At March 31,
2003, $18.1 million of the exit and restructuring accruals are
included in Other Accrued Liabilities on the consolidated balance
sheet and $16.2 million are included in Other Non-current
Liabilities. The remaining liability balance is primarily
comprised of amounts due under the facilities consolidation, which
requires payments in 2003 and 2004 for certain lease cancellation
fees and other lease costs, with the remainder expected to be paid
over the remaining lease terms, which expire in 2009.
Note (3) Cumulative Effect of Change in
Accounting Principle
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". Goodwill and intangible assets
acquired in a purchase business combination and determined to have
an indefinite useful life are not amortized, but instead tested for
impairment at least annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS
No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets.”
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 the reporting unit
exceeds its fair value, the goodwill of the reporting unit is
impaired.
In connection
with the initial adoption of this standard as of January 1, 2002, during the first quarter of 2002, 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, the Company 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 an undiscounted cash flow method, as required
by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," to an
estimated fair value 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, 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.
Note (4) Discontinued
Operations
In
August 2002, the Company’s board of directors 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.
In
July 2002, the Company’s board of directors made the
decision to exit all of its international telecommunications
business through a combination of selling its operations within its
Titan Wireless segment. Titan began implementing these
actions immediately and expects to complete these actions during
2003. 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’s board of directors 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 have been
sold or that are held for sale have been reflected as discontinued
operations for all periods presented in Titan’s consolidated
financial statements.
On
March 16, 2001, SureBeam Corporation, Titan's subsidiary that
provides electronic food irradiation systems and services,
completed an initial public offering ("IPO") of 6,700,000 shares of
Class A common stock at a price of $10 per share. 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 the next 12 months from that date. The plan involved
filing a letter ruling request with the Internal Revenue Service
("IRS") to obtain approval of the tax-free distribution.
Titan received a favorable ruling in May 2002, and on August 5,
2002, Titan’s remaining ownership interest in SureBeam was
spun-off to Titan stockholders as a tax-free
dividend.
Following is
a summary in tabular format of the loss from discontinued
operations for 2003 (amounts in millions):
|
|
Three
months ended March 31, 2003
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
Titan
Technologies
|
|
Cayenta
|
|
SureBeam
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses from
operations
|
|
$
|
(0.5
|
)
|
$
|
(0.9
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(1.4
|
)
|
|
Tax benefit
|
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.3
|
)
|
$
|
(0.6
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Summary
Following is
a table of all related balance sheet categories for each
discontinued operation:
|
|
|
As
of
March 31,
2003
|
|
As
of
December 31,
2002
|
|
|
|
|
|
|
|
|
Current assets of
discontinued operations:
|
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
$
|
88,299
|
|
$
|
93,145
|
|
|
Cayenta
|
|
|
661
|
|
|
661
|
|
|
SureBeam
|
|
|
—
|
|
|
—
|
|
|
Titan
Technologies
|
|
|
11,206
|
|
|
10,065
|
|
|
|
|
|
|
|
|
|
$
|
100,166
|
|
$
|
103,871
|
|
|
|
|
|
|
|
|
Non-current assets of
discontinued operations:
|
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
$
|
4,426
|
|
$
|
4,212
|
|
|
Cayenta
|
|
|
—
|
|
|
—
|
|
|
SureBeam
|
|
|
—
|
|
|
—
|
|
|
Titan
Technologies
|
|
|
2,410
|
|
|
2,370
|
|
|
|
|
|
|
|
|
|
$
|
6,836
|
|
$
|
6,582
|
|
|
|
|
|
|
|
|
Current liabilities of
discontinued operations:
|
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
$
|
36,447
|
|
$
|
38,603
|
|
|
Cayenta
|
|
|
1,419
|
|
|
2,155
|
|
|
SureBeam
|
|
|
205
|
|
|
187
|
|
|
Titan
Technologies
|
|
|
8,202
|
|
|
8,198
|
|
|
|
|
|
|
|
|
|
$
|
46,273
|
|
$
|
49,143
|
|
|
|
|
|
|
|
|
Non-current liabilities of
discontinued operations:
|
|
|
|
|
|
|
|
|
Titan
Wireless
|
|
$
|
42,003
|
|
$
|
42,821
|
|
|
Cayenta
|
|
|
928
|
|
|
1,205
|
|
|
SureBeam
|
|
|
—
|
|
|
—
|
|
|
Titan
Technologies
|
|
|
769
|
|
|
800
|
|
|
|
|
|
|
|
|
|
$
|
43,700
|
|
$
|
44,826
|
|
|
|
|
|
|
|
Included in
the total assets of Titan Wireless as of March 31, 2003 are
approximately $90.2 million of gross accounts receivable, less
approximately $40.5 million (classified as a non-current
liability) representing the amounts drawn on the non-recourse loan
facility with the African Merchant Bank to cover subcontract costs
on Titan Wireless’s contract with the Office of Post and
Telecommunications (OPT). The net accounts receivable of
$49.7 million are comprised of approximately
$31.8 million due from the OPT, $14.4 million due from
Titan Wireless’s customer in Nigeria, and $3.5 million
due from customers of the GlobalNet business. The current
liabilities of $36.4 million of Titan Wireless include
approximately $8.7 million of remaining exit costs and
approximately $17.9 million of accounts payable and lease
obligations of GlobalNet. Titan is endeavoring to divest
these businesses through stock and asset sales and is currently in
negotiations with a number of potential buyers of GlobalNet.
