THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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.
Recent
Developments
In
August 2002, Titan made the decision to sell or otherwise
divest its LinCom Wireless business and to sell a remaining
commercial information technology business, both of which were
previously reported in the Company’s Titan Technologies
segment. Accordingly, Titan has reflected both operations as
discontinued in accordance with SFAS No. 144 (see Note
6).
On
July 11, 2002, Titan announced that it would exit all of its
international telecommunications business through a combination of
selling and winding down its operations 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. The Company has reported this exit of the Titan
Wireless segment as a discontinued operation in accordance with
SFAS No. 144 (see Note 6).
During the
first quarter of 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 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 (see Note
6).
As a result
of Titan’s decision in the third quarter of 2002 to exit
substantially all of its remaining commercial businesses and
because most of Titan’s remaining operations are its
government businesses, Titan is no longer reporting the results of
operations by segments in accordance with SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related
Information.” Also, as a result of these decisions, the
Company merged its Titan Systems Corporation subsidiary, which
encompassed its primary government businesses, into The Titan
Corporation on September 25, 2002 (see Note 9).
Recent Accounting
Pronouncements
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 Accounting Principles Board
(“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. As a result of the timing of
the effective date of SFAS No. 144, the Company has reported
the discontinuance of its SureBeam segment under the provisions of
APB No. 30 and the discontinuance of certain components
discussed in Note 6 in accordance with SFAS No. 144 as of
January 1, 2002.
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 No. 145 rescinds
SFAS No. 4 and SFAS No. 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 of
changes in the criteria, gains and losses from debt extinguishment
are to be classified as extraordinary only if they meet the
criteria set forth in 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.” SFAS No. 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.
However, the loss from the current extinguishment of the
Company’s credit facility, which was appropriately recorded
as an extraordinary item in accordance with APB No. 30, will
be reclassified to income from continuing operations in 2003 when
the Company adopts SFAS No. 145.
In June 2002, the
FASB issued SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” SFAS
No. 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 No. 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. Under current rules, companies can record a
liability for restructuring costs when a commitment to a plan of
action is made. SFAS No. 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 No. 146 is effective
prospectively for exit or disposal activities initiated after
December 31, 2002, with earlier adoption encouraged. Under
SFAS No. 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. Titan does not
intend to adopt SFAS No. 146 until after December 31,
2002.
Note (2)
Acquisitions and Investment
On
September 12, 2002, the Company completed the acquisition of
100% of the outstanding shares of Wave Science, Inc., a privately
held designer of radio components and communication systems, for a
purchase price of approximately $8.5 million in cash, subject
to post-closing adjustments and indemnification obligations.
Also, additional consideration of up to $3.0 million
may be paid based on achieving certain revenue and profit
margin targets for the two-year period beginning January 1,
2002 through December 31, 2003, and additional consideration
of up to $1.0 million may be paid based on the receipt of
certain contract awards through December 31, 2004. The
acquisition was to further Titan’s goal of acquiring
government information technology companies which fit strategically
with its government business, particularly the addition of Wave
Science’s experienced engineering team. The transaction
was accounted for as a purchase. The excess of the purchase
price over the estimated fair market value of the net assets
acquired was approximately $7.4 million, and has been recorded
as goodwill. Operating results of Wave Science are reported
in operating results from September 13, 2002.
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 its government business. At the closing, 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 operating results from March 22, 2002. The excess
of the $99.6 million purchase price over the estimated fair
market value of the net assets acquired ($57.6 million) was
approximately $42.0 million. The transaction was
accounted for as a purchase. In April 2002, the Company
had an independent valuation completed by Bearing Point (formerly
KPMG Consulting, Inc.), to assist management in its purchase price
allocation for the Jaycor acquisition. The independent
valuation was the basis for the Company’s allocation of
$38.1 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
$42.0 million.
Following is
unaudited condensed balance sheet information for Jaycor at the
date of acquisition (amounts in millions):
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Jaycor
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Cash
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$
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36.0
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Accounts
receivable
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|
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28.4
|
|
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Other current
assets
|
|
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2.2
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Property, plant and
equipment
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4.0
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Non-current
assets
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1.1
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Total assets
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71.7
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Accounts payable
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3.2
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Other current
liabilities
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10.6
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Non-current
liabilities
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0.3
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|
|
|
|
|
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Total
liabilities
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14.1
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|
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Net assets
(liabilities)
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$
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57.6
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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. 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 near future, 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 its
government business. 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
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 of Titan stock
valued at $1.2 million were issued based on the receipt of
certain of these contract awards. The value of the shares was
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. In October 2002, under the provisions
of the original purchase agreement, Titan advanced
$0.8 million to a former principal shareholder of
International Systems. Such advance is evidenced by a
promissory note which is secured by the shareholder’s
purchase consideration of Titan shares and shares issuable upon
achievement of certain milestones as provided under the original
purchase agreement. The note bears interest at 6 percent per
annum, commencing in October 2003. The operations of
International Systems are reported in our operating results from
February 23, 2002. The transaction was accounted for as
a purchase, and goodwill of $4.3 million has been
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. In connection with the determination of the fair
value of assets acquired and pursuant to the provisions of SFAS
No. 141, “Business Combinations,” 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
$5.5 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
$0.5 million and $1.1 million of this allowance in the
three and nine months ended September 30, 2002, respectively,
as a reduction of costs, with the remaining $3.8 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 2005.
On
September 28, 2001, Titan completed the acquisition of Datron
Systems Incorporated ("Datron"), a provider of radio and
satellite-based communication systems and broadband communication
products for government and commercial markets. 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 $0.5 million of this allowance in the
three and nine months ended September 30, 2002, respectively,
as a reduction of costs, with the remaining $0.1 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 2002.
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 September 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 an interim period,
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 September 30, 2002, the Company’s voting interest of
e-tenna is 12% and the Company’s total equity interest in
e-tenna is 58.7%.
During the
nine months ended September 30, 2002, approximately
$2.0 million was paid in satisfaction of purchase price
holdbacks for the SenCom Corporation acquisition made in 2000 and
approximately $2.7 million was paid in satisfaction of
purchase price holdbacks for the System Resources Corporation
acquisition made in 1999. Each of these amounts had been
recorded as liabilities in periods prior to January 1,
2002.
Note (3) Exit and
Restructuring Charges and Other
Included in
the quarter and nine months ended September 30, 2002 are
$46.7 million and $50.1 million, respectively, of
restructuring costs related to the merger of Titan Systems into
Titan on September 25, 2002 and exit charges related to the
shutdown of Cayenta’s headquarters office.
Approximately $8.0 million and $11.4 million, for the
quarter and nine months ended September 30, 2002,
respectively, of these exit charges are related to the shutdown of
the Cayenta headquarters office and network operations center,
which includes employee termination costs and other liabilities of
approximately $0.8 million, lease commitment costs of
approximately $4.8 million, and asset impairment charges of
approximately $2.4 million relating primarily to the
unamortized leasehold improvements and other fixed assets at the
Cayenta headquarters. The remaining lease commitment costs
are expected to be paid through future periods ending in
January 2007. The amounts recorded in the first and
second quarter of 2002 of $3.4 million primarily relate to
employee termination costs and lease costs.
Approximately
$38.7 million of restructuring charges for the quarter and
nine months ended September 30, 2002 were related to the
merger of Titan Systems into Titan and other associated
reorganization and consolidation costs. The costs included
approximately $32.2 million for the consolidation of various
Titan Systems facilities into centralized locations in Virginia and
California. This charge reflects the estimated losses, net of
estimated sublease income, on future lease commitments of
facilities with terms extending through year 2009. The
Company intends to actively market the facilities for sublease
opportunities.
Approximately
$6.5 million of the Titan Systems restructuring costs are
primarily related to employee termination costs, employee retention
costs, duplicate transition costs related to certain reorganization
and consolidation activities within Titan Systems, and professional
fees.
