<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 2000
REGISTRATION NO. 333-35188
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT
NO. 1
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE TITAN CORPORATION
(Exact name of registrant as specified in its governing instrument)
<TABLE>
<S> <C> <C>
DELAWARE 7373 95-2588754
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>
3033 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121
(858) 552-9500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
GENE W. RAY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3033 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121
(858) 552-9500
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES E. SHOWEN, ESQ. NICHOLAS J. COSTANZA, ESQ.
JESSICA C. CLARK, ESQ. THE TITAN CORPORATION
HOGAN & HARTSON L.L.P. 3033 SCIENCE PARK ROAD
555 THIRTEENTH STREET, N.W. SAN DIEGO, CALIFORNIA 92121
WASHINGTON, D.C. 20004-1109 (858) 552-9500
(202) 637-5600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______________
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AVERSTAR, INC.
23 FOURTH AVENUE
BURLINGTON, MA 01803
MERGER PROPOSAL
Dear stockholders:
We are pleased to report that the Boards of Directors of AverStar and The
Titan Corporation have approved a merger agreement which provides for the merger
of a Titan subsidiary into AverStar. As a result of the proposed merger, we will
become a wholly owned subsidiary of Titan. Our board of directors believes that
the combination with Titan enables our stockholders to realize a significant
return on their investment, while allowing our business to continue to grow.
If we complete the proposed merger:
- our seven classes of common stock, Class A, Class B, Class C, Class D,
Class E, Class F and Class G, will be converted into one class of common
stock as provided in our certificate of incorporation; and
- you will become a stockholder of Titan and receive the number of shares of
Titan common stock determined according to a formula contained in the
merger agreement in exchange for your shares of our common stock.
These transactions are more fully described in the accompanying proxy
statement. If the merger were completed on May 19, 2000, AverStar stockholders
would own approximately 7.07% of Titan's outstanding common stock immediately
after the proposed merger. Titan's common stock is listed on the New York Stock
Exchange under the trading symbol "TTN."
This proxy statement also serves as Titan's prospectus under the Securities
Act of 1933 for the issuance of Titan's common stock to you in the proposed
merger. We encourage you to read this joint proxy statement/prospectus
carefully. IN PARTICULAR, YOU SHOULD REVIEW THE MATTERS REFERRED TO UNDER "RISK
FACTORS" STARTING ON PAGE 14.
We are asking our stockholders to approve the proposed merger, the merger
agreement and the related transactions at a special meeting. We cannot complete
the proposed merger unless a majority of the shares of our voting common stock
vote to approve it.
The date, time and place of our special meeting is:
10:30 a.m., Eastern Time
June 26, 2000
AverStar, Inc.
23 Fourth Avenue
Burlington, MA 01803
We appreciate your consideration in this matter.
Sincerely,
/s/ MICHAEL B. ALEXANDER
Michael B. Alexander
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
This proxy statement/prospectus is dated May 24, 2000
and is first being mailed on or about May 26, 2000.
<PAGE>
AVERSTAR, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
<TABLE>
<S> <C>
TIME: 10:30 a.m., Eastern Time
DATE: June 26, 2000
PLACE: AverStar, Inc.
23 Fourth Avenue
Burlington, MA 01803
PURPOSE: Consider and vote on the proposed merger of AverStar and a
Titan subsidiary, the merger agreement and related
transactions.
</TABLE>
Only our voting common stockholders of record on May 19, 2000 may vote at
the special meeting. Only our stockholders or their proxies and AverStar guests
may attend the special meeting.
/s/ PETER J. DWYER
Peter J. Dwyer
SECRETARY
May 24, 2000
<PAGE>
AVERSTAR, INC.
PROXY STATEMENT
----------------
THE TITAN CORPORATION
PROSPECTUS
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 3
RISK FACTORS................................................ 14
INFORMATION IN THIS DOCUMENT................................ 23
THE AVERSTAR SPECIAL MEETING................................ 24
General................................................... 24
Matters to be Considered.................................. 24
Recommendation of the AverStar Board of Directors......... 24
Record Date and Vote Required............................. 24
Proxies................................................... 25
Availability of Independent Auditors...................... 26
THE MERGER.................................................. 27
General................................................... 27
Background of the Merger.................................. 27
Recommendation of AverStar Board of Directors; AverStar
Reasons for the Merger.................................. 29
Titan Reasons for the Merger.............................. 31
Interests of AverStar Directors and Executive Officers in
the Merger.............................................. 31
Stockholder Approval Requirements......................... 32
Accounting Treatment...................................... 32
Listing of Titan Common Stock on the NYSE................. 32
Dissenters' Rights........................................ 33
Clearance Under Federal Antitrust Laws.................... 35
Federal Income Tax Consequences........................... 35
Restrictions on Resale of Titan Common Stock by
Affiliates.............................................. 36
Anti-Dilution Adjustments................................. 37
Exchange of Certificates.................................. 37
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS...... 39
General................................................... 39
Effective Time............................................ 45
Representations and Warranties............................ 45
Business and Agreements of AverStar and Titan Pending the
Merger.................................................. 47
Non-Solicitation Agreement by AverStar.................... 51
Conditions to Completion of the Merger.................... 53
Termination of the Merger Agreement; Termination Fee...... 55
Waiver and Amendment of the Merger Agreement.............. 56
Expenses.................................................. 57
AverStar Voting Agreement................................. 57
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
UNAUDITED PRO FORMA FINANCIAL INFORMATION................... 59
INFORMATION ABOUT TITAN..................................... 71
General................................................... 71
Recent Developments....................................... 73
INFORMATION ABOUT AVERSTAR.................................. 75
General................................................... 75
AverStar's Services and Products.......................... 75
AverStar's Markets and Customers.......................... 77
Contracts................................................. 77
Backlog................................................... 77
Competition............................................... 78
Proprietary Information................................... 78
Employees................................................. 79
Regulatory Matters........................................ 79
Legal Proceedings......................................... 79
AverStar's Management's Discussion and Analysis of
Financial Condition and Result of Operations............ 80
Voting Securities and Principal Stockholders.............. 86
OWNERSHIP OF TITAN COMMON STOCK............................. 88
DESCRIPTION OF TITAN CAPITAL STOCK.......................... 91
Common Stock.............................................. 91
Preferred Share Purchase Rights........................... 91
Preferred Stock........................................... 95
Anti-Takeover Effect of Titan's Bylaw Provisions.......... 95
Section 203 of the Delaware General Corporation Law....... 96
Director Liability and Indemnification of Directors and
Officers................................................ 97
Listing of Common Stock................................... 98
Transfer Agent and Registrar.............................. 98
COMPARATIVE RIGHTS OF TITAN STOCKHOLDERS AND AVERSTAR
STOCKHOLDERS.............................................. 99
Authorized Shares of Capital Stock; Dividend Rights; Other
Distributions........................................... 99
Voting Rights............................................. 100
Preemptive Rights......................................... 100
Business Combinations; Supermajority Voting
Requirements............................................ 101
Appraisal Rights.......................................... 102
Special Meetings of Stockholders.......................... 102
Stockholder Action Without a Meeting...................... 102
Stockholder Proposal Procedures........................... 103
Shareholder Rights Plan................................... 103
Classified Board of Directors............................. 104
Nominations of Directors.................................. 104
Removal of Directors...................................... 105
Vacancies in the Board of Directors....................... 105
Indemnification........................................... 105
Limitation of Personal Liability of Directors............. 105
Amendment of Certificate of Incorporation................. 106
Amendment of Bylaws....................................... 106
OTHER MATTERS............................................... 107
Validity of Titan Common Stock............................ 107
Experts................................................... 107
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION......................... 108
AVERSTAR FINANCIAL STATEMENTS............................... F-1
</TABLE>
APPENDICES
APPENDIX A--Agreement and Plan of Merger
APPENDIX B--Form of Escrow Agreement
APPENDIX C--Section 262 of the Delaware General Corporation Law
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. WHY ARE AVERSTAR AND TITAN PROPOSING THE MERGER?
A. The boards of directors of AverStar and Titan believe the combined strengths
of the two companies will enable them to compete more effectively than
either can compete alone. The merger will allow both Titan and AverStar to
take advantage of the trend toward consolidation in the government
information technology industry in recent years. The combined company's
greater resources will enhance its ability to effectively compete for large,
multiple award contracts, will provide it access to broader information
technology and commercial customer bases and broader technology and
expertise. To review the background and reasons for the merger in greater
detail, see page 27.
Q. WHAT WILL HAPPEN TO AVERSTAR AS A RESULT OF THE MERGER?
A. If the merger is completed, AverStar will become a wholly owned subsidiary
of Titan.
Q. WHAT WILL I RECEIVE IN THE MERGER?
A. After the consolidation of all classes of AverStar common stock into one
class of AverStar common stock as required by AverStar's certificate of
incorporation and stockholders' agreement, all shares of AverStar common
stock will be converted into the right to receive shares of Titan common
stock in an amount which will be determined at the time of the merger based
on the average of the closing sale prices of the Titan common stock on the
New York Stock Exchange for the ten consecutive trading days ending two
trading days immediately before the merger closing date.
Q. HOW WILL THE MERGER AFFECT MY FUTURE DIVIDENDS?
A. Neither Titan nor AverStar has historically paid dividends to its common
stockholders. Titan does not anticipate that it will pay dividends to its
common stockholders in the foreseeable future.
Q. WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO AVERSTAR STOCKHOLDERS?
A. In general, AverStar stockholders who exchange their shares of AverStar
common stock for shares of Titan common stock as a result of the merger will
not recognize any gain or loss on the exchange for U.S. federal income tax
purposes. To review the tax consequences to AverStar stockholders in greater
detail, see page 35.
Q. WHEN DO AVERSTAR AND TITAN EXPECT THE MERGER TO BE COMPLETED?
A. AverStar and Titan are working to complete the merger as quickly as
possible. We hope to complete the merger during the second quarter of 2000.
Q. ARE AVERSTAR STOCKHOLDERS ENTITLED TO DISSENTERS' RIGHTS?
A. Yes. Under Delaware law, which governs AverStar and the rights of its
stockholders, AverStar stockholders who comply with section 262 of the
Delaware General Corporation Law are entitled to dissenters' rights of
appraisal for their shares in cash instead of Titan shares by reason of the
merger.
1
<PAGE>
Q. WHO MUST APPROVE THE MERGER?
A. In addition to the boards of directors of AverStar and Titan, which have
already approved the merger, the stockholders of AverStar must adopt the
merger agreement. The AverStar special meeting of stockholders to approve
the merger will take place on June 26, 2000. AverStar and Titan must also
obtain some regulatory approvals for the merger.
Q. WHAT DO I NEED TO DO NOW?
A. You should carefully read and consider the information contained in this
proxy statement/ prospectus. You should then complete and sign your proxy
and return it in the enclosed return envelope as soon as possible so that
your shares of AverStar common stock will be represented at the AverStar
special meeting. If you sign, date and mail your proxy card without
identifying how you want to vote, your proxy will be voted "FOR" adoption of
the merger agreement and approval of the merger and related transactions. If
you do not vote in person or by returning your completed proxy card, your
failure to vote will have the same effect as a vote "AGAINST" the merger
agreement.
Q. CAN I CHANGE MY VOTE AFTER I MAIL MY SIGNED PROXY?
A. Yes. You can change your vote at any time before your proxy is voted at the
special meeting of AverStar stockholders. You can do this in one of three
ways. First, you can send a written notice stating that you would like to
revoke your proxy. Second, you can complete and submit a new proxy
reflecting a later date. If you choose either of these two methods, you must
submit your notice of revocation or your new proxy to the address on page 25
before the vote at the special meeting. Third, you can attend the special
meeting and vote in person.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. NO, YOU SHOULD NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY. Titan
will send you written instructions on how to exchange your stock
certificates.
Q. WHO CAN HELP ANSWER MY QUESTIONS?
A. If you have any questions about the merger or if you need additional copies
of this proxy statement/prospectus or the enclosed proxy, you should contact
AverStar at the following address:
AverStar, Inc.
23 Fourth Avenue
Burlington, Massachusetts 01803
Attention: Charles D'Ambrosio
Telephone: (781) 221-6990
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT/PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. TO UNDERSTAND THE PROPOSED MERGER, YOU SHOULD READ CAREFULLY
THIS ENTIRE DOCUMENT AND THE OTHER DOCUMENTS TO WHICH TITAN AND AVERSTAR REFER.
FOR MORE INFORMATION ABOUT TITAN, SEE "WHERE YOU CAN FIND MORE INFORMATION" ON
PAGE 109. EACH SUBJECT IN THIS SUMMARY REFERS TO THE PAGES IN THIS PROXY
STATEMENT/PROSPECTUS WHERE YOU CAN FIND A MORE COMPLETE DISCUSSION OF THAT
SUBJECT.
THE COMPANIES (PAGE 71)
The parties to the merger agreement are The Titan Corporation,
AverStar, Inc. and V T Acquisition Corp.
THE TITAN CORPORATION
3033 Science Park Road
San Diego, California 92121
Telephone: (619) 552-9500
The Titan Corporation is a leading provider of communications and
information solutions to U.S. military and allied government agencies, as well
as commercial customers. Titan's systems, products and services enable
government and commercial customers to generate, process, transmit, store and
distribute information in a secure, cost-effective and timely manner. Titan has
organized its business into five segments: information technologies, or IT,
software systems, medical sterilization and food pasteurization, communications
systems, and emerging businesses.
AVERSTAR, INC.
23 Fourth Avenue
Burlington, Massachusetts 01803
Telephone: (781) 221-6990
AverStar provides information technology, or IT, services and software
products for the mission-critical systems of a significant number of civilian
and defense agencies of the United States government. AverStar also provides IT
services and software products to large commercial companies. During its 30-year
history, AverStar has maintained a strong record of customer satisfaction based
on the quality and reliability of its services and products.
V T ACQUISITION CORP.
3033 Science Park Road
San Diego, California 92121
Telephone: (619) 552-9500
V T Acquisition Corp. is a wholly owned subsidiary of Titan which Titan
formed solely for the purpose of completing the merger. V T Acquisition Corp. is
a newly formed corporation that to date has not conducted any activities other
than activities related to its formation, the execution of the merger agreement
and the preparation of this proxy statement/prospectus.
THE MERGER (PAGE 27)
The merger agreement is attached as Appendix A to this proxy
statement/prospectus and is incorporated by reference into this document. We
encourage you to read the entire merger agreement because it is the legal
document that governs the merger.
3
<PAGE>
In the merger, Titan will acquire AverStar by merging V T Acquisition Corp.
with and into AverStar. AverStar will become a wholly owned subsidiary of Titan
and AverStar stockholders will become stockholders of Titan. Based on the number
of shares of Titan and AverStar common stock outstanding on May 19, 2000, if the
merger were completed on that date, AverStar stockholders would own
approximately 7.07% of Titan's outstanding common stock immediately after the
merger.
Some AverStar stockholders, who are members of AverStar's management and
board of directors and who collectively own approximately 31.3% of AverStar's
outstanding voting common stock, have signed an agreement to vote their shares
in favor of adoption of the merger agreement and approval of the merger and
related transactions. Each of these stockholders also has given Titan an
irrevocable proxy authorizing Titan to vote the stockholder's shares of AverStar
voting common stock in favor of adoption of the merger agreement and approval of
the merger and related transactions. These stockholders are referred to as the
AverStar Principal Stockholders in this proxy statement/prospectus. See "Terms
of the Merger Agreement and Related Transactions--AverStar Voting Agreement"
beginning on page 57 for more information about the voting agreement.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE 39)
In connection with the merger, AverStar's seven classes of common stock,
Class A, Class B, Class C, Class D, Class E, Class F and Class G, will be
converted into one class of common stock as required by AverStar's certificate
of incorporation and stockholders agreement.
In the merger, after the conversion of all classes of AverStar common stock
into one class of common stock as required by AverStar's certificate of
incorporation and stockholders' agreement, each outstanding share of AverStar
common stock will be converted into the right to receive shares of Titan common
stock. The number of Titan common shares you will be entitled to receive for
each share of AverStar common stock that you own will depend on the exchange
ratio of Titan common stock to AverStar common stock. The exchange ratio has not
been fixed in the merger agreement, but will be calculated at the time of the
merger according to a formula contained in the merger agreement. Under this
formula, the exchange ratio will be based on the average of the closing sale
prices of Titan common stock on the New York Stock Exchange for the ten
consecutive trading days ending two trading days immediately before the merger
closing date.
- If the average Titan stock price is less than $39.60, (a) AverStar has the
right to terminate the merger agreement, unless Titan elects to have the
exchange ratio fixed at an amount equal to the quotient obtained by
dividing the product of the "AverStar stock value" (as defined below)
multiplied by 0.90 by the average Titan stock price or (b) if AverStar
does not exercise this termination right and Titan does not make the
election described in (a), the exchange ratio will be equal to the
quotient obtained by dividing the AverStar stock value by $44.00.
- If the average Titan stock price is greater than or equal to $39.60 and
less than $44.00, the exchange ratio will be equal to the quotient
obtained by dividing the AverStar stock value by $44.00.
- If the average Titan stock price is greater than or equal to $44.00 and
less than or equal to $56.00, the exchange ratio will be equal to the
quotient obtained by dividing the AverStar stock value by the average
Titan stock price.
- If the average Titan stock price is greater than $56.00 and less than or
equal to $61.60, the exchange ratio will be equal to the quotient obtained
by dividing the AverStar stock value by $56.00.
- If the average Titan stock price is greater than $61.60, (a) Titan has the
right to terminate the merger agreement unless AverStar elects to have the
exchange ratio fixed at an amount equal to the quotient obtained by
dividing the product of the AverStar stock value multiplied by 1.10 by
4
<PAGE>
the average Titan stock price or (b) if Titan does not exercise this
termination right and AverStar does not make the election described in
(a), the exchange ratio will be equal to the quotient obtained by dividing
the AverStar stock value by $56.00.
As used in this proxy statement/prospectus, the term "AverStar stock value"
means the result of dividing the "transaction value" by the sum of (a) the
number of shares of AverStar common stock outstanding as of the merger effective
time (assuming for such purposes, that as of the merger effective time, all
shares of AverStar capital stock were converted into a single class of common
stock as required in AverStar's certificate of incorporation) and (b) the number
of shares of AverStar common stock which would be issuable with respect to all
vested AverStar options outstanding as of the merger effective time if all of
the conditions to exercisability of such option had been satisfied at that time
and (c) one-half of the number of shares of AverStar common stock which would be
issuable with respect to all unvested AverStar options outstanding as of the
merger effective time if all of the conditions to exercisability of such options
(including, without limitation, vesting) had been satisfied at that time.
As used in this proxy statement/prospectus, the term "transaction value"
means $205 million plus (i) the sum of (a) the total consideration payable to
AverStar upon the exercise of all vested AverStar options issued and outstanding
immediately prior to the merger effective time and (b) one-half of the total
consideration payable to AverStar upon the exercise of all unvested AverStar
options issued and outstanding immediately prior to the merger effective time,
less (ii) AverStar's estimated net debt as of the merger closing date (as
certified by AverStar's chief financial officer two days prior to the merger
closing date), less (iii) all payments made to AverStar common stockholders
after the date of the merger agreement and prior to the merger effective time to
redeem AverStar common stock.