In the event that Titan is unsuccessful in its endeavors to sell
GlobalNet, Titan may incur a net cash outlay of approximately
$12.6 million, the net liability balance of GlobalNet, to shut
down the business.
The current
assets of Titan Technologies are primarily comprised of accounts
receivable balances and prepaid assets.
Note (5) Debt
At
March 31, 2003, total borrowings outstanding under the
Company's senior credit facility were $348.3 million at a
weighted average interest rate of 4.15%. Commitments under
letters of credit were $12.3 million at March 31, 2003,
$12.2 million of which reduces availability of the working
capital line. Of the total borrowings, $3.5 million was
short-term. At March 31, 2003, the Company was in compliance
with all financial covenants under its various debt
agreements.
On May 9,
2003, the Company priced a private placement of $200 million of its
8% senior subordinated notes due 2011. Titan intends to use
the net proceeds of this offering, together with proceeds from
borrowings of $50 million the Company expects to make under its
existing revolving senior credit facility plus additional cash on
hand, to redeem in their entirety its 53/4%
HIGH TIDES convertible preferred securities and to pay associated
fees and expenses. This offering is conditioned upon the
effectiveness of an amendment to our existing senior credit
facility to permit the offering and the redemption of the
53/4% HIGH TIDES. The amendment has
been approved by the requisite lenders in our bank group and
becomes effective upon the funding of the senior subordinated
notes, which is expected to occur on May 15, 2003. The
amendment to the senior credit facility includes the modification
of certain financial covenants, specifically the total debt to
EBITDA (as defined) ratio and a new total senior debt to EBITDA
ratio. In addition, the amendment to the senior credit
facility also includes increased interest rate margins for loans
made or outstanding under the senior credit facility at times when
the ratio of our total debt to EBITDA equals or exceeds 3.5 to
1. The terms of
the 53/4% HIGH TIDES require that we provide holders
at least 20 days notice prior to any optional redemption of
the 53/4% HIGH TIDES. The Company will provide
that notice to the holders upon the consummation of the offering,
and will deposit the net proceeds of the offering, together with
enough additional cash to permit the mandatory redemption of the
notes, into a secured proceeds account for investment in United
States Treasury securities. The 8% senior subordinated notes
are subject to mandatory redemption by Titan in the event that we
do not redeem the 53/4% HIGH TIDES on or prior to the date 30 days
after the date of issuance of the notes. The redemption price
for the mandatory redemption of the 8% senior subordinated notes is
101% of the issue price of the notes, plus accrued and unpaid
interest to the redemption date. The Company will incur
approximately $12.4 million in charges related to the
extinguishment of the HIGH TIDES, comprised of the write-off of
$7.9 million of remaining deferred financing costs of HIGH
TIDES, a call premium of $3.6 million to redeem the HIGH
TIDES, and approximately $0.9 million of interest during the
call period. All extinguishment charges will be recorded in
the second quarter of 2003 as a charge to income from continuing
operations. Following the redemption of the HIGH TIDES,
availability on the working capital line will be reduced by
$50 million for the borrowings expected on the Company’s
revolving line of credit. In addition, the borrowing capacity
available on the line of credit is subject to compliance with
financial and other covenants included in our senior credit
facility.
Note (6) Other Financial
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.
In connection
with the determination of the fair value of assets acquired in
connection with acquisitions in 2001, 2000 and 1999, and pursuant
to the provisions of SFAS No. 141, the Company has valued acquired
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. This adjustment has been
reflected in the accompanying consolidated balance sheet as an
increase to goodwill and a corresponding increase to deferred
profit. The Company recognized approximately
$1.0 million and $0 million as a reduction of costs
against the deferred profit in the first quarter of 2002 and 2003,
respectively. The remaining amount of $0.8 million at
March 31, 2003 is estimated to reduce costs through
2007.