A summary of
exit and restructuring charges is as follows
(in millions):
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Three
months
ended
September 30, 2002
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Nine
months
ended
September 30, 2002
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Titan Systems
restructuring:
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Estimated
facilities consolidation costs
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$
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32.2
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$
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32.2
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Employee
termination/retention costs and other
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6.5
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6.5
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38.7
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38.7
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Cayenta headquarters exit
costs:
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Lease
commitment costs
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4.8
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4.8
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Asset
impairment costs
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2.4
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2.4
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Employee
termination costs and other
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0.8
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4.2
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8.0
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11.4
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$
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46.7
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$
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50.1
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Note (4)
Acquisition and Integration Related Charges and
Other
There have
been no acquisition and integration related charges and other in
2002.
The
$27.8 million acquisition and integration related charges in
the first nine 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 the Company’s government business. 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 Company’s government
business. 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 nine
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 approximately $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. 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.
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
APB 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.
Initial
Adoption
In connection
with adopting this standard as of January 1, 2002, during the first quarter the Company’s
independent valuation consultant, Bearing Point (formerly KPMG
Consulting, Inc.), 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, Bearing Point 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, 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 previously 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. The entire
$50.1 million charge was related to discontinued businesses;
approximately $42.4 million of this charge pertained to
businesses that were discontinued by the Company on March 1,
2002 with the remaining charge of $7.7 million related to the
Company’s long distance telecommunications business that was
discontinued in the third quarter of 2002.
Impairment in the
Quarter Ended September 30, 2002
As a result
of Titan’s decision in July 2002 to exit its long
distance telecommunications business, and the deterioration in
pricing and valuations in the telecommunications industry, Titan
recorded an additional impairment charge of $59.5 million of
goodwill in its international telecommunications business, Titan
Wireless, based upon recent indications of fair value as determined
by recent sales offers from potential buyers.
In connection
with the Company’s decision in the third quarter of 2002 to
divest its LinCom Wireless business, Titan recorded a
$2.7 million impairment of goodwill based upon recent
indications of fair value as determined by offers from potential
buyers. In October 2002, Titan shut down the operations
of LinCom Wireless.
In addition,
approximately $8.7 million of additional goodwill was
determined to be impaired related to previously discontinued
components of Cayenta and the AverCom business. This
impairment was identified in the third quarter of 2002 in
connection with the sale of these entities.
All
impairment charges recognized during the quarter ended
September 30, 2002 have been reported in the loss from
discontinued operations, as all impairments were incurred in
businesses held for sale or disposed of during the third quarter of
2002. Refer to Note 6.
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 nine months ended September 30, 2002 and
2001 is set forth below:
Reconciliation of Net
Income (Loss) and Earnings (Loss) Per Share:
Note (6)
Discontinued Operations
In
August 2002, Titan made the decision to sell or otherwise
divest its LinCom Wireless business and to sell a remaining
commercial information technology business, both of which were
previously reported in the Company’s Titan Technologies
segment. Accordingly, Titan has reflected both operations as
discontinued in accordance with SFAS No. 144.
On
July 11, 2002, Titan announced that it would exit its
international telecommunications business through a combination of
selling and winding down its operations 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. The Company has reported this exit of the Titan
Wireless segment as a discontinued operation in accordance with
SFAS No. 144.
During the
first quarter of 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 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.
Revenues and
net loss generated by the operations discontinued in 2002 and 2001
were as follows:
|
|
|
Three
months ended
September 30,
|
|
Nine
months ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2001
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
$
|
28,797
|
|
$
|
21,534
|
|
$
|
98,348
|
|
$
|
65,550
|
|
|
Cayenta
|
|
|
446
|
|
|
4,651
|
|
|
6,428
|
|
|
17,372
|
|
|
SureBeam
|
|
|
225
|
|
|
11,662
|
|
|
4,946
|
|
|
25,754
|
|
|
Titan Technologies
|
|
|
8,449
|
|
|
10,815
|
|
|
26,703
|
|
|
35,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,917
|
|
$
|
48,662
|
|
$
|
136,425
|
|
$
|
144,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) –
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
$
|
(161,904
|
)
|
$
|
776
|
|
$
|
(165,355
|
)
|
$
|
1,477
|
|
|
Cayenta
|
|
|
(3,309
|
)
|
|
(31
|
)
|
|
(4,153
|
)
|
|
(13,690
|
)
|
|
SureBeam
|
|
|
—
|
|
|
(42,279
|
)
|
|
(9,913
|
)
|
|
(84,416
|
)
|
|
Titan Technologies
|
|
|
(26,569
|
)
|
|
(194
|
)
|
|
(30,308
|
)
|
|
(488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(191,782
|
)
|
$
|
(41,728
|
)
|
$
|
(209,729
|
)
|
$
|
(97,117
|
)
|
|
|
|
|
|
|
|
|
|
|
All
intercompany revenues and profits have been appropriately
eliminated in the tables above.
2002 Discontinued
Operations
Fiscal
2002
Titan
Wireless
Overview
On
July 11, 2002, Titan announced it would exit all of its
international telecommunications business, directly as a result of
an increasingly deteriorating market, particularly in the wholesale
long distance business. Notably, the bankruptcies of Global
Crossing, WorldCom and Globaltron, and the dire financial condition
of other providers, such as Ibasis, have imposed a rapid and sudden
deterioration in wholesale prices. As a direct result of
decreasing wholesale margins, and the difficulty of providers to
obtain financing to invest in new projects globally, Titan’s
telecommunications business operating results declined
substantially beginning in the second quarter of 2002. The
losses in the second quarter of 2002 and the bleak outlook of the
telecommunications market globally led to the July 2002 Titan
Board of Directors decision to exit these markets.
Acquisitions and
Investments
On
March 21, 2002, Titan completed the acquisition of GlobalNet,
Inc. ("GlobalNet"), a provider of international voice, data, and
Internet services. 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 from March 22, 2002 are
reported in our Titan Wireless business, which was discontinued in
the third quarter of 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 Bearing Point (formerly KPMG Consulting,
Inc.) to assist management in its purchase price allocation of the
GlobalNet acquisition. The independent valuation was the
basis for the Company’s allocation of $50.8 million to
goodwill and $0 to intangible assets as of March 31,
2002.
As a result
of Titan’s decision on July 11, 2002, to exit its
telecommunications business, and to sell certain of these
businesses, Titan determined that there was an impairment of the
carrying value of GlobalNet’s goodwill of approximately
$40.5 million in accordance with SFAS No. 142. The
measurement of this impairment was evident based upon recent
indications of fair value, as determined by recent offers from
potential buyers, compared to the carrying value of the
asset.
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% equity 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. Titan has also 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 Non-current Assets of Discontinued
Operationsin the Company's consolidated balance sheet
at December 31, 2001 and, as previously reported, is reported
on the cost method. Titan has not consolidated the operations
of Ivoire Telecom because of 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 did not complete
its audit procedures due to difficulties encountered in resolving
open audit issues. Specifically, the independent public
accounting firm has reported that there are weaknesses in internal
controls, inconsistent accounting policies and procedures, and
limited use of management information systems, all resulting in the
inability of Ivoire Telecom to prepare and report accurate
financial statements. Titan has made direct efforts and made
repeated requests of Ivoire Telecom management to establish
controls, implement record keeping, and establish financial
reporting controls to conform to U.S. reporting standards.
Titan sent financial managers to Ivoire Telecom headquarters in
attempts to help establish controls and implement financial
reporting. All of Titan’s requests and other direct
actions have resulted in no success in obtaining timely and
reliable financial statements.
However,
consistent with Titan’s original expectations, management of
Ivoire Telecom appears to have executed the plan of using
Titan’s investment to build out the network and begin
offering services to subscribers. Management of Titan has had
frequent interaction with the management of Ivoire Telecom and has
received operational status reports. Although Titan has been
provided with operational status reports, Titan has been treated as
a passive investor and its attempts to exercise control or exert
influence have been blocked. 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 telecommunications service provider. 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.
Subsequent to
Titan’s decision to exit and sell this business, Titan
received indications of interest that are substantially below the
carrying value of its investment. Titan believes the value of
Ivoire Telecom has been impaired not only by the recent
deterioration and poor outlook of the global telecommunications
market, but also as a result of the recent civil unrest in the
Ivory Coast, which is where the earth station hub is located for
all of Ivoire Telecom’s West African network.