FOR INFORMATION ON SOME OF THE POSSIBLE MARKET VALUES OF TITAN SHARES YOU
COULD RECEIVE, SEE "TERMS OF THE MERGER AGREEMENT AND RELATED
TRANSACTIONS--GENERAL--CONVERSION OF AVERSTAR COMMON STOCK" AND "--CONVERSION OF
AVERSTAR COMMON STOCK TO TITAN COMMON STOCK" BEGINNING ON PAGE 39.
Titan will not issue fractional shares of its common stock in the merger.
Instead, fractional shares will be rounded up to the nearest whole share of
Titan common stock.
ESCROW (PAGE 44)
Under the merger agreement, Titan will withhold shares of its common stock
issuable to AverStar stockholders in connection with the merger in an amount
equal to 5% of the transaction value divided by the average of the closing sale
prices of Titan common stock on the New York Stock Exchange for the ten
consecutive trading days ending two trading days immediately before the merger
closing date. Promptly after the merger, Titan will deposit such shares in
escrow with First Union National Bank, as escrow agent, as security for
performance of AverStar's indemnity obligations to Titan in the merger agreement
and to pay Titan any required closing adjustment due under the merger agreement.
The amount of closing adjustment will be equal to the amount by which the net
debt of AverStar and its subsidiaries as of the closing date of the merger is
greater or less than the estimated net debt as set forth in the certificate that
AverStar is required to deliver to Titan two days prior to the closing date of
the merger. Any amounts of losses to which Titan or its affiliates are entitled
to indemnification will be determined by a loss adjustment and paid for out of
the shares of Titan common stock held in escrow. The escrow will be governed by
a separate escrow agreement, a form of which is attached as Appendix B.
On the earlier of (a) five business days after the final determination of
the closing adjustment and loss adjustment (including, without limitation, final
resolution of any disputes thereto); or (b) 90 days after the closing of the
merger, the shares of Titan common stock held in escrow, other than any amounts
taken out to pay any closing or loss adjustment or any amounts that are pending
final resolution of any disputes therefrom, will be released to the former
holders of AverStar common stock
5
<PAGE>
(other than those who exercised appraisal rights) pro-rata in accordance with
the number of shares of Titan common stock held by each former AverStar
stockholder immediately after the effective time of the merger.
TREATMENT OF OPTIONS IN THE MERGER (PAGE 44)
Titan will assume each outstanding option to purchase shares of AverStar
common stock at the effective time of the merger. Each assumed option will be
converted into an option to purchase shares of Titan common stock. The number of
shares subject to the assumed options and the option exercise prices will be
adjusted based on the exchange ratio. All other terms of the options will remain
unchanged.
EXCHANGE OF STOCK CERTIFICATES (PAGE 37)
You will receive a letter of transmittal that will provide you with
instructions on how to exchange your AverStar stock certificates for stock
certificates representing the Titan common stock you receive in the merger.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME.
SPECIAL MEETING OF AVERSTAR STOCKHOLDERS (PAGE 24)
Under Delaware law, AverStar stockholders must vote to adopt the merger
agreement in order for AverStar to complete the merger.
The special meeting of AverStar stockholders will be held at the offices of
AverStar at 23 Fourth Avenue, Burlington, Massachusetts 01803 on June 26, 2000,
at 10:30 a.m., eastern time. At the special meeting, you will be asked to vote
to adopt the merger agreement and to approve the merger and the other
transactions contemplated by the merger agreement.
You may vote, or submit a proxy to vote, at the special meeting if you were
a record holder of AverStar voting common stock at the close of business on
May 19, 2000, which is the record date for the special meeting. If you return
your proxy, you may revoke it at any time before the vote at the special meeting
by sending a later-dated proxy or a written notice revoking the proxy to the
secretary of AverStar or by attending the meeting and voting in person.
VOTE REQUIRED (PAGE 24)
A majority of the shares of AverStar voting common stock issued and
outstanding on May 19, 2000 must vote to approve the merger and adopt the merger
agreement. If you do not vote your shares of AverStar voting common stock, the
effect will be the same as a vote against the merger.
As of May 19, 2000, directors and officers of AverStar beneficially owned
25.3% of the outstanding shares of AverStar common stock and 28.5% of the
outstanding shares of AverStar voting common stock.
AVERSTAR'S REASONS FOR THE MERGER (PAGE 29)
In reaching its decision to approve the merger and recommend the approval of
the merger agreement to the AverStar stockholders, the AverStar board of
directors considered and analyzed a number of factors, including the following:
- the opportunity for AverStar stockholders to own stock of a publicly
traded company, with greater resources and a more diversified business;
6
<PAGE>
- the realization of full value for AverStar's stockholders and a
significant return to them on their investment, based on the current value
of the Titan common stock to be issued in the merger;
- the access to Titan's complimentary base of customers and to broader
technology and expertise to offer to existing and potential customers;
- the benefits of consolidation in response to the current market trends in
the federal IT industry toward larger, multiple-award contracts; and
- the potential opportunities in a larger company for AverStar employees and
customers.
RECOMMENDATION OF AVERSTAR'S BOARD OF DIRECTORS (PAGE 29)
The AverStar board of directors has concluded unanimously that the merger is
in the best interests of, and that the terms of the merger are fair to, AverStar
and to the AverStar stockholders. The AverStar board of directors has
recommended unanimously that you vote "FOR" adoption of the merger agreement and
approval of the merger and the other transactions contemplated by the merger
agreement.
INTERESTS OF AVERSTAR'S DIRECTORS AND OFFICERS IN THE MERGER (PAGE 31)
In considering the recommendation of the AverStar board of directors that
you vote to adopt the merger agreement, you should be aware that some of the
AverStar directors and executive officers identified in this proxy
statement/prospectus have interests in the merger that are different from, or in
addition to, their rights as AverStar stockholders.
CLEARANCE UNDER FEDERAL ANTITRUST LAWS (PAGE 35)
In order to complete the merger, AverStar and Titan had to make filings with
the Department of Justice and the Federal Trade Commission in compliance with
federal antitrust law. Before the merger can occur, the applicable pre-merger
30-day waiting period under this law must expire or be terminated.
CONDITIONS TO THE MERGER (PAGE 53)
The merger will not be completed unless customary conditions are satisfied
or waived by Titan or AverStar. Some conditions may not be waived, however, such
as approval of the merger by the AverStar stockholders, clearance under federal
antitrust laws and the absence of governmental action to block the merger.
TERMINATION OF THE MERGER AGREEMENT (PAGE 55)
The merger agreement may be terminated by either Titan or AverStar in a
number of circumstances, in which case the merger will not be completed.
Breaches of the merger agreement, withdrawal by the AverStar board of directors
of its recommendation that AverStar stockholders adopt the merger agreement and
the failure of the AverStar stockholders to adopt the merger agreement are some
of the factors that could permit Titan or AverStar to terminate the merger
agreement. See "Terms of the Merger Agreement and Related
Transactions--Termination of the Merger Agreement; Termination Fee" beginning on
page 55 for a more detailed description of the termination provisions of the
merger agreement.
TERMINATION FEE (PAGE 55)
If the merger agreement is terminated, under some circumstances AverStar may
have to pay Titan a termination fee of up to $4 million. See "Terms of the
Merger Agreement and Related
7
<PAGE>
Transactions--Termination of the Merger Agreement; Termination Fee" beginning on
page 55 for more information about when this termination fee or other
termination payments may be payable.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 35)
It is a condition to the merger that Titan and AverStar receive opinions
from their counsel to the effect that the merger will constitute a
reorganization for U.S. federal income tax purposes. Accordingly, AverStar
stockholders will not recognize gain or loss upon the exchange of their AverStar
common stock for Titan common stock in the merger. To review the expected
federal income tax consequences of the merger, see the tax discussion beginning
on page 35.
The tax consequences of the merger to AverStar stockholders will depend on
the particular facts of each AverStar stockholder's own situation. Therefore,
AverStar stockholders should consult their own tax advisors regarding the
merger's specific tax consequences.
ACCOUNTING TREATMENT (PAGE 32)
Titan and AverStar have structured the merger to be accounted for as a
pooling of interests in accordance with generally accepted accounting
principles. This means that the two companies will be treated as if they had
always been combined for accounting and financial reporting purposes.
DISSENTERS' RIGHTS (PAGE 33)
Under Delaware law, which governs your rights as an AverStar stockholder,
you will be entitled to dissent from the merger and to exercise appraisal rights
in connection with the merger.
DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS (PAGE 99)
If you own AverStar common stock, you will receive Titan common stock and
become a stockholder of Titan after the merger. Your rights will continue to be
governed by Delaware law, but also will be governed by Titan's certificate of
incorporation, bylaws and shareholder rights plan, rather than by AverStar's
certificate of incorporation, bylaws and stockholders agreement. For a
description of how your rights as a Titan stockholder would differ from your
rights as an AverStar stockholder, see "Comparative Rights of Titan Stockholders
and AverStar Stockholders" beginning on page 99.
WHERE YOU CAN FIND MORE INFORMATION (PAGE 108)
If you would like more information about Titan, you can find this
information in documents filed by Titan with the Securities and Exchange
Commission. These documents are identified on page 108. Instructions on how you
can obtain copies of these documents are on page 108.
8
<PAGE>
DIVIDENDS AND MARKET PRICES OF TITAN COMMON STOCK AND DIVIDENDS OF AVERSTAR
COMMON STOCK
TITAN. The Titan common stock is listed on the NYSE under the symbol "TTN."
The table below shows, for the periods indicated, the high and low sale prices
of the Titan common stock on the NYSE composite tape:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter............................................. $ 3.75 $ 2.88
Second Quarter............................................ 4.38 2.75
Third Quarter............................................. 7.44 4.19
Fourth Quarter............................................ 8.38 5.25
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter............................................. $ 6.88 $ 5.50
Second Quarter............................................ 8.25 5.75
Third Quarter............................................. 6.56 3.81
Fourth Quarter............................................ 6.19 4.25
FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter............................................. $ 6.25 $ 4.75
Second Quarter............................................ 11.00 4.94
Third Quarter............................................. 14.63 9.38
Fourth Quarter............................................ 48.38 13.13
FISCAL YEAR ENDING DECEMBER 31, 2000
First Quarter............................................. $60.50 $32.50
Second Quarter (through May 22, 2000)..................... 55.50 25.31
</TABLE>
Titan did not declare or pay a cash dividend on its common stock in any of
the periods shown in the table above. Titan may pay cash dividends only if it
complies with financial tests and other restrictions contained in agreements
relating to Titan's indebtedness. Other than earnings distributed as quarterly
dividends to holders of Titan public preferred stock, Titan anticipates that,
for the foreseeable future, it will continue to retain any earnings for use in
its business.
On March 24, 2000, the last full trading day before public announcement of
the execution of the merger agreement, the closing sale price of the Titan
common stock, as reported on the NYSE composite tape was $53.25. On May 22,
2000, the last practicable date before the printing of this proxy
statement/prospectus for which sales price information was available, the
closing sale price of the Titan common stock, as reported on the NYSE composite
tape was $29.50.
AVERSTAR. Because there is no established public trading market for
AverStar common stock, information with respect to market prices of AverStar
common stock and the equivalent per share market prices of Titan common stock
have been omitted.
AverStar has not declared or paid any cash dividends on its common stock
since its inception and does not anticipate declaring or paying any cash
dividends in the foreseeable future. AverStar may pay cash dividends only if it
complies with financial tests and other restrictions contained in its credit
agreement.
9
<PAGE>
THE TITAN CORPORATION AND AVERSTAR, INC.
SUMMARY UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL DATA
The accompanying pro forma condensed combined financial statements have been
prepared to reflect the pooling of interests method of accounting for the
proposed Titan and AverStar merger. The statements have been prepared to reflect
what the businesses of Titan and AverStar might have looked like if the merger
between the two companies had occurred on January 1, 1997, the first day of the
first period for which financial information is presented here. We have combined
the Titan unaudited pro forma statement of operations data for the years ended
December 31, 1999, 1998 and 1997 and the three months ended March 31, 2000 with
the historical AverStar consolidated statement of operations data for the years
ended December 31, 1999, 1998, and 1997 and the three months ended March 31,
2000 to reflect the proposed merger of Titan and AverStar.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31 YEAR ENDED DECEMBER 31,
---------- ------------------------------
2000 1999 1998 1997
---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 221,666 $834,455 $532,236 $381,763
Costs and expenses:
Cost of revenues.......................................... 165,013 620,507 395,492 295,925
Selling, general and administrative expense............... 46,833 149,091 86,968 58,262
Research and development expense.......................... 2,247 10,551 5,590 7,466
Acquisition related charges and other..................... 18,070 (28,035) 9,891 8,510
---------- -------- -------- --------
Total costs and expenses................................ 232,163 752,114 497,941 370,163
Operating profit (loss)..................................... (10,497) 82,341 34,295 11,600
Interest expense............................................ (7,415) (24,122) (11,564) (7,985)
Interest income............................................. 927 1,187 474 1,025
---------- -------- -------- --------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle
and extraordinary item.................................... (16,985) 59,406 23,205 4,640
Income tax provision (benefit).............................. (4,127) 25,047 9,184 4,088
---------- -------- -------- --------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle and extraordinary
item...................................................... $ (12,858) $ 34,359 $ 14,021 $ 552
========== ======== ======== ========
Basic earnings per share:
Income (loss) from continuing operations(a)............... $ (0.23) $ 0.70 $ 0.31 $ (0.01)
========== ======== ======== ========
Weighted average shares................................... 53,122 47,788 42,306 37,530
========== ======== ======== ========
Diluted earnings per share:
Income (loss) from continuing operations(a)............... $ (0.23) $ 0.63 $ 0.30 $ (0.01)
========== ======== ======== ========
Weighted average shares................................... 53,122 54,893 43,862 37,530
========== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH DECEMBER 31,
31, 2000 1999
----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 65,212 $ 13,469
Working capital............................................. 229,836 123,829
Property and equipment, net................................. 58,537 47,556
Total assets................................................ 813,914 638,138
Total debt.................................................. 202,924 272,315
Stockholders' equity........................................ 143,277 153,267
</TABLE>
- ------------------------
Note: (a) Calculation of earnings per share includes dividend requirements on
preferred stock of $174, $695, $778 and $875 in the three months ended
March 31, 2000 and for the years ended December 31, 1999, 1998 and
1997, respectively.
10
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF TITAN
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
TITAN DERIVED THE FOLLOWING INFORMATION FROM ITS AUDITED CONSOLIDATED
FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1995 THROUGH
1999 AND THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 2000. THE FOLLOWING INFORMATION SHOULD BE READ IN
CONJUNCTION WITH THE HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF TITAN AND
RELATED NOTES INCORPORATED BY REFERENCE HEREIN.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $268,606 $277,641 $328,117 $411,180 $624,803 $126,213 $175,499
Cost and expenses:
Cost of revenues................................... 204,052 211,964 254,240 301,888 465,929 93,746 128,503
Selling, general and administrative expense........ 45,715 46,479 47,859 66,387 102,960 22,575 39,224
Research and development expense................... 6,907 5,023 7,466 5,590 6,690 1,474 2,247
Special acquisition related charges and other...... 6,249 -- 8,510 9,891 (28,880) -- 18,070
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses......................... 262,923 263,466 318,075 383,756 546,699 117,795 188,044
-------- -------- -------- -------- -------- -------- --------
Operating profit (loss).............................. 5,683 14,175 10,042 27,424 78,104 8,418 (12,545)
Interest expense..................................... (3,002) (5,021) (6,779) (9,295) (14,125) (2,480) (5,968)
Interest income...................................... 444 696 1,025 474 1,187 44 927
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations before
income taxes before cumulative effect of change in
accounting principle............................... 3,125 9,850 4,288 18,603 65,166 5,982 (17,586)
Income tax provision (benefit)....................... 498 2,603 3,934 7,016 24,385 1,997 (4,397)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle
and extraordinary item............................. 2,627 7,247 354 11,587 40,781 3,985 (13,189)
Extraordinary loss from early extinguisment of debt,
net of taxes....................................... (3,454)
Minority interest.................................... 1,378
Cumulative effect of change in accounting principle,
net................................................ -- -- -- (19,474) -- -- --
Loss from discontinued operations, net of taxes...... (12,942) (6,326) (17,930) (7,444) (5,600) -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................................. (10,315) 921 (17,576) (15,331) 35,181 3,985 (15,265)
Dividend requirements on preferred stock............. (695) (803) (875) (778) (695) (174) (174)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) applicable to common stock....... $(11,010) $ 118 $(18,451) $(16,109) $ 34,486 $ 3,811 $(15,439)
======== ======== ======== ======== ======== ======== ========
Basic earnings per share:
Income from continuing operations................ $ 0.05 $ 0.17 $ (0.01) $ 0.28 $ 0.91 $ 0.09 $ (0.25)
Extraordinary loss from early extinguishment of
debt, net of taxes............................. -- -- -- -- -- -- (0.07)
Cumulative effect of change in accounting
principle...................................... -- -- -- (0.50) -- -- --
Loss from discontinued operations................ (0.36) (0.17) (0.50) (0.19) (0.13) -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................................. $ (0.31) $ -- $ (0.52) $ (0.41) $ 0.78 $ 0.09 (0.32)
======== ======== ======== ======== ======== ======== ========
Weighted average shares.......................... 35,879 37,402 35,539 38,995 44,246 40,970 $ 49,600
======== ======== ======== ======== ======== ======== ========
Diluted earnings per share:
Income from continuing operations................ $ 0.05 $ 0.17 $ (0.01) $ 0.27 $ 0.80 $ 0.08 $ (0.25)
Extraordinary loss from early extinguishment of
debt, net of taxes............................. -- -- -- -- -- -- (0.07)
Cumulative effect of change in accounting
principle...................................... -- -- -- (0.48) -- -- --
Loss from discontinued operations................ (0.35) (0.17) (0.50) (0.18) (0.11) -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................................. $ (0.30) $ -- $ (0.52) $ (0.40) $ 0.69 $ 0.08 $ (0.32)
======== ======== ======== ======== ======== ======== ========
Weighted average shares.......................... 36,501 37,779 35,539 40,336 51,030 49,720 49,600
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Depreciation and Amortization...................... 6,901 8,446 9,684 9,390 13,592 2,965 10,661
Capital Expenditures............................... 11,324 7,008 7,325 6,530 14,644 2,841 12,358
Ratio of Earnings to Fixed Charges (1)............. 1.5x 2.2x 1.4x 2.5x 4.7x 3.0x N/A
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
---------------------------------------------------- -----------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents...................................... $ 10,069 $ 6,896 $ 14,127 $ 13,536 $ 13,364 $ 65,131
Investments............................................... 5,000 9,888 4,499 -- -- --
Working capital........................................... 39,446 68,021 66,315 85,974 106,693 220,434
Property and equipment, net............................... 33,193 29,962 28,927 33,746 43,269 54,099
Total assets.............................................. 169,673 205,952 209,690 310,035 545,899 709,216
Total debt................................................ 35,455 56,930 62,200 111,523 193,914 123,308
Company's obligated mandatory redeemable preferred
securities.............................................. -- -- -- -- -- 250,000
Stockholders' equity...................................... 74,188 86,654 79,275 95,594 160,642 150,488
</TABLE>
- ----------------------------------
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges and "fixed charges"
consist of interest expense (including amortization of debt discount and
expense), leasing expense and the estimated interest factor attributable to
rentals. The ratio of earnings to combined fixed charges and preferred
dividends was 1.5x during 1995, 2.1x during 1996, 1.4x during 1997, 2.4x
during 1998, and 4.6x during 1999 and 2.8x during the three months ended
March 31, 1999.