Earnings Per
Share
The following
data summarize information relating to the per share computations
for income from continuing operations before the cumulative effect
of a change in accounting principle:
The effect of
the minority interests primarily represents the dilutive effect of
outstanding stock options of Titan’s subsidiaries, notably
Titan Systems in 2002.
In the three
months ended March 31, 2003, options and warrants to purchase
approximately 4,689,100 shares of common stock at prices
ranging from $9.76 to $29.74 per share were not included in the
computation of diluted EPS as the effect would have been
anti-dilutive due to the exercise price. Options to purchase
approximately 1,218,400 shares of common stock at prices
ranging from $20.70 to $47.50 per share were not included
in the computation of diluted EPS for the three month period ended
March 31, 2002, as the effect would have been anti-dilutive
due to the exercise price.
Approximately
6,776,500 and 5,038,000 shares in 2003 and 2002, 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
537,400 and 460,000 shares of common stock in the three months in
2003 and 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. The primary change in potential dilution from
2002 to 2003 for the HIGH TIDES and preferred stock is the change
in conversion ratios due to the SureBeam spin-off (see Note
4).
Select Balance Sheet
Data
Following are
details concerning certain balance sheet data:
|
|
|
March 31,
2003
|
|
December 31,
2002
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
Materials
|
|
$
|
10,587
|
|
$
|
11,213
|
|
Work-in-process
|
|
|
12,600
|
|
|
9,947
|
|
Finished
goods
|
|
|
8,196
|
|
|
10,120
|
|
|
|
|
|
|
|
|
$
|
31,383
|
|
$
|
31,280
|
|
|
|
|
|
Supplemental Cash Flow
Information
Supplemental
disclosure of cash flow information:
|
|
|
Three
months ended
March 31,
|
|
|
|
|
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
Noncash investing and
financing activities:
|
|
|
|
|
|
|
|
|
Issuance of
stock for acquisitions
|
|
$
|
—
|
|
$
|
134,176
|
|
|
Shares
contributed to employee benefit plans
|
|
|
3,567
|
|
|
3,604
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
8,085
|
|
$
|
8,605
|
|
|
Cash paid for (provided
by) income tax
|
|
|
338
|
|
|
(574
|
)
|
In addition,
net cash proceeds of $26.8 million resulting from the
acquisition of businesses, net of cash acquired was reported for
the three months ended March 31, 2002. This was primarily the
result of cash acquired from Jaycor, which was a stock transaction
completed in March 2002.
Note (7) Commitments and
Contingencies
During the first quarter of
2003, the Company entered into new long-term lease and sublease
agreements for office space in Virginia and Maryland as part of the
Company’s efforts to consolidate various facilities of its
government business into centralized locations (see Note 2).
The lease and subleases in Virginia require future minimum lease
payments of approximately $100.4 million over approximately 13
years, commencing at various dates from May 2003 through May
2004. The lease in Maryland requires future minimum lease
payments of approximately $45.8 million over 10 years,
commencing approximately July 1, 2004.
On
August 16, 2002, Perimex International Corporation
(“Perimex”) 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 Titan prevails, or if
Perimex does not prevail. Perimex elected not to post the
bond and the complaint was voluntarily dismissed without prejudice
by Perimex. However, Perimex has the right to file a new
complaint. 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 service we 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. We have been cooperating and will continue
to cooperate fully with the investigation.
The Company received a subpoena from the
office of Inspector General for the National Aeronautics and Space
Administration, or NASA, seeking certain records relating to
billing for labor services in connection with our contracts with
NASA. We also received a subpoena from the office of Inspector
General for the General Services Administration, or GSA, seeking
similar records relating to billing for labor categories in
connection with contracts with GSA. We are fully cooperating with
the government’s inquiries in these areas.
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 (8) Related Party
Transactions
Agreements With
Executive Officers
In 2000, the
Company entered into an agreement with the Company’s Chairman
of the Board, President and Chief Executive Officer and the
Company’s General Counsel (hereinafter referred to as the
"Executives") to reinforce and encourage their continued dedication
without distraction arising from the possibility of a change in
control of Titan. The terms of the agreements provide that, in the
event of a Change in Control (as defined), and the termination of
the Executive's employment at any time during the three-year period
thereafter by the Company other than for cause (as defined) or by
the Executive for good reason (as defined), the Executives will be
paid a lump sum amount equal to three times their base salary plus
maximum annual bonus. Additionally, the Executives will receive a
prorated bonus for the year of termination and continuation of
medical and dental benefits covering the Executives and their
dependents for three years following the termination.