Specifically, a rebel uprising in the Ivory Coast commenced on
September 21, 2002 and has continued to spread to other parts
of the West African country, whereby fighting has occurred in
Abidjan between rogue soldiers and troops loyal to the government
Gbagbo. In addition, the Central African Republic has been
wracked by civil unrest, which commenced on October 30, 2002,
at which time shortly thereafter a specialized U.S. military
assessment team was sent to the Central African Republic to assess
security for Americans in the country.
Titan has
recently been informed by investment banking firms representing two
potential buyers that their clients are hesitant to acquire equity
interest in Ivoire Telecom due to the recent political turmoil and
civil unrest in both the Ivory Coast and the Central African
Republic. Titan also believes that the value of the Ivoire Telecom
investment has been impacted by its investment intent to no longer
hold and retain but rather to exit and divest as soon as
practical. Accordingly, Titan has
concluded that there has been a non-temporary impairment of the
entire carrying value of its investment in Ivoire Telecom as of
September 30, 2002. Titan has taken a charge for this impairment
based upon recent indications of fair value as determined by recent
offers from potential buyers. This impairment charge has been included in
Titan’s consolidated income statement for the period ending
September 30, 2002.
Operating
Results
Included in
Titan Wireless’ net loss for the quarter and nine months
ended September 30, 2002 are impairment charges of
$190.7 million, or $143.0 million, net of tax, that were
recorded as a result of Titan’s decision to exit its
international telecommunications business. The charges were
comprised of the following: (1) impairment of goodwill
in accordance with SFAS No. 142 of approximately
$59.5 million, primarily comprised of Titan’s
acquisition of GlobalNet discussed above and Sakon, recorded in
accordance with SFAS No. 142; (2) impairment of investments of
approximately $62.6 million, primarily comprised of
Titan’s investment in Ivoire Telecom discussed above; (3) and
impairment of fixed and other assets of approximately
$68.6 million.
In addition,
exit charges of approximately $22.5 million were recorded in
the third quarter of 2002, primarily related to outstanding
commitments of warranty obligations of $3.9 million,
commitments for space satellite segments of $3.9 million, and
outstanding lease obligations of $1.6 million. The
remaining $13.1 million of the charge is primarily related to
employee termination costs of $2.6 million, other estimated
direct costs to exit these businesses of $5.5 million and the
estimated settlements of other obligations of approximately
$5.0 million. Such commitments are expected to be paid
through the first half of 2004.
In summary,
included in Titan Wireless’ net loss for the quarter and nine
months ended September 30, 2002 is an impairment charge of
$190.7 million, exit charges of $22.5 million and pre-tax
losses excluding impairment and exit charges of $2.8 million
and $8.3 million for the three and nine months ended
September 30, 2002. Included in the operating losses of
Titan Wireless for the three and nine months ended
September 30, 2002 is interest expense allocated to
discontinued operations of $0.6 million. All amounts
presented are net of tax benefits. Following is a summary in
tabular format of Titan Wireless’ net loss for the quarter
and nine months ended September 30, 2002 (amounts
in millions):
|
|
|
Three
months
ended
September 30, 2002
|
|
Nine
months
ended
September 30, 2002
|
|
|
|
|
|
|
|
|
Impairment of
goodwill
|
|
$
|
(59.5
|
)
|
$
|
(59.5
|
)
|
|
Impairment of
investments
|
|
|
(62.6
|
)
|
|
(62.6
|
)
|
|
Impairment of fixed and
other assets
|
|
|
(68.6
|
)
|
|
(68.6
|
)
|
|
Exit charges
|
|
|
(22.5
|
)
|
|
(22.5
|
)
|
|
|
|
|
|
|
|
|
|
(213.2
|
)
|
|
(213.2
|
)
|
|
Pre-tax losses excluding
impairment and exit charges
|
|
|
(2.8
|
)
|
|
(8.3
|
)
|
|
|
|
|
|
|
|
|
|
(216.0
|
)
|
|
(221.5
|
)
|
|
Tax benefit
|
|
|
(54.1
|
)
|
|
(56.1
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(161.9
|
)
|
$
|
(165.4
|
)
|
|
|
|
|
|
|
Titan
Technologies
Included in
Titan Technologies’ net loss for the quarter and nine months
ended September 30, 2002 is an impairment charge of
$12.0 million, net of tax, related to LinCom Wireless.
The measurement of this impairment is based upon recent indications
of fair value, resulting in a write-off of the carrying value of
its assets which included an impairment of goodwill of
$2.7 million, in accordance with SFAS No. 142. In
October 2002, Titan shut down the operations of LinCom
Wireless. Accordingly, a charge will be recorded in the
fourth quarter of 2002 for all employee termination costs, lease
termination costs and other outstanding commitments.
In
September 2002, certain assets of the AverCom business were
sold for $0.5 million cash and an earn-out of
$0.6 million of additional consideration based on certain
gross margin targets. In addition, the Company retained
approximately $3.0 million of net accounts receivable
balances, which are expected to be collected by December 31,
2002. A charge of approximately $10.7 million, or
$6.7 million net of tax, was recorded in the third quarter of
2002 to reflect the excess of the carrying value over the sale
proceeds, which included an additional impairment of goodwill of
approximately $3.5 million in accordance with SFAS
No. 142. Included in the $10.7 million charge is
the remaining facility lease commitment of $1.6 million, which
was recorded to reflect the remaining lease obligations related to
the AverCom business. For the nine months ended
September 30, 2002, the charge for goodwill impairment in
accordance with SFAS No. 142 of AverCom was approximately
$18.4 million. However, $14.9 million of the SFAS
No. 142 impairment was reported as a cumulative effect of a
change in accounting principle in the first quarter of 2002 (see
Note 5).
In addition
to the impairment charges discussed above, pre-tax losses excluding
impairment and exit charges for the Titan Technologies businesses
for the three and nine months ended September 30, 2002 were
$7.0 million and $13.5 million, respectively.
Included in the operating losses for the three and nine months
ended September 30, 2002 is interest expense allocated to
discontinued operations of $0.2 million. Following is a
summary in tabular format of the net loss of Titan Technologies for
the quarter and nine months ended September 30, 2002 (amounts
in millions):
|
|
|
Three
months
ended
September 30, 2002
|
|
Nine
months
ended
September 30, 2002
|
|
|
|
|
|
|
|
|
Impairment of
goodwill
|
|
$
|
(10.2
|
)
|
$
|
(10.2
|
)
|
|
Impairment of fixed assets
and other
|
|
|
(22.9
|
)
|
|
(22.9
|
)
|
|
Exit charges
|
|
|
(1.6
|
)
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
(34.7
|
)
|
|
(34.7
|
)
|
|
Pre-tax losses excluding
impairment and exit charges
|
|
|
(7.0
|
)
|
|
(13.5
|
)
|
|
|
|
|
|
|
|
|
|
(41.7
|
)
|
|
(48.2
|
)
|
|
Tax benefit
|
|
|
(15.1
|
)
|
|
(17.9
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(26.6
|
)
|
$
|
(30.3
|
)
|
|
|
|
|
|
|
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. In
addition, a maximum potential earn-out is available for
approximately $7.5 million based on certain future EBITDA
(earnings before interest, taxes, depreciation and amortization)
targets. A charge of $4.3 million or $2.6 million
net of tax, was recorded in the third quarter of 2002 to reflect
the excess of the carrying value over the collected sale
proceeds. Approximately $1.1 million of this charge was
related to additional impairment of goodwill in accordance with
SFAS No. 142. For the nine months ended
September 30, 2002, the charge for goodwill impairment in
accordance with SFAS No. 142 associated with these two
businesses was approximately $28.6 million. However,
$27.5 million of the SFAS No. 142 impairment was reported
as a cumulative effect of a change in accounting principle in the
first quarter of 2002. In addition to the impairment charges
noted above, operating losses, net of tax, for the three and nine
months ended September 30, 2002 were $0.7 million and
$1.6 million, respectively.
