002 operating results is amortization of purchased intangibles
of $2.7 million and deferred compensation of
$0.4 million. Excluding the charges and the amortization
of goodwill and purchased intangibles and deferred compensation,
operating profit increased from $40.7 million in the first six
months of 2001 to $54.6 million in the first six months of
2002. The increase in operating profit was primarily a
result of the increased revenues discussed previously.
Titan
Wireless. Titan
Wireless’ operating performance decreased from operating
income of $1.3 million in the first six months of 2001 to an
operating loss of $5.1 million in the first six months of
2002. Included in the 2001 operating income was
$0.8 million amortization of goodwill and an integration and
acquisition related charge of $0.5 million. Excluding
the charge and amortization of goodwill, operating profit decreased
from operating income of $2.7 million in the first six months
of 2001 to an operating loss of $5.1 million in the second
quarter of 2002. Although revenues were up over the prior
year, reduced operating margins were caused in large part by
certain competitors of our long distance business that are now in
bankruptcy or undergoing significant reorganizations, that have
sought to generate revenue by reducing pricing, thereby creating
significant margin pressure.
Titan
Technologies. Titan Technologies operating profit
increased from $1.2 million in the first six months of 2001 to
$2.8 million in the first six months of 2002. The
operating profits in 2002 were impacted by the increase in revenues
discussed previously, offset by increased development expenses in
LinCom Wireless. The first six months of 2001 operating
results include approximately $2.0 million of amortization of
goodwill. Excluding the impact of the amortization of
goodwill in 2001, operating profit decreased from $3.2 million
in the first six months of 2001 to $2.8 million in the first
six months of 2002.
Interest Expense,
Net
Our net interest expense
decreased from $10.1 million and $18.8 million in the
second quarter and first six months of 2001, respectively, to
$7.8 million and $16.1 million in the second quarter and
first six months of 2002, respectively. Net interest expense
decreased primarily as a result of reduced effective interest
rates. Borrowings from our primary bank lines of credit,
excluding working capital lines from acquired companies, averaged
$341.6 million and $349.7 million for the three and six
months ended June 30, 2002, respectively, at weighted average
rates of 5.3% and 5.2%, respectively, compared to
$348.7 million and $334.9 million in the three and six
months ended June 30, 2001, respectively, at weighted average
interest rates of 8.3% and 8.6%, respectively.
Income
Taxes
Consolidated income taxes
reflect effective rates of a provision rate of 46% and a benefit
rate of 23% in the quarter and six months ended June 30, 2001,
respectively, compared to a provision rate of 42% in the quarter
and six months ended June 30, 2002. The reduced rate for the
tax benefit in 2001 is primarily due to significant non-deductible
expenses which were recorded for financial reporting purposes,
which resulted in a reduced benefit rate for the net loss
reported.
Net Income
(Loss)
In
the quarter and six months ended June 30, 2001, we reported a
net loss of $7.8 million and $67.7 million, respectively,
compared to a net loss of $11.8 million and $45.4 million
in the quarter and six months ended June 30, 2002. Loss
from discontinued operations was $10.4 million and
$55.6 million in the quarter and six months ended
June 30, 2001, respectively, compared to a loss of
$11.1 million and $11.2 million in the quarter and six
months ended June 30, 2002, respectively. Included
in the loss from discontinued operations in 2001 was approximately
$42.1 million of a net loss from the Company’s SureBeam
operations, which included approximately $38.9 million of
deferred compensation related to the initial public offering of
SureBeam in March 2001. Included in the loss from
discontinued operations for the three and six months ended June 30,
2002, is approximately $11.0 million related to SureBeam,
which includes current net losses of approximately
$4.6 million, net of the application of the remaining accrued
losses and an accrual for estimated net losses and spin-off
expenses expected to be incurred by SureBeam through the spin-off
date of August 5, 2002.
The Company is currently
in the process of selling its AverCom business. Based upon
the outcome of this process, once the Company has obtained a
reasonable determination of fair value, it will determine if there
is an impairment in value. Management anticipates that it
will have a reasonable determination of fair value during the third
quarter of 2002.
Liquidity and Capital
Resources
We generated
approximately $38.1 million cash from our continuing
operations during the six months ended June 30, 2002, resulting
from income from continuing operations coupled with a reduction of
receivable balances of $50.6 million, partially offset by
decreases in other working capital components. Our investing
activities generated net cash of approximately $3.6 million,
resulting from net cash acquired of approximately
$30.0 million, primarily from the Jaycor acquisition which
closed in late March 2002, offset by investments and capital
expenditures. Financing activities provided
$7.1 million, primarily from an increase in our line of credit
borrowings.