Under the
agreements, Change in Control is deemed to have occurred in the
event of (i) the acquisition by any person, together with its
affiliates, of beneficial ownership of our voting securities
possessing 20% or more of the combined voting power of our
outstanding voting securities, (ii) the majority of the
members of the board being comprised of individuals other than
those who were members at the time of execution of the agreements,
unless the new members elected were approved or nominated by a
majority of the members of the then-incumbent board or
(iii) the consummation of a merger, reorganization,
consolidation or sale or other disposition of all or substantially
all of our assets, subject to certain exceptions.
On
April 2, 2003, the Company entered into an Employment
Agreement with the Company’s Chairman of the Board, President
and Chief Executive Officer (hereinafter referred to as the
“CEO”) in connection with his duties in these
positions. Among other things, the terms of the agreement
provide for continued employment of the CEO by Titan for a term of
three years, eligibility to receive annual incentive awards and to
participate in long-term incentive, employee benefit and retirement
programs. In the event that the CEO is terminated without
cause, or retires at the end of the term of the agreement, he will
be entitled to a lump sum equal to three times the sum of his
current base salary and target bonus, a prorated bonus for the year
of termination, vesting of all outstanding stock options and
participation for the CEO and his dependents in our extended health
benefits program for retired senior executives.
Also, on
April 2, 2003 the Company entered into Employment Agreements
with the Company’s General Counsel and the Company’s
Chief Financial Officer (hereinafter referred to as the
“Officers”) in connection with their duties in those
positions. Among other things, the terms of their agreements
provide for continued employment by Titan for a term of two years,
eligibility to receive annual incentive awards and to participate
in long-term incentive, employee benefit and retirement programs.
In the event of termination without cause, the Officers will each
be entitled to a lump sum equal to two times the sum of their
respective current base salaries and target bonuses, a prorated
bonus for the year of termination, vesting of all outstanding stock
options and continued medical and dental benefits coverage for a
period of two years. The Chairman and Officers have agreed to non
competition and non solicitation covenants in connection with their
respective employment agreements.
Certain Relationships
And Related Transactions
In
conjunction with Titan’s plan to exit its international
telecommunications business, Titan entered into an agreement with
Geolutions, Inc. (“Geolutions”) to assume and perform
all of Titan Wireless’s outstanding 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. The contract is cancelable by Titan under certain
circumstances of non-performance by Geolutions. 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. If Geolutions fails to perform these contracted
obligations, Titan Wireless remains obligated to perform them and
may incur costs in excess of these contracted amounts.
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 the participants with their
individual financial planning. Under the program, a participant was
allowed to relinquish eligible, in-the-money stock options in
exchange for a loan, the principal amount of which was 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
made contingent upon the participant's 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.
Under
the program the following transactions have occurred:
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Dr. Ray, Chairman of
the Board and Chief Executive Officer: 222,380 options relinquished
on June 18, 2002, $3,985,725 principal amount of loan, 5.48%
interest per annum;
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Mr. Fink, Director:
15,000 options relinquished on June 27, 2002, $336,337.50
principal amount of loan, 5.48% interest per annum; and
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Mr. Alexander,
Director: 19,972 options relinquished effective June 19, 2002,
$499,999 principal amount of loan, 5.48% interest per
annum.
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The amount of
the stock options relinquished under the program do not reflect any
adjustment as a result of the spin-off of our subsidiary SureBeam
Corporation August 5, 2002, since the relinquishment occurred
before the date for said adjustment. Titan has recorded interest income of $0.2
million to date related to the accrued interest on the outstanding
loans due from the directors noted above.
As of the
effective date of the Sarbanes-Oxley Act in July 2002, which
precludes such loans to company officers and directors, the Stock
Option and Relinquishment Plan was no longer available to our
Directors and executive officers.
SureBeam
Agreements
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 $29.5 million through 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 financial plan
submitted to Titan. As of March 31, 2003, SureBeam had
borrowed $25 million on this facility, of which
$21.6 million is reflected as a non-current asset in Other
Assets and $3.4 million is reflected as a current asset in
Prepaid expenses and other on the consolidated balance sheet.
On February 3, 2003, SureBeam filed a Form 8-K with the Securities
and Exchange Commission wherein SureBeam stated that they do not
anticipate borrowing additional amounts on the credit facility
during 2003 or during the remaining period that the credit facility
is outstanding. There have been no additional borrowings in
2003.
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 March 2003, SureBeam and Titan
entered into an agreement amending the credit agreement. That
amendment waived, subject to certain conditions, SureBeam’s
obligation to use net proceeds from the sale of up to
$25 million of its equity securities to make mandatory
payments under the credit agreement during the period of March 2003
through September 2004. In connection therewith, SureBeam
agreed to provide for certain change orders and the furnishing of
maintenance services under the Equipment Services
Agreement.