The
consolidated financial statements of Titan for all periods
presented have been restated to reflect all businesses discussed
above as discontinued in accordance with SFAS
No. 144.
Fiscal
2001
Titan
Wireless
Included in
Titan Wireless’ net income for the nine months ended
September 30, 2001 is a charge of $0.5 million for
employee termination costs related to certain organizational
changes within that business unit. Also included in the nine
months ended September 30, 2001, is a $2.0 million charge
taken in the third quarter of 2001 representing employee
termination costs related to a reduction in employee workforce of
approximately 35 employees resulting from the elimination of
Wireless' internal product development group as the unit’s
long-term strategy was shifted to the service and systems
integration business, not the development and sale of
equipment.
Cayenta
Included in
Cayenta’s net loss for the nine months ended
September 30, 2001 are charges of $5.0 million related to
the restructuring of Cayenta, 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.
Titan
Technologies
Employee
termination costs of $0.8 million were recorded in the nine
months ended September 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.
2001 Discontinued
Operations
SureBeam
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 involved
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 stockholders of record on July 26, 2002, received .6986
SureBeam shares for each share of Titan stock held. Titan had
historically reported the SureBeam business as a separate
segment. In accordance with 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," the consolidated
financial statements of Titan for all periods presented have been
restated to reflect SureBeam as a discontinued business. The
net assets of SureBeam as of August 5, 2002 and tax
liabilities and other costs resulting from the spin-off resulted in
a net dividend of approximately $105.4 million which was
recorded as a decrease to paid-in-capital, partially offset by the
reduction in deferred compensation related to deferred compensation
charges in 2000 and 2001, reflecting the net value distributed to
Titan’s stockholders. The net assets excluded
SureBeam’s liability to Titan of $15 million at
August 5, 2002 under SureBeam’s line of credit with
Titan (see Note 12). The line of credit balance at
September 30, 2002, was $20 million and is reflected as a
non-current asset on the accompanying consolidated balance
sheet.
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,
and is included in the results for the three and nine months of
2001 above. All losses incurred by SureBeam since that time
have been charged against this accrual. Losses charged
against the accrual in 2001 were $14.9 million and in 2002
were $20.5 million in the six months ended June 30,
2002. 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 is no
longer included in Titan’s results of operations.
Losses through August 5, 2002 charged against the accrual in
the three months ended September 30, 2002 were
$1.8 million. Approximately $3.0 million of costs
related to the spin-off have been charged against the loss
accruals. As of September 30, 2002, $0.5 million
remains accrued for trailing spin-off costs.
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. In addition, the accompanying
consolidated financial statements reflect operations discontinued
by Titan in 2000. Accordingly, 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.
Balance Sheet
Summary
Following is
a table of all related balance sheet categories for each
discontinued operation:
|
|
|
As
of
September 30,
2002
|
|
As
of
December 31,
2001
|
|
|
|
|
|
|
|
|
Current assets of
discontinued operations:
|
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
$
|
28,448
|
|
$
|
27,621
|
|
|
Cayenta
|
|
|
7,067
|
|
|
14,190
|
|
|
SureBeam
|
|
|
—
|
|
|
44,940
|
|
|
Titan
Technologies
|
|
|
16,112
|
|
|
17,632
|
|
|
Other
|
|
|
—
|
|
|
1,692
|
|
|
|
|
|
|
|
|
|
$
|
51,627
|
|
$
|
106,075
|
|
|
|
|
|
|
|
|
Non-current assets of
discontinued operations:
|
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
$
|
90,476
|
|
$
|
205,396
|
|
|
Cayenta
|
|
|
—
|
|
|
29,875
|
|
|
SureBeam
|
|
|
—
|
|
|
65,704
|
|
|
Titan
Technologies
|
|
|
13,417
|
|
|
45,163
|
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
103,893
|
|
$
|
346,138
|
|
|
|
|
|
|
|
|
Current liabilities of
discontinued operations:
|
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
$
|
46,314
|
|
$
|
21,174
|
|
|
Cayenta
|
|
|
2,364
|
|
|
6,303
|
|
|
SureBeam
|
|
|
500
|
|
|
30,977
|
|
|
Titan
Technologies
|
|
|
11,305
|
|
|
8,013
|
|
|
Other
|
|
|
382
|
|
|
2,493
|
|
|
|
|
|
|
|
|
|
$
|
60,865
|
|
$
|
68,960
|
|
|
|
|
|
|
|
|
Non-current liabilities of
discontinued operations:
|
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
$
|
44,043
|
|
$
|
42,456
|
|
|
Cayenta
|
|
|
1,992
|
|
|
451
|
|
|
SureBeam
|
|
|
—
|
|
|
7,608
|
|
|
Titan
Technologies
|
|
|
77
|
|
|
510
|
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
46,112
|
|
$
|
51,025
|
|
|
|
|
|
|
|
The reduction
of current and non-current assets from December 31, 2001 to
September 30, 2002 were primarily a result of the asset
impairments discussed above in the operating results as well as due
to the spin-off of SureBeam on August 5, 2002. The net
assets of Titan Wireless of $28.6 million as of
September 30, 2002 are comprised primarily of net receivable
amounts due from customers primarily the Office of Post and
Telegraph (OPT) of Benin and other African customers, as well as
the remaining net goodwill of GlobalNet. The net asset
balance also reflects remaining obligations to be paid including
estimated exit costs. The realizability of these net assets
is dependent upon collections to be received from these African
customers as well as the sale of GlobalNet for the estimated fair
value.
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
(collectively referred to hereafter as the “senior
lenders”). 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 September 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 $264 million. At
September 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 excluded Titan’s ownership of
SureBeam stock as collateral, which enabled Titan to spin-off
SureBeam in accordance with Titan’s plans to do so.
However, the credit agreement of $50 million that Titan has
executed with SureBeam is secured by a first priority lien on all
of SureBeam’s assets. Titan is required to collaterally
assign its rights under this credit agreement and its security as
well as the license agreement it has with SureBeam to its senior
lenders under its senior secured credit facility (see Note
13).
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 nine months ended September 30, 2002, resulting in an
extraordinary loss in the amount of $5.4 million which is net
of a tax benefit of $3.9 million, which has been reflected as
an extraordinary item in the accompanying consolidated statements
of operations.
At
September 30, 2002, total borrowings outstanding under the
Company's senior credit facility were $350 million at a
weighted average interest rate of 4.79%. Commitments under
letters of credit were $11.8 million at September 30,
2002, $10.9 million of which reduces availability of the
working capital line. Of the total borrowings,
$3.5 million was short-term. At September 30, 2002,
the Company was in compliance with all financial covenants under
its various debt agreements.
As a result
of the spin-off of SureBeam by Titan, each HIGH TIDES
(Titan’s remarketable term income deferrable equity
securities), formerly convertible into 1.0076 shares of Titan
common stock, is now convertible into 1.3553 shares of Titan common
stock.
Note (8) Other
Financial Information
As a result
of the Company’s discontinuance of substantially all the
operations in the Company’s Titan Wireless and Titan
Technologies segments and the commercial businesses within Cayenta
(See Note 6), and because most of Titan’s remaining
operations are its government businesses, Titan is no longer
reporting the results of operations by operating segments in
accordance with SFAS No. 131, “Disclosures about
Segments of an Enterprise and Related
Information.”
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.
Earnings Per
Share:
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 2002 and Cayenta in 2001.
In the three
months ended September 30, 2002, options and warrants to
purchase approximately 2,870,000 shares of common stock at
prices ranging from $1.04 to $10.37 per share were not included in
the computation of diluted EPS, due to the loss from continuing
operations, and approximately 4,353,900 shares at prices ranging
from $10.54 to $29.74 were not included in the computation, as the
effect would have been anti-dilutive due to the exercise
price. Options to purchase approximately
1,365,000 shares of common stock at prices ranging from
$19.20 to $47.50 per share were not included in the
computation of diluted EPS for the three month period ended
September 30, 2001, as the effect would have been
anti-dilutive due to the exercise price.
