NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(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 our Annual Report on
Form 10-K to the Securities and Exchange Commission (SEC) for the year ended
December 31, 2004. 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.
Significant Accounting Policies
Reclassifications. Certain reclassifications have been made to the prior
year presentation to conform to the 2005 presentation.
Stock-Based Compensation. As allowed by Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," Titan has
elected to continue to apply the intrinsic value based method of accounting for
stock options and has adopted the disclosure only provisions of the fair value
method contained in SFAS No. 123. Compensation cost, if any, is measured as the
excess of the quoted market price of Titan's stock on the date of grant over the
exercise price of the grant. Had compensation cost for Titan stock-based
compensation plans been determined based on the fair value method at the grant
dates for awards under those plans, our results of operations would have been
reduced to the pro forma amounts indicated below:
Three months ended
March 31,
2005 2004
Net income, as reported $ 19,012 $ 3,059
Add: Total stock-based compensation expense in 11 290
reported net income, net of tax related benefits
Less: Total stock-based employee compensation expense (1,818 ) (1,630 )
determined under fair value method for all
awards, net of tax related effects
Net income, pro forma $ 17,205 $ 1,719
Earnings per share:
Basic as reported $ 0.22 $ 0.03
Basic pro forma $ 0.20 $ 0.02
Diluted as reported $ 0.22 $ 0.03
Diluted pro forma $ 0.20 $ 0.02
6
Goodwill and Other Intangible Assets. Goodwill represents the excess of
costs over fair value of assets of businesses acquired. Effective January 1,
2002, Titan 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 least annually, utilizing a two step methodology. The
initial step requires Titan 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.
Titan performs its annual testing for impairment of goodwill and other
intangible assets in connection with the preparation of its annual financial
statements.
Note (2) Merger, Investigation and Settlement Costs
On June 26, 2004, Lockheed Martin Corporation terminated the merger
agreement pursuant to which Lockheed Martin was to have acquired Titan. The
merger agreement was entered into in September 2003 and amended in March 2004
and April 2004 to provide additional time for Titan to resolve the Securities
and Exchange Commission (SEC) and Department of Justice (DoJ) investigations
under the Foreign Corrupt Practices Act (FCPA) (see Note 7).
On March 1, 2005, Titan settled the government investigations related to the
FCPA. In the three months ended March 31, 2005, merger, investigation and
settlement costs of $5.8 million, in the accompanying consolidated income
statements, include $5.4 million in legal costs related to the resolution of the
FCPA investigation and $0.4 million in legal costs stemming from FCPA-related
litigation and investigations (see Note 7).
In the three months ended March 31, 2004, Titan incurred approximately
$17.6 million in legal, investment banking, accounting, printing and other
professional fees and costs related to the then-proposed merger, which are
reflected in merger, investigation and settlement costs in the accompanying
consolidated income statements. Approximately $11.9 million of these costs were
associated with the comprehensive internal review being conducted by Titan to
evaluate whether payments involving international consultants for Titan or its
subsidiaries were made in violation of applicable law. The legal, accounting and
other professional fees incurred also supported the related inquiry by the DoJ
and the investigation by the SEC (see Note 7). Also included are costs of
approximately $5.7 million related to the merger transaction itself, including
the exchange offer and consent solicitation for Titan's senior subordinated
notes and the redemption of Titan's preferred stock, both of which were
conditions to close the then-proposed merger.
Note (3) Redemption of Cumulative Convertible Preferred Stock
On March 15, 2004, Titan redeemed all outstanding shares of its cumulative
convertible preferred stock. The redemption was a condition to the close of the
proposed merger with Lockheed Martin. An aggregate of 625,846 shares were
redeemed at $20 per share, plus cumulative dividends in arrears of $0.03 per
share, which utilized cash of approximately $12.5 million, and the remaining
60,983 shares of
7
preferred stock were converted by shareholders into 47,580 shares of common
stock. The redemption of the preferred stock is recorded in stockholders'
equity.
Note (4) Discontinued Operations
In June 2004, Titan's board of directors decided to sell or otherwise divest
its Datron World Communications business (Datron World) and its Titan Scan
Technologies service business (Scan Services). These non-core operations did not
perform to management's expectations, and their divestiture would allow Titan to
better focus on its core National Security Solutions business. Subsequently, in
November 2004, Titan sold its Datron World business for approximately
$4.7 million, resulting in a loss of approximately $2.0 million. Additionally,
in February 2005, Titan sold Scan Services for $4.9 million, resulting in a gain
of $0.2 million. In connection with the sale, Titan assigned its lease on one
facility to the buyer, but remained liable for facilities restoration costs on
this facility. Prior to its sale, Scan Services generated revenues for the first
quarter of 2005 of $0.6 million. These businesses have been reported as
discontinued operations in accordance with SFAS No. 144, and all periods
presented have been restated accordingly to reflect these operations as
discontinued.
In July 2002, Titan's board of directors decided to exit all of its
international telecommunications businesses by selling and winding down its
operations within its previously reported Titan Wireless segment. Titan
immediately began implementing these actions, which were substantially completed
during 2003. Titan reported this exit of the Titan Wireless segment as a
discontinued operation in accordance with SFAS No. 144.
On December 10, 1999, Titan's 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 (the OPT), 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 financing was subsequently increased
by 6.0 billion francs CFA to approximately $54.0 million. This medium-term
financing is a non-recourse loan to Titan Africa which is guaranteed by the OPT
and secured by the OPT's equipment and revenues related to the project. The
facility has a fixed interest rate of 9.5% per year and was originally to 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 and were scheduled to end
on December 31, 2003. The payment terms were subsequently amended calling for
quarterly payments through mid-2006. The borrowings on this facility have been
utilized to fund various equipment and subcontractor costs incurred most notably
by Alcatel of France, a major subcontractor to this project.
Related to Titan's contract with the OPT, Titan has a $37.7 million gross
receivable due from the OPT, less a reserve of $14.3 million, which is reflected
as a net $23.4 million in non-current assets of discontinued operations as of
March 31, 2005. The $23.4 million receivable is equal to the outstanding balance
on the non-recourse loan, drawn to cover subcontract costs. The $23.4 million
balance on the non-recourse loan is included in non-current liabilities of
discontinued operations at March 31, 2005. The $14.3 million difference between
the gross receivable of $37.7 million and the $23.4 million balance on the
non-recourse loan represents amounts currently due from the OPT under the Titan
settlement agreement entered into with the OPT in 2003. This agreement
contemplated a $25 million payment by the OPT to Titan, which was due in full by
November 30, 2003. On December 31, 2003, Titan received a partial payment of
$11 million on the settlement. Based on the facts available in the second
quarter of 2004, principally the OPT's cash flow deficiencies and inability to
obtain adequate financing, Titan recorded a full reserve for the $14.3 million
balance outstanding. Notwithstanding this reserve, Titan has commenced an
international arbitration against the OPT seeking collection of this receivable.