In addition,
Titan has guaranteed certain lease obligations of SureBeam, and
SureBeam is obligated to reimburse Titan for any payments we make
under these guarantees. Any guarantee payments Titan makes
reduce amounts available for future borrowing under the credit
agreement. The aggregate amount of the lease obligations
Titan has guaranteed as of March 31, 2003 is approximately
$23.1 million. The leases extend through periods ending
in 2020.
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 March 31, 2003, Titan has guaranteed approximately
$1.2 million, or 19.9% of the current loan balance of
$6.0 million. In the event that Hawaii Pride defaults on
the loan, Titan may be obligated to cover any defaults on the
entire outstanding balance of the loan.
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. Through 2001, Titan
utilized net operating losses previously generated by SureBeam
which resulted in an estimated liability of approximately
$6.2 million. The Company estimates that in 2002 it will
utilize net operating losses previously generated by SureBeam which
may result in a liability of approximately $1.9 million, which
will be finalized upon completion of the Company’s 2002
corporate tax return. As of March 31, 2003, all amounts have
been accrued related to the estimated liability related to the
utilization of the net operating losses previously generated by
SureBeam. Payment is due the earlier of the first year in
which SureBeam could have used those losses to reduce its taxes or
when the net operating losses expire. SureBeam has not
generated taxable income since its inception, and we do not know if
and when SureBeam will generate taxable income and, accordingly,
when such payment will become due. The net operating losses
generated in 2001 and 2002 expire in 2021 and 2022,
respectively.
Other
Agreements. In connection with the license Titan
purchased to use SureBeam’s intellectual property, the
remaining unamortized balance of $7.4 million at March 31,
2003, is reflected as a non-current asset in Other Assets in the
consolidated balance sheet. The license is being amortized
over a 15 year life, the average life of the related
patents.
Titan has
agreed to purchase all of its requirements for electron beam
accelerators from SureBeam through December 31, 2003 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 Titan agrees to an
alternative pricing arrangement for a purchase
order.
Titan has
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 Titan sublease payments equal to
Titan’s monthly expense under these leases plus a 10%
markup. SureBeam is obligated to continue to seek to have
itself substituted as the direct lessee under each master lease so
that the sublease can be terminated.
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
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.
Revenues
Our
consolidated revenues increased from $314.3 million in the
first quarter of 2002 to $377.9 million in the first quarter
of 2003, reflecting a 20% increase. Increased revenues were
attributable to our core national security business, which
comprised over 99% of our revenue for the period. The most
notable contributors to the increase in revenues were continued
growth on our enterprise information technology contract with the
Special Operations Command, which contributed approximately
$12.6 million of increased revenues and increased demand from
the intelligence community for technical services including systems
integration services, including our contact with the Army’s
Intelligence and Security Command for linguist support, which
experienced increased demand resulting from the war on terrorism
and the war in Iraq, which resulted in approximately
$11.3 million of increased revenues. In addition,
increased revenues were due in part to increased work in areas
related to homeland security such as continuity of operations
planning and emergency response training and work for the Air
Force’s Electronic Systems Center (ESC) on a variety of
technical, engineering, systems integration and acquisition support
contracts. Revenues from the Navy also increased in the first
quarter in large part as a result of increased work for the Naval
Air Systems Command for systems engineering and program support
services. Also, the acquisitions of Jaycor in the first
quarter of 2002 and Wave Science in the fourth quarter of 2002,
contributed $19.7 million of the increase.
Selling, General and
Administrative
Our SG&A
expenses increased from $34.7 million in the first quarter of
2002, to $39.5 million in the first quarter of 2003, a 14%
increase. The increase is primarily a result of the increased
revenues discussed above and increased deferred compensation
amortization in 2003. Included in SG&A was amortization
of purchased intangibles of $1.4 million and
$1.2 million, respectively, and deferred compensation
amortization expense of $1.0 million and $2.8 million,
respectively, in the quarters ended March 31, 2002 and 2003.
The increase in the deferred compensation in the quarter ended
March 31, 2003 resulted from the merger of Titan’s defense
subsidiary, Titan Systems, into Titan, which occurred on
September 25, 2002, and resulted in the exchange of all
outstanding Titan Systems stock options for Titan Corporation stock
options. Excluding the amortization of purchased intangibles
and deferred compensation, SG&A decreased as a percentage of
revenues from 10.3% of revenues in the quarter ended March 31,
2002 to 9.4% in the quarter ended March 31, 2003. The
decrease in 2003 is primarily attributable to overall increased
economies of scale with higher revenues.