In the nine
months ended September 30, 2002, options and warrants to
purchase approximately 3,648,300 shares of common stock at
prices ranging from $1.04 to $13.72 per share were not
included in the computation of diluted EPS, due to the loss from
continuing operations, and approximately 2,060,400 shares at prices
ranging from $13.85 to $29.74 were not included in the computation,
as the effect would have been anti-dilutive due to the exercise
price. Options to purchase approximately
3,471,000 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 nine month period ended
September 30, 2001, due to the loss from continuing operations
and/or the exercise price.
Approximately
6,776,500 and 5,038,000 shares in 2002 and 2001, respectively, from
the potential conversion of remarketable term income deferrable
equity securities (HIGH TIDES) were not included in the
computations as their effect was anti-dilutive. Approximately
538,500 and 538,600 shares of common stock in the three months and
nine months in 2002, respectively, 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. Similarly, approximately 460,000
shares of common stock in 2001 that could result from the
conversion of cumulative convertible preferred stock were not
included in the computations of diluted EPS. The primary
change in potential dilution from 2001 to 2002 for the HIGH TIDES
and preferred stock is the change in conversion ratios due to the
SureBeam spin-off (see Note 7 and Note 10).
Select Balance Sheet
Data
Following are
details concerning certain balance sheet data:
|
|
|
September 30,
2002
|
|
December 31,
2001
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
Materials
|
|
$
|
11,874
|
|
$
|
11,143
|
|
Work-in-process
|
|
|
12,185
|
|
|
8,853
|
|
Finished
goods
|
|
|
6,527
|
|
|
3,926
|
|
|
|
|
|
|
|
|
$
|
30,586
|
|
$
|
23,922
|
|
|
|
|
|
The change in the current portion
of deferred income tax asset from $53.9 million at
December 31, 2001 to $27.8 million at September 30,
2002 primarily reflects the impact of the Company’s most
recent estimate of net operating losses that will be utilized in
the next twelve months. Accordingly, the current and
non-current portion of deferred income tax assets have been
adjusted to reflect these recent estimates. In addition, the
increase in the non-current deferred income tax asset from $0 at
December 31, 2001 to $110.5 million at September 30,
2002 is a result of the tax benefit of the current period operating
losses.
Supplemental Cash Flow
Information:
Supplemental
disclosure of cash flow information:
|
|
|
Nine
months ended
September 30,
|
|
|
|
|
|
|
2002
|
|
2001
|
|
|
|
|
|
|
Noncash investing and
financing activities:
|
|
|
|
|
|
|
|
Issuance of
stock for acquisitions
|
|
$
|
139,657
|
|
$
|
44,932
|
|
Extraordinary
loss on early extinguishment of debt
|
|
|
5,408
|
|
|
—
|
|
Gain related
to issuance of stock in subsidiary
|
|
|
—
|
|
|
52,025
|
|
Shares
contributed to employee benefit plans
|
|
|
7,529
|
|
|
1,435
|
|
Write-off of
deferred compensation related to discontinued
operations
|
|
|
629
|
|
|
—
|
|
Deferred
compensation related to the issuance of stock
options
|
|
|
29,690
|
|
|
78,604
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
25,575
|
|
$
|
28,974
|
|
Cash paid for (provided
by) income tax
|
|
|
(8,591
|
)
|
|
2,711
|
In addition,
net cash proceeds of $27.9 million resulting from the
acquisition of businesses, net of cash acquired was reported for
the nine months ended September 30, 2002. This was
primarily the result of cash acquired from Jaycor, which was a
stock transaction completed in March 2002.
Note (9) Merger of
Titan Systems
On
September 25, 2002, Titan Systems, Titan’s national
security subsidiary, was merged into The Titan Corporation.
As a result of this merger, outstanding stock options held by
employees of Titan Systems Corporation were exchanged using an
exchange ratio of .8371, for approximately 5.4 million stock
options in The Titan Corporation. The exchange ratio was
determined by Titan using a valuation of Titan Systems Corporation,
as determined by a globally recognized valuation firm, and the
average Titan Corporation closing stock price for the
20 trading days ending on the day before the
merger.
The exchange
of Titan options resulted in a non-cash deferred compensation
charge of approximately $21.3 million in the third quarter of
2002, which is reflected in selling, general and administrative
expense in the accompanying consolidated statements of
operations. Additional non-cash deferred compensation of
approximately $8.2 million will be amortized over the next
three years as the options vest over time.
Note (10) Capital
Stock
As a result
of the spin-off of SureBeam by Titan, each outstanding share of
cumulative convertible preferred stock, formerly convertible into
Titan common stock, at the option of the holder, at a rate of
two-thirds share of common stock for each share of cumulative
convertible preferred stock, is now convertible at a rate of .781
share of common stock for each share of cumulative convertible
preferred stock.
Note (11)
Stock-Based Compensation Plans
As a result
of the SureBeam spin-off, all Titan outstanding stock options under
each of the Company’s stock option plans were adjusted such
that the number of options was increased by a factor of 1.345 and
the exercise price was decreased by dividing by 1.345. This
adjustment maintained the same aggregate intrinsic value of the
stock options that existed prior to the spin-off compared to the
aggregate intrinsic value of the stock options immediately after
the transaction and ensured that the ratio of the exercise price
per share to the market value per share was not reduced. The
adjustment was determined in accordance with the FASB’s
Financial Interpretation No. 44 (FIN 44), “Accounting
for Certain Transactions Involving Stock Compensation,” and
resulted in no compensation charge.
Note (12)
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.
On
August 16, 2002, Perimex International Corporation filed a
complaint against Titan, Titan Wireless and a former Titan Wireless
employee in San Diego Superior Court in San Diego,
California. The complaint alleges breach of contract, breach
of the covenant of good faith and fair dealing, intentional
interference with existing contractual relationships and
prospective business advantage and violation of the California
unfair competition law arising from an alleged failure of Titan
Wireless to enter a joint venture with Perimex to provide wireless
telecommunication services in Argentina and other related alleged
misconduct. The complaint seeks damages of
$53.65 million and seeks injunctive relief prohibiting Titan
and Titan Wireless from transferring any of Titan Wireless’
assets. The court recently denied Perimex’s request for
a preliminary injunction, sustained Titan and Titan Wireless’
demurrer as to all causes of action in the complaint and granted
Perimex leave to amend the complaint. The court also ordered
Perimex to post a bond for $0.09 million to secure payment of Titan and
Titan Wireless’ costs if they prevail. The Company
believes that Perimex’s claims are without merit and the
Company intends to defend its position vigorously.
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. The Company has received a grand jury
subpoena from the Antitrust Division of the Department of Justice
requesting the production of documents relating to information
technology services performed for the Air Force at Hanscom Air
Force Base in Massachusetts. The Company has been informed
that other companies who have performed such services have received
subpoenas as well. The Company intends to cooperate fully
with the investigation.
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 (13) Related Party
Transactions
Prior to the
spin-off of SureBeam Corporation, Titan and SureBeam entered into a
number of agreements.
Credit
Agreement. We have 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 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 SureBeam’s earnings before interest,
taxes, depreciation and amortization (EBITDA) for the prior quarter
as a percentage of the EBITDA target in its annual operating
plan. If EBITDA is less than 25% of target EBITDA, then the
amount available is $5 million, provided that no amounts are
available unless SureBeam covenants during the current quarter to
limit its total operating expenses (defined as research and
development and selling, general and administrative expenses) to
$5 million. If EBITDA is 25% of target, then the amount
available is $6.25 million on 50% of the quarterly maximum and
for each percentage of EBITDA above 25% of target, the percentage
of the quarterly maximum above 50% will be increased pro
rata. To the extent SureBeam does not fully borrow the
maximum amount during any quarter of 2002, the unutilized amount
can be borrowed in the subsequent quarters. As of the end of
the third quarter of 2002, SureBeam had borrowed $20 million
on this facility and had $9.5 million unutilized
amounts. As of November 14, 2002, SureBeam has borrowed
$25 million and had $7.0 million unutilized
amounts.
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. Titan is 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
(see Note 7).