At December 31, 2004, Titan Wireless had an accrual for $10.3 million for
estimated costs of resolving a
8
contingent liability with a subcontractor related to this project. In
February 2005, Titan received a demand for full payment from the subcontractor,
based on an international arbitration ruling which Titan was in the process of
appealing. In light of this, Titan and the subcontractor later reached a final
settlement whereby, in March 2005, Titan paid $9.0 million in full settlement of
the matter, resulting in a gain of $1.3 million in the first quarter of 2005.
A summary of the utilization of exit and restructuring accruals related to
the Titan Wireless discontinued operation during the three months ended
March 31, 2005 is as follows:
Balance Balance
December 31, Change in March 31,
2004 Cash Paid Estimate 2005
Titan Wireless:
Contingent liability with subcontractor $ 10,311 $ (8,980 ) $ (1,331 ) $ -
Estimated exit costs 3,192 (360 ) (484 ) 2,348
$ 13,503 $ (9,340 ) $ (1,815 ) $ 2,348
On June 2, 2004, Titan sold Cayenta Canada, its remaining commercial
information technology business for a net $5.6 million in cash, with no
resulting gain or loss recorded on the sale. Titan recorded current liabilities
related to this sale of approximately $1.8 million related to potential purchase
price adjustments due to the buyer and transaction-related costs and
indemnification obligations related to the sale. Additionally, Titan had
previously guaranteed performance on several customer contracts and leased a
facility that was subleased to Cayenta Canada. Although the buyer agreed to
indemnify Titan for performance on certain of these contracts and subleased the
facility, Titan was not released from its obligations under these guarantees or
under the facility lease. The face value of the performance guarantees is
approximately $14 million at March 31, 2005. Substantially all of the guarantees
were issued prior to December 31, 2003 and are therefore not required to be
recognized and measured under the provisions of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others-an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34."
Titan has not had to make any payments with respect to performance guarantees
provided to customers of this business since Titan acquired the business in 1999
and has not provided any reserves for these contingencies at March 31, 2005,
based on management's assessment that such payments are not probable of being
made.
In October 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. At the time Titan adopted the plan to spin-off SureBeam, in
accordance with APB No. 30, Titan accounted for SureBeam as a discontinued
operation. On August 5, 2002, Titan's remaining ownership interest in SureBeam
was spun-off to Titan stockholders as a tax-free dividend. Prior to the adoption
of the spin-off plan, Titan reported the SureBeam business as a separate
segment.
In January 2004, SureBeam began liquidation proceedings under Chapter 7 of
the United States Bankruptcy Code. During 2004, as a result of the bankruptcy
proceedings, Titan assumed certain lease obligations and idle facilities which
were previously guaranteed by Titan. Additionally, and since the time of the
completion of the bankruptcy proceedings, Titan has incurred expenses and
recorded charges related to these lease obligations and idle facilities that
have been accounted for in discontinued operations, as such guarantees on the
obligations of SureBeam existed at the time SureBeam was originally discontinued
in October 2001. In the second and fourth quarters of 2004, the Company recorded
charges aggregating $14.4 million to accrue the estimate of the shortfall
between the amount of the SureBeam lease guarantees and the amount expected to
be recovered by subleasing activities and for amounts to be incurred for
facilities restoration costs.
9
As of March 31, 2005, the total amount of the accrual remaining to cover the
aforementioned costs was $13.4 million, reflecting an approximate $0.5 million
use of the accrual for lease payments made on idle facilities in the quarter. To
date, Titan has not yet subleased or otherwise transferred any of the guaranteed
leases or lease obligations to third parties. The gross obligations under leases
and lease guarantees is approximately $21.0 million.
In relation to SureBeam's strategic alliance with Hawaii Pride, Titan has
guaranteed repayment of Hawaii Pride's bank debt up to the greater of SureBeam's
equity interest in Hawaii Pride (which is zero), or 19.9% of Hawaii Pride's
$6.8 million, 15-year loan from its lender, WebBank. As of March 31, 2005, Titan
has guaranteed approximately $1.1 million, or 19.9% of the current loan balance
of $5.3 million. In the event that Hawaii Pride defaults on the loan, Titan
currently expects to be obligated to cover any defaults on the entire
outstanding balance of the loan if the default is not cured within 90 days. In
late October 2003, Titan was notified by Hawaii Pride that Hawaii Pride had
stopped receiving financial support from SureBeam and did not have sufficient
cash resources to make its monthly principal and interest payments to WebBank.
Titan subsequently extended a credit facility to Hawaii Pride of up to a maximum
of $0.8 million in principal to cover shortfalls in debt service payments. This
facility is secured by a second lien on the assets of Hawaii Pride, including a
second mortgage on its facility. As of March 31, 2005, Titan has loaned
approximately $0.6 million to Hawaii Pride and, to Titan's knowledge, Hawaii
Pride is current in its debt service to WebBank. All amounts outstanding under
the Titan credit facility are required to be repaid in twenty equal quarterly
installments commencing on October 1, 2005.
Income Statement Summary
Following is a summary of the income (loss) from discontinued operations for
2005 and 2004:
Three months ended March 31,
2005 2004
Loss from discontinued operations $ (636 ) $ (1,092 )
Gain on subcontractor liability settlement 1,331 -
Change in estimated exit costs 484 -
Gain on sale of businesses, net 185 -
1,364 (1,092 )
Tax expense (benefit) 505 (520 )
Net income (loss) $ 859 $ (572 )
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Balance Sheet Summary
Following is a table of all related balance sheet categories for
discontinued operations:
As of As of
March 31, December 31,
2005 2004
------------ ----------------
Current assets of discontinued operations:
Accounts receivable, inventory and other $ - $ 1,665
------------ ----------------
$ - $ 1,665
------------ ----------------
Non-current assets of discontinued operations:
Accounts receivable $ 23,387 $ 23,387
Fixed assets and other - 3,082
------------ ----------------
$ 23,387 $ 26,469
------------ ----------------
Current liabilities of discontinued operations:
Subcontractor contingency reserve $ - $ 10,311
Lease obligations and facilities restoration 4,691 5,095
Exit costs 2,348 3,192
Other 2,043 2,397
------------ ----------------
$ 9,082 $ 20,995
------------ ----------------
Non-current liabilities of discontinued operations:
Non-recourse loan $ 23,387 $ 23,387
Lease obligations and facilities restoration 9,677 9,931
------------ ----------------
$ 33,064 $ 33,318
------------ ----------------
|
Note (5) Debt
Senior Credit Facility
On May 23, 2002, Titan entered into an agreement with Wachovia Bank,
National Association and Wachovia Securities for a $485 million senior 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 and Trust Company and Toronto Dominion
Bank as Co-Documentation Agents and other financial institutions. The senior
credit facility is comprised of an aggregate credit commitment of $485 million,
consisting of a seven-year term loan in an aggregate principal amount of
$350 million and a six-year $135 million revolving credit facility. The
seven-year term loan matures on June 30, 2009, and the senior revolver matures
on May 28, 2008.
At March 31, 2005, total borrowings outstanding under Titan's senior credit
facility were $385.4 million at a weighted average interest rate of 5.34%.