11
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF AVERSTAR
The following tables set forth AverStar's selected historical financial
data. These tables do not present all of AverStar's financial information. You
should read this information together with AverStar's financial statements and
the notes to those statements contained in this proxy statement/ prospectus and
the information under "Information About AverStar--Management's Discussion and
Analysis of Financial Condition and Results of Operations." On March 13, 1995,
an investor group formed a holding company which acquired Intermetrics
(AverStar's predecessor) in August 1995. Substantially all data for the period
March 13, 1995 through February 29, 1996 relate to the operations and financial
position of Intermetrics. The selected financial data for the 12 months ended
February 29, 1996, which are unaudited, combine the two preceding columns which
reflect the operations of Intermetrics for the first six months of the period
based on Intermetrics' basis of accounting prior to the acquisition, and
AverStar's operations giving effect to the acquisition of Intermetrics in
August 1995. In February 1998, AverStar acquired Pacer, whose results of
operations are included from the date of acquisition in AverStar's results for
the 12 months ended December 31, 1998. In March 1999, AverStar acquired Computer
Based Systems, Inc. whose results of operations are included from the date of
acquisition in AverStar's results for the 12 months ended December 31, 1999. The
selected financial data for the 12 months ended February 28, 1997, the
10 months ended December 31, 1997 and the 12 months ended December 31, 1998, and
the 12 months ended December 31, 1999, are derived from AverStar's audited
financial statements. The results of operations for the three months ended March
31, 1999 and 2000 and as of March 31, 2000 are derived from unaudited financial
statements.
<TABLE>
<CAPTION>
SIX MARCH 13 TWELVE TWELVE
MONTHS 1995 MONTHS MONTHS
ENDED THROUGH ENDED ENDED
AUGUST 31, FEBRUARY 29, FEBRUARY 29, FEBRUARY 28,
1995 1996 1996 1997
----------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $27,103 $27,787 $54,890 $53,274
Cost of revenues.............. 20,470 21,399 41,869 40,704
Selling, general and
administrative expense...... 6,908 5,247 12,155 10,159
Amortization expense.......... -- 514 514 1,085
In process research and
development expense......... -- 8,600 8,600 --
------- ------- ------- -------
Income (loss) from
operations.................. (275) (7,973) (8,248) 1,326
Offering expense.............. -- -- -- --
Interest expense.............. 13 734 747 1,441
Interest income............... 363 149 512 160
------- ------- ------- -------
Income (loss) from continuing
operations before taxes..... 75 (8,558) (8,483) 45
Provision for income taxes.... 40 32 72 18
------- ------- ------- -------
Net income (loss) from
continuing operations....... $ 35 $(8,590) $(8,555) $ 27
======= ======= ======= =======
Income (loss) per share from
continuing operations:
Basic....................... $ 0.01 $ (2.20) $ (2.19) $ 0.01
======= ======= ======= =======
Diluted..................... $ 0.01 $ (2.20) $ (2.19) $ 0.01
======= ======= ======= =======
Weighted average common shares
and equivalents:
Basic....................... 4,151 3,901 3,901 3,878
Diluted..................... 4,151 3,901 3,901 4,523
<CAPTION>
THREE
TEN TWELVE TWELVE MONTHS
MONTHS MONTHS MONTHS ENDED
ENDED ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------
1997 1998 1999 1999 2000
------------- ------------- ------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $53,646 $121,056 $184,336 $36,346 $46,167
Cost of revenues.............. 41,685 93,604 145,130 28,841 36,510
Selling, general and
administrative expense...... 10,253 19,531 25,225 4,940 6,610
Amortization expense.......... 150 1,050 3,694 357 999
In process research and
development expense......... -- -- -- -- --
------- -------- -------- ------- -------
Income (loss) from
operations.................. 1,558 6,871 10,287 2,208 2,048
Offering expense.............. -- -- 845 -- --
Interest expense.............. 1,302 2,513 4,737 790 1,470
Interest income............... 96 244 155 30 23
------- -------- -------- ------- -------
Income (loss) from continuing
operations before taxes..... 352 4,602 4,860 1,448 601
Provision for income taxes.... 154 2,168 2,284 656 270
------- -------- -------- ------- -------
Net income (loss) from
continuing operations....... $ 198 $ 2,434 $ 2,576 $ 792 $ 331
======= ======== ======== ======= =======
Income (loss) per share from
continuing operations:
Basic....................... $ 0.05 $ 0.38 $ 0.37 $ 0.11 $ 0.05
======= ======== ======== ======= =======
Diluted..................... $ 0.04 $ 0.36 $ 0.34 0.11 0.04
======= ======== ======== ======= =======
Weighted average common shares
and equivalents:
Basic....................... 3,865 6,428 6,877 6,927 6,839
Diluted..................... 4,552 6,847 7,500 7,440 7,560
</TABLE>
The following table is a summary of AverStar's balance sheet data.
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF AS OF
FEBRUARY 29, FEBRUARY 28, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------ -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 1,345 $ 614 $ 131 $ 332 $ 105 $ 81
Working capital.......................... 6,608 7,140 2,567 9,916 13,656 5,922
Total assets............................. 19,192 17,039 23,646 59,888 88,759 101,218
Total debt............................... 12,710 12,769 15,060 31,610 56,766 68,016
Redeemable common stock.................. -- -- 1,412 5,598 4,961 4,961
Stockholders' equity (deficit)........... (3,312) (3,218) (5,795) (2,752) 745 909
</TABLE>
12
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows selected historical per share data of Titan and
AverStar and combined per share data on an unaudited pro forma combined basis
for the years ended December 31, 1999, 1998 and 1997 after giving effect to the
merger as if it had occurred on January 1, 1997 under the pooling of interests
method of accounting. The Titan pro forma combined per share data for the year
ended December 31, 1999 combines the historical per share data of Titan (which
includes the pooling of interests with ACS) with the historical per share data
of Mainsaver, Assist and SFG as if each company had been combined with Titan on
January 1, 1999. The pro forma combined per share data assume that .5150 of a
share of Titan common stock had been issued in exchange for each outstanding
share of AverStar common stock. You should read this information in conjuction
with the selected historical audited and unaudited financial information
included elsewhere in this proxy statement/ prospectus and the historical
audited and unaudited financial statements of Titan and AverStar and related
notes that are included elsewhere or incorporated by reference in this proxy
statement/ prospectus.
The per share data presented below are derived from the historical
consolidated financial statements of Titan and AverStar, of which the Titan
financial statements are incorporated in this proxy statement/prospectus by
reference and the AverStar financial statements are included herein. The
unaudited pro forma combined results of Titan and of AverStar are not
necessarily indicative of results of operations that would have resulted if the
merger had been completed at the beginning of the periods indicated or of the
results that will be achieved in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro Forma--Titan:
Net income (loss) per share........................ $0.50 $(0.40) $(0.52)
Book value per share(1)............................ 3.15
Historical--AverStar:
Net income (loss) per share........................ $0.34 $(0.39) $(0.34)
Book value per share(1)............................ 0.10
Pro forma combined per Titan share(2):
Net income (loss) per share........................ $0.53 $(0.43) $(0.53)
Book value per share(1,2).......................... 2.79
Equivalent pro forma combined per AverStar share(3):
Net income (loss) per share........................ $0.49 $(0.40) $(0.50)
Book value per share(1,2).......................... 2.62
</TABLE>
- ------------------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock and equivalents outstanding
at the end of each period. The pro forma book value per share is computed by
dividing pro forma stockholders' equity by the pro forma number of shares of
common stock and equivalents at the end of each period.
(2) Titan estimates that Titan and AverStar will incur approximately
$11.6 million of primarily direct transaction and employee termination costs
associated with the merger, which will be charged to operations as the costs
are incurred. The book value per share data under pro forma combined per
Titan share give effect to estimated costs of $8.1 million, net of tax, as
if such costs had been incurred and charged to operations as of
December 31, 1999. These costs and this charge are not included in the pro
forma income per share data. See "Unaudited Pro Forma Financial Information"
and the related notes in this proxy statement/prospectus.
(3) The amounts for equivalent pro forma combined per AverStar share are
calculated by dividing the amounts for pro forma combined per Titan share by
an assumed total exchange of 3,863,000 Titan shares for all outstanding
shares and outstanding options of AverStar (or a .5150 exchange ratio based
upon total diluted AverStar shares and options as of December 31, 1999 of
7,500,000).
13
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS RELATING TO THE
MERGER AND OWNERSHIP OF TITAN COMMON STOCK BEFORE YOU DECIDE WHETHER TO VOTE TO
ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER AND RELATED TRANSACTIONS. YOU
ALSO SHOULD CONSIDER THE OTHER INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS
AND THE OTHER DOCUMENTS CONSIDERED A PART OF THIS PROXY STATEMENT/PROSPECTUS.
FOR INFORMATION ABOUT THESE OTHER DOCUMENTS, SEE "WHERE YOU CAN FIND MORE
INFORMATION."
RISKS RELATING TO THE MERGER
TITAN CANNOT ASSURE YOU THAT TITAN'S AND AVERSTAR'S BUSINESS OPERATIONS WILL
BE SUCCESSFULLY INTEGRATED.
If Titan and the stockholders of the combined company are to realize the
anticipated benefits of the merger, the operations of Titan and AverStar must be
integrated and combined efficiently. Titan cannot assure you that the
integration will be successful or that the anticipated benefits of the merger
will be fully realized. Similarly, Titan cannot guarantee that the AverStar
stockholders will achieve greater value through their ownership of Titan common
stock than they would have achieved as stockholders of AverStar as a separate
entity. The dedication of Titan's management resources to integration activities
may detract attention from the day-to-day business of the combined company. The
difficulties of integration may be increased by the need to coordinate
geographically separate organizations, integrate personnel with disparate
business backgrounds and combine different corporate cultures. This integration
may also be more difficult due to Titan's integration challenges as a result of
its recently completed acquisitions or any future acquisitions. Titan cannot
assure you that there will not be substantial costs associated with the
integration process, that integration activities will not result in a decrease
in revenues or a decrease in the value of Titan common stock, or that there will
not be other material adverse effects from Titan's integration efforts.
THE EXPECTED COSTS OF THE MERGER WILL BE SUBSTANTIAL.
Titan estimates that it will incur primarily direct transaction costs of
approximately $11.6 million associated with the merger. These costs will be
charged to operations as incurred. This amount is a preliminary estimate only;
there can be no assurance that Titan will not actually incur charges in excess
of this estimate.
SALES OF SUBSTANTIAL AMOUNTS OF TITAN'S COMMON STOCK IN THE OPEN MARKET BY
AVERSTAR STOCKHOLDERS COULD DEPRESS TITAN'S STOCK PRICE.
If AverStar stockholders sell substantial amounts of Titan common stock in
the public market following the merger, including shares issued upon the
exercise of outstanding options, the market price of Titan common stock could
fall. These sales might also make it more difficult for Titan to sell equity or
equity-related securities at a time and price that it otherwise would deem
appropriate. Based on the number of outstanding shares of AverStar common stock
as of May 19, 2000, Titan will issue approximately 3,862,281 shares of Titan
common stock in the merger. In addition, Titan will assume all outstanding
options to purchase AverStar common stock, which will be converted into options
to acquire shares of Titan common stock using the same exchange ratio which is
applicable to AverStar common stock in the merger. All of the shares of Titan
common stock issued to stockholders of AverStar, including those issued upon the
exercise of options, will be freely tradable without restrictions or further
registration under the Securities Act of 1933, unless you are an AverStar
"affiliate," as that term is defined under the Securities Act, at the time the
merger is submitted for approval by AverStar stockholders. The term "affiliate"
would generally include directors, executive officers and some significant
stockholders of AverStar.
14
<PAGE>
RISKS RELATING TO TITAN'S BUSINESS AND COMMON STOCK
THE CAYENTA, SUREBEAM AND TITAN WIRELESS BUSINESSES OPERATE IN EMERGING
MARKETS, AND TITAN WILL BE UNABLE TO EXPAND THESE BUSINESSES AS IT EXPECTS IF
THE PRINCIPAL PRODUCTS AND SERVICES OF THOSE BUSINESSES DO NOT MEET WITH MARKET
ACCEPTANCE.
Titan is committed to creating, building and launching technology-based
businesses. As part of implementing that strategy, Titan has created, built and
launched technology-based businesses known as Cayenta, SureBeam and Titan
Wireless. If any of the primary markets targeted by Cayenta, SureBeam or Titan
Wireless fails to develop as Titan anticipates, Titan's revenues will be less
than expected, its business will suffer and it may be unable to recoup the
investments it has made to develop and market the principal products and
services of those businesses.
To grow as currently contemplated, Titan will need to derive an increasing
portion of its revenues from the Cayenta, SureBeam and Titan Wireless
businesses.
To date, none of Cayenta's revenues have been derived from direct sales by
it of its total services provider offering, or TSP. Cayenta's only TSP-related
revenues have resulted from providing TSP services to the customers of a joint
venture in which it holds a 10% equity interest. The market for TSP offerings
has only recently begun to develop, and Cayenta cannot be certain that the
market for TSP offerings will develop.
The use of the SureBeam electron beam technology for food irradiation has
only recently been approved by the applicable regulatory authorities in the
United States. Accordingly, a market for pasteurized foods has only recently
begun to develop, and its continued development will depend on broad acceptance
of irradiated foods by customers, food producers and providers, restaurant
chains and food retailers. This acceptance may not occur.
Titan Wireless' principal strategy is to provide products used in telephony
systems in developing countries. Titan cannot guarantee that a substantial
market for telephony services in developing countries will ever develop, or if
such a market does develop, that fixed-site satellite equipment will capture a
significant portion of that market. The development of a market for telephony
services in developing countries will depend upon a variety of factors including
whether a particular country has sufficient resources to support such a market
and whether the telephony services are offered at a reasonable cost to the end
users of such services. Titan Wireless' ability to penetrate the telephony
market in developing countries will be adversely affected to the extent that
other competing elements of the communications infrastructure, such as telephone
lines, other satellite-delivered solutions and fiber optic cable and television
cable, are installed in the developing countries. In addition, the development
and implementation of telephony systems will be dependent upon, among other
items, the continued development of necessary technologies, continued financial
and other support from governmental agencies, the implementation of
cost-effective systems, market acceptance for such systems and approval by
appropriate regulatory agencies.
TITAN HAS A LIMITED HISTORY OF COMMERCIALIZING NEW TECHNOLOGIES AND ITS
COMMERCIAL BUSINESSES MAY NOT REMAIN OR EVER BECOME SUCCESSFUL.
In 1991, Titan adopted a strategy of seeking to develop commercial
businesses using technology developed in its defense businesses. The SureBeam
and Titan Wireless businesses are a product of this strategy. Many of Titan's
commercial businesses are in an early stage of development or have only recently
begun to offer their products, services, systems or solutions in the emerging
markets in which they operate. These technology-based businesses are subject to
risks inherent in companies at these early stages of development, including:
- the risks that their base technology will become obsolete and that they
will fail to respond in a timely and cost-effective manner to rapid
technological changes;
15
<PAGE>
- the risks associated with operating in markets that are subject to a high
degree of competition;
- the risk that they will have inadequate management resources to capitalize
on market opportunities and execute their strategy;
- the risk that they will be unable to manage rapid growth effectively;
- the risk that they will be unable to execute successfully each portion of
their business strategy on schedule;
- the risk that Titan may not identify markets with sufficient opportunities
to justify its investments in products and solutions for these markets;
- the market and operating risks that are unique to each particular
business; and
- the risk that adequate capital may not be available to fund their
continued development.
TITAN CANNOT GUARANTEE THAT CAYENTA'S PENDING INITIAL PUBLIC OFFERING WILL
CLOSE OR THAT TITAN WILL BE ABLE TO EXECUTE ON ITS STRATEGY OF OBTAINING PUBLIC
OR PRIVATE FINANCING TO FUND THE GROWTH OF ITS COMMERCIAL BUSINESSES.
As part of Titan's strategy of seeking external financing to grow its
commercial businesses, Titan's Cayenta subsidiary filed a registration statement
for an initial public offering of its common stock in December 1999, as last
amended in March 2000. Titan cannot guarantee that Cayenta will succeed in
completing the offering, which may be adversely affected by market conditions or
other factors. Titan has extended a credit facility of up to a maximum of
$70.0 million under which Cayenta owed Titan approximately $68.4 million as of
March 20, 2000. Cayenta may not use the proceeds of its initial public offering
to pay amounts outstanding under its credit facility with Titan.
Titan may seek public or private financing for one or more of its commercial
businesses to fund their growth, including through initial public offerings or
spin-offs for any of its segments. Titan cannot guarantee that adequate capital
to fund its growth will be available to Titan or be available on acceptable
terms or that Titan will complete any spin-off of any of its segments.
TITAN DEPENDS ON GOVERNMENT CONTRACTS FOR A MAJORITY OF ITS REVENUES.
Titan earns a majority of its total revenues from U.S. government contracts.
Any cancellations or modifications of Titan's significant U.S. government
contracts or subcontracts, or failure by the U.S. government to exercise an
option period relating to those contracts or subcontracts, could hurt Titan's
business, financial condition and results of operations in the short or long
term. Continuing declines in U.S. defense and other federal agency budgets also
may hurt Titan's prospects.
Titan's revenues from U.S. government business represented approximately 83%
of its total revenues in 1997 and 1998 and 80% of its total revenues for 1999.
This percentage may rise in the future. Although Titan bids for and is awarded
long-term U.S. government contracts and subcontracts, the U.S. government only
funds these contracts on an annual basis, and many of Titan's contracts and
subcontracts include option years. The U.S. government may cancel these
contracts at any time without penalty or may change its requirements, programs
or contract budget, and generally has the right not to exercise option periods.
The U.S. Congress may decline to appropriate funds needed to complete the
contracts awarded to Titan or the prime contractor. On its subcontracts, Titan
generally does not control the prime contractor's allocation of resources. Titan
also depends upon the prime contractor to perform its obligations on the primary
government contract. In addition to contract cancellations and declines in
agency budgets, Titan's prospects may be adversely affected by:
- budgetary constraints affecting U.S. government spending generally, and
changes in fiscal policy or available funding;
- curtailment of the U.S. government's use of technology services providers;
16
<PAGE>
- the adoption of new laws or regulations;
- technological developments;
- U.S. government shutdowns, such as that which occurred during the U.S.
government's 1996 fiscal year;
- competition and consolidation in Titan's business areas; and
- general economic conditions.
These or other factors could cause government agencies to reduce their purchases
under contracts, to exercise their right to terminate contracts or not to
exercise options to renew contracts. Any of these actions could have a material
adverse effect on Titan's business, financial condition and results of
operations.