At
June 30, 2002, total borrowings under our credit facility were
$350 million at a weighted average interest rate of
4.84%. Commitments under letters of credit were
$9.7 million at June 30, 2002, $8.7 million of which
reduce availability of our working capital line, resulting in
$126.3 million of availability on our working capital line at
June 30, 2002. Of the total borrowings, $3.5 million was
short-term.
We
generated approximately $38.1 million cash from our continuing
operations during the six months ended June 30, 2002, resulting
from income from continuing operations coupled with net source
resulting from changes in working capital, with the most notable
source of $50.6 million from a reduction in accounts
receivables. Our investing activities generated net cash of
approximately $3.6 million, resulting from net cash acquired of
approximately $30.0 million, primarily from the Jaycor acquisition
which closed in late March 2002, offset by investments and capital
expenditures.
Our financing activities
generated cash of $7.1 million, primarily reflecting additions
to debt of $20.0 million, resulting from the Company’s
new credit facility, as well as the payment of deferred financing
costs of $8.7 million for the Company’s new credit
facility. Proceeds of $7.1 million were received from
the exercise of stock options.
On
May 23, 2002, the Company entered into an agreement with Wachovia
Bank, National Association and Wachovia Securities for a $485
million credit facility from a syndicate of commercial banks
including Wachovia Securities acting as Sole Lead Arranger and
Wachovia Bank, National Association, as Administrative Agent, The
Bank of Nova Scotia and Comerica Bank as Co-Syndication Agents and
Branch Banking Trust Company and Toronto Dominion Bank as
Co-Documentation Agents and other financial institutions. The
proceeds of the loan were used to repay outstanding indebtedness on
the Company’s $425 million credit facility arranged by
Credit Suisse First Boston in February 2000. The senior
secured credit facility is secured by substantially all of our and
our subsidiaries’ assets (other than the assets of SureBeam,
LinCom Wireless, Sakon and our foreign operations) and guaranteed
by substantially all of our subsidiaries. The
$485 million facility is comprised of a seven-year term loan
in an aggregate principal amount of $350 million and a
six-year $135 million revolving credit facility. Loans
made under the term loan amortize at 1.0% per year for years one
through six, with the remaining 94% due in four equal quarterly
payments in year seven of the agreement. Under the term loan
and the revolving facility, the Company has the option to borrow at
the bank’s rate or at adjusted LIBOR plus, in each case, an
applicable margin based on our total debt to EBITDA ratio (earnings
before interest and taxes and depreciation and amortization).
The agreement contains financial covenants, which were comprised of
the following at June 30, 2002: a maximum debt to EBITDA
limit of 3.50 to 1, a minimum interest coverage ratio of 2.75
to 1, a minimum fixed charge ratio of 1.20 to 1 and a minimum
net worth (as defined) of $445 million. At June 30,
2002, the Company was in compliance with all financial
covenants. No funds were drawn initially on the revolver,
which will be available to the Company for general corporate needs,
including strategic acquisitions. Additionally, the new
facility excludes Titan’s ownership of SureBeam stock as
collateral, which enabled Titan to spin-off SureBeam in accordance
with Titan’s plans to do so.
On
December 10, 1999, our wholly owned subsidiary, Titan Africa, Inc.