Commitments under letters of credit, which reduce availability under the senior
credit facility, were approximately $4.2 million at March 31, 2005, resulting in
approximately $85.8 million of borrowing availability on the senior revolver at
March 31, 2005. Of the total outstanding borrowings, $3.5 million was
short-term. At March 31, 2005, Titan was in compliance with all financial
covenants under its various debt agreements; which are comprised of a maximum
total debt to EBITDA ratio of 4.75 to 1.0, a maximum total senior debt to EBITDA
ratio of 3.0 to 1.0, a minimum interest coverage ratio of 3.0 to 1.0; a minimum
fixed charge coverage ratio of 1.35 to 1.0 and a minimum net worth of
approximately $277.0 million at March 31, 2005. The remaining unamortized
deferred costs and expenses of $6.6 million related to the senior credit
facility,
11
which were incurred primarily in 2002, are included in "Intangible Assets" at
March 31, 2005 and will be amortized over the remaining term of the senior
credit facility, assuming no prepayment is made.
Senior Subordinated Notes
On May 15, 2003, Titan sold $200 million of 8% senior subordinated notes due
May 15, 2011 in a private placement (the Notes). Titan used the net proceeds
from the issuance of the Notes, plus borrowings of $50 million under its
revolving credit facility and additional cash on hand, to redeem all of the
$250 million of the then-outstanding 5 3/4% HIGH TIDES convertible preferred
securities. The redemption of HIGH TIDES occurred on June 4, 2003.
Titan is required to make interest payments on the Notes semi-annually in
arrears on May 15 and November 15 at the rate of 8% per annum. Titan may redeem
the Notes, in whole or in part, on or after May 15, 2007 at the following
redemption prices, plus accrued and unpaid interest and liquidated damages, if
any:
Year Percentage
2007 104.0 %
2008 102.0 %
2009 and thereafter 100.0 %
In addition, on or prior to May 15, 2006, Titan may redeem up to 35% of the
aggregate principal amount of the Notes with the net proceeds of certain equity
offerings at a redemption price of 108% of principal together with accrued and
unpaid interest. The Notes are unsecured and rank or will rank equally with
Titan's current or future senior subordinated indebtedness. Each of Titan's
domestic subsidiaries, other than Cayenta, guarantee the Notes. The guarantees
are unsecured and rank equally with each guarantor's senior subordinated
indebtedness. The Notes and the guarantees are junior to all of Titan's and each
guarantor's senior indebtedness and senior to all of Titan's and each
guarantor's subordinated indebtedness (see Note 9).
On July 19, 2004, Titan completed the exchange of the existing Notes for a
new series of substantially identical 8% senior subordinated notes due May 15,
2011 registered under the Securities Act.
The remaining unamortized deferred costs and expenses of $4.8 million
related to the Notes, which were incurred in May 2003, are included in
"Intangible Assets" at March 31, 2005, and will be amortized over the term of
the Notes, assuming no payment is made.
Note (6) Other Financial Information
Earnings Per Share
Basic and diluted earnings per share were computed based on net income, less
the regular quarterly dividend requirement for preferred stock and the accrued
dividend to the date of redemption.
12
The following data summarize information relating to the per share
computations for income from continuing operations:
Three months ended March 31, 2005
Income Shares (000's) Per Share
(Numerator) (Denominator) Amounts
Income from continuing operations $ 18,153
Basic EPS:
Income from continuing operations
available to common stockholders $ 18,153 84,802 $ 0.21
Effect of dilutive securities:
Stock options and warrants - 3,029 -
Diluted EPS:
Income from continuing operations
available to common stockholders $ 18,153 87,831 $ 0.21
Three months ended March 31, 2004
Income Shares (000's) Per Share
(Numerator) (Denominator) Amounts
Income from continuing operations $ 3,631
Less: preferred stock dividends (190 )
Basic EPS:
Income from continuing operations
available to common stockholders $ 3,441 82,767 $ 0.04
Effect of dilutive securities:
Stock options and warrants - 4,117 -
Diluted EPS:
Income from continuing operations
available to common stockholders $ 3,441 86,884 $ 0.04
In the three months ended March 31, 2005, options and warrants to purchase
approximately 893,000 shares of common stock at prices ranging from $17.18 to
$29.74 per share were not included in the computation of diluted EPS, as their
effect was anti-dilutive due to the exercise price being higher than Titan's
average market price in the period. For the three month period ended March 31,
2004, options and warrants to purchase approximately 281,400 shares of common
stock at prices ranging from $23.79 to $29.74 per share were not included in the
computation of diluted EPS, as their effect was anti-dilutive due to the
exercise price being higher than Titan's average market price in the period.
Approximately 460,100 shares of common stock in the three month period in
2004 that could have been issued from the potential conversion of cumulative
convertible preferred stock were not included in the computations of diluted
EPS, as the effect would have been anti-dilutive. The change in potential
dilution from 2004 to 2005 for the preferred stock is the result of its
redemption on March 15, 2004 (see Note 3).
Select Statement of Operations Data
Included in revenues for the three months ended March 31, 2005, are revenues
related to a single contract with the U.S. Army to provide linguist services of
$85.0 million, or 15.2% of total revenues, in
13
the three month period. Revenues related to our enterprise information
technology contract for U.S. Special Operations Command were $18.9 million, or
3.4%, of total revenues, during the first quarter of 2005. No other single
contract accounted for more than 3% of total revenues in the first quarter of
2005.
The net gain on sale of assets reflected in the consolidated statement of
operations for the three months ended March 31, 2004 represents a gain on the
sale of certain contracts and related assets and liabilities of $0.9 million,
which sale was completed in order to mitigate concerns raised by one customer
related to organizational conflict of interest issues arising from the
terminated merger with Lockheed Martin. The aforementioned gain was partially
offset by a loss of $0.3 million on another sale of certain contracts and
related assets and liabilities, which were sold as part of Titan's ongoing
strategy to divest non-core assets and operations.
Select Balance Sheet Data
The following are details concerning certain balance sheet data:
March 31, December 31,
2005 2004
Accounts Receivable:
U.S. government-billed $ 379,274 $ 415,889
U.S. government-unbilled 122,222 88,257
Trade 21,431 14,648
Less: Allowance for doubtful accounts (3,447 ) (3,408 )
$ 519,480 $ 515,386
Inventories:
Materials $ 7,371 $ 6,988
Work-in-process 10,164 10,107
Finished goods 3,952 4,241
$ 21,487 $ 21,336
A summary of the utilization of exit and restructuring accruals during the
three months ended March 31, 2005 is as follows:
Balance Balance
December 31, Change in March 31,
2004 Cash Paid Estimate 2005
Titan Systems restructuring:
Estimated facilities consolidation costs $ 14,856 $ (1,137 ) $ 400 $ 14,119
Cayenta headquarters exit costs:
Lease commitment costs 383 (77 ) - 306
Employee termination costs and other 45 (26 ) - 19
428 (103 ) - 325
$ 15,284 $ (1,240 ) $ 400 $ 14,444
At March 31, 2005, $5.4 million of the exit and restructuring accruals are
included in "Other Accrued Liabilities" on the consolidated balance sheet, and
$9.0 million are included in "Other Non-current Liabilities." The remaining
accrual balance is primarily comprised of amounts due under the excess
facilities as a result of facilities consolidation actions, which requires lease
payments and
14
other lease costs, net of assumed sublease income, to be paid over the remaining
lease terms, which expire in 2009.