GOVERNMENT AUDITS OF TITAN'S GOVERNMENT CONTRACTS COULD CAUSE A MATERIAL
NEGATIVE ADJUSTMENT TO ITS REVENUES.
Titan's government contracts are subject to cost audits by the government.
These audits may occur several years after completion of the audited work.
Audits may result in a recalculation of contract revenues or result in the
government refusing to reimburse some of Titan's contract costs and fees.
Generally, Titan resolves audit issues by negotiation without material
adjustments. However, in the future, Titan could have a material adjustment to
revenue as a result of an audit, including an audit of one of the companies
Titan has recently acquired. Before Titan acquired them, some of its recently
acquired companies did not impose internal controls as rigorous as those Titan
imposes on the government contracts it performs. As part of the integration
process, Titan seeks to apply its policies throughout the acquired companies.
TITAN'S OPERATING MARGINS MAY DECLINE UNDER ITS FIXED-PRICE CONTRACTS IF IT
FAILS TO ESTIMATE ACCURATELY THE RESOURCES NECESSARY TO SATISFY ITS OBLIGATIONS.
Some of Titan's contracts are fixed-price contracts under which Titan bears
the risk of any cost overruns. Its profits are adversely affected if its costs
under a contract exceed the assumptions it used in bidding for these contracts.
TITAN IS NOT ABLE TO GUARANTEE THAT IT WILL RETAIN ITS CONTRACTS WITH THE
U.S. GOVERNMENT AND SUBCONTRACTS UNDER U.S. GOVERNMENT PRIME CONTRACTS IN ANY
COMPETITIVE REBIDDING PROCESS.
Upon expiration of a U.S. government contract or subcontract under U.S.
government prime contracts, if the government customer requires further services
of the type provided in the contract, there is frequently a competitive
rebidding process. Titan cannot guarantee that it, or the prime contractor, will
win any particular bid, or that it will be able to replace business lost upon
expiration or completion of a contract. Further, all U.S. government contracts
are subject to protest by competitors. The unexpected termination of one or more
of Titan's significant contracts could result in significant revenue shortfalls.
The termination or non-renewal of any of its significant contracts, short-term
revenue shortfalls, the imposition of fines or damages, or Titan's suspension or
debarment from bidding on additional contracts could have a material adverse
effect on its business, financial condition and results of operations.
MANY OF TITAN'S U.S. GOVERNMENT CUSTOMERS SPEND THEIR PROCUREMENT BUDGETS
THROUGH GSA SCHEDULE CONTRACTS, AND TITAN IS REQUIRED TO COMPETE FOR POST-AWARD
ORDERS.
Budgetary pressures and reforms in the procurement process have caused many
U.S. government customers increasingly to purchase goods and services through
"indefinite delivery, indefinite quantity" contracts, General Services
Administration, or GSA, Schedule contracts and other multiple award or
government-wide acquisitions contract vehicles. Titan's failure to compete
effectively in this
17
<PAGE>
procurement environment could have a material adverse effect on its business,
financial condition and results of operations. These contract vehicles have
resulted in increased competition and pricing pressure and required Titan to
make sustained post-award efforts to realize revenues under the relevant
contract. Titan cannot guarantee that it will continue to increase revenues or
otherwise sell successfully under these contract vehicles.
TITAN MAY BE LIABLE FOR PENALTIES UNDER A VARIETY OF PROCUREMENT RULES AND
REGULATIONS, AND CHANGES IN GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT ITS
BUSINESS.
Titan's defense, government and commercial businesses must comply with and
are affected by various government regulations. Among the most significant
regulations are the following:
- the Federal Acquisition Regulations, which comprehensively regulate the
formation, administration and performance of government contracts;
- the Truth in Negotiations Act, which requires certification and disclosure
of all cost and pricing data in connection with contract negotiations;
- the Cost Accounting Standards, which impose accounting requirements that
govern Titan's right to reimbursement under certain cost-based government
contracts; and
- laws, regulations and Executive Orders restricting the use and
dissemination of information classified for national security purposes and
the exportation of certain products and technical data.
These regulations affect how Titan and its customers do business and, in some
instances, impose added costs on its businesses. Any changes in applicable laws
could adversely affect the financial performance of the business affected by the
changed regulations. Any failure to comply with applicable laws could result in
contract termination, price or fee reductions or suspension or debarment from
contracting with the U.S. government.
TITAN'S FAILURE TO RETAIN QUALIFIED TECHNICAL AND MANAGEMENT PERSONNEL COULD
ADVERSELY AFFECT ITS FINANCIAL PERFORMANCE.
Titan needs to maintain its workforce of highly qualified technical and
management personnel for each of its business segments, including its engineers,
computer programmers and personnel with security clearances required for
classified work. In addition, Titan's future success will depend in part on its
ability to identify, recruit and retain additional qualified personnel,
including individuals with security clearances required for classified work. The
loss of any key personnel could negatively affect its business, financial
condition and results of operations. Titan's employees generally have many other
job opportunities, and there is intense competition for their services.
Consequently, Titan strives to maintain an entrepreneurial work environment and
provide financial incentives to attract and retain its key personnel. Titan
cannot guarantee that it will be able to continue to attract and retain
personnel with the advanced technical and security clearance qualifications
necessary for the development of its business.
TITAN COMPETES IN HIGHLY COMPETITIVE MARKETS AGAINST MANY COMPANIES THAT ARE
LARGER, BETTER FINANCED AND BETTER KNOWN THAN TITAN.
Titan's businesses operate in highly competitive markets. Many of Titan's
competitors are larger, better financed and better known companies who may
compete more effectively. Titan believes it must continue to expand its defense
and government information technology businesses so that it can remain price
competitive and compete for larger contracts. For that reason, Titan is
continuing to look for acquisition candidates. Titan's commercial businesses
compete against other technologies as well as against companies with similar
products. In order to remain competitive, Titan must invest to keep its products
technically advanced and compete on price and on value added to its customers.
Titan's ability
18
<PAGE>
to compete may be adversely affected by limits on its capital resources and its
ability to invest in maintaining and expanding its market share. Any adverse
financial developments could make Titan a less effective competitor.
TITAN IS SUBJECT TO RISKS ASSOCIATED WITH ITS ACQUISITIONS OF OTHER
COMPANIES.
Since January 1, 1998, Titan has acquired ten defense information technology
companies as part of the consolidation strategy for its defense and government
information technology businesses. Five of these ten transactions were
structured as stock-for-stock pooling of interests transactions. In addition,
since January 1, 1999, Titan has acquired four information technology services
and solutions companies as part of Cayenta's development of its total services
provider offering. The acquisition and integration of new companies involves
risk. The integration of acquired businesses may be costly and may result in a
decrease in its revenues or a decrease in the value of its common stock for the
following reasons, among others:
- Titan may need to divert more management resources to integration than it
planned, which may adversely affect its ability to pursue other more
profitable activities;
- the difficulties of integration may be increased by the necessity of
coordinating geographically separated organizations, integrating personnel
with disparate business backgrounds and combining different corporate
cultures;
- Titan may not eliminate as many redundant costs as it anticipated in
selecting its acquisition candidates; and
- one or more of Titan's acquisition candidates also may have liabilities or
adverse operating issues that Titan failed to discover through its
diligence prior to the acquisition.
Consequently, Titan's recent acquisitions may not improve its business,
financial condition and results of operations in the short-term or long-term as
it expects them to do.
Titan intends to continue to look for complementary businesses or
technologies to acquire so that it can expand its core businesses. However,
Titan may not find any more attractive candidates or may find that the
acquisition terms are not favorable to it. In addition, Titan may compete with
other companies for these acquisition candidates. Instability in the U.S.
securities markets and volatility in its stock price may make acquisitions with
Titan stock more expensive. Titan also may not adequately assess the risks
inherent in a particular acquisition candidate or correctly assess the
candidate's potential contribution to its financial performance. Accordingly,
Titan's acquisition strategy may not improve its overall business, financial
condition and results of operations, and could weaken them.
TITAN MAY INCUR SIGNIFICANT COSTS IN PROTECTING ITS INTELLECTUAL PROPERTY.
As a policy, Titan seeks to protect its proprietary technology and
inventions through patents, copyrights, trade secret law and other legal
protections. While Titan's patent portfolio is valuable, its financial success
ultimately depends upon its ability to deliver products and services that meet
customer needs, not on intellectual property laws. Titan may, however, incur
significant expense both in protecting its intellectual property and in
depending or assessing claims with respect to intellectual property owned by
others. Any patent or other infringement litigation by or against Titan could
have an adverse effect on its business, financial condition and results of
operations. Titan also could be forced to modify or abandon one or more planned
or current products based upon its assessment of intellectual property risks or
actual or threatened claims by other companies.
On January 6, 2000, Ion Beam Applications s.a., a Belgian corporation, and
some of its U.S. subsidiaries filed an action for declaratory judgment in a
federal court in Virginia against Titan relating to its patent for its SureBeam
technology. The action attacks the validity of Titan's patent, seeks a
declaration that Ion Beam Applications and its customers have not infringed any
of the 62 claims in
19
<PAGE>
Titan's patent, and alleges that Titan has engaged in unfair competition and
that Titan's conduct constitutes patent misuse. Titan intends to vigorously
defend its patent position. A finding in favor of Ion Beam Applications in this
action could adversely affect Titan's business, financial condition and results
of operations by reducing the growth of its Titan Scan business segment and
preventing Titan from generating the revenues that it expects from food
pasteurization.
TITAN'S QUARTERLY AND ANNUAL FINANCIAL PERFORMANCE AND STOCK PRICE HAVE
HISTORICALLY FLUCTUATED AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY IN THE
FUTURE.
Titan's revenues are affected by factors such as the unpredictability of
sales and contracts awards due to the long procurement process for most of its
products and services, defense, intelligence and government information
technology budgets, competition and general economic conditions. Titan's product
mix and unit volume, its ability to keep expenses within budgets, its
distribution channels and its pricing affect its gross margins. These factors
and other risk factors described in this proxy statement/prospectus may
adversely affect Titan's financial performance within a period and cause its
financial results to fluctuate significantly on a quarterly or annual basis.
Consequently, Titan does not believe that comparison of its financial
performance from period to period is necessarily meaningful or predictive of its
likely future performance. It is possible that in some future quarter or
quarters Titan's operating results will be below the expectations of public
market analysts or investors. If so, the market price of Titan's common stock
may decline significantly.
From time to time, there may be significant volatility in the market price
for Titan's common stock. Over the past three years, the market price of Titan's
common stock has fluctuated over a wide range. From January 1, 1999 through
May 19, 2000, the highest sale price of its common stock on the New York Stock
Exchange was $60.50 and the lowest sale price of its common stock was $4.75. A
number of factors involving Titan and its industry could contribute to future
fluctuations in its stock price, including the risk factors described in this
proxy statement/prospectus.
RISKS OF TITAN'S INTERNATIONAL OPERATIONS, INCLUDING ECONOMIC CONDITIONS IN
EMERGING MARKETS, COULD ADVERSELY AFFECT THE PROSPECTS OF ITS COMMERCIAL
COMMUNICATIONS BUSINESS.
Titan sells commercial communications products and services primarily in
developing countries. Its revenues from sales of these products and services in
foreign countries represented 5% of its total revenues for the year ended
December 31, 1999. Titan expects its revenues from these activities in foreign
countries to increase. Although Titan generally sells commercial communications
products and services in U.S. dollars, currency devaluations and adverse market
conditions in emerging markets have negatively affected demand for its
commercial communications products and services and, consequently, its revenues
for this segment. Titan's commercial communications products generally require
substantial capital investments, and its potential customers have not had the
capital resources to make these investments. Titan has assisted its established
marketing partner in Indonesia by providing trade credit that has subsequently
been extended with a final installment due in September 2000. Because of market
conditions in Indonesia and other factors, there is a risk that its customer in
Indonesia may not be able to pay this debt in accordance with the extended
terms. Further, Titan does not have the capital resources or tolerance of risk
to finance the purchase of its commercial communications products and therefore
relies upon its customers' abilities to obtain such financing. As a result,
revenues in this group may be adversely affected by economic conditions in
emerging markets and the unavailability of financing on reasonable terms. Titan
also is increasingly seeking opportunities to capture operating revenues from
use of its systems to provide telephony services. These services generally are
billed in U.S. dollars but in the future may be billed in local currency. Titan
does not believe that its international operations currently subject it to
material risks from fluctuations in currency exchange rates. However, as Titan
increases its commercial communications activities in foreign countries, its
risks from fluctuations in currency exchange rates could increase.
20
<PAGE>
Selling products or services in international markets also entails other
market, economic, cultural, legal and political risks, conditions and expenses.
These risks include:
- trade barriers;
- export and import restrictions and other applicable laws;
- political and economic instability;
- difficulties in collecting amounts owed to Titan; and
- difficulties in managing overseas employees and contractors.
Any one of these factors or other international business risks could adversely
affect Titan's financial performance.
TITAN'S OPERATING RESULTS MAY SUFFER IF A SIGNIFICANT NUMBER OF ITS U.S.
NAVY CONTRACTS ARE DELAYED OR CANCELED.
A significant percentage of Titan's products and services are predominately
sold and performed under contracts with various parts of the U.S. Navy or with
prime contractors to the U.S. Navy. Although these various parts of the U.S.
Navy are subject to common budgetary pressures and other factors, Titan's
various U.S. Navy customers exercise independent purchasing decisions. However,
because of such concentration of its contracts, Titan is vulnerable to adverse
changes in its business, financial condition and results of operations if a
significant number of its U.S. Navy contracts and subcontracts are
simultaneously delayed or canceled for budgetary or other reasons.
THE COVENANTS IN TITAN'S EXISTING CREDIT FACILITY RESTRICT ITS FINANCIAL AND
OPERATIONAL FLEXIBILITY, AND IT IS LIKELY THAT ITS ANTICIPATED REPLACEMENT
CREDIT FACILITY WILL CONTAIN SIMILAR OR MORE RESTRICTIVE COVENANTS.
Titan's existing credit facility contains covenants that restrict, among
other things, its ability to borrow money, make particular types of investments
or other restricted payments, swap or sell assets, merge or consolidate or make
acquisitions. An event of default under its credit facility could allow the
lenders to declare all amounts outstanding to be immediately due and payable.
Titan has pledged substantially all of its consolidated assets and the stock of
its subsidiaries to secure the debt under its credit facility. If the amounts
outstanding under the credit facility were accelerated, the lenders could
proceed against Titan's consolidated assets and the stock of its subsidiaries.
Any event of default, therefore, could have a material adverse effect on its
business. Titan's credit facility also requires it to maintain specified
financial ratios. Titan's ability to meet these financial ratios can be affected
by events beyond its control, and Titan cannot assure you that it will meet
those ratios. Titan also may incur future debt obligations that might subject it
to restrictive covenants that could affect its financial and operational
flexibility or subject it to other events of default.
TITAN'S OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY DISRUPTIONS IN ITS
SUPPLY OF PRODUCTS AND COMPONENTS OR SERVICES.
Because its internal manufacturing capacity is limited, Titan uses contract
manufacturers. While it uses care in selecting its manufacturers, this
arrangement gives Titan less control over the quality and price of products or
components than if it manufactured them. In some cases, Titan obtains products
from a sole supplier or a limited group of suppliers. Consequently, Titan risks
disruptions in its supply of key products and components if its suppliers fail
or are unable to perform because of strikes, natural disasters, financial
condition or other factors. Any material supply disruptions could adversely
affect its business, financial condition and results of operations as well as
its ongoing product cost structure.
21
<PAGE>
TITAN'S BUSINESS IS SUBJECT TO SIGNIFICANT ENVIRONMENTAL REGULATION.
Titan is subject to environmental and safety laws and regulations governing
the uses, storage and disposal of hazardous substances or waste and imposing
liability for the cleanup of contamination from these substances. Titan cannot
completely eliminate the risk of contamination or injury from these substances
or waste, and, in the event of such an incident, Titan could be held liable for
any damages that result. From time to time, Titan has been notified of
violations of government and environmental regulations. Titan attempts to
correct these violations promptly without any material impact on Titan's
operations. In addition, Titan may be required to incur significant additional
costs to comply with environmental laws and regulations in the future. These
costs, and any future violations or liability under environmental laws or
regulations, could have a material adverse effect on Titan's business, financial
condition and results of operations.
TITAN DOES NOT ANTICIPATE THAT IT WILL PAY DIVIDENDS ON ITS COMMON STOCK.
Titan has not paid cash dividends on its common stock within the past three
years and does not anticipate that it will pay cash dividends in the foreseeable
future. Titan may pay cash dividends only if it complies with financial tests
and other restrictions contained in agreements relating to its indebtedness.
PROVISIONS IN TITAN'S CERTIFICATE OF INCORPORATION AND BYLAWS AND IN
DELAWARE LAW COULD DISCOURAGE TAKEOVER ATTEMPTS TITAN OPPOSES EVEN IF TITAN'S
STOCKHOLDERS MIGHT BENEFIT FROM A CHANGE IN CONTROL OF TITAN.
Provisions in Titan's certificate of incorporation and bylaws and in the
Delaware General Corporation Law may make it difficult and expensive for a third
party to pursue a takeover attempt Titan opposes even if a change in control of
Titan would be beneficial to the interests of its stockholders. Titan's bylaws
permit its stockholders to take action by written consent instead of at a
meeting and to nominate directors or bring other business before stockholder
meetings only if they comply with advance notice and other procedural
requirements in its bylaws. Titan's board of directors currently has the
authority under its certificate of incorporation to issue up to 2,500,000
authorized shares of Titan preferred stock in one or more series and to fix the
powers, preferences and rights of each series without stockholder approval. The
ability to issue preferred stock could discourage unsolicited acquisition
proposals or make it more difficult for a third party to gain control of Titan,
or otherwise could adversely affect the market price of Titan's common stock.
Further, as a Delaware corporation, Titan is subject to section 203 of the
Delaware General Corporation Law. This section generally prohibits Titan from
engaging in mergers and other business combinations with stockholders that
beneficially own 15% or more of its voting stock, or with their affiliates,
unless Titan's directors or stockholders approve the business combination in the
prescribed manner.
TITAN HAS ADOPTED A SHAREHOLDER RIGHTS PLAN WHICH COULD DISCOURAGE HOSTILE
ACQUISITIONS OF CONTROL IN WHICH ITS STOCKHOLDERS MAY WISH TO PARTICIPATE.
In 1995, Titan's board of directors adopted a "poison pill" shareholder
rights plan, which may discourage a third party from making a proposal to
acquire Titan which Titan has not solicited or does not approve, even if the
acquisition would be beneficial to its stockholders. As a result, Titan's
stockholders who wish to participate in such a transaction may not have an
opportunity to do so. Under Titan's rights plan, preferred share purchase
rights, which are attached to its common stock, generally will be triggered upon
the acquisition, or actions that would result in the acquisition, of 15% or more
of its common stock by any person or group. If triggered, these rights would
entitle its stockholders other than the acquiror to purchase, for the exercise
price, shares of its common stock having a market value of two times the
exercise price. In addition, if a company acquires Titan in a merger or other
business combination not approved by the board of directors, these rights will
entitle Titan's stockholders other than the acquiror to purchase, for the
exercise price, shares of the common stock of the acquiring company having a
market value of two times the exercise price.