("Titan Africa"), in connection with its contract to build a
satellite-based telephone system for its customer, the national
telephone company of Benin, Africa, entered into a Loan Facility
agreement for up to 30.0 billion Francs CFA (the currency of the
African Financial Community), equivalent to approximately $45.0
million U.S. dollars, with a syndicate of five banks, with Africa
Merchant Bank as the arranger. This medium term financing is
a non-recourse loan to Titan Africa which is guaranteed by the
national telephone company of Benin, Africa and secured by the
national telephone company's equipment and revenues related to the
project. The facility has a fixed interest rate of 9.5% and
will be repaid in seven equal semi-annual payments from the net
receipts of this project, or by the OPT in the event that such
receipts are not adequate to make these payments, which commenced
on December 31, 2000. The borrowings on this facility have
been utilized to fund the subcontractor costs incurred by Alcatel
of France, a major subcontractor to this project. The
non-Alcatel equipment provided by Titan Africa was financed through
arrangement with the OPT whereby Titan Africa would be paid in
seven equal semi-annual installments, which commenced on
December 31, 2000. Due to the approximate six to nine
month delay in the delivery of the system, which was impacted by
the expansion of the original project to include increased GSM
lines, increased capacity and capability of the VSAT sites and an
overall increase in lines in Benin, the Africa Merchant Bank and
Titan Africa have collectively agreed to extend the due date of the
semi-annual principal payments until such time as the service
revenues have achieved certain levels, which occurred in mid
2002. The terms of Titan Africa's agreement with the customer
include, among other things, a revenue sharing of total net
receipts earned on this project for up to a period of 9 years
depending upon when the equipment has been paid for. As of
June 30, 2002, approximately $40.5 million was drawn on
this facility, which has been reflected as Non-recourse debt in the
accompanying consolidated balance sheet and approximately
$87.7 million has been reflected as Long-term contract
receivables, related to the gross amount due from the OPT on the
contract. The $40.5 million drawn on the facility
reflects the amount that has been funded by the Africa Merchant
Bank to cover subcontract costs. In October 2000, we
collected an $18 million progress payment from an African group
related to the construction financing of this project. As of
June 30, 2002, the outstanding receivable balance, net of the
non-recourse debt, due on this contract was approximately
$47.2 million. Management believes that the appropriate
insurance policies are in place to cover risk related to loss in
Benin and certain other foreign countries.
In
relation to our investment in Ivoire Telecom, we provided equipment
with an approximate aggregate value of $4.5 million and we
committed to provide up to a maximum of $35 million for capital
expenditures and other expenditures necessary to build out the
Ivoire Telecom network. At March 31, 2002, this maximum
commitment has been substantially funded, resulting in an
investment balance of approximately $50.0 million, which includes
our initial equity investment of approximately $10.5 million and
equipment we provided. Our investment is reflected in Other Assets
in the accompanying consolidated balance sheet. In addition, in
connection with our agreement to acquire an additional 30.0% equity
interest in Sakon, an additional $12.5 million of consideration was
due and payable upon certain revenue targets being attained. These
targets were met in January 2001, and a $5.0 million installment
was made in the second quarter of 2001, a $3.75 million installment
was made in the first quarter of 2002, and the remaining $3.75
million was paid in July 2002.
There are no Titan
guarantees of debt, either directly or indirectly, associated with
Ivoire Telecom or Sakon or any other unconsolidated subsidiaries
other than approximately $2.0 million of equipment
financing.
As
part of our strategy of seeking external financing to grow our
commercial businesses, our discontinued SureBeam subsidiary
completed its initial public offering of its common stock on
March 16, 2001 and raised gross proceeds of $67 million. We
extended a credit facility for up to a maximum of
$75.0 million under which SureBeam owed us approximately $73.0
million as of December 31, 2001. On December 31, 2001, $2.0
million of the note was exchanged for common stock of SureBeam, at
$10.505, the fifteen day trading average of SureBeam stock as of
December 30, 2001, which resulted in the exchange for 190,385 Class
B common shares of SureBeam. As of December 31, 2001,
SureBeam had approximately $73.0 million in principal outstanding
under the note. On February 13, 2002, the remaining
outstanding balance on the note of $73.0 million was exchanged for
equity of SureBeam, at $9.521 per share, the twenty day trading
average of SureBeam stock as of February 12, 2002, which resulted
in the exchange for 4,441,496 Class A and 3,225,765 Class B common
shares of SureBeam.
On
October 16, 2001, Titan adopted a definitive plan to spin off
SureBeam in the form of a tax-free dividend to Titan stockholders
within 12 months from that date. The plan involved filing a
letter ruling request with the Internal Revenue Service seeking
approval of the tax-free distribution. Titan filed the letter
ruling request, and received a favorable determination in May
2002. Titan announced a completed spin-off on August 5,
2002. Titan has purchased a world-wide perpetual and
exclusive, non-royalty bearing license to use SureBeam's
intellectual property for all applications and fields other than
the food, animal hide and flower markets for the following
consideration: 1) Titan provides to SureBeam a $50 million
senior secured line of credit, 2) the exchange of the $75 million
debt owed by SureBeam to Titan for additional shares of Class B and
Class A common stock of SureBeam, and 3) a cash payment of $8
million, with $4 million paid at September 30, 2001 and four
installments of $1.0 million payable on each of March 31, 2002,
June 30, 2002, September 30, 2002 and December 31,
2002.