Supplemental Cash Flow Information
Supplemental disclosure of cash flow information:
Three months ended March 31,
2005 2004
Non-cash investing and financing activities:
Shares contributed to employee benefit plans $ 3,099 $ 2,718
Shares tendered for stock option exercises - 128
Cash paid for interest $ 3,527 $ 4,761
Cash paid for (refunds of) income tax 401 (509 )
Note (7) Commitments and Contingencies
Legal Matters
Foreign Corrupt Practices Act Related Investigations
During the first quarter of 2004, Titan learned of allegations that improper
payments under the Foreign Corrupt Practices Act (FCPA) had been made, or items
of value had been provided, involving international consultants for Titan or its
subsidiaries to foreign officials. The allegations were identified as part of
internal reviews conducted by Titan and Lockheed Martin, and jointly reported by
them to the government. Titan's board of directors established a committee of
the board to oversee Titan's internal review of these matters.
The internal review began with a focus on Titan's Datron World
Communications unit, which was discontinued in June 2004 and sold in
November 2004, but the internal review later was expanded to a number of Titan's
international businesses, including Titan Wireless (which was discontinued in
2002 and was substantially wound down in 2003) and Titan's National ID Card
contract in Saudi Arabia. Titan agreed to, and did, provide the Securities and
Exchange Commission (SEC) and the Department of Justice (DoJ) with the results
of the internal investigation on an ongoing basis. In connection with the
internal review, the SEC commenced an investigation into whether payments
involving Titan's international consultants were made in violation of applicable
law, particularly the FCPA. In addition, the DoJ initiated a criminal inquiry
into this matter, and also initiated an investigation into whether these same
alleged practices violated provisions of the United States Tax Code.
Titan recorded a provision of $3.0 million as of December 31, 2003 for
resolution of the government FCPA investigations. Titan recorded an additional
provision of $25.5 million in the second quarter of 2004 to reflect the change
in its estimate of the cost of resolving these investigations.
As a result of the investigation, Titan began to implement significant
expanded FCPA and International Traffic in Arms Regulations (ITAR) policies. To
lead and oversee those expanded policies, in September 2004, Titan created the
position of Vice-President for Compliance and Ethics and hired an experienced
executive to fill this position.
On March 1, 2005, Titan announced that it had entered into a consent to
entry of a final judgment with the SEC without admitting or denying the SEC's
allegations, and reached a plea agreement with the DoJ, under which Titan pled
guilty to three felony FCPA counts related to its overseas operations, including
in particular its operations in Benin. These counts consist of violations of the
anti-bribery and the books and records provisions of the FCPA and aiding and
assisting in the preparation of a false tax return. Matters resolved through the
plea agreement with the DoJ involved commercial international
15
business that Titan had discontinued and is in the process of winding down. As a
part of the settlement, Titan was given credit for self reporting and
cooperating with the government, and for accepting responsibility.
On March 1, 2005, in connection with the FCPA settlement, Titan made total
payments of $28.5 million, the same figure Titan reserved for this purpose
during 2003 and 2004. The total includes a DoJ-recommended fine of $13 million,
payments to the SEC consisting of disgorgement of $12.6 million and prejudgment
interest of $2.9 million. The Hon. Roger T. Benitez, a judge of the Federal
District Court in San Diego, imposed upon Titan a fine of $13 million and a
three-year term of supervised probation, both of which are consistent with the
DoJ's and Titan's agreed-upon recommendations to the Court. In addition, the
sentence imposed by the Court incorporated Titan's agreement to implement a
best-practices compliance program designed to detect and deter future violations
of the FCPA.
Further, as a result of Titan's plea agreement, Titan is currently unable to
obtain new export licenses for items regulated by the U.S. Department of State.
Titan has been working with the U.S. Department of State to obtain relief from
this automatic statutory provision, but there is no assurance that Titan will be
able to obtain new export licenses in the foreseeable future.
The plea agreement requires Titan to file an amended corporate tax return
for 2002 to correct deductions previously taken with respect to matters at issue
in the investigations. The amended tax return will not result in additional
taxes, but is estimated to reduce Titan's net operating loss carry forward
benefit by approximately $1.3 million. The tax provision effect of the amended
tax return was made in the fourth quarter of 2004. Under the Consent to Entry of
Final Judgment with the SEC, Titan has retained a qualified independent
consultant to review Titan's policies and procedures with respect to its
compliance with the FCPA, and Titan has agreed to adopt the consultant's
recommendations.
On March 2, 2005, Titan and the Navy executed an administrative settlement
agreement that will allow Titan to continue to conduct business under U.S.
government contracts and receive U.S. government contracts. The agreement also
provides for Navy monitoring of Titan's compliance activities for three years.
Titan has an ongoing obligation under indemnity agreements with current and
former employees to advance their costs of defense relating to the FCPA
investigations and the related class action and derivative litigation described
below, subject to the individuals undertaking to repay the costs of defense if
it is ultimately determined that such individual is not entitled to be
indemnified by Titan.
Other Legal Matters
Titan is involved in legal actions in the normal course of its business,
including audits and investigations by various governmental agencies that result
from its work as a defense contractor. Titan and its subsidiaries are named as
defendants in legal proceedings from time to time and third parties, including
the government, may assert claims against Titan from time to time. In addition,
Titan has acquired companies from time to time that have legal actions pending
against them at the time of acquisition. Based upon current information,
including consultation with its lawyers, Titan does not believe that the
ultimate liability arising from any of these actions, including those discussed
below, will materially affect its consolidated financial position. However, the
March 1, 2005 FCPA settlement payment materially impacted cash flow and Titan's
borrowings under its senior revolver in the first quarter of 2005. Titan's
evaluation of the likely impact of these actions, including those discussed
below, could change in the future and Titan could have unfavorable outcomes that
it does not expect. Any of these matters could have a material adverse effect on
Titan's results of operations or cash flows in a future period and could have
other adverse effects on Titan's business.
16
Stockholder Class Actions
Since April 2, 2004, two stockholder class action lawsuits have been filed
against Titan and certain of its officers, asserting claims under the federal
securities laws, which Titan refers to collectively as the "federal securities
actions". On September 17, 2004, these class action lawsuits were consolidated
as In re Titan Inc. Securities Litigation, No. 04-CV-0701-K(NLS), a consolidated
purported class action filed before the U.S. District Court for the Southern
District of California. The federal securities action purports to be brought on
behalf of all purchasers of Titan common stock during the period from July 24,
2003 through and including March 22, 2004. The complaint seeks an unspecified
amount of damages. The complaint alleges, among other things, that the
defendants violated Section 10(b) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and SEC Rule 10b-5 promulgated thereunder, and
Section 20(a) of the Exchange Act, by issuing a series of press releases, public
statements and filings disclosing significant historical and future revenue
growth, but omitting to mention certain allegedly improper payments involving
international consultants in connection with Titan's international operations,
thereby artificially inflating the trading price of Titan's common stock. On
January 14, 2005, Titan and certain individual defendants jointly filed a motion
to dismiss the complaint. The plaintiff intends to seek leave to amend the
complaint. If the court allows the plaintiff to amend the complaint, Titan
expects to file a motion to dismiss the amended complaint. Titan intends to
defend the claims vigorously.