22
<PAGE>
INFORMATION IN THIS DOCUMENT
Important information in the documents referred to under the heading "Where
You Can Find More Information" is considered a part of, but is not included
directly in, this proxy statement/ prospectus. You may obtain this information
without charge upon written or oral request to:
The Titan Corporation
3033 Science Park Road
San Diego, California 92121-1199
Attn: Investor Relations
Telephone (858) 552-9500
If you would like to request documents, please do so by June 19, 2000 to
receive them before the special meeting of AverStar's stockholders.
This proxy statement/prospectus and the information incorporated by
reference in it include "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Titan and
AverStar intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements by
either Titan or AverStar regarding its expected financial position and operating
results, its business strategy, its financing plans, forecasted trends relating
to the markets in which it operates, its ability to complete acquisitions, and
similar matters are forward-looking statements. These statements can sometimes
be identified by the use of forward-looking words such as "may," "will,"
"anticipate," "estimate," "expect" or "intend." Neither Titan nor AverStar can
promise you that its expectations in such forward-looking statements will turn
out to be correct. The actual results of Titan or AverStar could be materially
different from such expectations. Important factors that could cause the actual
results to be materially different from expectations include those discussed in
this proxy statement/prospectus under the caption "Risk Factors."
Some of the information contained in or considered a part of this proxy
statement/prospectus concerning the markets and industries in which Titan and
AverStar operate is derived from publicly available information and from
industry sources. Although Titan and AverStar believe that this publicly
available information and the information provided by these industry sources are
reliable, Titan and AverStar have not independently verified the accuracy of any
of this information.
23
<PAGE>
THE AVERSTAR SPECIAL MEETING
GENERAL
This proxy statement/prospectus, together with a notice of special meeting
and a form of proxy, is being provided to AverStar stockholders in connection
with the solicitation of proxies by the AverStar board of directors for use at a
special meeting of AverStar stockholders to be held on June 26, 2000, at
10:30 a.m., eastern time, at the offices of AverStar at 23 Fourth Avenue,
Burlington, Massachusetts 01803, or at any adjournment, postponement or
rescheduling of that meeting.
This proxy statement/prospectus and the accompanying notice of special
meeting and form of proxy are first being mailed to stockholders of AverStar
around May 26, 2000.
MATTERS TO BE CONSIDERED
The special meeting of stockholders is being held so that AverStar
stockholders may consider and vote on adoption of the merger agreement and
approval of the merger and the other transactions contemplated by the merger
agreement.
AverStar stockholders also will be asked to act on any other matters that
may properly come before the meeting.
RECOMMENDATION OF THE AVERSTAR BOARD OF DIRECTORS
THE AVERSTAR BOARD OF DIRECTORS HAS APPROVED UNANIMOUSLY THE MERGER
AGREEMENT, THE PROPOSED MERGER AND OTHER TRANSACTIONS RELATED TO THE MERGER AND
CONTEMPLATED BY THE MERGER AGREEMENT. THE AVERSTAR BOARD OF DIRECTORS BELIEVES
THAT THE MERGER IS IN THE BEST INTERESTS OF, AND THAT THE TERMS OF THE MERGER
ARE FAIR TO, AVERSTAR AND ITS STOCKHOLDERS. THE AVERSTAR BOARD RECOMMENDS
UNANIMOUSLY THAT AVERSTAR STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER
AGREEMENT AND APPROVAL OF THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY
THE MERGER AGREEMENT.
RECORD DATE AND VOTE REQUIRED
The AverStar board of directors has fixed May 19, 2000 as the record date
for determining the AverStar stockholders who are entitled to notice of and to
vote at the special meeting. Therefore, only stockholders of record at the close
of business on the record date will receive notice of, and be able to vote at,
the special meeting of AverStar stockholders.
At the close of business on the record date, there were 5,958,125 shares of
AverStar common stock outstanding and entitled to a vote, held by 1,203 record
holders. A majority of these shares must be represented, in person or by proxy,
at the special meeting in order to constitute a quorum. A quorum must be present
before a vote can be taken on the adoption of the merger agreement, or any other
matter except adjournment or postponement of the meeting due to the absence of a
quorum. Abstentions, but not shares held in AverStar's treasury, will be counted
for purposes of determining the presence of a quorum at the special meeting.
At the close of business on the record date, there were 922,136 shares of
AverStar non-voting common stock outstanding, held by 5 record holders. These
shares are not entitled to vote on any matters at the special meeting and will
not be counted for purposes of determining the presence of a quorum at the
special meeting.
Each share of AverStar voting common stock entitles its holder to cast one
vote on each matter submitted to a vote at the special meeting. For the merger
to be approved under Delaware law and AverStar's certificate of incorporation,
at least a majority of the outstanding shares of AverStar voting common stock on
the record date must be voted for the adoption of the merger agreement. In the
event that stockholders are asked to vote on a proposal to adjourn or postpone
the special meeting to
24
<PAGE>
permit solicitation of additional proxies, approval of that proposal would
require the affirmative vote of at least a majority of the shares of AverStar
voting common stock present in person or represented by proxy at the meeting.
As of May 19, 2000, 2,062,168 of the outstanding shares of AverStar common
stock, which represented approximately 25.3% of the AverStar common stock
outstanding and approximately 28.5% of the AverStar voting common stock, were
beneficially owned by directors and executive officers of AverStar.
The AverStar Principal Stockholders, who collectively owned approximately
31.3% of AverStar's outstanding voting common stock as of the record date, have
signed an agreement to vote their shares in favor of adoption of the merger
agreement and approval of the merger and the other transactions contemplated by
the merger agreement. Each of these stockholders also has given Titan an
irrevocable proxy authorizing Titan to vote the stockholder's shares in favor of
adoption of the merger agreement and approval of the merger and the other
transactions contemplated by the merger agreement. See "Terms of the Merger
Agreement and Related Transactions--AverStar Voting Agreement" for more
information about this voting agreement.
PROXIES
This proxy statement/prospectus is being furnished to AverStar stockholders
in connection with the solicitation of proxies by the AverStar board of
directors for use at the special meeting of AverStar stockholders. It is
accompanied by a form of proxy.
AverStar stockholders should complete, sign and return the form of proxy if
they will not be able to attend the special meeting in person. A stockholder who
submits a proxy and later changes his or her mind as to the vote, or decides to
attend the meeting in person, may revoke the proxy at any time before the vote
at the special meeting by (x) notifying the corporate secretary of AverStar in
writing of the revocation or (y) completing, signing and returning a proxy with
a later date. In addition, an AverStar stockholder may revoke a prior proxy by
attending the special meeting and voting in person. However, attendance at the
special meeting by an AverStar stockholder who has signed a proxy but does not
provide a notice of revocation or request to vote in person is not sufficient to
revoke that proxy.
Written notices of revocation of proxies and other communications relating
to proxies should be addressed to:
AverStar, Inc.
23 Fourth Avenue
Burlington, Massachusetts 01803
Attn: Carol Doherty
All shares of AverStar stock entitled to vote represented at the special
meeting of AverStar stockholders by properly executed proxies that are received
prior to or at the meeting and not revoked before the vote at the special
meeting will be voted at the meeting as directed by the stockholders in the
proxies for such shares. If a properly executed proxy is returned but contains
no voting instructions, the shares of AverStar common stock represented by the
proxy will be voted "FOR" adoption of the merger agreement and approval of the
merger and the other transactions contemplated by the merger agreement. In the
event that AverStar stockholders are asked to vote on a proposal to adjourn or
postpone the meeting to permit the solicitation of additional proxies and no
directions on this proposal are indicated, proxies that indicate a vote in favor
of adoption of the merger agreement will be voted "FOR" the proposal to postpone
or adjourn, proxies that indicate a vote against adoption of the merger
agreement will be voted "AGAINST" the proposal to postpone or adjourn, and
proxies that
25
<PAGE>
abstain from a vote on adoption of the merger agreement will be voted "FOR" the
adjournment or postponement.
ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER AND THE OTHER
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE
OF A MAJORITY OF THE OUTSTANDING SHARES OF AVERSTAR VOTING COMMON STOCK ON THE
RECORD DATE. ACCORDINGLY, ABSTENTIONS AND FAILURES TO VOTE WILL HAVE THE SAME
EFFECT AS VOTES AGAINST ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE
MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
THEREFORE, THE AVERSTAR BOARD OF DIRECTORS URGES ALL AVERSTAR STOCKHOLDERS TO
COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE
PRE-ADDRESSED, POSTAGE-PAID ENVELOPE PROVIDED FOR THAT PURPOSE.
If any other matters are properly presented for consideration at the special
meeting, the persons named in the enclosed form of proxy will have the
discretion to vote on those matters using their best judgment.
All expenses incurred in connection with the solicitation of proxies,
including the cost of preparing and mailing the proxy materials, are
approximately $100,000 and will be paid by AverStar. If the merger is not
completed, AverStar and Titan have agreed to share equally certain costs,
including costs of printing, filing and mailing this proxy statement/prospectus
and the registration statement of which it is a part, up to $100,000, and Titan
shall bear all such costs and expenses in excess of $100,000. Directors,
officers and employees of AverStar may solicit proxies in person or by
telephone, mail, facsimile or other means. These directors, officers and
employees will not be separately compensated for soliciting proxies.
PLEASE DO NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARD.
AVAILABILITY OF INDEPENDENT AUDITORS
Ernst & Young LLP has acted as AverStar's independent auditors since 1995.
Representatives of Ernst & Young LLP familiar with AverStar are expected to
attend the special meeting and to be available to answer appropriate questions
and will have an opportunity to make a statement if they should desire to do so.
26
<PAGE>
THE MERGER
The discussion in this proxy statement/prospectus of the merger and the
principal terms of the merger agreement is qualified in its entirety by
reference to the merger agreement, which is attached to this proxy
statement/prospectus as Appendix A and is incorporated in this document by
reference.
GENERAL
Under the terms of the merger agreement, V T Acquisition Corp., a wholly
owned subsidiary of Titan, will be merged with and into AverStar at the
effective time of the merger. AverStar will be the surviving corporation in the
merger and will become a wholly owned subsidiary of Titan.
At the effective time of the merger, all issued and outstanding shares of
AverStar common stock will be converted into the right to receive the number of
shares of Titan common stock calculated as described below. Titan will not issue
fractional shares of its common stock in the merger. Instead, fractional shares
will be rounded up to the nearest whole share of Titan common stock. After the
conversion of all classes of AverStar common stock into one class of common
stock as required by AverStar's certificate of incorporation and stockholders'
agreement, the number of shares of Titan common stock AverStar stockholders will
be entitled to receive will depend on the exchange ratio of Titan common stock
to AverStar common stock. The exchange ratio has not been fixed in the merger
agreement, but will be calculated at the time of the merger in accordance with a
formula contained in the merger agreement. Under this formula, the exchange
ratio will be based on the average of the closing sale prices of the Titan
common stock on the NYSE for the ten consecutive trading days ending two trading
days immediately before the merger closing date.
At the effective time of the merger, Titan will assume all outstanding
AverStar stock options. Each assumed option will be converted in the merger into
an option to purchase shares of Titan common stock using the same exchange ratio
which is applicable to AverStar common stock in the merger. Except for the
number of shares issuable upon exercise of such options and the option exercise
prices, which will be adjusted based on the exchange ratio, the assumed options
will remain subject to the same terms and conditions that were in effect before
the merger. The exercise price per share of Titan common stock issuable under
the assumed options will equal the exercise price per share of AverStar common
stock issuable under the applicable option at the effective time of the merger
divided by the exchange ratio, rounded to the nearest whole cent. The option
conversion will not result in accelerated vesting of any assumed options or
otherwise affect the vesting schedules in effect before the merger for the
assumed options.
BACKGROUND OF THE MERGER
AVERSTAR CONSIDERATION OF STRATEGIC ALTERNATIVES. AverStar has pursued a
strategy of internal growth, through leveraging both its position in IT
assurance and its expertise and reputation in the federal IT market, and
external growth, through the acquisition of complimentary companies that operate
in defined vertical market niches. As part of its external growth strategy,
AverStar's current management has completed a series of strategic acquisitions
of five well established IT companies. In order to position itself to continue
to benefit from the consolidation in the federal IT industry, AverStar pursued
an initial public offering of its common stock during the summer of 1999.
Because of adverse market conditions, however, AverStar decided not to complete
its initial public offering. AverStar continued to explore all of its strategic
opportunities, including combining with a larger company in the federal IT
industry, and continuing to grow and develop AverStar's business.
TITAN ACQUISITION STRATEGY. In recent years, developments in government
procurement policies and other factors have contributed to substantial
consolidation in the government information technology industry, as larger
companies have acquired smaller companies without the broad capabilities needed
to compete effectively for government contracts. Titan has pursued a policy of
supplementing the internal
27
<PAGE>
growth in its defense and government information technology business with an
active program of strategic acquisitions to take advantage of growth
opportunities from this ongoing consolidation. Since January 1, 1998, Titan has
acquired ten defense information technology companies as part of its
consolidation strategy. In implementing its strategy, Titan seeks acquisition
candidates it believes are capable of bringing strategic advantages, earnings
and strong management resources to the combined company.
CHRONOLOGY OF EVENTS LEADING UP TO EXECUTION OF THE MERGER AGREEMENT.
On January 20, 2000, Gene Ray, Titan's Chairman, President and Chief
Executive Officer, called Michael Alexander, AverStar's Chairman and Chief
Executive Officer, and requested a meeting among Mr. Ray, Mr. Alexander and Eric
DeMarco, Titan's Chief Financial Officer in New York on February 10, 2000.
Mr. Ray said he could not discuss the reason for the meeting and would explain
at the meeting. Mr. Alexander asked if Joe Saponaro, AverStar's President,
should also attend the meeting and Mr. Ray responded that it would probably be
helpful.
Early the next week, Mr. Ray's assistant called Mr. Alexander to reschedule
the meeting for February 14, 2000, and to ask for a suggestion of a meeting
place. Mr. Alexander suggested the offices of AverStar's counsel.
On February 14, 2000, Mr. Alexander and Mr. Saponaro met with Mr. Ray and
Nick Costanza, Titan's in-house counsel at the offices of Swidler Berlin Shereff
Friedman, LLP, counsel to AverStar, in New York City. Mr. DeMarco participated
by telephone. Swidler Berlin Shereff Friedman, LLP attended parts of the
meeting. Mr. Ray began the meeting by stating that Titan would like to explore
the possibility of a business combination with AverStar, particularly if it
could be structured as a tax-free exchange of stock accounted for as a pooling
of interests. He apologized for not disclosing the purpose of the meeting in
advance, explaining that Titan needed to close its preferred stock offering
prior to beginning any such discussions.
AverStar and Titan spent the next ten hours or so exchanging and clarifying
financial numbers on both the companies. Ultimately, Mr. Ray made an offer of
$185 million for the enterprise value of AverStar. Mr. Alexander and
Mr. Saponaro responded that AverStar would require an enterprise value of at
least $200 million to move forward under the structure of the proposed deal, and
that AverStar would require a collar around Titan's stock to protect that
enterprise value during the time period between the signing of a definitive
agreement and the closing of a merger. Titan agreed to AverStar's requests
subject to AverStar agreeing to a 10% holdback of shares of Titan's common stock
until the expiration of the normal representations and warranties. AverStar
agreed to a holdback of not longer than 90 days.
AverStar and Titan worked through the evening and into the next day,
February 15, to craft an exclusivity agreement and a term sheet which were
consistent with the terms discussed. On February 15, 2000, AverStar's board of
directors approved the signing of a 30-day exclusivity agreement with Titan,
including appropriate break-up fees, based upon an accompanying unsigned,
non-binding term sheet.
On February 17, 2000, Titan's board of directors met to review the proposed
terms of the merger on a preliminary basis.
On February 24, 2000, AverStar engaged Ernst & Young LLP to perform certain
limited due diligence procedures at Titan in connection with the proposed
merger.
Over the next six weeks, Titan and AverStar performed due diligence
investigations of each other and, with the assistance of Swidler Berlin Shereff
Friedman, LLP, CS First Boston, Titan's financial adviser, Nick Costanza,
Titan's in-house counsel, and Hogan & Hartson L.L.P., counsel to Titan,
negotiated a definitive merger agreement. The merger agreement contained
essentially the same terms as contemplated by the term sheet, with the following
exceptions:
28
<PAGE>
- When the merger agreement was almost fully negotiated and the parties were
nearly comfortable with the proposed deal, Titan's common stock
experienced a significant price increase. On March 22, 2000, Mr. Ray
called Mr. Alexander to explain that the price increase had caused a
problem with Titan's investment bankers recommendation of the proposed
deal to Titan's board of directors. Mr. Ray asked Mr. Alexander to work
together to devise a solution. Over the next day and a half the parties
explored several suggested solutions. Titan and its advisers insisted that
the only acceptable solution was to adjust the midpoint of the collar
upward, so that the current trading price of Titan would be within the
collar when the transaction was announced.
- On March 22, 2000, Titan's board of directors met in a special meeting. At
this meeting, members of Titan's senior management, together with Hogan &
Hartson L.L.P. and CS First Boston, reviewed with Titan's board of
directors, among other things, the financial and legal aspects of the
transaction, the terms of the merger agreement, the agreement with the
AverStar Principal Stockholders, and the other matters described below
under "Titan Reasons for the Merger." After discussion and consideration,
the Titan board of directors unanimously approved the merger agreement and
the merger and the issuance of Titan common stock in connection with the
merger, subject to finalizing certain open points in the merger agreement.
- On March 23, 2000, Mr. Ray and Bob Lovett of CS First Boston called
Mr. Alexander to propose a solution to the problem. In exchange for
raising the midpoint of the collar, Titan offered to increase the
enterprise value to $205 million. Mr. Alexander responded that he believed
he could recommend that proposal to AverStar's board of directors if Titan
would also agree to drop the holdback provision. Later that day, Mr. Ray
informed Mr. Alexander that Titan would agree to reduce the holdback to
5%.
- AverStar's board of directors held a meeting on the evening of March 23,
2000. Mr. Alexander explained the status of the proposed merger to
AverStar's board of directors and a lengthy discussion ensued. The Board
authorized the merger agreement, subject to finalizing certain open points
in the merger agreement.
During the day of March 24, 2000, the final provisions of the merger
agreement were negotiated. Titan and AverStar exchanged signatures that evening.
RECOMMENDATION OF AVERSTAR BOARD OF DIRECTORS; AVERSTAR REASONS FOR THE MERGER
AVERSTAR'S BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS ADVISABLE, FAIR
TO, AND IN THE BEST INTERESTS OF AVERSTAR AND THE AVERSTAR STOCKHOLDERS.
ACCORDINGLY, AVERSTAR'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, UNANIMOUSLY ADOPTED A RESOLUTION DECLARING THE MERGER ADVISABLE AND
UNANIMOUSLY RECOMMENDS THAT AVERSTAR STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE
MERGER AGREEMENT AND THE APPROVAL OF THE MERGER AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT.