Tax
Allocation Agreement and Tax Disaffiliation and Tax Sharing
Agreement. We have agreed to pay SureBeam for any tax
benefits we realized through our use of net operating losses
generated by SureBeam while it was a member of our consolidated
group for federal income tax purposes. Payment is due in the
first year in which SureBeam could have used those losses to reduce
its taxes and we do not know when such payment may become
due. We and SureBeam also have allocated responsibility for
the payment of taxes we each owe and agreed to reimburse the other
party for the tax liabilities we assume. We also agree to be
responsible for taxes imposed on the spin-off under Section 355(e)
of the Internal Revenue Code that result from our respective
actions, including the sale of our respective equity
securities. We have agreed to share equally any tax that is
imposed for reasons other than an action by us or
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,
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.
In addition,
Titan has 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 reduce
amounts available for future borrowing under the credit
agreement. 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.
In
December 2001, Titan exchanged $2 million of debt owed to
Titan by SureBeam 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.
These shares were part of the distribution to Titan stockholders as
a result of the spin-off.
Titan has
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 for the periods that
SureBeam was part of Titan’s consolidated financial
statements.
Titan has
agreed to purchase all of its requirements for electron beam
accelerators from SureBeam through December 31, 2003 and
related integration services through December 31, 2002 unless
SureBeam does not offer competitive pricing or cannot meet required
delivery schedules. The equipment and services are priced at
SureBeam’s cost plus a 20% markup unless we agree to an
alternative pricing arrangement for a purchase order.
SureBeam has supplied equipment and services under this contract in
connection with our contract with the U.S. Postal Service and in
connection with our medical sterilization business.
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 (which is currently zero), or 19.9% of Hawaii Pride's
$6.8 million, 15-year loan from its lender, Web Bank. As
of September 30, 2002, Titan has guaranteed approximately
$1.4 million, or 19.9% of the loan balance.
We have
subleased to SureBeam approximately 70,522 square feet used for its
service center in Sioux City, Iowa, as well as facilities in
Dublin, California, Omaha, Nebraska and Saudi Arabia.
Generally, SureBeam is paying us sublease payments equal to our
monthly expense under these leases. 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 was 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 was intended to assist our directors and executive officers
with their individual financial planning. Under the program,
a participant who gave notice of his intent to participate by
March 29, 2002, could 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 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 was made. The
loans were contingent upon the participants, 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.
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 elected not to participate in the program
or no life insurance policy was obtained, the loans were repaid
with accrued interest thereon and the options were 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,
the following transactions have occurred:
|
|
•
|
Dr. Ray, Chairman of
the Board and Chief Executive Officer: 222,380 options
relinquished, $3,985,725 principal amount of loan, 5.48% interest
per annum;
|
|
|
|
|
|
|
•
|
Mr. Fink, director:
15,000 options relinquished, $336,337.50 principal amount of loan,
5.48% interest per annum;
|
|
|
|
|
|
|
•
|
Mr. Alexander,
director: 19,972 options 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.
In
conjunction with Titan’s plan to exit its international
telecommunications business, Titan entered into an agreement with
Geolutions, Inc. to subcontract Titan’s outstanding
contractual and warranty obligations. Geolutions is a newly
formed company, founded by a former executive of Titan Wireless and
former officer of Titan. Titan has a fixed price contract of
$1.9 million, plus incidental expenses of up to
$0.6 million and other third party costs of an aggregate
maximum of $1.4 million, which is payable through mid 2004,
the period over which Titan’s warranty obligations exist on
its existing customer contracts. In conjunction with
Titan’s agreement with Geolutions, Titan has assigned its
existing warranty obligations in its international
telecommunications business with its existing customers to
Geolutions.
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 within
its Cayenta and Titan Technologies segments. During the third
quarter of 2002, the Company made the decision to exit its
international telecommunications business of its Titan Wireless
segment, and to exit its LinCom Wireless business and sell a
remaining operation of Cayenta, both of which were previously
reported in the Titan Technologies segment. Further, the
commercial information technology operations which were held for
sale at the end of the first and second quarters of 2002 were sold
during the third quarter of 2002. Effectively, almost all
commercial operations of Titan have either been sold, are held for
sale, have been exited or will be exited shortly. As a
result, all commercial operations that are held for sale or have
been sold or exited have been reflected as discontinued operations
for all periods presented in Titan’s consolidated financial
statements. Since nearly all commercial operations have been
disposed of or will be disposed of, and most of Titan’s
remaining business is its government business, Titan is no longer
reporting the results of operations by reporting segments.
All prior period financial information has been restated to reflect
the discontinuances and the elimination of the reporting
segments.
Revenues
Our
consolidated revenues increased from $237.2 million in the
third quarter of 2001 to $352.8 million in the third quarter
of 2002, reflecting a 48.7% increase. Increased revenues were
primarily attributable to revenue generated by the acquired
companies of BTG, Inc. in the fourth quarter of 2001 and Jaycor in
the first quarter of 2002, which contributed an aggregate of
approximately $93.8 million, coupled with internal revenue
growth in both the business units of the acquired companies as well
as in our other businesses. Internal revenue growth came from
the following sources. Increased work in areas related to
homeland security such as continuity of operations planning,
vulnerability assessments and risk mitigation plans for critical
infrastructure, and weapons of mass destruction modeling and sensor
integration contributed to our revenue growth. Increased
revenues were also driven by continued work on Titan’s
enterprise information technology contract with the Special
Operations Command, as well as from Titan’s information
services contract with the Program Executive Office, Standard Army
Management Information Systems. In addition, work for the Air
Force’s Electronic Systems Center on a variety of technical,
engineering, and acquisition support contracts contributed to
internal growth. Revenues from the Navy also increased in the
third quarter in part as a result of work for the Naval Space
Command for satellite communications support and for the Naval Sea
Systems Command for systems engineering and program support
services for the Naval Fires Network. Lastly, increased
demand for cryptology products, mini-DAMA terminals, and continued
work on the Prophet Program (an Army signals intelligence system)
also contributed to the third quarter internal revenue
growth.
Our
consolidated revenues increased from $681.5 million in the
nine months ended September 30, 2001 to $1.0 billion in the
nine months ended September 30, 2002, a 48.6%
increase. Increased revenues were primarily
attributable to internal revenue growth generated by business units
of the acquired company BTG, Inc. in the fourth quarter of 2001 and
the acquisitions of Datron in the third quarter of 2001 and Jaycor
in the first quarter of 2002, which contributed an aggregate of
approximately $255.6 million, coupled with internal revenue
growth in our other businesses as described previously.
Selling, General and
Administrative
Our SG&A
expenses increased from $38.7 million and $113.3 million
in the third quarter and first nine months of 2001, respectively,
to $60.7 million and $137.4 million in the third quarter
and first nine months of 2002, respectively. This reflects a
57% increase and 21% increase for the quarter and nine months ended
September 30, 2002, respectively. Included in SG&A
was amortization of goodwill of $2.5 million and
$7.4 million for the three months and nine months ended
September 30, 2001, and amortization of purchased intangibles
of $1.5 million and $4.2 million for the three months and
nine months ended September 30, 2002, and deferred
compensation amortization expense of $1.1 million and
$3.2 million in the quarter and nine months ended
September 30, 2001 and $22.4 million and
$24.9 million in the quarter and nine months ended
September 30, 2002. The increase in the deferred
compensation in the quarter and nine months ended
September 30, 2002 resulted from the merger of Titan’s
defense subsidiary, Titan Systems, into Titan, which occurred on
September 25, 2002, which resulted in the exchange of all
outstanding Titan Systems stock options for Titan Corporation stock
options. Excluding the amortization of goodwill and purchased
intangibles and deferred compensation, SG&A decreased from
14.8% of revenues in the quarter ended September 30, 2001 to
10.4% in the quarter ended September 30, 2002, and from 15.1%
in the nine months ended September 30, 2001, to 10.7% in the
nine months ended September 30, 2002. The decrease in
2002 is, in part, attributable to certain cost reductions Titan
made during 2002, as well as due to a difference in the methodology
of the classification of operating costs reported as costs of sales
versus SG&A 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 $3.0 million in the third quarter of
2001 to $4.0 million in the third quarter of 2002 and remained
constant at $7.1 million for the nine months ended
September 30, 2001 and 2002, respectively. The increase
in the third quarter of 2002 is primarily attributable to increased
development expenses incurred to develop software programmable
modems and digital radios for military and homeland security
applications. As a percentage of revenues,
R&D expenses remained fairly constant at approximately 1.0% for
all periods in 2001 versus the comparable periods in
2002.