Since April 7, 2004, two stockholder class action complaints have been filed
against certain Titan officers, asserting that these officers breached their
fiduciary duties to Titan's stockholders. The complaints, which Titan refers to
as the "fiduciary duty actions", were filed in the Superior Court for the State
of California in and for San Diego County. The cases include Paul Berger v. Gene
W. Ray, et al., No. GIC 828346, and Robert Garfield v. Mark W. Sopp, et. al, No.
GIC 828345. The fiduciary duty actions purport to be brought on behalf of all
holders of Titan common stock as of April 7, 2004. The fiduciary duty actions
allege, among other things, that the defendants breached their fiduciary duties
by acquiescing in or condoning Titan's alleged violations of the FCPA by failing
to establish adequate procedures to prevent the alleged FCPA violations, and by
failing, in bad faith, to voluntarily report the alleged FCPA violations to
government officials. The complaints seek compensatory damages in respect of the
loss of value sustained by Titan stockholders as a result of the reduction in
merger consideration payable to them under the terms of the amendment to the
merger agreement with Lockheed Martin delivered on April 7, 2004. The Berger and
Garfield matters have been consolidated and are now treated, for all purposes,
as the Garfield matter. Additionally, plaintiffs and defendants have agreed that
defendants are not required to answer or otherwise respond to the Garfield
complaint until the motions to dismiss in the federal securities action have
been denied or granted with prejudice. Titan intends to defend the claims
vigorously.
Since June 28, 2004, four shareholder derivative lawsuits have been filed
against Titan directors and certain Titan officers, naming Titan as a nominal
defendant, which Titan refers to collectively as the "derivative actions". The
derivative actions include Theodore Weisgerber v. Gene Ray, et al., No. 832018,
which was filed in the Superior Court for the State of California, San Diego;
Robert Ridgeway v. Gene Ray, et al., No. 542-N, which was filed in Delaware
Court of Chancery, New Castle County; Bernd Bildstein v. Gene Ray, et al.,
No. 833701, which was filed in the Superior Court for the State of California,
San Diego County and Madnick v. Gene Ray, et al, No. 1215-N, which was filed in
the Delaware Court of Chancery, New Castle County. The derivative actions
purport to be brought for the benefit of the nominal defendant, Titan, and
allege that the defendants breached their fiduciary duties by failing to monitor
and supervise management in a way that would have either prevented alleged FCPA
violations or would have detected the FCPA violations. The Weisgerber complaint
was subsequently amended to include allegations that the defendants breached
their fiduciary duties by failing to monitor and supervise management in a way
that would have prevented the alleged mistreatment of prisoners at the Abu
Ghraib prison in Iraq, alleged billing errors relating to work
17
performed by foreign nationals, and the loss of contracts with the government.
The plaintiffs seek to recover the costs incurred in the internal and external
investigations, penalties or damages paid to settle private litigation or
government proceedings, and lost goodwill. The Weisgerber and Bildstein matters
have been consolidated and are now treated, for all purposes, as the Weisgerber
matter. The Ridgeway plaintiff intends to file an amended complaint which will
include both derivative and direct claims. Titan intends to defend all claims
made in the derivative actions vigorously.
SureBeam Related Litigation
In August 2002, Titan completed the spin-off of its former subsidiary,
SureBeam Corporation. On January 19, 2004, SureBeam voluntarily filed for
bankruptcy relief to be liquidated under Chapter 7 of the United States
Bankruptcy Court. Various lawsuits have been filed against Titan and/or certain
directors and executive officers of Titan in connection with SureBeam.
Since August 2003, Titan, certain corporate officers of SureBeam
Corporation, Dr. Gene Ray and Susan Golding, as SureBeam directors, and certain
investment banks that served as lead underwriters for SureBeam's March 2001
initial public offering, have been named as defendants in several purported
class action lawsuits filed by holders of common stock of SureBeam in the U.S.
District Court. On October 6, 2003, these class action lawsuits were
consolidated into In re SureBeam Corporation Securities Litigation,
No. 03-CV-001721-JM (POR), a single class action for which an amended
consolidated class action complaint was filed on March 24, 2004, with the U.S.
District Court for the Southern District of California. The complaint seeks an
unspecified amount of damages. The SureBeam class action complaint alleges that
each of the defendants, including Titan, as a "control person" of SureBeam
within the meaning of Section 15 of the Securities Act, should be held liable
under Section 11 of the Securities Act because the prospectus for SureBeam's
initial public offering was allegedly inaccurate and misleading, contained
untrue statements of material facts, and omitted to state other facts necessary
to make the statements made not misleading. The SureBeam class action complaint
also alleges that the defendants, including Titan, as a control person of
SureBeam within the meaning of Section 20(a) of the Exchange Act, should be held
liable under Section 10(b) of the Exchange Act for false and misleading
statements made during the period from March 16, 2001 to August 27, 2003. On
January 3, 2005, the court granted in part and denied in part motions to dismiss
the amended consolidated complaint. The court granted plaintiffs 45 days leave
to amend their complaint, which amended complaint has been filed. Titan intends
to defend the claims vigorously.
On September 17, 2004, the bankruptcy trustee in the SureBeam Corporation
bankruptcy pending in the United States Bankruptcy Court for the Southern
District of California brought an action in San Diego Superior Court, on behalf
of the bankruptcy estate, against certain directors and current and former
executive officers of Titan who served at one time as directors or officers of
SureBeam. As of the date of this report, the bankruptcy trustee has not served
the complaint. Titan is not named as defendant in this litigation and received a
prior release of claims from the bankruptcy trustee. Because the defendants were
named by reason of the fact that they were serving as directors or officers of
SureBeam at the request of Titan, Titan is covering the costs of defense of
these claims, subject to indemnification agreements and bylaw provisions.
Other Legal Proceedings
Since June 9, 2004, two lawsuits have been filed alleging that Titan and
other defendants either participated in, approved of, or condoned the
mistreatment of prisoners by United States military officials in certain prison
facilities in Iraq in violation of federal, state and international law. The
first of these cases, Saleh v. Titan Corporation, No. 04-CV-1143 R, was filed in
the United States District Court for the Southern District of California against
The Titan Corporation, CACI International, Inc. (CACI), and its affiliates, and
three individuals (one formally employed by Titan and one by a Titan
subcontractor). Plaintiffs in Saleh seek class certification. The second case,
Ibrahim v. Titan Corporation,
18
NO. 04-CV-1248, was filed on July 27, 2004, on behalf of five individual
plaintiffs against Titan, CACI and CACI affiliates, and contains allegations
similar to those in Saleh. Class certification has not been requested in
Ibrahim. Titan intends to defend these lawsuits vigorously.