Research and
Development
Our R&D
expenses remained fairly constant at $2.4 million in the first
quarters of 2002 and 2003. As a percentage of revenues,
R&D expenses decreased slightly from 0.8% in the first quarter
of 2002 to 0.6% in the first quarter of 2003.
Exit and
Restructuring Charges and Other
Fiscal 2002
Charges
Exit and
restructuring charges and other of $1.5 million in the first
quarter of 2002 were related to the shut-down of Cayenta’s
headquarters office and network operations center.
Operating
Profit
Our operating profit decreased from operating profit
of $22.3 million in the three months ended March 31, 2002 to
operating profit of $20.7 million in the three months ended
March 31, 2003. Included in the operating results for the
three months ended March 31, 2002 is deferred compensation
amortization expense of $1.0 million, amortization of
purchased intangibles of $1.4 million and exit and
restructuring charges and other of $1.5 million.
Included in the operating results for the three months ended March
31, 2003 is deferred compensation amortization expense of
$2.8 million and amortization of purchased intangibles of
$1.2 million. Excluding the impact of these charges,
operating income decreased from $26.2 million in the first
quarter of 2002 to $24.8 million in the first quarter of
2003. The year over year decline in overall operating profit
was primarily related to our non-core commercial electron beam
medical products sterilization and mail sanitation business, which
had particularly strong results in the first quarter of 2002
related to our contract with the United States Postal Service to
deliver mail sanitation systems. Conversely, operating margin
in the first quarter of 2003 was adversely impacted by a
$1 million loss in this business, which experienced higher
than expected costs in delivering medical sterilization systems to
two customers.
Interest Expense,
Net
Our net
interest expense decreased from $8.2 million in the first
quarter of 2002, to $7.5 million in the first quarter of
2003. Net interest expense decreased primarily as a result of
reduced effective interest rates on our credit facility as well as
an increase of interest income in 2003. The increase in
interest income was primarily related to interest income due from
SureBeam on the outstanding balance of its credit
facility. Borrowings from our senior credit
facility, excluding working capital lines from acquired companies,
averaged $354.3 million for the three months ended March 31,
2003, at a weighted average rate of 4.68%, compared to
$312.5 million in the three months ended March 31, 2002, at
weighted average interest rates of 5.04%.
Income
Taxes
Consolidated
income taxes reflect effective rates of 44% in the quarter ended
March 31, 2002, compared to 40% in the quarter ended March 31,
2003. The 2003 rate reflects the expected provision rate for
the full year.
Loss From
Discontinued Operations
In the
quarter ended March 31, 2002, loss from discontinued
operations was $1.4 million, net of a tax benefit of
$1.5 million. The net loss was primarily related to net
operating losses of $1.9 million and $0.7 million in the
Company’s LinCom Wireless and Titan Wireless businesses,
respectively, offset in part by net income of $1.2 million
generated in our commercial information technology
business.
In the
quarter ended March 31, 2003, loss from discontinued operations was
$0.9 million, net of a tax benefit of $0.5 million.
The net loss included $0.3 million in net operating losses
related to the exit of the Company’s international
telecommunications business, Titan Wireless, and $0.6 million
in net operating losses from the disposal or wind-down of the
Company’s commercial information technology business and the
LinCom Wireless business which were discontinued in the first and
third quarters of 2002.
Net Income
(Loss)
In the
quarter ended March 31, 2002, we reported a net loss of
$33.6 million, compared to net income of $7.0 million in
the quarter ended March 31, 2003. Loss from discontinued
operations was $1.4 million in the quarter ended March 31,
2002, compared to a loss of $0.9 million in the quarter ended
March 31, 2003. Included in the net loss for the three months
ended March 31, 2002, is a charge of $40.1 million for the
Company’s adoption of SFAS No. 142, all related to
discontinued operations, which is reported as a cumulative effect
of a change in accounting principle.
Liquidity and Capital
Resources
We generated
cash of approximately $5.6 million from our continuing
operations during the three months ended March 31, 2003, primarily
resulting from our core government business, net of an increase in
receivable balances of approximately $26.4 million.
Accounts receivable collections and billings of unbilled
receivables have historically been more difficult for us in the
first quarter of the year, which this year was further adversely
affected by the delayed passage of the government budget for 2003,
which impacted funding for some of our federal civilian agency
contracts. Our investing activities used net cash of
approximately $2.5 million, primarily for capital
expenditures. Financing activities provided
$1.0 million, primarily from the exercise of stock
options.