Exit and
Restructuring Charges and Other
Fiscal 2002
Charges
Exit and
restructuring charges and other of $46.7 million and
$50.1 million in the third quarter and first nine months of
2002, respectively, were comprised of costs of $8.0 million
and $11.4 million incurred in the third quarter and first nine
months of 2002, respectively, related to the shut-down of
Cayenta’s headquarters office, and $38.7 million in the
third quarter and first nine months of 2002 related primarily to
certain facility consolidation costs of Titan
Systems.
The shut-down
costs of the Cayenta headquarters and network operations center of
$8.0 million that were recorded in the third quarter of 2002
included approximately $4.8 million of future lease commitment
costs, which are expected to be paid through future periods ending
in January 2007, approximately $2.4 million of asset
impairments primarily related to the unamortized leasehold
improvements and other fixed assets at the Cayenta headquarters,
and employee termination costs and other liabilities of
approximately $0.8 million. The amounts recorded in the
first and second quarters of 2002 of $3.4 million primarily
relate to employee termination costs and lease costs.
The charge
of $38.7 million that was recorded in the third quarter
of 2002 related to Titan Systems’ merger into Titan
Corporation and other associated reorganization and consolidation
costs included approximately $32.2 million for the
consolidation of various Titan Systems facilities into centralized
locations in Virginia and California. This charge reflects
the estimated losses, net of estimated sublease income, on future
lease commitments of facilities with terms extending through the
year 2009. The Company intends to actively market the
facilities for sublease opportunities. Approximately
$6.5 million of the restructuring costs discussed above
related to employee termination costs, employee retention costs,
duplicate transition costs related to certain reorganization and
consolidation activities within Titan Systems, and professional
fees.
Acquisition and
Integration Related Charges and Other
Fiscal 2001
Charges
Acquisition
and integration related charges and other of $27.8 million in
the first nine months of 2001 were comprised of 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 the Company’s government
business, 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
Company’s government business. 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
nine 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 approximately $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 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 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.
Operating Profit
(Loss)
Consolidated. Our
operating profit decreased from operating profit of
$13.9 million in the three months ended September 30,
2001 to an operating loss of $45.6 million in the three months
ended September 30, 2002. Included in the operating
results for the three months ended September 30, 2001 is
deferred compensation amortization expense of $1.1 million and
amortization of goodwill of $2.5 million. Included in
the operating results for the three months ended September 30,
2002 is deferred compensation amortization expense of
$22.4 million, amortization of purchased intangibles of
$1.5 million and exit and restructuring charges and other of
$46.7 million. Excluding the impact of these charges,
operating income increased from $17.4 million in the third
quarter of 2001 to $25.2 million in the third quarter of
2002. The increased operating income is primarily a result of
the increase in revenues noted previously.
Our operating
profit decreased from $8.7 million for the nine months ended
September 30, 2001 to $1.1 million for the nine months
ended September 30, 2002. Included in the operating
results for the nine months ended September 30, 2001 is
deferred compensation amortization expense of $3.2 million,
amortization of goodwill of $7.4 million and acquisition and
integration related charges and other of $27.8 million.
Included in the operating results for the nine months ended
September 30, 2002 is deferred compensation amortization
expense of $24.9 million, amortization of purchased
intangibles of $4.2 million and exit and restructuring charges
and other of $50.1 million. Excluding the impact of
these charges, operating income increased from $47.1 million
in the nine months ended September 30, 2001 to
$80.2 millionin the nine months ended
September 30, 2002. The increased operating income is
primarily a result of the increase in revenues noted previously, as
well as the impact of the revenues recorded in 2002 from the
Company’s mail sanitization systems business.
Interest Expense,
Net
Our net
interest expense decreased from $8.3 million and
$27.3 million in the third quarter and first nine months of
2001, respectively, to $7.7 million and $23.5 million in
the third quarter and first nine 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 $350.0 million
for the three and nine months ended September 30, 2002,
respectively, at a weighted average rate of 5.2% for both periods,
compared to $354.6 million and $341.5 million in the
three and nine months ended September 30, 2001, respectively,
at weighted average interest rates of 6.6% and 7.9%,
respectively.
Income
Taxes
Consolidated
income taxes reflect effective rates of a provision rate of 49% and
a benefit rate of 24% in the quarter and nine months ended
September 30, 2001, respectively, compared to a benefit rate
of 37% and 31% in the quarter and nine months ended
September 30, 2002, respectively. The lower rate for the
tax benefit in 2001 compared to the rates used in 2002 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.
The change in
the current portion of deferred income tax asset from
$53.9 million at December 31, 2001 to $27.8 million
at September 30, 2002 primarily reflects the impact of the
Company’s most recent estimate of net operating losses that
will be utilized in the next twelve months. Accordingly, the
current and non-current portion of deferred income tax assets have
been adjusted to reflect these recent estimates. In addition,
the increase in the non-current deferred income tax asset from $0
at December 31, 2001 to $110.5 million at
September 30, 2002 is a result of the tax benefit of the
current period operating losses.
Loss From
Discontinued Operations
In the
quarter and nine months ended September 30, 2001, loss from
discontinued operations was $41.7 million and
$97.1 million, respectively. The loss in these periods
included $31.9 million of estimated operating losses to be
incurred by SureBeam, which was discontinued in the third quarter
of 2001, through the estimated date of disposal. In addition,
the loss for the nine months ended September 30, 2001 included
a $35.0 million charge for deferred compensation resulting
from the initial public offering of SureBeam in
March 2001.
In the
quarter and nine months ended September 30, 2002, loss from
discontinued operations was $191.8 million and
$209.7 million, respectively. The loss in these periods
included approximately $161.9 million and $165.4 million,
respectively, related to the exit of the Company’s
international telecommunications business, Titan Wireless.
The remainder of the loss in the quarter and nine months ended
September 30, 2002 relates to the operating losses and the
loss from the disposal or wind-down of the Cayenta businesses,
AverCom, and LinCom Wireless businesses which were discontinued in
the first and third quarters of 2002.
Net Income
(Loss)
In the
quarter and nine months ended September 30, 2001, we reported
a net loss of $38.8 million and $106.5 million,
respectively, compared to a net loss of $225.3 million and
$270.7 million in the quarter and nine months ended
September 30, 2002. Loss from discontinued operations
was $41.7 million and $97.1 million in the quarter and
nine months ended September 30, 2001, respectively, compared
to a loss of $191.8 million and $209.7 million in the
quarter and nine months ended September 30, 2002,
respectively. Included in the net loss for the nine
months ended September 30, 2002, is a charge of
$40.1 million for the Company’s adoption of SFAS
No. 142, which is reported as a cumulative effect of a change
in accounting principle, and an extraordinary loss of
$5.4 million which is related to the Company’s
extinguishment of its former credit facility.
Liquidity and Capital
Resources
We generated
cash of approximately $122.2 million from our continuing
operations during the nine months ended September 30, 2002,
primarily resulting from our government business, coupled with a
reduction of receivable balances of approximately
$73.3 million, partially offset by decreases in other working
capital components. Our investing activities generated net
cash of approximately $2.9 million, resulting primarily from
net cash acquired of approximately $27.9 million, primarily
from the Jaycor acquisition which closed in late March 2002,
offset by advances on the SureBeam line of credit of
$20 million and other investments and capital
expenditures. Financing activities provided
$13.3 million, primarily from an increase in our term
debt.
Our financing
activities generated cash of $13.3 million, primarily
reflecting additions to debt of $20.0 million, resulting from
the Company’s new credit facility, partially offset by the
payment of deferred financing costs of $8.8 million for the
Company’s new credit facility and other debt pay downs of
$4.4 million. Proceeds from stock issuances of
$8.3 million were primarily 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 (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, as defined per the
senior secured credit agreement, which were comprised of the
following at September 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 $264 million.