On August 16, 2002, Perimex International Corporation (Perimex) filed a
complaint against Titan, Titan Wireless, Inc. (Titan Wireless) and a former
Titan Wireless employee in San Diego Superior Court in San Diego, California.
Perimex later dismissed its complaint voluntarily and filed a new complaint with
substantially similar allegations in the United States District Court for the
Southern District of California, NO. 03-CV-1037 IEG (WMC). The complaint alleged
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 develop a telecommunications network in Argentina and other related
alleged misconduct. On April 25, 2005, the court dismissed the complaint with
prejudice, and the case was terminated.
On January 23, 2004, Titan, together with its wholly-owned subsidiary, Titan
Wireless, Inc., and Titan Wireless's wholly-owned subsidiary, Titan
Africa, Inc., were named as defendants in Gonzales Communications, Inc. v. Titan
Wireless, Inc., Titan Africa, Inc., The Titan Corporation, Geolution
International Inc., and Mundi development, Inc., a lawsuit filed in the U.S.
District Court for the Southern District of California, NO. 04-CV-00147 WQH
(JMA). The complaint relates to the purchase by Gonzales Communications of
equipment and related services under an equipment purchase agreement entered
into with Titan Wireless in June 2001. Gonzales Communications contends that the
equipment and services delivered were unsatisfactory. In the complaint, Gonzales
Communications seeks direct damages in the amount of $0.9 million plus interest,
representing the amount Gonzales Communications alleges to have previously paid
under the agreement, and consequential damages of approximately $16.3 million.
To date, Titan and its subsidiaries have not received payment in full under the
agreement for the equipment and services that were delivered to Gonzales
Communications. Titan has filed a counterclaim against Gonzales Communications
for in excess of $1.2 million. Titan intends to defend its position vigorously.
On March 14, 2005, Makram Majid Chams, a former consultant of Titan filed a
claim with the Preliminary Committee on Labor Disputes Settlement in Saudi
Arabia. Mr. Chams alleges that Titan wrongfully terminated his consulting
agreement and that he was defamed by Titan's publication in a local newspaper of
a mandatory notice that he is no longer representing Titan. The plaintiff is
seeking approximately $21.9 million in damages. Titan intends to defend its
position vigorously.
In October 2002, Titan received a grand jury subpoena from the Antitrust
Division of the DoJ requesting the production of documents relating to
information technology services performed for the Air Force at Hanscom Air Force
Base in Massachusetts. Titan has been informed that other companies who have
performed similar services have received subpoenas as well. Titan is not aware
of any illegal or inappropriate conduct and has been cooperating and will
continue to cooperate fully with the investigation.
In March 2003, Titan 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 its
contracts with NASA. Titan 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.
Titan is not aware of any illegal or inappropriate conduct and has been
cooperating and will continue to cooperate fully with the investigation.
19
Note (8) Guarantor Condensed Consolidating Financial Statements
As discussed in Note 5, on May 15, 2003, Titan sold $200 million of 8%
senior subordinated notes in a private placement. Titan used the net proceeds
from the issuance of the 8% senior subordinated notes, plus borrowings of
$50 million made under its revolving credit facility and additional cash on
hand, to redeem all of the $250 million of the then-outstanding 53/4% HIGH TIDES
convertible preferred securities. The redemption of HIGH TIDES occurred on
June 4, 2003.
Following are consolidating condensed balance sheets as of March 31, 2005
(unaudited) and December 31, 2004, and unaudited statements of operations for
the three months ended March 2005 and 2004, and statements of cash flows for the
three months ended March 31, 2005 and 2004 for the Guarantor Subsidiaries and
the Non-guarantor Subsidiaries as defined below. The following consolidated
condensed financial statements present financial information for:
Parent: The Titan Corporation on a stand-alone basis.
Guarantor Subsidiaries: All directly and indirectly owned domestic
subsidiaries of Parent other than Cayenta Inc. on a stand-alone basis.
Non-guarantor Subsidiaries: Cayenta Inc., and all direct and indirect
subsidiaries of Parent that are not organized under the laws of the United
States, any state of the United States or the District of Columbia and that
conduct substantially all business operations outside the United States.
Reclassifications and Eliminations: Entries that eliminate the investment in
subsidiaries and intercompany balances and transactions.
The Titan Corporation and Subsidiaries: The financial information for The
Titan Corporation on a condensed consolidated basis.
The classification of operating entities within each of the columns is based
on the legal status of the entity as of March 31, 2005. Accordingly, certain
legal entities that existed in prior years that have been merged into Titan as
of March 31, 2005 have been reclassified in the prior year condensed financial
statements to conform to the current year presentation.
20
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Three Months Ended March 31, 2005
(Unaudited)
(In thousands)
The Titan
Corporation
Guarantor Non-guarantor Reclassifications and
Parent Subsidiaries Subsidiaries and Eliminations Subsidiaries
--------- -------------- --------------- ------------------- --------------
Revenues $ 541,672 $ 16,273 $ 1,941 $ (893 ) $ 558,993
--------- -------------- --------------- ------------------- --------------
Costs and expenses:
Cost of revenues 455,464 14,160 1,692 (821 ) 470,495
Selling, general and
administrative 38,725 1,362 505 - 40,592
Research and
development 3,359 232 - - 3,591
Merger, investigation
and settlement costs 5,818 - - - 5,818
--------- -------------- --------------- ------------------- --------------
Total costs and
expenses 503,366 15,754 2,197 (821 ) 520,496
--------- -------------- --------------- ------------------- --------------
Operating profit (loss) 38,306 519 (256 ) (72 ) 38,497
Interest expense (9,971 ) - - - (9,971 )
Interest income 287 - 2 - 289
--------- -------------- --------------- ------------------- --------------
Income (loss) from
continuing operations
before income taxes 28,622 519 (254 ) (72 ) 28,815
Income tax provision
(benefit) 10,590 192 (94 ) (26 ) 10,662
--------- -------------- --------------- ------------------- --------------
Income (loss) from
continuing operations 18,032 327 (160 ) (46 ) 18,153
Income (loss) from
discontinued operations,
net of taxes (11 ) 870 - - 859
--------- -------------- --------------- ------------------- --------------
Earnings (loss) before
equity in earnings of
subsidiaries 18,021 1,197 (160 ) (46 ) 19,012
Equity in losses of
subsidiaries 1,037 - - (1,037 ) -
--------- -------------- --------------- ------------------- --------------