On
August 5, 2002, as part of our commitment to extend a $50.0 million
line of credit to SureBeam, Titan extended a $50 million senior
secured revolving loan commitment to SureBeam that allows SureBeam
to borrow up to $12.5 million in the second quarter of 2002 (which
$10 million was borrowed in the second quarter), up to $17
million in the third quarter of 2002 and up to $12.5 million per
quarter beginning in the fourth quarter of 2002 through the fourth
quarter of 2003, subject to the $50 million limitation on
borrowing. The amount available for borrowing in the second,
third and fourth quarters of 2003 is based upon certain minimum
ratios of SureBeam’s earnings before interest, taxes,
depreciation and amortization (EBITDA) as a percentage compared to
target EBITDA amounts in SureBeam’s financial plan submitted
to Titan, but subject to a maximum of $12.5 million per quarter in
2003. As of August 11, 2002, SureBeam has borrowed $15
million under the credit facility.
In
addition, we have guaranteed certain lease obligations of SureBeam,
and SureBeam is obligated to reimburse us for any payments we make
under these guarantees. Any guarantee payments we make
reduces amounts available for future borrowing under the credit
agreement. SureBeam will pay us a monthly fee of 10% of the
guaranteed monthly payments. Some of the guaranteed leases
have longer terms than the credit facility. If Titan remains
a guarantor at the maturity date for the credit facility, then
SureBeam will enter into a reimbursement agreement with Titan
covering the outstanding guarantees.
SureBeam is obligated to
make quarterly principal payments on the credit facility as
follows: 13.75% of the outstanding principal balance as of
December 31, 2003 during each quarter in 2004; 25% of the
outstanding principal balance as of December 31, 2004 during each
quarter in 2005; and all remaining principal by December 31,
2005. In addition, with some exceptions, SureBeam is
obligated to use net proceeds from the sale of assets and its
securities to repay amounts advanced under this facility.
Interest is payable monthly beginning in January 2003. The
credit agreement contains affirmative and negative covenants,
including covenants limiting SureBeam’s incurrence of debt,
capital expenditures, operating expenses, investments, declaration
of dividends and other restricted payments, sale of stock of
subsidiaries and consolidations and mergers. The credit
agreement, however, does not contain any financial covenants
requiring SureBeam to maintain specific financial ratios. The
credit agreement is secured by a first priority lien on all of
SureBeam’s assets. We are required to collaterally
assign our rights under this credit agreement and our security as
well as the License Agreement to our senior lenders under our
senior credit facility.
Funding for the
advancement of our strategic goals, including acquisitions and
continued investment in targeted commercial businesses and start-up
ventures and capital expenditures, is expected to continue. We plan
to finance these requirements from a combination of sources, which
include cash generation from our core businesses, our credit
facility and other available cash sources. Management believes that
the combination of our existing cash, amounts available under our
credit facility and cash flow expected to be generated from our
operations will be sufficient to fund planned investments and
working capital requirements for at least the next twelve months.
However, we could elect, or we could be required, to raise
additional funds during that period and we may need to raise
additional capital in the future. Additional capital may not be
available at all, or may not be available on terms favorable to us.
Any additional issuance of equity or equity-linked securities may
result in substantial dilution to our stockholders. Management is
continually monitoring and reevaluating its level of investment in
all of its operations, specifically the investment required in
fiscal 2002 to further grow its commercial businesses, and the
financing sources available to achieve our goals in each business
area.
Forward Looking
Information: Certain Cautionary Statements: "Safe Harbor" Statement
under the Private Securities Litigation Reform Act of
1995:
Statements contained in
this Management's Discussion and Analysis of Financial Condition
and Results of Operations and otherwise which are not historical
facts are forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Examples of such
forward looking statements include our expectations regarding our
continuing funding for the advancement of our strategic goals,
including acquisitions, the Company’s expectation that it
will be able to determine what, if any, impairment charges are
required on AverCom in the third quarter, expectations regarding
the operations of Titan Wireless, that it believes that it will be
able to complete planned exit actions in Titan Wireless, that it
will eliminate future operating losses in Titan Wireless, that the
Company will be able to sell or dispose of any assets which are not
material to its core business, and management’s belief as to
the outcome of pending litigation or claims and any other
expressions of belief, expectation, anticipation, plan, strategies,
intention, possibilities or elections, including statements of
events or contingencies that may or could occur or similar
statements. Actual results may differ materially from those
stated or implied in the forward looking statements. Further,
certain forward looking statements are based upon assumptions of
future events which may not prove to be accurate and are subject to
risks and uncertainties that could cause actual results to differ
materially from those set forth or implied by forward looking
statements. These risks and uncertainties include but are not
limited to those referred to in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 2001, and in
the Company’s Registration Statement on Form S-4, as amended,
filed with the Securities and Exchange Commission on August 8,
2002, including its ability to access the capital markets,
dependence on continued funding of U.S. Department of Defense and
federal civilian agency programs, that the Government will fund,
continue to make awards or exercise options, and issue task orders
against the potential funding ceiling of contracts, contract
termination risks, risks associated with acquiring other companies,
including integration risks, the risks of doing business in
developing countries and international markets, including foreign
currency risks, and other risks described in the Company's
Securities and Exchange Commission filings.