AverStar's board of directors and senior management believe that the
proposed merger will benefit AverStar and our stockholders for the following
reasons:
- the opportunity for AverStar stockholders to own stock of a publicly
traded company, with greater resources and a more diversified business;
- the realization of full value for AverStar's stockholders and a
significant return to them on their investment, based on the current value
of the Titan common stock to be issued in the merger;
- the access to Titan's complimentary base of customers and to broader
technology and expertise to offer to existing and potential customers;
29
<PAGE>
- the benefits of consolidation in response to the current market trends in
the federal IT industry toward larger, multiple award contracts; and
- the potential opportunities in a larger company for AverStar employees and
customers.
At a meeting of AverStar's board of directors held on March 23, 2000, after
due consideration, AverStar's board of directors unanimously:
- determined that the merger agreement and the proposed merger are fair to,
and in the best interests of, AverStar and its stockholders;
- approved the merger agreement, the proposed merger and related
transactions; and
- determined to recommend that AverStar's stockholders approve the merger,
the proposed merger and related transactions.
Accordingly, AverStar's board of directors recommends that you vote FOR the
approval of the proposed merger, the merger agreement and the related
transactions.
In the course of its deliberations, AverStar's board of directors and senior
management reviewed a number of other factors relevant to the proposed merger.
In particular, AverStar's board of directors considered, among other things:
- all the proposed benefits described above;
- information relating to the business, assets, management, competitive
position, operating performance, trading performance and prospects of each
of AverStar and Titan, including the prospects of AverStar if it were to
continue as an independent company;
- Titan's filings with the Securities and Exchange Commission;
- the current and historical market prices of Titan's common stock and the
risks associated with ownership of Titan's common stock;
- Titan's management presentation;
- information and advice based on the results of due diligence
investigations of Titan by members of AverStar's management and legal and
financial advisors;
- the capabilities of Titan's management team;
- the fact that the proposed merger is expected to qualify as a tax free
reorganization and be accounted for as a pooling of interest;
- the possibility of other alternatives to the proposed merger to increase
AverStar stockholder value;
- the impact of the proposed merger on AverStar's customers, suppliers and
employees;
- the likelihood that the proposed merger would be completed; and
- the terms of the merger agreement, including representations and
warranties, conditions to closing, rights of termination and provisions
permitting the AverStar board of directors to terminate the merger
agreement in response to a third party proposal which the AverStar board
of directors determines in its good faith judgment to be more favorable to
the AverStar stockholders than the proposed merger.
30
<PAGE>
AverStar's board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the proposed
merger, including:
- the risk that AverStar's operations might not be successfully integrated;
- the risk that the merger will not be completed;
- the risk that the price of Titan's common stock may fall precipitously
after the merger is completed;
- the risk that Titan may not grow or remain profitable after the proposed
merger; and
- the risk that the potential benefits of the proposed merger might not be
fully realized.
AverStar's board of directors believes that some of these risks are unlikely to
occur, that AverStar and Titan can avoid or mitigate others, and that, overall,
these risks are outweighed by the potential benefits of the proposed merger.
In view of the variety of factors considered in connection with its
evaluation of the merger agreement and the proposed merger, AverStar's board of
directors did not find it practical to and did not quantify or otherwise assign
relative weight to the specific factors considered in making its decisions and
recommendations. AverStar's board of directors considered the factors described
above as a whole and, overall, considered the factors to be favorable to and
support its decisions and recommendations. Individual members of AverStar's
board of directors may have given different weight to different factors.
TITAN REASONS FOR THE MERGER
Titan believes a business combination with AverStar will advance its
strategic objective of taking advantage through acquisitions of growth
opportunities from ongoing consolidation in the commercial and government
information technology industries. Titan expects the combination with AverStar
to offer the following strategic benefits to Titan after the merger:
- enhancement of Titan's government information technology and commercial
business revenues;
- expansion of Titan's government information technology and commercial
customer bases;
- broadening of Titan's capability to serve the government information
technology industry and to compete for new projects;
- enhancement of Titan's ability to create, build and launch
technology-based businesses; and
- strengthening of Titan's ability to develop promising emerging businesses
in its new Network, Internet and Information Security and Information
Technology Services business units.
INTERESTS OF AVERSTAR DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
The following AverStar directors and executive officers have interests in
the merger that are different from, or in addition to, the interests generally
of AverStar stockholders:
- The merger agreement provides that Michael B. Alexander, the Chairman and
Chief Executive Officer of AverStar, will become a member of the Titan
board of directors.
- Michael B. Alexander's and Joseph A. Saponaro's outstanding options to
purchase 387,831 shares and 116,349 shares of AverStar common stock,
respectively, will immediately and fully vest upon completion of the
merger.
31
<PAGE>
- Upon completion of the merger, holders of certain classes of AverStar
common stock, including Messrs. Levy and Schulte, will receive
approximately 386,230 additional shares of AverStar common stock pursuant
to allocations on certain classes of AverStar common stock required by
AverStar's certificate of incorporation and stockholders agreement.
As of May 19, 2000, directors and executive officers of AverStar held a
total of 1,484,629 shares of AverStar common stock and options to purchase
577,539 shares of AverStar common stock. These shares and options will be
converted in the merger into the right to receive shares of Titan common stock
or options to purchase shares of Titan common stock on the same basis as all
other outstanding AverStar shares and options.
As a result of their interests in the merger, the individuals listed above
may be more likely to vote to approve the merger agreement and the merger than
if they did not hold such interests. The AverStar board of directors was aware
of these interests and considered them, among other matters, in approving the
merger agreement and the transactions contemplated thereby.
STOCKHOLDER APPROVAL REQUIREMENTS
Under Delaware law, AverStar stockholders must vote to adopt the merger
agreement in order for AverStar to complete the merger. Titan stockholders are
not required to adopt the merger agreement under Delaware law because Titan is
not a constituent corporation in the merger, or under NYSE rules because the
maximum number of shares of Titan common stock which Titan is obligated to issue
in the merger will be less than 20% of the Titan common stock outstanding before
the merger.
ACCOUNTING TREATMENT
It is intended that the merger be accounted for by Titan as a pooling of
interests under generally accepted accounting principles. This means that Titan
and AverStar will be treated as if they had always been combined for accounting
and financial reporting purposes. It is a condition to the completion of the
merger that the following will occur:
- AverStar and Titan will receive a letter, dated the merger closing date,
from AverStar's independent auditors setting forth a statement that
AverStar's independent auditors, after reasonable investigation, are not
aware of any fact concerning AverStar or its stockholders or affiliates
that could preclude Titan from accounting for the merger as a pooling of
interests. In satisfaction of such condition, such letter from AverStar's
independent auditors will state that they concur with AverStar
management's conclusion that certain criteria relating to pooling of
interests accounting have been met; and
- Titan and AverStar will receive a letter, dated the merger closing date,
from Titan's independent accountants stating that the accountants are not
aware of any fact concerning Titan or any of its affiliates which could
preclude Titan from accounting for the merger as a pooling of interests,
and that the merger is eligible to be accounted for as a pooling of
interests.
LISTING OF TITAN COMMON STOCK ON THE NYSE
It is a condition to the obligation of Titan and AverStar to complete the
merger that the Titan common stock to be issued under the merger agreement,
including the Titan shares issuable upon exercise of the assumed stock options,
be approved for listing on the NYSE, subject to official notice of issuance.
32
<PAGE>
DISSENTERS' RIGHTS
Both Titan and AverStar are incorporated under the laws of Delaware, and are
therefore governed by the Delaware General Corporation Law. Titan stockholders
are not entitled to dissent from the merger or to exercise appraisal rights
under section 262 of the Delaware General Corporation Law because Titan is not a
constituent corporation in the merger. Under section 262 of the Delaware General
Corporation Law, the stockholders of AverStar are entitled to dissent from the
merger and to exercise appraisal rights in connection with the merger.
If the merger is consummated, a holder of record of AverStar common stock on
the date of making a demand for appraisal, as described below, will be entitled
to have those shares appraised by the Delaware Court of Chancery under
section 262 of the Delaware General Corporation Law and to receive payment for
the "fair value" of those shares instead of the consideration provided for in
the merger agreement. In order to be eligible to receive this payment, however,
a stockholder must (1) continue to hold his shares through the time of the
merger; (2) strictly comply with the procedures discussed under section 262; and
(3) not vote in favor of the merger. Shares of AverStar common stock outstanding
immediately prior to the effective time of the merger, with respect to which
appraisal shall have been properly demanded in accordance with section 262, will
not be converted into the right to receive shares of Titan common stock in the
merger at or after the effective time of the merger unless and until the holder
of such shares withdraws his demand for such appraisal or becomes ineligible for
such appraisal.
This proxy statement and prospectus is being sent to all holders of record
of AverStar common stock on the record date for the AverStar special meeting and
constitutes notice of the appraisal rights available to those holders under
section 262.
The following summary is not a complete statement of section 262 of the
Delaware General Corporation law, and is qualified in its entirety by reference
to section 262 which is incorporated herein by reference, together with any
amendments to the laws that may be adopted after the date of this proxy
statement and prospectus. A copy of section 262 is attached as Appendix C to
this proxy statement/prospectus.
A holder of AverStar common stock who elects to exercise appraisal rights
under section 262 must deliver a written demand for appraisal of his shares of
AverStar prior to the vote on the merger. The written demand must identify the
stockholder of record and state the stockholder's intention to demand appraisal
of his shares. Voting against approval of the merger, abstaining from voting or
failing to vote with respect to approval of the merger will not constitute a
demand for appraisal within the meaning of section 262. All demands should be
delivered to: AverStar, Inc., 23 Fourth Avenue, Burlington, MA 01803,
Attn: Secretary.
Only a holder of shares of AverStar common stock on the date of making a
written demand for appraisal who continuously holds those shares through the
time of the merger is entitled to seek appraisal. Demand for appraisal must be
executed by or for the holder of record, fully and correctly, as that holder's
name appears on the holder's stock certificates representing shares of AverStar
common stock. If AverStar common stock is owned of record in a fiduciary
capacity by a trustee, guardian or custodian, the demand should be made in that
capacity. If AverStar common stock is owned of record by more than one person,
as in a joint tenancy or tenancy in common, the demand should be made by or for
all owners of record. An authorized agent, including one or more joint owners,
may execute the demand for appraisal for a holder of record; that agent,
however, must identify the record owner or owners and expressly disclose in the
demand that the agent is acting as agent for the record owner or owners of the
shares.
A record holder such as a broker who holds shares of AverStar common stock
as a nominee for beneficial owners, some of whom desire to demand appraisal,
must exercise appraisal rights on behalf
33
<PAGE>
of those beneficial owners with respect to the shares of AverStar common stock
held for those beneficial owners. In that case, the written demand for appraisal
should state the number of shares of AverStar common stock covered by it. Unless
a demand for appraisal specifies a number of shares, the demand will be presumed
to cover all shares of AverStar stock held in the name of the record owner.
BENEFICIAL OWNERS WHO ARE NOT RECORD OWNERS AND WHO INTEND TO EXERCISE
APPRAISAL RIGHTS SHOULD INSTRUCT THE RECORD OWNER TO COMPLY WITH THE STATUTORY
REQUIREMENTS WITH RESPECT TO THE EXERCISE OF APPRAISAL RIGHTS BEFORE THE DATE OF
THE AVERSTAR SPECIAL MEETING.
Within 10 days after the merger, the surviving corporation in the merger is
required to send notice of the effectiveness of the merger to each stockholder
who prior to the time of the merger has complied with the requirements of
section 262.
Within 120 days after the merger, the surviving corporation in the merger or
any stockholder who has complied with the requirement of section 262 may file a
petition in the Delaware Court of Chancery demanding a determination of the fair
value of the shares of AverStar common stock held by all stockholders seeking
appraisal. A dissenting stockholder must serve a copy of the petition on
AverStar, as the surviving corporation in the merger. If no petition is filed by
either the surviving corporation or any dissenting stockholder within the
120-day period, the rights of all dissenting stockholders to appraisal will
cease. Stockholders seeking to exercise appraisal rights should not assume that
the surviving corporation will file a petition with respect to the appraisal of
the fair value of their shares or that the surviving corporation will initiate
any negotiations with respect to the fair value of those shares. The surviving
corporation is under no obligation to and has no present intention to take any
action in this regard. Accordingly, stockholders who wish to seek appraisal of
their shares should initiate all necessary action with respect to the perfection
of their appraisal rights within the time periods and in the manner prescribed
in section 262.
Within 120 days after the time of the merger, any stockholder who has
complied with subsections (a) and (d) of section 262 is entitled, upon written
request, to receive from the surviving corporation in the merger a statement
setting forth the total number of shares of AverStar common stock not voted in
favor of the merger with respect to which demands for appraisal have been
received and the number of holders of those shares. The statement must be mailed
within 10 days after the surviving corporation has received the written request
or within 10 days after the time for delivery of demands for appraisal under
subsection (d) of section 262 has expired, whichever is later.
If a petition for an appraisal is filed in a timely manner, at the hearing
on that petition the Delaware Court of Chancery will determine which
stockholders are entitled to appraisal rights and will appraise the shares of
AverStar common stock owned by those stockholders. The court will determine the
fair value of those shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, to be paid, if any, upon the fair value. The Delaware Court of
Chancery may require the stockholders who have demanded appraisal rights for
their shares of AverStar common stock and who hold certificates representing
such shares to submit such certificates to the Register in Chancery for notation
thereon during the pendency of any hearing. The Court of Chancery may dismiss
the proceedings as to any stockholder who fails to comply with any such
directions.
Stockholders who consider seeking appraisal should consider that the fair
value of their shares under section 262 could be more than, the same as, or less
than, the value of the consideration provided for in the merger agreement
without the exercise of appraisal rights. The Court of Chancery may determine
the cost of the appraisal proceeding and assess it against the parties as the
Court deems equitable. Upon application of a dissenting stockholder, the Court
may order that all or a portion of the expenses incurred by any dissenting
stockholder in connection with the appraisal proceeding
34
<PAGE>
(including, without limitation, reasonable attorney's fees and the fees and
expenses of experts) be charged pro rata against the value of all shares of
AverStar common stock entitled to appraisal. In the absence of a court
determination or assessment, each party bears its own expenses.
Any stockholder who has demanded appraisal in compliance with section 262
will not, after the merger, be entitled to vote such stock for any purpose or
receive payment of dividends or other distributions, if any, on the AverStar
common stock, except for dividends or distributions, if any, payable to
stockholders of record at a date prior to the merger.
A stockholder may withdraw a demand for appraisal and accept the Titan
common stock at any time within 60 days after the effective date of merger, or
thereafter may withdraw a demand for appraisal with the written approval of the
surviving corporation in the merger. If an appraisal proceeding is properly
instituted, it may not be dismissed as to any stockholder without the approval
of the Delaware Court of Chancery, and any such approval may be conditioned on
the Court of Chancery's deeming the terms to be just. If, after the merger, a
holder of AverStar common stock who had demanded appraisal for his shares fails
to perfect or loses his right to appraisal, those shares will be treated under
the merger agreement as if they were converted into Titan common stock at the
time of the merger.
CLEARANCE UNDER FEDERAL ANTITRUST LAWS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the merger
may not be completed until notifications have been given and certain information
has been furnished to the Federal Trade Commission and the Antitrust Division of
the Department of Justice and specified waiting period requirements have been
satisfied. The obligations of Titan and AverStar to complete the merger are
subject to the condition that the applicable waiting period will have expired or
been terminated. Titan and AverStar filed pre-merger notification and report
forms with respect to the merger with the Federal Trade Commission and the
Antitrust Division on April 14, 2000. Satisfaction or termination of the waiting
period requirement with respect to any such filing does not preclude the Federal
Trade Commission, the Antitrust Division or any other party from challenging or
seeking to delay or enjoin the merger on antitrust or other grounds either
before or after the effective time of the merger. There can be no assurance that
such a challenge will not be made or, if made, would not succeed.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material U.S. federal income
tax consequences of the merger to a stockholder of AverStar holding shares of
AverStar common stock as a capital asset within the meaning of section 1221 of
the Internal Revenue Code of 1986 at the effective time of the merger.
This discussion does not address all aspects of federal taxation that may be
relevant to particular stockholders of AverStar in light of their personal
circumstances or to stockholders of AverStar subject to special treatment under
the Internal Revenue Code. Stockholders subject to special treatment include
banks, tax-exempt organizations, insurance companies, dealers in securities or
foreign currencies, stockholders who received their AverStar common stock
through the exercise of employee stock options or otherwise as compensation,
stockholders who are not U.S. persons and stockholders who hold AverStar common
stock as part of a hedge, straddle or conversion transaction. In addition, the
discussion does not address any state, local or foreign tax consequences of the
merger, or the tax consequences of the merger to holders of stock options or
restricted stock.
This discussion is based on the Internal Revenue Code, the U.S. Department
of Treasury regulations and administrative rulings and court decisions as of the
date of this proxy statement/ prospectus. These sources of legal authority are
all subject to change, possibly with retroactive effects,
35
<PAGE>
and are subject to differing interpretations. Neither Titan nor AverStar has
sought or will seek a ruling from the Internal Revenue Service concerning the
tax consequences of the merger. AverStar stockholders are urged to consult their
tax advisors regarding the tax consequences of the merger to them, including the
effects of U.S. federal, state, local, foreign and other tax laws.
TAX CONSEQUENCES OF THE MERGER. One of the conditions of the merger is that
Titan must receive the opinion of Hogan & Hartson L.L.P., counsel to Titan, and
AverStar and the AverStar stockholders must receive the opinion of Swidler
Berlin Shereff Friedman, LLP, counsel to AverStar, that the merger of V T
Acquisition Corp. into AverStar will qualify as a reorganization under
section 368(a) of the Internal Revenue Code, subject to the assumptions,
limitations, qualifications and other considerations described below under
"Considerations with Respect to Opinions." Under such treatment,
(1) no gain or loss will be recognized by an AverStar stockholder as a
result of the receipt solely of shares of Titan common stock in exchange for
the stockholder's AverStar common stock;
(2) an AverStar stockholder's tax basis in the Titan common stock
received in the merger will be equal to the stockholder's aggregate tax
basis in the AverStar common stock immediately before the merger;
(3) an AverStar stockholder's holding period for Titan common stock
received in the merger will include the holding period of the AverStar
common stock for which it was exchanged, assuming such AverStar common stock
was held as a capital asset on the effective date of the merger; and
(4) neither Titan nor AverStar will recognize any gain or loss as a
result of the merger.
CONSIDERATIONS WITH RESPECT TO OPINIONS. The tax opinions of Hogan &
Hartson L.L.P. and Swidler Berlin Shereff Friedman, LLP and the foregoing
summary of the U.S. federal income tax consequences of the merger will be and
are subject to assumptions, limitations and qualifications and are based on
current law and, among other things, representations of AverStar and Titan,
including representations made by the respective managements of AverStar and
Titan. Opinions of counsel are not binding on the Internal Revenue Service and
do not preclude the Internal Revenue Service from adopting a contrary position.
In addition, if any of the representations or assumptions underlying the
opinions are inconsistent with the facts relating to the merger and the parties
to the merger, the U.S. federal income tax consequences of the merger could
differ from those described above.