Net earnings (loss) $ 19,058 $ 1,197 $ (160 ) $ (1,083 ) $ 19,012
--------- -------------- --------------- ------------------- --------------
|
21
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Operations
For the Three Months Ended March 31, 2004
(Unaudited)
(In thousands)
The Titan
Corporation
Guarantor Non-guarantor Reclassifications and
Parent Subsidiaries Subsidiaries and Eliminations Subsidiaries
--------- -------------- --------------- ------------------- --------------
Revenues $ 435,933 $ 12,048 $ 7,694 $ (1,653 ) $ 454,022
--------- -------------- --------------- ------------------- --------------
Costs and expenses:
Cost of revenues 364,898 10,744 8,233 (1,603 ) 382,272
Selling, general and
administrative 33,308 1,227 1,354 - 35,889
Research and development 3,177 241 - - 3,418
Merger, investigation and
settlement costs 17,579 - - - 17,579
--------- -------------- --------------- ------------------- --------------
Total costs and
expenses 418,962 12,212 9,587 (1,603 ) 439,158
--------- -------------- --------------- ------------------- --------------
Operating profit (loss) 16,971 (164 ) (1,893 ) (50 ) 14,864
Interest expense (9,116 ) - - - (9,116 )
Interest income 163 - - - 163
Gain (loss) on sale of assets 863 (300 ) - - 563
--------- -------------- --------------- ------------------- --------------
Income (loss) from continuing
operations before income
taxes 8,881 (464 ) (1,893 ) (50 ) 6,474
Income tax provision
(benefit) 3,805 (185 ) (757 ) (20 ) 2,843
--------- -------------- --------------- ------------------- --------------
Income (loss) from continuing
operations 5,076 (279 ) (1,136 ) (30 ) 3,631
Income (loss) from
discontinued operations, net
of taxes (167 ) (614 ) 209 - (572 )
--------- -------------- --------------- ------------------- --------------
Earnings (loss) before equity
in earnings of subsidiaries 4,909 (893 ) (927 ) (30 ) 3,059
Equity in losses of
subsidiaries (1,820 ) - - 1,820 -
--------- -------------- --------------- ------------------- --------------
Net earnings (loss) $ 3,089 $ (893 ) $ (927 ) $ 1,790 $ 3,059
--------- -------------- --------------- ------------------- --------------
|
22
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Balance Sheet
As of March 31, 2005
(Unaudited)
(In thousands)
The Titan
Corporation
Guarantor Non-guarantor Reclassifications and
Parent Subsidiaries Subsidiaries and Eliminations Subsidiaries
----------- -------------- --------------- ------------------- --------------
Assets
Current Assets:
Cash and cash
equivalents $ 19,715 $ (379 ) $ (14 ) $ - $ 19,322
Accounts receivable-net 490,689 17,078 11,713 - 519,480
Inventories 21,487 - - - 21,487
Prepaid expenses and
other 22,225 315 690 (71 ) 23,160
Deferred income taxes 84,441 - - - 84,441
----------- -------------- --------------- ------------------- --------------
Total current
assets 638,557 17,015 12,389 (71 ) 667,890
Property and equipment-net 54,801 407 768 - 55,976
Goodwill 456,033 8,377 59 - 464,469
Other assets-net 56,445 24 72 - 56,541
Deferred income taxes 52,651 - - - 52,651
Non-current assets of
discontinued operations - 23,387 - - 23,387
Intercompany investments,
advances and liabilities-net 335,486 (182,671 ) (152,815 ) - -
----------- -------------- --------------- ------------------- --------------
Total assets $ 1,593,973 $ (133,461 ) $ (139,527 ) $ (71 ) $ 1,320,914
----------- -------------- --------------- ------------------- --------------
Liabilities and
Stockholders' Equity
Current Liabilities:
Current portion of
amounts outstanding
under line of credit $ 3,500 $ - $ - $ - $ 3,500
Accounts payable 91,592 4,686 282 - 96,560
Current portion of
long-term debt 36 - - - 36
Accrued compensation and
benefits 75,973 1,571 367 - 77,911
Other accrued
liabilities 92,152 2,551 724 - 95,427
Current liabilities of
discontinued operations 6,655 2,427 - - 9,082
----------- -------------- --------------- ------------------- --------------
Total current
liabilities 269,908 11,235 1,373 - 282,516
----------- -------------- --------------- ------------------- --------------
Long-term portion of amounts
outstanding under line of
credit 381,875 - - - 381,875
Senior subordinated notes 200,000 - - - 200,000
Other long-term debt 479 - - - 479
Other non-current
liabilities 50,415 - 624 - 51,039
Non-current liabilities of
discontinued operations 9,677 23,387 - - 33,064
Stockholders' equity
(deficit) 681,619 (168,083 ) (141,524 ) (71 ) 371,941
----------- -------------- --------------- ------------------- --------------
Total liabilities
and equity $ 1,593,973 $ (133,461 ) $ (139,527 ) $ (71 ) $ 1,320,914
----------- -------------- --------------- ------------------- --------------
|
23
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Balance Sheet
As of December 31, 2004
(In thousands)
The Titan
Non- Corporation
Guarantor guarantor Reclassifications and
Parent Subsidiaries Subsidiaries and Eliminations Subsidiaries
----------- -------------- -------------- ------------------- --------------
Assets
Current Assets:
Cash and cash equivalents $ 17,364 $ (611 ) $ (81 ) $ - $ 16,672
Accounts receivable-net 484,664 15,973 14,749 - 515,386
Inventories 21,336 - - - 21,336
Prepaid expenses and other 28,885 501 230 (577 ) 29,039
Deferred income taxes 95,390 - - - 95,390
Current assets of
discontinued operations - 1,665 - - 1,665
----------- -------------- -------------- ------------------- --------------
Total current assets 647,639 17,528 14,898 (577 ) 679,488
Property and equipment-net 56,243 427 872 - 57,542
Goodwill 456,033 8,377 59 - 464,469
Other assets-net 61,325 21 72 - 61,418
Deferred income taxes 52,647 - - - 52,647
Non-current assets of
discontinued operations - 26,469 - 26,469
Intercompany investments,
advances and liabilities-net 321,296 (171,744 ) (149,552 ) - -
----------- -------------- -------------- ------------------- --------------
Total assets $ 1,595,183 $ (118,922 ) $ (133,651 ) $ (577 ) $ 1,342,033
----------- -------------- -------------- ------------------- --------------
Liabilities and Stockholders'
Equity
Current Liabilities:
Current portion of amounts
outstanding under line of
credit $ 3,500 $ - $ - $ - $ 3,500
Accounts payable 107,991 7,296 745 116,032
Current portion of long-term
debt 500 - - - 500
Accrued compensation and
benefits 93,412 2,213 2,743 - 98,368
Other accrued liabilities 109,536 3,339 2,293 - 115,168
Current liabilities of
discontinued operations 6,872 14,123 - - 20,995
----------- -------------- -------------- ------------------- --------------
Total current
liabilities 321,811 26,971 5,781 - 354,563
----------- -------------- -------------- ------------------- --------------
Long-term portion of amounts
outstanding under line of credit 352,750 - - - 352,750
Senior subordinated debt 200,000 - - - 200,000
Other long-term debt 491 - - - 491
Other non-current liabilities 50,899 - 1,932 - 52,831
Non-current liabilities of
discontinued operations 9,931 23,387 - - 33,318
Stockholders' equity (deficit) 659,301 (169,280 ) (141,364 ) (577 ) 348,080
----------- -------------- -------------- ------------------- --------------
Total liabilities and