PART II—OTHER INFORMATION
THE TITAN CORPORATION
Item 1. Legal Proceedings.
On
January 6, 2000, Ion Beam Applications s.a., a Belgian corporation,
and some of its U.S. subsidiaries ("IBA") filed an action for
declaratory judgment in a federal court in Virginia against Titan
and the SureBeam Corporation ("SureBeam") relating to SureBeam's
patents for SureBeam systems. The action attacked the
validity of SureBeam's core patent, sought a declaration that IBA
and its customers had not infringed any of the 62 claims in
SureBeam's patent, and alleged that Titan and SureBeam engaged in
unfair competition and that Titan and SureBeam's conduct
constituted patent misuse. The case was moved to the federal
court in San Diego. On November 22, 2000, IBA filed an
amended complaint alleging, in addition to the original claims,
that Titan and SureBeam engaged in false advertising,
monopolization, restraint on trade and unfair business
practices.
On
January 25, 2002, Titan and SureBeam announced that they settled
the litigation with IBA. Under the settlement, IBA dropped
all the claims it made against Titan and SureBeam in the
litigation, including IBA's challenge to the validity and
enforceability of SureBeam's core patent. Titan and SureBeam
agreed that IBA and its customers may continue to operate or use
IBA's electronic irradiation facility in Bridgeport, New
Jersey. The settlement terms include, among other things,
that IBA will purchase its requirements in the United States for
e-beam and x-ray systems for use for processing food and sanitizing
mail from Titan and SureBeam during the next four years, provided
Titan and SureBeam offer competitive terms. Titan and
SureBeam also agreed to purchase their requirements of accelerators
with above 150 kilowatts of power from IBA during the same
four-year period, provided IBA offers competitive terms.
Other terms of the settlement agreement are immaterial and were not
discloseable.
In
the ordinary course of business, defense contractors are subject to
many levels of audit and investigation by various government
agencies. Further, we are subject to claims and from time to
time are named as defendants in various types of legal
proceedings. We may also assert claims from time to
time. In the opinion of management, the amount of ultimate
liability or recovery with respect to these actions will not
materially affect our financial position or results of operations
taken as a whole. However, our evaluation of the likely
impact of these actions could change in the future and an
unfavorable outcome, depending upon the amount and timing, could
have a material adverse effect on our results of operations or our
cash flows in a future period.
Item 4. Submission of Matters to a Vote of
Security Holders.
At the Annual
Meeting of Stockholders held on May 16, 2002, the following matters
were submitted and approved by shareholders:
|
1.
|
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Election of Directors. The
holders of proxies solicited by the Board cast the following votes
(no other votes were cast):
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Affirmative
|
Negative/Abstaining
|
|
|
|
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Michael B. Alexander
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68,965,922
|
782,959
|
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Edward H. Bersoff,
Ph.D.
|
68,980,511
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768,370
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Joseph F.
Caliguiri
|
68,980,190
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768,691
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Peter A. Cohen
|
68,979,004
|
769,877
|
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Daniel J. Fink
|
68,985,366
|
763,515
|
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Susan Golding
|
68,982,486
|
766,395
|
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Robert M.
Hanisee
|
68,985,466
|
763,415
|
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Robert E. La
Blanc
|
68,985,366
|
763,515
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Gene W. Ray,
Ph.D.
|
68,982,744
|
766,137
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James Roth
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68,984,366
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764,515
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Joseph R. Wright.
Jr.
|
68,985,466
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763,415
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2.