At March 31,
2003, total borrowings under our credit facility were
$348.3 million at a weighted average interest rate of
4.15%. Commitments under letters of credit were
$12.3 million at March 31, 2003, $12.2 million of which
reduce availability of our working capital line, resulting in
$122.8 million of availability on our working capital line at
March 31, 2003. Of the total borrowings, $3.5 million
was short-term. At March 31, 2003, the Company was in
compliance with all financial covenants.
On May 9,
2003, the Company priced a private placement of $200 million of its
8% senior subordinated notes due 2011. Titan intends to use
the net proceeds of this offering, together with proceeds from
borrowings of $50 million the Company expects to make under its
existing revolving senior credit facility plus additional cash on
hand, to redeem in their entirety its 53/4%
HIGH TIDES convertible preferred securities and to pay associated
fees and expenses. This offering is conditioned upon the
effectiveness of an amendment to our existing senior credit
facility to permit the offering and the redemption of the
53/4% HIGH TIDES. The amendment has
been approved by the requisite lenders in our bank group and
becomes effective upon the funding of the senior subordinated
notes, which is expected to occur on May 15, 2003. The
amendment to the senior credit facility includes the modification
of certain financial covenants, specifically the total debt to
EBITDA (as defined) ratio and a new total senior debt to EBITDA
ratio. In addition, the amendment to the senior credit
facility also includes increased interest rate margins for loans
made or outstanding under the senior credit facility at times when
the ratio of our total debt to EBITDA equals or exceeds 3.5 to
1. The terms of
the 53/4% HIGH TIDES require that we provide holders
at least 20 days notice prior to any optional redemption of
the 53/4% HIGH TIDES. The Company will provide
that notice to the holders upon the consummation of the offering,
and will deposit the net proceeds of the offering, together with
enough additional cash to permit the mandatory redemption of the
notes, into a secured proceeds account for investment in United
States Treasury securities. The 8% senior subordinated notes
are subject to mandatory redemption by Titan in the event that we
do not redeem the 53/4% HIGH TIDES on or prior to the date 30 days
after the date of issuance of the notes. The redemption price
for the mandatory redemption of the 8% senior subordinated notes is
101% of the issue price of the notes, plus accrued and unpaid
interest to the redemption date. The Company will incur
approximately $12.4 million in charges related to the
extinguishment of the HIGH TIDES, comprised of the write-off of
$7.9 million of remaining deferred financing costs of HIGH
TIDES, a call premium of $3.6 million to redeem the HIGH
TIDES, and approximately $0.9 million of interest during the
call period. All extinguishment charges will be recorded in
the second quarter of 2003 as a charge to income from continuing
operations. Following the redemption of the HIGH TIDES,
availability on the working capital line will be reduced by
$50 million for the borrowings expected on the Company’s
revolving line of credit. In addition, the borrowing capacity
available on the line of credit is subject to compliance with
financial and other covenants included in our senior credit
facility.
Related to
the Company’s contract with the national telephone company of
Benin (the “OPT”), Titan has a $72.3 million gross
receivable due from the OPT, which is reflected in Non-current
Assets of Discontinued Operations as of March 31, 2003. In
addition, approximately $40.5 million was drawn on the
non-recourse loan with the Africa Merchant Bank, which has been
reflected 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. As of March 31, 2003, the carrying value, net of
non-recourse debt, due on this contract was approximately
$31.8 million. During 2002, approximately
$2.4 million was collected on the Company’s receivable
from the OPT, and approximately $3.7 million has been
collected in the quarter ended March 31, 2003.
Titan is
endeavoring to divest discontinued businesses through stock and
asset sales, and is currently in negotiations with a number of
potential buyers, including buyers interested in GlobalNet.
In the event that Titan is unsuccessful in its endeavors specific
to sell GlobalNet, Titan may have to pay the remaining net
liabilities and incur a net cash outlay of approximately
$12.6 million to shut down the business. Titan may also
incur unforeseen liabilities if it decides to shut down
GlobalNet.
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 $1.4 million of
equipment financing.
The
Company’s $50 million senior secured revolving loan
commitment to SureBeam provides for borrowings up to
$29.5 million through 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 financial plan
submitted to Titan. Our aggregate level
of indebtedness, and our debt service requirements, may increase to
the extent we loan additional funds to SureBeam under the credit
facility. 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, including as described below in connection with our
recent amendment to the credit agreement, SureBeam is obligated to
use net proceeds from the sale of assets and its securities to
repay amounts advanced under this facility. In March 2003,
Titan and SureBeam entered into an agreement amending the credit
agreement. That amendment waived, subject to certain
conditions, SureBeam’s obligation to use net proceeds from
the sale of up to $25 million of its equity securities during the
period from March 2003 through September 2004 to make mandatory
payments under the credit agreement. In connection therewith,
SureBeam agreed to provide for certain change orders and the
furnishing of maintenance services under the Equipment Services
Agreement between us and SureBeam executed in February 2002.