equity $ 1,595,183 $ (118,922 ) $ (133,651 ) $ (577 ) $ 1,342,033
----------- -------------- -------------- ------------------- --------------
|
24
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Cash Flows
For the Three Months Ended March 31, 2005
(Unaudited)
(In thousands)
The Titan
Non- Corporation
Guarantor guarantor Reclassifications and
Parent Subsidiaries Subsidiaries and Eliminations Subsidiaries
--------- -------------- -------------- ------------------- --------------
Cash Flows from Operating
Activities:
Income (loss) from
continuing operations $ 18,350 $ 327 $ (160 ) $ (364 ) $ 18,153
Adjustments to reconcile
income (loss) from
continuing operations to
net cash used for
continuing operations (33,038 ) (4,714 ) (3,027 ) 364 (40,415 )
--------- -------------- -------------- ------------------- --------------
Net cash used by
continuing operations (14,688 ) (4,387 ) (3,187 ) - (22,262 )
--------- -------------- -------------- ------------------- --------------
Income (loss) from
discontinued operations (11 ) 870 - - 859
Adjustments to reconcile
income (loss) from
discontinued operations to
cash used for discontinued
operations 2,709 (7,033 ) - - (4,324 )
--------- -------------- -------------- ------------------- --------------
Net cash provided (used)
by discontinued operations 2,698 (6,163 ) - - (3,465 )
--------- -------------- -------------- ------------------- --------------
Net cash used by operating
activities (11,990 ) (10,550 ) (3,187 ) - (25,727 )
--------- -------------- -------------- ------------------- --------------
Cash Flows from Investing
Activities:
Capital expenditures (1,963 ) (55 ) (9 ) - (2,027 )
Proceeds from sale of
investments and net assets
Earnout payment related to
prior year acquisition
Other investments
Proceeds (payments) on
intercompany investments,
advances and liabilities (14,274 ) 11,011 3,263 - -
Other 33 - - - 33
--------- -------------- -------------- ------------------- --------------
Net cash provided (used)
by investing activities (16,204 ) 10,956 3,254 - (1,994 )
--------- -------------- -------------- ------------------- --------------
Cash Flows from Financing
Activities:
Retirement of debt (476 ) - - - (476 )
Additions to debt 29,125 - - - 29,125
Proceeds from exercise of
stock options and other 1,732 - - - 1,732
Other 164 (174 ) - - (10 )
--------- -------------- -------------- ------------------- --------------
Net cash provided (used)
by financing activities 30,545 (174 ) - - 30,371
--------- -------------- -------------- ------------------- --------------
Net decrease in cash and
cash equivalents 2,351 232 67 - 2,650
Cash and cash equivalents
at beginning of year 17,364 (611 ) (81 ) - 16,672
--------- -------------- -------------- ------------------- --------------
Cash and cash equivalents
at end of period $ 19,715 $ (379 ) $ (14 ) $ - $ 19,322
--------- -------------- -------------- ------------------- --------------
|
25
Condensed Consolidating Parent Company, Guarantor and Non-guarantor
Statement of Cash Flows
For the Three Months Ended March 31, 2004
(Unaudited)
(In thousands)
The Titan
Non- Corporation
Guarantor guarantor Reclassifications and
Parent Subsidiaries Subsidiaries and Eliminations Subsidiaries
--------- -------------- -------------- ------------------- --------------
Cash Flows from
Operating Activities:
Income (loss) from
continuing operations $ 4,943 $ (224 ) $ (1,060 ) $ (28 ) $ 3,631
Adjustments to
reconcile income (loss)
from continuing
operations to net cash
used for continuing
operations (24,119 ) (5,080 ) (136 ) 28 (29,307 )
--------- -------------- -------------- ------------------- --------------
Net cash used by
continuing operations (19,176 ) (5,304 ) (1,196 ) - (25,676 )
--------- -------------- -------------- ------------------- --------------
Income (loss) from
discontinued operations (167 ) (614 ) 209 - (572 )
Adjustments to
reconcile loss from
discontinued operations
to cash used for
discontinued operations 2,362 (2,206 ) (649 ) - (493 )
--------- -------------- -------------- ------------------- --------------
Net cash used by
discontinued operations 2,195 (2,820 ) (440 ) - (1,065 )
--------- -------------- -------------- ------------------- --------------
Net cash used by
operating activities (16,981 ) (8,124 ) (1,636 ) - (26,741 )
--------- -------------- -------------- ------------------- --------------
Cash Flows from
Investing Activities:
Capital expenditures (3,260 ) (5,595 ) (8 ) - (8,863 )
Proceeds from sale of
investments and net
assets 2,494 386 - - 2,880
Earnout payment related
to prior year
acquisition (1,781 ) - - - (1,781 )
Other investments (17 ) - - - (17 )
Proceeds (payments) on
intercompany
investments, advances
and liabilities (12,831 ) 13,031 (200 ) - -
Other 563 - - - 563
--------- -------------- -------------- ------------------- --------------
Net cash provided
(used) by investing
activities (14,832 ) 7,822 (208 ) - (7,218 )
--------- -------------- -------------- ------------------- --------------
Cash Flows from
Financing Activities:
Additions to debt 30,000 - - - 30,000
Retirement of debt (26 ) - - - (26 )
Preferred stock
redemption (12,518 ) - - - (12,518 )
Proceeds from exercise
of stock options and
other 5,632 - - - 5,632
Dividends paid (190 ) - - - (190 )
Other (25 ) - (5 ) - (30 )
--------- -------------- -------------- ------------------- --------------
Net cash provided
(used) by financing
activities 22,873 - (5 ) - 22,868
--------- -------------- -------------- ------------------- --------------
Effect of exchange rate
changes on cash - - (131 ) - (131 )
--------- -------------- -------------- ------------------- --------------
Net decrease in cash
and cash equivalents (8,940 ) (302 ) (1,980 ) - (11,222 )
Cash and cash
equivalents at
beginning of year 25,861 (852 ) 1,965 - 26,974
--------- -------------- -------------- ------------------- --------------
Cash and cash
equivalents at end of
period $ 16,921 $ (1,154 ) $ (15 ) $ - $ 15,752
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26
Note (9) Subsequent Events
On April 21, 2005, Titan completed the acquisition of 100% of the
outstanding shares of Intelligence Data Systems, Inc. (IDS) for $42.5 million in
cash, before considering the effect of cash acquired in the transaction. Of this
amount, $6.3 million has been placed in escrow to satisfy any indemnification
claims by Titan. IDS is a high-technology and professional services firm
supporting the U.S. intelligence community through highly specialized expertise
in data mining, high-performance computing, data analysis, information fusion,
and information sharing. The acquisition was to further Titan's goal of
acquiring government information technology companies that fit strategically
with its government business, particularly within the intelligence community
marketplace. The acquisition will be accounted for as a purchase in accordance
with the provisions of SFAS No. 141, "Business Combinations", and accordingly,
the results of operations of IDS will be included in Titan's results of
operations beginning as of the date of acquisition.
27
THE TITAN CORPORATION
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