THIS DISCUSSION IS ONLY A GENERAL SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER. THE TAX CONSEQUENCES OF THE MERGER TO AN AVERSTAR
STOCKHOLDER MAY BE DIFFERENT FROM THOSE SUMMARIZED ABOVE, BASED ON THE AVERSTAR
STOCKHOLDER'S INDIVIDUAL SITUATION. THE STOCKHOLDERS OF AVERSTAR ARE STRONGLY
ENCOURAGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES
TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX LAWS,
AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
RESTRICTIONS ON RESALE OF TITAN COMMON STOCK BY AFFILIATES
The issuance of Titan shares to AverStar stockholders in connection with the
merger has been registered under the Securities Act. Such shares may be traded
freely and without restriction by those AverStar stockholders who are not deemed
to be AverStar "affiliates," as that term is defined under the Securities Act,
at the time the merger agreement is submitted for approval by the AverStar
stockholders at the special meeting. An affiliate of AverStar is a person who
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with
36
<PAGE>
AverStar. Any subsequent transfer of Titan common stock issued in the merger by
any AverStar affiliate will, under existing law, require one of the following:
- registration of the transfer under the Securities Act;
- compliance with Rule 145 under the Securities Act, which allows limited
sales under specified circumstances; or
- availability of another exemption from registration.
The foregoing restrictions are expected to apply to, among other persons,
directors and executive officers of AverStar and any holders of 10% or more of
the AverStar common stock converted in the merger.
SEC guidelines regarding qualifying for the pooling of interests method of
accounting also limit sales of shares of the acquiring and acquired companies by
affiliates of either company. SEC guidelines indicate further that the pooling
of interests method of accounting generally will not be challenged on the basis
of sales by affiliates of the acquiring or acquired company if the affiliates do
not dispose of any of the shares of the corporation they own or shares of a
corporation they receive in connection with a business combination during the
period beginning 30 days before the completion of the business combination and
ending when financial results covering at least 30 days of post-merger
operations of the combined entity have been published in accordance with SEC
Accounting Series Release No. 135.
Titan has agreed in the merger agreement to use its reasonable best efforts
to cause each person who is an affiliate of Titan, for purposes of qualifying
the merger for pooling of interests accounting treatment, to deliver to AverStar
no later than 31 days before the effective time of the merger a written
agreement intended to preserve the ability to treat the merger as a pooling of
interests and to ensure compliance with the Securities Act. AverStar has agreed
to the same undertaking with respect to its affiliates.
This proxy statement/prospectus does not cover any resales of Titan common
stock, including Titan common stock issuable upon the exercise of any assumed
options, to be received by AverStar stockholders upon completion of the merger.
No person is authorized to make use of this proxy statement/prospectus in
connection with any resale.
ANTI-DILUTION ADJUSTMENTS
If between March 24, 2000 and the effective time of the merger, the
outstanding shares of Titan common stock or AverStar common stock are changed
into a different number of shares because of any reclassification,
recapitalization, split-up, combination or exchange of shares, or if any
dividend payable in stock or other securities is declared on such shares with a
record date within this period, the merger agreement requires that the exchange
ratio be adjusted accordingly to provide the same economic effect as
contemplated by the merger agreement before such reclassification,
recapitalization, split-up, combination, exchange or dividend.
EXCHANGE OF CERTIFICATES
Titan has agreed to deposit certificates representing the shares of Titan
common stock to be issued or paid under the merger agreement with an agent
designated by Titan and reasonably acceptable to AverStar, which will act as
exchange agent in the merger for the benefit of the holders of issued and
outstanding shares of AverStar common stock. Titan will cause the exchange agent
to mail a letter of transmittal to each holder of AverStar common stock. The
letter of transmittal will contain instructions on how AverStar stockholders may
surrender their AverStar stock certificates to the exchange agent in exchange
for Titan certificates.
37
<PAGE>
YOU SHOULD NOT RETURN YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY, AND
YOU SHOULD NOT FORWARD THEM TO THE EXCHANGE AGENT UNTIL YOU RECEIVE THE LETTER
OF TRANSMITTAL. FOLLOWING YOUR RECEIPT OF THE LETTER OF TRANSMITTAL, YOU SHOULD
FORWARD THE CERTIFICATES ONLY IN ACCORDANCE WITH THE INSTRUCTIONS SPECIFIED IN
THE LETTER.
After the effective time of the merger and until AverStar stockholders
surrender the certificates representing their AverStar common stock for
exchange, holders of these certificates will not be paid any dividends or other
distributions declared after the effective time of the merger on the Titan
common stock issuable to such stockholders in the merger. Any such unpaid
dividends or other distributions on such Titan common stock will be paid,
without interest, only to the holders who have properly tendered their AverStar
common stock certificates for exchange. All stock certificates presented after
the effective time of the merger will be canceled and exchanged for a
certificate or certificates representing the applicable number of shares of
Titan common stock to be received in the merger.
Any shares of Titan common stock that remain undistributed 12 months after
the effective time of the merger will be delivered to Titan on demand. After
that time, certificates representing AverStar common stock must be surrendered
for exchange to Titan or to AverStar as the surviving corporation of the merger.
Titan and AverStar, as the surviving corporation of the merger, will not be
liable for any shares of Titan common stock or cash delivered to a public
official under any abandoned property, escheat or similar laws.
If a certificate representing AverStar common stock has been lost, stolen or
destroyed, the exchange agent will issue the consideration payable under the
merger agreement when the claimant submits an affidavit of loss, theft or
destruction, and, if required by Titan in the case of any certificate
representing more than 7,500 shares of AverStar common stock, posts a bond as
indemnity against any claim that may be made later with respect to the lost
certificate.
38
<PAGE>
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS
The following summary of the material terms and provisions of the merger
agreement is qualified in its entirety by reference to the merger agreement. The
merger agreement is attached as Appendix A to this proxy statement/prospectus
and is considered a part of this document.
GENERAL
The merger agreement provides that at the effective time of the merger, V T
Acquisition Corp., a wholly owned subsidiary of Titan, will merge with and into
AverStar. AverStar will be the surviving corporation of the merger and will be a
wholly owned subsidiary of Titan. The separate corporate existence of V T
Acquisition Corp. will terminate at the effective time of the merger. At the
effective time of the merger, each AverStar stockholder will obtain the right to
receive, in exchange for each share of AverStar common stock held, the number of
shares of Titan common stock calculated as described below under "Conversion of
AverStar Common Stock."
CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION. The
certificate of incorporation of V T Acquisition Corp., as amended by the
certificate of merger, will become the certificate of incorporation of AverStar
after the merger. The bylaws of V T Acquisition Corp. will become the bylaws of
AverStar after the merger.
DIRECTORS AND OFFICERS OF THE AVERSTAR AFTER THE MERGER. The directors and
officers of V T Acquisition Corp. will be the initial directors and officers of
AverStar as the surviving corporation of the merger, and will serve until their
successors have been duly elected or appointed and qualified, or until their
earlier death, resignation or removal.
DIRECTORS AND OFFICERS OF TITAN AFTER THE MERGER. The merger agreement
provides that Michael B. Alexander, who currently is the Chairman and Chief
Executive Officer of AverStar, will become a director of Titan after the merger.
The following sets forth biographical information concerning Mr. Alexander:
Michael B. Alexander has served as AverStar's Chief Executive Officer and
Chairman from February 1998 to the present, and as Chief Executive Officer and
Chairman of Intermetrics from August 1995 to February 1998. From 1993 to
August 1995, Mr. Alexander was the principal of AFH Partners, which invests in
public and private computer software companies. From 1990 to 1993,
Mr. Alexander served as President and Chief Operating Officer of
Pinelands, Inc., a New York Stock Exchange company that was a spin-off from
MCA, Inc. From 1981 to 1990, Mr. Alexander worked for MCA/Universal in several
capacities, including as President and General Manager of WWOR-TV, Executive
Vice President of MCA Broadcasting and Vice President and Chief Financial
Officer of USA Network. Mr. Alexander is a member of the Board of Directors of
IES Holding, Inc. Mr. Alexander received an AB from Harvard College, cum laude,
an MA in Education from Ohio State and completed the course work for a doctorate
in education from the Harvard Graduate School of Education.
CONVERSION OF AVERSTAR COMMON STOCK. In connection with the merger, all
outstanding classes of AverStar's common stock will be automatically converted
into one class of AverStar common stock pursuant to AverStar's certificate of
incorporation, as amended and restated, filed on February 27, 1998, and
stockholders' agreement dated as of February 27, 1998. Each share of Class D
common stock, Class F common stock and Class G common stock will be converted
into one share of AverStar common stock.
The conversion rate of Class A common stock, Class B common stock, Class C
common stock and Class E common stock will be based upon several variables,
including the date the merger is completed and the determination of "transaction
value' as defined in the merger agreement. The determination of
39
<PAGE>
"transaction value' is based in part on the consideration payable to AverStar
upon exercise of certain outstanding options, AverStar's net debt, and payments
made to AverStar stockholders to redeem AverStar common stock. The conversion
rate among Class A, Class B, Class C and Class E also may vary based upon the
trading price of Titan's common stock. However, AverStar's management believes
any such variation of the conversion rate would be immaterial. The discussion of
the conversion rate below is qualified in its entirety by reference to
AverStar's certificate of incorporation and stockholders' agreement.
For illustration purposes, the allocations described below are based on the
following assumptions:
- The merger is completed on June 28, 2000;
- The relevant option consideration is $3.725 million;
- AverStar's net debt is $61 million;
- No payments are made to redeem stock;
- If the average Titan stock price is less than $39.60, Titan elected to
exercise the exchange ratio to prevent AverStar's termination of the
merger agreement; and
- If the average Titan stock price is greater than $61.60, AverStar elected
to exercise the exchange ratio to prevent Titan's termination of the
merger agreement.
Although AverStar's management believes that these assumptions are reasonable,
the final conversion rate may vary.
CLASS A COMMON STOCK
AverStar's Class A common stock is subject to an allocation for the benefit
of AverStar's Class E common stock. This allocation represents a percentage of
the increased value of AverStar Class A common stock from the date of the
acquisition of Intermetrics, as well as an interest factor.
Based on the assumptions described above, upon the completion of the merger
and all required allocations, each share of Class A common stock will be
converted into approximately 0.96 shares of AverStar common stock.
CLASS B COMMON STOCK
AverStar's Class B common stock is subject to an allocation for the benefit
of AverStar's Class C common stock. This allocation represents a percentage of
the return on the original investment in Class B common stock in the acquisition
of Intermetrics.
Based on the assumptions described above, upon the completion of the merger
and all required allocations, each share of Class B common stock will be
converted into approximately 0.82 shares of AverStar common stock.
CLASS C COMMON STOCK
AverStar's Class C common stock is entitled to the benefit of an allocation
from AverStar's Class B common stock. This allocation represents a percentage of
the return on the original investment in Class B common stock in the acquisition
of Intermetrics.
Based on the assumptions described above, upon the completion of the merger
and all required allocations, each share of Class C common stock will be
converted into approximately 3.16 shares of AverStar common stock.
40
<PAGE>
CLASS E COMMON STOCK
AverStar's Class E common stock is entitled to the benefit of an allocation
from AverStar's Class A common stock, including shares of AverStar's Class A
common stock held in treasury. This allocation represents a percentage of the
increased value of AverStar Class A common stock from the date of the
acquisition of Intermetrics, as well as an interest factor.
Based on the assumptions described above, upon the completion of the merger
and all required allocations, each share of Class E common stock will be
converted into approximately 1.96 shares of AverStar common stock.
CONVERSION OF AVERSTAR COMMON STOCK TO TITAN COMMON STOCK. At the effective
time of the merger, after the conversion of all outstanding classes of AverStar
common stock into one class of AverStar common stock as explained above, each
issued and outstanding share of AverStar common stock will be converted into the
right to receive the number of shares of Titan common stock calculated as
described below. Fractional shares of Titan common stock will not be issued in
the merger, but instead will be rounded up to the nearest whole share of Titan
common stock.
The number of shares of Titan common stock you will be entitled to receive
will depend on the merger exchange ratio of Titan common stock to AverStar
common stock. For example, if the merger exchange ratio is fixed at .35, you
would receive .35 of a share of Titan common stock for each AverStar share you
own. The merger exchange ratio has not been fixed in the merger agreement, but
will be calculated at the time of the merger in accordance with a formula
contained in the merger agreement. Under this formula, the merger exchange ratio
will be based on the average of the closing sale prices of the Titan common
stock on the NYSE for the ten consecutive trading days ending two trading days
immediately before the merger closing date. References to the average Titan
stock price in the following discussion mean the average of these closing sale
prices over the ten-day period.
- If the average Titan stock price is less than $39.60, (a) AverStar has the
right to terminate the merger agreement, unless Titan elects to have the
exchange ratio fixed at an amount equal to the quotient obtained by
dividing the product of the "AverStar stock value" (as defined below)
multiplied by 0.90 by the average Titan stock price or (b) if AverStar
does not exercise this termination right and Titan does not make the
election described in (a), the exchange ratio will be equal to the
quotient obtained by dividing the AverStar stock value by $44.00.
- If the average Titan stock price is greater than or equal to $39.60 and
less than $44.00, the exchange ratio will be equal to the quotient
obtained by dividing the AverStar stock value by $44.00.
- If the average Titan stock price is greater than or equal to $44.00 and
less than or equal to $56.00, the exchange ratio will be equal to the
quotient obtained by dividing the AverStar stock value by the average
Titan stock price.
- If the average Titan stock price is greater than $56.00 and less than or
equal to $61.60, the exchange ratio will be equal to the quotient obtained
by dividing the AverStar stock value by $56.00.
- If the average Titan stock price is greater than $61.60, (a) Titan has the
right to terminate the merger agreement unless AverStar elects to have the
exchange ratio fixed at an amount equal to the quotient obtained by
dividing the product of the AverStar stock value multiplied by 1.10 by the
average Titan stock price or (b) if Titan does not exercise this
termination right and AverStar does not make the election described in
(a), the exchange ratio will be equal to the quotient obtained by dividing
the AverStar stock value by $56.00.
41
<PAGE>
The following table and accompanying chart show the merger exchange ratio
within the indicated ranges of average Titan stock prices and assuming an
AverStar stock value of $17.97:
<TABLE>
<CAPTION>
RANGE OF AVERAGE
TITAN STOCK PRICES EXCHANGE RATIO
------------------ -------------------------------------
<S> <C>
less than $39.60..................... $16.173 divided by Titan stock
price(1)
greater than or equal to $39.60 and
less than $44.00................... .408
greater than or equal to $44.00 and
less than or equal to $56.00....... $17.97 divided by Titan stock price
greater than $56.00 and less than or
equal to $61.60.................... .321
greater than $61.60.................. $19.767 divided by Titan stock
price(2)
</TABLE>
- ------------------------
(1) This represents an exchange ratio that Titan may elect to prevent AverStar's
termination of the merger agreement. If Titan elects this exchange ratio,
AverStar may not terminate the merger agreement. If AverStar does not
terminate the merger agreement and if Titan does not elect this exchange
ratio, the exchange ratio shall be equal to .408.
(2) This represents an exchange ratio that AverStar may elect to prevent Titan's
termination of the merger agreement. If AverStar elects this exchange ratio,
Titan may not terminate the merger agreement. If Titan does not terminate
the merger agreement and if AverStar does not elect this exchange ratio, the
exchange ratio shall be equal to .321.
42
<PAGE>
Assuming an AverStar stock value of $17.97, the following table lists some
of the possible values of the consideration that you may receive in the merger:
<TABLE>
<CAPTION>
AND, FOR EACH SHARE OF
AVERSTAR COMMON STOCK YOU OWN,
AFTER THE CONVERSION DESCRIBED ABOVE,
YOU WILL RECEIVE THE FOLLOWING
THE MERGER EXCHANGE RATIO DOLLAR VALUE BASED ON THE
IF THE AVERAGE TITAN STOCK PRICE IS: WILL BE: AVERAGE TITAN STOCK PRICE:
- ------------------------------------ ------------------------- -------------------------------------
<S> <C> <C>
$30.00......................... 0.53910(1) $16.17
$31.00......................... 0.52171(1) $16.17
$32.00......................... 0.50541(1) $16.17
$33.00......................... 0.49009(1) $16.17
$34.00......................... 0.47568(1) $16.17
$35.00......................... 0.46209(1) $16.17
$36.00......................... 0.44925(1) $16.17
$37.00......................... 0.43711(1) $16.17
$38.00......................... 0.42561(1) $16.17
$39.00......................... 0.41469(1) $16.17
$40.00......................... 0.40841 $16.34
$41.00......................... 0.40841 $16.74
$42.00......................... 0.40841 $17.15
$43.00......................... 0.40841 $17.56
$44.00......................... 0.40841 $17.97
$45.00......................... 0.39933 $17.97
$46.00......................... 0.39065 $17.97
$47.00......................... 0.38234 $17.97
$48.00......................... 0.37438 $17.97
$49.00......................... 0.36673 $17.97
$50.00......................... 0.35940 $17.97
$51.00......................... 0.35235 $17.97
$52.00......................... 0.34558 $17.97
$53.00......................... 0.33906 $17.97
$54.00......................... 0.33278 $17.97
$55.00......................... 0.32673 $17.97
$56.00......................... 0.32089 $17.97
$57.00......................... 0.32089 $18.29
$58.00......................... 0.32089 $18.61
$59.00......................... 0.32089 $18.93
$60.00......................... 0.32089 $19.25
$61.00......................... 0.32089 $19.57
$62.00......................... 0.31882(2) $19.77
$63.00......................... 0.31376(2) $19.77
$64.00......................... 0.30886(2) $19.77
$65.00......................... 0.30411(2) $19.77
$66.00......................... 0.29950(2) $19.77
$67.00......................... 0.29503(2) $19.77
$68.00......................... 0.29069(2) $19.77
$69.00......................... 0.28648(2) $19.77
$70.00......................... 0.28239(2) $19.77
</TABLE>
- ------------------------
(1) This merger exchange ratio assumes Titan elected to exercise its right to
accept this merger
43
<PAGE>
exchange ratio to prevent AverStar's termination of the merger agreement.
(2) This merger exchange ratio assumes AverStar elected to exercise its right to
accept this merger exchange ratio to prevent Titan's termination of the
merger agreement.
Each share of AverStar common stock held in the treasury of AverStar after
all required allocations will be canceled at the effective time of the merger
without the payment of any consideration. Each share of common stock of V T
Acquisition Corp. issued and outstanding immediately before the effective time
of the merger will be converted into and exchanged for one share of common stock
of the surviving corporation of the merger, which will continue to be held by
Titan.
ASSUMPTION OF OPTIONS. As of May 19, 2000, AverStar's employees and others
had outstanding options to purchase 1,386,105 shares of AverStar common stock.
At the effective time of the merger, Titan will assume all outstanding AverStar
stock options. Each assumed option will be converted in the merger into an
option to purchase shares of Titan common stock using the same merger exchange
ratio. Except for the number of shares issuable upon exercise of such options
and the option exercise prices, which will be adjusted based on the merger
exchange ratio, the assumed options will remain subject to the same terms and
conditions that were in effect before the merger. The exercise price per share
of Titan common stock issuable under the assumed options will equal the exercise
price per share of AverStar common stock issuable under the applicable option at
the effective time of the merger divided by the exchange ratio, rounded to the
nearest whole cent.