Interest is payable monthly beginning in January 2003.
As of March 31, 2003, SureBeam had borrowed $25 million on
this facility. On February 3, 2003, SureBeam filed a Form 8-K
with the Securities and Exchange Commission wherein SureBeam stated
that they do not anticipate borrowing additional amounts on the
credit facility during 2003 or during the remaining period that the
credit facility is outstanding. There have been no additional
borrowings in 2003.
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. The aggregate amount of the lease
obligations Titan has guaranteed as of March 31, 2003 is
approximately $23.1 million. The leases extend through
periods ending in 2020. 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 March
31, 2003, Titan has guaranteed approximately $1.2 million, or
19.9% of the current loan balance of $6.0 million. In
the event Hawaii Pride defaults on the loan, Titan may be obligated
to cover any defaults on the entire outstanding balance of the
loan.
Titan and
SureBeam have entered into an exclusive contract for the purchase
and sale of electronic beam accelerators through December 31, 2003
unless SureBeam does not offer competitive pricing.
Our strategic
goals include the pay down of indebtedness, continued funding of
capital expenditures and the funding of potential strategic
acquisitions. We plan to finance these requirements from a
combination of sources, which include cash generation from our core
businesses, our credit facility and potential cash generated from
the disposal of discontinued businesses. 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 the intent to pay down
indebtedness, 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, that the Company’s collection cycle will improve,
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 for the year ended
December 31, 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, risks associated with
divesting its discontinued commercial businesses, 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
August 16, 2002, Perimex International Corporation
(“Perimex”) 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 Titan prevails, or if
Perimex does not prevail. Perimex elected not to post the
bond and the complaint was voluntarily dismissed without prejudice
by Perimex. However, Perimex has the right to file a new
complaint. 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 service we 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. We
have been cooperating and will continue to cooperate fully with the
investigation.
We received a
subpoena from the office of Inspector General for the National
Aeronautics and Space Administration, or NASA, seeking certain
records relating to billing for labor services in connection with
our contracts with NASA. We also received a subpoena from the
office of Inspector General for the General Services
Administration, or GSA, seeking similar records relating to billing
for labor categories in connection with contracts with GSA. We are
fully cooperating with the government’s inquiries in these
areas.
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 6. Exhibits and Reports
on Form 8-K.
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a.
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List of
exhibits:
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10.1
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Agreement of Lease
by and between NBP 220, LLC and The Titan
Corporation (“220 National Business Park”), dated March
31, 2003, including all exhibits and attachments.
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10.2
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Deed of Lease dated April
1, 2003, by and between Two Freedom Square, L.L.C. and The Titan
Corporation, including all exhibits and
attachments.
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10.3
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Employment Agreement, made
and entered into as of April 3, 2003 by and between The Titan
Corporation, a Delaware corporation, and Dr. Gene W.
Ray.
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10.4
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Employment Agreement, made
and entered into as of April 3, 2003 by and between The Titan
Corporation, a Delaware corporation, and Mark Sopp.
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10.5
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Employment Agreement, made
and entered into as of April 3, 2003 by and between The Titan
Corporation, a Delaware corporation, and Nicholas J.
Costanza.
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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 March 31, 2003, 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
dated April 29, 2003 and filed on April 30, 2003 to furnish
Regulation FD Disclosure pursuant to “Item 12. Results
of Operations and Financial Condition” on Form 8-K in
accordance with the Securities and Exchange Commission’s
Release Nos. 33-8216 and 34-47583.
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(2)
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Current Report on Form 8-K
dated and filed on April 30, 2003, to announce the Company’s
intention to offer $200 million of senior subordinated notes
due 2001 for sale in a private placement.
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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: May 13,
2003
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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: May 13, 2003
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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: May 13, 2003
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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
Note (1) Basis of Financial Statement
Preparation
Note (2) Exit and Restructuring Charges and
Other
Note (3) Cumulative Effect of Change in
Accounting Principle
Note (4) Discontinued Operations
Note (5) Debt
Note (6) Other Financial Information
Note (7) Commitments and
Contingencies
Note (8) Related Party
Transactions
Item 2. Management's Discussion And
Analysis Of Financial Condition And Results of Operations
Item 4. Controls and
Procedures.
Part II — Other
Information
Item 1. Legal
Proceedings.
Item 6. Exhibits and
Reports on Form 8-K.
Signatures
Certifications
Exhibit 99.1 Certification Pursuant to
Section 906 of the Public Company Accounting Reform and Investor
Protection Act of 2002