At September 30, 2002, total borrowings under our credit
facility were $350 million at a weighted average interest rate
of 4.79%. Commitments under letters of credit were
$11.8 million at September 30, 2002, $10.9 million
of which reduce availability of our working capital line, resulting
in $124.1 million of availability on our working capital line
at September 30, 2002. Of the total borrowings,
$3.5 million was short-term. At September 30, 2002,
the Company was in compliance with all financial
covenants.
The
credit agreement of $50 million that Titan has executed with
SureBeam is secured by a first priority lien on all of
SureBeam’s assets. Titan is required to collaterally
assign its rights under this credit agreement and its security as
well as the license agreement it has with SureBeam to its senior
lenders under its senior secured credit facility.
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 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
September 30, 2002, approximately $40.5 million was drawn
on this facility, which has been reflected as non-recourse
liability in Non-current liabilities of discontinued operations in
the accompanying consolidated balance sheet. 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 September 30, 2002, the
outstanding receivable balance, net of the non-recourse debt, due
on this contract was approximately $28.7 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. As of the end of 2001, this maximum
commitment had 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. On
July 11, 2002, Titan made the decision to exit and dispose of
its international telecommunications business. In connection
with our attempts to sell this investment, Titan has yet to receive
any offers for its equity interest in Ivoire Telecom.
Management believes this is due in part to current political
instability in certain countries in which Ivoire Telecom’s
subsidiaries operate. Accordingly, Titan recorded an
impairment equal to the carrying value of this investment as of
September 30, 2002 (refer to Note 6 of the accompanying
financial statements for further discussion).
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 $1.3 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 $67.0 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
$50.0 million senior secured line of credit, 2) the exchange
of the $75.0 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 $8.0 million, with $4.0 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 executed a
$50.0 million senior secured revolving loan commitment to
SureBeam that allowed SureBeam to borrow up to $12.5 million
in the second quarter of 2002, up to $17.0 million in the
third quarter of 2002 (of which $20.0 million was borrowed by
the end of the third quarter) and up to $12.5 million per
quarter beginning in the fourth quarter of 2002 through the fourth
quarter of 2003, subject to the $50.0 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 the end of the third quarter of 2002,
SureBeam has borrowed $20 million on this facility and had
$9.5 million unutilized amounts. As of November 6,
2002, SureBeam had borrowed $25.0 million under the credit
facility and Titan expects SureBeam to borrow additional funds in
the future.
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 reduce
amounts available for future borrowing under the credit
agreement. 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
capital expenditures, is expected to continue. We plan to finance
these requirements from a combination of sources, which include
cash generation from our government 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 and the financing
sources available to achieve our goals.
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
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 collect remaining receivable balances
and sell GlobalNet 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.
Item 4. Controls and
Procedures.
Evaluation of
Disclosure Control and Procedures.
Under the
supervision and with the participation of our executive management,
including our Chief Executive Officer and Chief Financial Officer,
we performed an evaluation of the effectiveness and design of our
disclosure controls and procedures within 90 days before the filing
date of this quarterly report. Based on that evaluation, our
executive management, including our Chief Executive Officer and our
Chief Financial Officer, concluded that our disclosure controls and
procedures are effective.
Changes in
internal controls.
There have
been no significant changes in our internal controls or procedures
or other factors that could significantly affect our internal
controls.
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.
On
August 16, 2002, Perimex International Corporation filed a
complaint against Titan, Titan Wireless and a former Titan Wireless
employee in San Diego Superior Court in San Diego,
California. The complaint alleges breach of contract, breach
of the covenant of good faith and fair dealing, intentional
interference with existing contractual relationships and
prospective business advantage and violation of the California
unfair competition law arising from an alleged failure of Titan
Wireless to enter a joint venture with Perimex to provide wireless
telecommunication services in Argentina and other related alleged
misconduct. The complaint seeks damages of
$53.65 million and seeks injunctive relief prohibiting Titan
and Titan Wireless from transferring any of Titan Wireless’
assets. The Court recently denied Perimex’s request for
a preliminary injunction, sustained Titan and Titan Wireless’
demurrer as to all causes of action in the complaint and granted
Perimex leave to amend the complaint. The court also ordered
Perimex to post a bond for $0.09 million to secure payment of Titan and
Titan Wireless’ costs if they prevail. The Company
believes that Perimex’s claims are without merit and the
Company intends to defend its position vigorously.
In the
ordinary course of business, defense contractors are subject to
many levels of audit and investigation by various government
agencies. The
Company has received a grand jury subpoena from the Antitrust
Division of the Department of Justice requesting the production of
documents relating to information technology services performed for
the Air Force at Hanscom Air Force Base in Massachusetts. The
Company has been informed that other companies who have performed
such services have received subpoenas as well. The Company
intends to cooperate fully with the investigation.
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. Based upon current information and review, 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 2. Changes in
Securities.
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(a)
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Conversion Rights of Titan
Cumulative Convertible Preferred Stock.
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As a result of the
spin-off of SureBeam by Titan, each outstanding share of cumulative
convertible preferred stock, formerly convertible into Titan common
stock, at the option of the holder, at a rate of .667 share of
common stock for each share of cumulative convertible preferred
stock, is now convertible at a rate of .781 share of common stock
for each share of cumulative convertible preferred
stock.
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(b)
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Conversion Rights and
Redemption Rights of Convertible Trust Preferred Securities
(Remarketable Term Income Deferrable Equity Securities, or HIGH
TIDESsm).
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As a result of the
spin-off of SureBeam by Titan, each HIGH TIDES, formerly
convertible into 1.0076 shares of Titan common stock, is now
convertible into 1.3553 shares of Titan common stock.
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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 of Periodic
Financial Reports pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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b.
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During the three months
ended September 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 May 23, 2002, and filed on 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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(2)
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Current Report on Form 8-K
dated July 30, 2002, and filed on August 1, 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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(3)
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Current Report on Form 8-K
dated August 2, 2002, and filed on August 14, 2002, to
report that the Company had entered into a $50 million Senior
Secured Credit Agreement with SureBeam Corporation in connection
with the distribution of the Company’s majority ownership of
SureBeam to Titan stockholders (the “Spin-off”) and to
file certain exhibits to that Credit Agreement and other agreements
entered into between the Company and SureBeam in connection with
the Spin-off of SureBeam on 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: November 14,
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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CERTIFICATION
I, Gene W. Ray, certify
that:
1. I have
reviewed this quarterly report on Form 10-Q of The Titan
Corporation;
2. Based
on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly
report;
3. Based
on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in
all material respects the financial condition, results of
operations and cash flows of The Titan Corporation as of, and for,
the periods presented in this quarterly report;
4. Titan
Corporation’s other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a)
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b)
evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c)
presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. Titan
Corporation’s other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all
significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. Titan
Corporation's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date:
November 14, 2002
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/s/ GENE W. RAY
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Gene W.
Ray
Chief Executive Officer
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CERTIFICATION
I, Mark W. Sopp, certify
that:
1. I have
reviewed this quarterly report on Form 10-Q of The Titan
Corporation;
2. Based
on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly
report;
3. Based
on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in
all material respects the financial condition, results of
operations and cash flows of The Titan Corporation as of, and for,
the periods presented in this quarterly report;
4. Titan
Corporation’s other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a)
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b)
evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c)
presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. Titan
Corporation’s other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all
significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. Titan
Corporation's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date:
November 14, 2002
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/s/ MARK W. SOPP
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Mark W.
Sopp
Chief Financial Officer
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QuickLinks
Part I — FINANCIAL
INFORMATION
Item
1. Financial Statements
CONSOLIDATED STATEMENTS OF
OPERATIONS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CASH
FLOWS
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 4. Controls and
Procedures.
Part II — OTHER
INFORMATION THE TITAN CORPORATION
Item 1. Legal
Proceedings.
Item 2. Changes in Securities.
Item 6. Exhibits and
Reports on Form 8-K.
SIGNATURES