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Ratification of Selection
of KPMG LLP as the Company's Auditors.
|
|
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Affirmative Votes
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68,759,027
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Negative Votes
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913,005
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|
|
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Abstaining and broker
non-votes
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76,848
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|
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3.
|
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Adoption of The Titan
Corporation 2002 Employee Stock Purchase Plan.
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|
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Affirmative Votes
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41,746,332
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Negative Votes
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2,369,485
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Abstaining and broker
non-votes
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202,582
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|
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4.
|
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Adoption of The Titan
Corporation 2002 Employee and Director Stock Option and Incentive
Plan.
|
|
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Affirmative Votes
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36,405,656
|
|
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Negative Votes
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7,586,623
|
|
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Abstaining and broker
non-votes
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326,122
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Item 6. Exhibits and Reports on Form
8-K.
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a.
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List of
exhibits:
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99.1
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Certification
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b.
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During the three months
ended June 30, 2002, and through the date of this filing, the
Company filed the following Forms 8-K and 8-K/A:
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(1)
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Current report on Form
8-K/A dated March 21, 2002, to provide the required pro forma
financial information giving effect to the GlobalNet and Jaycor
acquisitions, which were completed on March 21, 2002.
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|
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(2)
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Current report on Form 8-K
dated April 15, 2002, to report a change in Registrant’s
certifying accountant from Arthur Andersen LLP to KPMG LLP, to
serve as the Company’s principal public accountants for
fiscal year 2002.
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(3)
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Current report on Form 8-K
dated May 23, 2002 and filed June 4, 2002 and current report on
Form 8-K/A dated May 23, 2002 and filed June 21, 2002, to report
that the Company had entered into a Senior Secured Credit Agreement
for $485 million of financing from a syndicate of 68
institutions and commercial banks, with Wachovia Securities as sole
head Arranger, the Bank of Nova Scotia and Comerica Bank as
Co-Syndication Agents and Branch Banking Trust Company and Toronto
Dominion Bank as Co-Documentation Agents. The filings
included the Senior Secured Credit Agreement and attachments dated
as of May 23, 2002, and the Company’s Press Release dated
June 3, 2002.
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(4)
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Current report on Form
8-K/A dated May 23, 2002 and filed August 9, 2002, to provide as an
exhibit Annex I to Exhibit D to the Registrant’s Senior
Secured Credit Agreement previously filed.
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(5)
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Current report on Form 8-K
dated June 24, 2002, to report a change in Registrant’s
certifying accountant from Arthur Andersen LLP to KPMG LLP for
fiscal year 2002, and to report that the Administrative Committee
of the Titan Corporation Consolidated Retirement Plan has engaged
KPMG to provide audit services related to the plan.
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(6)
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Current report on Form 8-K
dated June 24, 2002, to report a change in Registrant’s
certifying accountant from Arthur Andersen LLP to KPMG LLP for
fiscal year 2002, and to report that the Administrative Committee
of the AverStar, Inc. Profit Sharing and Savings Plan has engaged
KPMG to provide audit services related to the plan.
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(7)
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Current Report on Form 8-K
dated July 30, 2002, to report that the Company announced the ratio
of SureBeam Corporation shares owned by the Company to the number
of Company common shares outstanding. The ratio will be used
to determine the SureBeam Corporation dividend to be received by
the holders of Titan common stock in connection with the tax-free
spin-off of SureBeam Corporation by the Company. The
distribution date will be August 5, 2002.
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THE TITAN CORPORATION
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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Dated: August
11, 2002
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THE TITAN
CORPORATION
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By:
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/s/ GENE W. RAY
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Gene W.
Ray
Chief Executive Officer,
Chairman of the Board
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By:
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/s/ MARK W. SOPP
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Mark W.
Sopp
Senior Vice President,
Chief Financial Officer
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By:
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/s/ DEANNA J. HOM
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Deanna J.
Hom
Vice President,
Corporate Controller
(Principal Accounting Officer)
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QuickLinks
Part I—FINANCIAL
INFORMATION
Item 1. Financial Statements
THE
TITAN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
THE TITAN CORPORATION CONSOLIDATED BALANCE
SHEETS
THE TITAN CORPORATION CONSOLIDATED STATEMENTS
OF CASH FLOWS
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THE TITAN
CORPORATION NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Part II—OTHER
INFORMATION THE TITAN CORPORATION
Item 1. Legal
Proceedings.
Item 4. Submission of Matters to a Vote of
Security Holders.
Item 6. Exhibits and Reports on Form
8-K.
THE
TITAN CORPORATION SIGNATURES