ESCROW. Under the merger agreement, Titan, the surviving corporation after
the merger and their respective officers and directors, and each person who
controls or may control Titan or the surviving corporation within the meaning of
the Securities Act will be indemnified against losses and expenses incurred as a
result of:
- any inaccuracy or breach of a representation or warranty of AverStar given
or made by AverStar in the merger agreement or in any certificate,
document or agreement delivered by AverStar pursuant to the merger
agreement, including the certificate of merger; and
- any failure of AverStar to perform or comply with any covenant or
agreement contained in the merger agreement or in any other certificate,
document or agreement delivered by AverStar pursuant to the merger
agreement.
Titan and its affiliates will be indemnified from an escrow fund. In
addition, any difference between AverStar's estimated net debt as set forth in
the certificate that AverStar is required to deliver to Titan two days prior to
the closing date of the merger and the actual net debt as of the closing date of
the merger will be paid to Titan from the escrow fund. The escrow fund will be
governed by an escrow agreement and First Union National Bank will act as escrow
agent. The escrow agreement is attached to this proxy statement/prospectus
substantially in the form of Appendix B. On the earlier of five business days
after the final determination of any adjustment or 90 days after the closing of
the merger, the shares of Titan common stock held in escrow, other than any
amounts taken out to pay any closing or loss adjustment or any amounts that are
pending final resolution of any disputes therefrom, will be released to the
former holders of AverStar common stock (other than those who exercised
appraisal rights) pro-rata in accordance with the number of shares of Titan
common stock held by each former AverStar stockholder immediately after the
effective time of the merger.
Upon the surrender of a properly executed certificate representing shares of
AverStar common stock to the exchange agent, a number of shares of Titan common
stock equal to 5% of the transaction value divided by the average of the closing
sale prices of Titan common stock on the New York Stock Exchange for the ten
consecutive trading days ending two trading days immediately before the merger
closing date will be delivered to the escrow agent and will comprise the escrow
fund. All dividends or
44
<PAGE>
distributions (other than stock or similar dividends) will be distributed to
stockholders whose shares are held in the escrow fund by the escrow agent in
accordance with the escrow agreement.
EFFECTIVE TIME
The merger will occur as soon as practicable after the satisfaction or
waiver of all of the conditions precedent set forth in the merger agreement. The
effective time of the merger will be the date and time that Titan and AverStar
file a certificate of merger with the Delaware secretary of state. If the merger
is not completed by September 20, 2000, which date may be extended by mutual
consent of Titan and AverStar, the merger agreement may be terminated by either
Titan or AverStar, unless the failure to consummate the merger by this date is
due to the material failure of the party seeking to terminate the merger
agreement to fulfill any of its obligations.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations of AverStar, Titan and
V T Acquisition Corp.
REPRESENTATIONS AND WARRANTIES OF AVERSTAR. The merger agreement contains
representations and warranties of AverStar regarding, among other matters:
- the corporate organization and existence of AverStar and each of its
subsidiaries, including that it is duly organized, validly existing and in
good standing with the corporate power and authority to own, operate and
lease its assets and to carry on its business as currently conducted;
- the certificate of incorporation and bylaws or other organizational
documents of AverStar and each of its subsidiaries;
- the capitalization of AverStar, including the number of shares of capital
stock authorized, the number of shares and rights to acquire shares
outstanding, and the number of shares reserved for issuance;
- the corporate power and authority of AverStar to execute and deliver the
merger agreement and related documents and to consummate the merger and
other contemplated transactions;
- the compliance of the merger agreement and related documents with
AverStar's certificate of incorporation and bylaws, applicable laws, and
material agreements, including the absence of events of default or breach
thereunder;
- required governmental and third-party consents;
- the accuracy of AverStar's financial reports delivered to Titan;
- the absence of material undisclosed liabilities;
- the absence of specified changes in AverStar's business since
December 31, 1999;
- the absence of material claims, actions, suits, proceedings and specified
judgments, decrees and injunctions;
- possession and validity of all required licenses and permits;
- the ownership of intellectual property, the absence of intellectual
property infringement or contests;
- the adequacy of protection by AverStar and its subsidiaries of their
confidential information and trade secrets;
45
<PAGE>
- AverStar's employee benefit plans and related matters, including that such
plans have been operated and administered in accordance with applicable
law;
- compliance with laws relating to employees or the workplace, and the
absence of material disputes with employees;
- the title to and condition of material assets owned by AverStar;
- the ownership and condition of the real property owned or leased by
AverStar;
- the validity of and absence of defaults under certain material contracts
and other agreements of AverStar;
- the filing and accuracy of AverStar's tax returns, the lack of pending or
threatened proceedings, deficiencies or audits with respect to taxes, and
the adequacy of AverStar's accruals for estimated taxes payable;
- compliance with environmental laws and the absence of environmental
liabilities;
- the maintenance of insurance;
- the validity of and absence of defaults of all material interest rate
swaps, caps, floors, option agreements and similar interest rate risk
management arrangements;
- with respect to AverStar's government contracts, the absence of any civil
fraud or criminal investigations, suspension and debarment proceedings,
contract price adjustments or claims of defective pricing, equitable
adjustments, cost disallowances, and notice of contract termination, cure
notice or show cause notice;
- the adoption by AverStar's board of directors of a resolution approving
the merger agreement and the merger and recommending adoption of the
merger agreement and approval of the merger by the stockholders of
AverStar;
- the absence of brokers utilized by AverStar;
- the absence of any action by AverStar that would cause the merger to fail
to qualify as a reorganization under section 368(a) of the Internal
Revenue Code or fail to be treated for financial accounting purposes as a
pooling of interests in accordance with generally accepted accounting
principles and the regulations and interpretations of the SEC; and
- the absence of material misstatements or omissions in the information
furnished by AverStar for inclusion in this proxy statement/prospectus.
REPRESENTATIONS AND WARRANTIES OF TITAN AND V T ACQUISITION CORP. The
merger agreement contains representations and warranties of Titan and V T
Acquisition Corp. regarding, among other matters:
- the corporate organization and existence of Titan and each of its
subsidiaries, including that it is duly organized, validly existing and in
good standing with the corporate power and authority to own, operate and
lease its properties and to carry on its business as currently conducted;
- The certificate of incorporation and bylaws of Titan and V T Acquisition
Corp.;
- the capitalization of Titan, including the number of shares of capital
stock authorized, the number of shares and rights to acquire shares
outstanding, and the number of shares reserved for issuance;
- the corporate power and authority of Titan and V T Acquisition Corp. to
execute and deliver the merger agreement and related documents and to
consummate the merger and other contemplated transactions;
46
<PAGE>
- the compliance of the merger agreement and related documents with Titan's
and V T Acquisition Corp.'s certificate of incorporation and bylaws,
applicable laws, and material agreements, including the absence of events
of default or acceleration;
- the corporate organization and existence of V T Acquisition Corp.,
including that it was formed solely for the purpose of engaging in the
merger, and that except for obligations and liabilities incurred in
connection with the merger, V T Acquisition Corp. has not incurred any
obligations or engaged in any business activities of any kind;
- required governmental and third-party consents;
- the filing by Titan of all forms, reports, statements and other documents
required to be filed with the SEC and the accuracy of the financial
reports contained in these filings;
- the absence of material undisclosed liabilities;
- the absence of specified changes in Titan's business since September 30,
1999;
- the absence of material claims, actions, suits, proceedings and specified
judgments, decrees and injunctions;
- the absence of certain business practices of Titan;
- with respect to Titan's government contracts, the absence of any civil
fraud or criminal investigations, suspension and debarment proceedings,
contract price adjustments or claims of defective pricing, equitable
adjustments, cost disallowances, and notice of contract termination, cure
notice or show cause notice;
- the adoption by Titan's board of directors of a resolution approving the
merger agreement and the merger;
- the absence of brokers utilized by Titan, except as identified in the
merger agreement;
- the validity of and absence of defaults of all material interest rate
swaps, caps, floors, option agreements and similar interest rate risk
management arrangements;
- the absence of any action by Titan or any of its affiliates that would
cause the merger to fail to qualify as a reorganization under
section 368(a) of the Internal Revenue Code, or fail to be treated for
financial accounting purposes as a pooling of interests in accordance with
generally accepted accounting principles and the regulations and
interpretations of the SEC;
- the absence of material misstatements or omissions in the information
furnished by Titan for inclusion in this proxy statement/prospectus; and
- the ownership of intellectual property, the absence of intellectual
property infringement or contests.
BUSINESS AND AGREEMENTS OF AVERSTAR AND TITAN PENDING THE MERGER
Under the merger agreement, AverStar has agreed to do the following, and has
agreed to cause its subsidiaries to do the following, pending the merger:
- conduct its business in the ordinary course consistent with past
practices;
- use its best efforts to preserve intact its business organization and
assets, maintain its rights and franchises, retain the services of its
officers and employees and maintain its relationships with customers,
suppliers, licensors, licensees and others having business dealings with
it;
- use its best efforts to cause all conditions to the obligations of Titan
and AverStar under the merger agreement to be satisfied on or before the
closing date of the merger;
47
<PAGE>
- use its best efforts to keep in full force and effect liability insurance
and bonds comparable in amount and scope of coverage to that currently
maintained; and
- prepare and file all tax returns required to be filed in a timely manner,
and in a manner consistent with past practices and applicable laws.
In addition, AverStar has agreed that, except as expressly contemplated by
the merger agreement or otherwise consented to by Titan, pending the merger, it
will not, among other matters:
- increase in any manner the compensation or fringe benefits of, or pay any
bonus to, any employee (who is not an officer or director) other than in
the ordinary course of business consistent with past practices or any
director or officer;
- grant any severance or termination pay except for normal severance
practices or under existing agreements in effect on the date of the merger
agreement to, or enter into any severance agreement with, any employee
(who is not an officer or director) other than in the ordinary course of
business consistent with past practices or any director or officer;
- adopt or amend any employee benefit plan or arrangement, except as may be
required to comply with applicable law;
- pay any benefit not provided for under any employee benefit plan or other
arrangement;
- grant any awards under any bonus, incentive, performance or other
compensation plan or arrangement or employee benefit plan or other
arrangement;
- take any action to fund or in any other way secure the payment of
compensation or benefits under any agreement;
- promote or fire any director, officer or, other than in the ordinary
course of business consistent with past practices, any employee who is not
an officer or director;
- declare, set aside or pay any dividend, or make any other distribution in
respect of, outstanding shares of capital stock;
- redeem, purchase or otherwise reacquire any shares of capital stock or any
securities or obligations convertible into or exchangeable for any shares
of capital stock, or any options, warrants or conversion or other rights
to acquire any shares of capital stock or any such securities or
obligations, except in connection with the Stockholders Agreement, dated
February 27, 1998, by and among AverStar and its stockholders that are
signatories thereto;
- effect any reorganization, recapitalization, merger or share exchange;
- split, combine or reclassify any shares of its capital stock;
- issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for, shares of its capital
stock;
- issue, deliver, award, grant or sell, or authorize the issuance, delivery,
award, grant or sale (including the grant of any limitations in voting
rights or other encumbrances) of any shares of any class of its capital
stock (including treasury shares, but excluding shares issuable upon the
exercise of options outstanding on the date of the merger agreement in
accordance with their terms on the date thereof), any securities
convertible into or exercisable or exchangeable for any such shares, or
any rights, warrants or options to acquire any such shares, or amend or
otherwise modify such rights, warrants or options the effect of which
shall be to make such terms more favorable to the holders thereof;
- acquire or agree to acquire by any manner any business or corporation,
partnership, association or other business organization or division
thereof, or otherwise agree to acquire assets of any
48
<PAGE>
other person (other than the purchase of assets from suppliers or vendors
in the ordinary course of business consistent with past practices);
- sell, lease, exchange, mortgage, pledge, transfer or otherwise subject to
any encumbrance or dispose of any of its assets, or agree to do any of the
foregoing, except for sales, dispositions, pledges, encumbrances or
transfers in the ordinary course of business consistent with past
practices;
- propose or adopt any amendments to its certificate of incorporation,
bylaws or other comparable charter or organizational documents;
- make or rescind any express or deemed election relating to taxes, settle
or compromise any claim, action, lawsuit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to taxes, except
where the amount of such settlements or controversies, individually or in
the aggregate, does not exceed $100,000, or change any of its methods of
reporting income or deductions for federal income tax purposes from those
employed in the preparation of the federal income tax returns for the
taxable year ended December 31, 1998, except in either case as may be
required by applicable law or generally accepted accounting principles;
- make or agree to make any new capital expenditures which are not included
in AverStar's 2000 capital budget which was furnished to Titan, to the
extent that such new capital expenditures exceed in the aggregate
$100,000;
- incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or any
warrants or rights to acquire any debt securities of AverStar or any
subsidiary of AverStar, enter into any "keep well" or other agreement to
maintain any financial statement condition of another person or enter into
any agreement having the economic effect of any of the foregoing, except
for borrowings incurred in the ordinary course of business consistent with
past practices;
- make any loans, advances or capital contributions to, or investments in,
any other person other than travel, entertainment, loans for tuition
expenses and payroll advances made to employees in the ordinary course of
business consistent with past practices;
- pay, discharge, settle or satisfy any claims, liabilities or obligations,
other than the payments, discharges or satisfactions, in the ordinary
course of business consistent with past practices which are materially in
accordance with their terms, of liabilities reflected or reserved against
in, or contemplated by, AverStar's financial statements delivered to Titan
or waive any material benefits of, or agree to modify in any material
respect, any confidentiality, standstill or similar agreements to which it
is a party;
- waive, release or assign any rights or claims, or modify, amend or
terminate any agreement to which it is a party, which would reasonably be
expected to have a material adverse effect on the business, operations,
condition (financial or otherwise), assets or liabilities of AverStar and
any AverStar subsidiaries, taken as a whole;
- make any change in any method of accounting or accounting practice or
policy other than those required by generally accepted accounting
principles or a government entity;
- take any action that is intended or would reasonably be expected to result
in any of AverStar's representations and warranties set forth in the
merger agreement becoming untrue in any material respect before the
effective time of the merger, or in any of the conditions to the merger
set forth in the merger agreement not being satisfied or in a violation of
any provision of the merger agreement;
49
<PAGE>
- take any action or fail to take any action that would reasonably be
expected to result in a material adverse effect on the business,
operations, condition (financial or otherwise), assets or liabilities of
AverStar and any AverStar subsidiaries, taken as a whole, prior to or
after the effective time of the merger or that would adversely affect the
ability of AverStar or any AverStar subsidiary prior to the effective time
of the merger to obtain consents of third parties or approvals of
government entities required to consummate the transactions contemplated
by the merger agreement; or
- authorize or commit or agree to do any of the foregoing.
Titan has agreed that, except as expressly contemplated by the merger
agreement or otherwise consented to by AverStar, pending the merger, it will
not, among other matters:
- declare or pay any dividend on, or make any other distribution in respect
of, outstanding shares of Titan common stock;
- repurchase, redeem or otherwise acquire any shares of capital stock or
other securities of, or other ownership interests in, Titan or any of its
subsidiaries, except for repurchases related to shares owned by employees
or former employees of Titan or any of its subsidiaries;
- except to the extent not otherwise accounted for in the merger agreement,
split, combine or reclassify any shares of Titan common stock or issue or
authorize or propose the issuance of any other securities in respect of,
in lieu of, or in substitution for, shares of its common stock or other
securities;
- take any action that would, or would be reasonably likely to, prevent the
merger from being accounted for as a "pooling of interests" in accordance
with generally accepted accounting principles and the rules and
regulations of the SEC;
- take any action that is intended or would reasonably be expected to result
in any of Titan's representations and warranties set forth in the merger
agreement becoming untrue in any material respect before the effective
time of the merger, or in any of the conditions to the merger set forth in
the merger agreement not being satisfied or in a violation of any
provision of the merger agreement;
- take any action that would, or would be reasonably likely to, prevent the
merger from qualifying as a reorganization under section 368(a) of the
Internal Revenue Code; or
- agree in writing or otherwise to do any of the foregoing.
AverStar also has agreed:
- to mail this proxy statement/prospectus to its stockholders promptly after
the registration statement of which it is a part becomes effective;
- promptly after the registration statement of which this proxy
statement/prospectus is a part becomes effective, to duly call, give
notice of, convene and hold a meeting of its stockholders in accordance
with the Delaware General Corporation Law and AverStar's certificate of
incorporation and bylaws for the purpose of obtaining the requisite
approval of its stockholders; and
- to furnish Titan with all information concerning AverStar and the holders
of its common stock which may reasonably be requested in connection with
the filing of the registration statement of which this proxy
statement/prospectus is a part.
50
<PAGE>
Titan also has agreed:
- to use its best efforts to cause all conditions to the obligations of
Titan and AverStar under the merger agreement to be satisfied on or before
the closing date of the merger;
- to take any action required to be taken by the SEC or the NYSE or under
any applicable state securities laws in connection with the issuance of
Titan common stock in the merger;
- to use reasonable efforts to cause the Titan common stock to be issued in
the merger to be approved for listing on the NYSE, subject to official
notice of issuance, before the effective time of the merger;
AverStar and Titan have further agreed:
- to prepare and file with the SEC this proxy statement/prospectus and the
registration statement of which it is a part;
- to use their best efforts to have the registration statement of which this
proxy statement/ prospectus is a part declared effective under the
Securities Act as promptly as possible after filing;
- along with V T Acquisition Corp., to complete all documents required to be
filed with the Federal Trade Commission and the Department of Justice in
order to comply with the Hart-Scott-Rodino Antitrust Improvements Act, and
to take all reasonable actions and use all reasonable best efforts to
secure approval for the completion of the merger;
- to notify each other of any representation or warranty made by it in
connection with this merger agreement becoming untrue or inaccurate;
- to use all reasonable efforts to cause each AverStar and Titan affiliate
to deliver to the other party a signed affiliate agreement as promptly as
practicable, but in no event later than 31 days prior to the merger
closing date;
- to notify each other of the occurrence or non-occurrence of any event
which would likely cause any condition to the merger obligations not to be
satisfied; and
- to notify each other of the failure of AverStar, any AverStar subsidiary,
Titan or V T Acquisition Corp., as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or
satisfied by it pursuant to the merger agreement which would be likely to
result in any condition to the obligations of any party to effect the
merger and the other transactions contemplated by the merger agreement not
to be satisfied.
NON-SOLICITATION AGREEMENT BY AVERSTAR
AverStar has agreed in the merger agreement that it will not do any of the
following pending the merger:
- initiate, solicit, encourage or knowingly facilitate (including by way of
furnishing information) the making of an "acquisition proposal," as this
term is defined below;
- enter into or maintain or continue discussions or negotiate with any
person in furtherance of such inquiries or to obtain an acquisition
proposal;
- agree to, approve, recommend or endorse any acquisition proposal;
- disclose any non-public information relating to AverStar or any AverStar
subsidiary or afford access to the properties, books or records of
AverStar or any AverStar subsidiary to any person that has made or may
reasonably be expected to make a proposal regarding an acquisition
51
<PAGE>
proposal or that has advised AverStar that it is or may be interested in
making a proposal regarding an acquisition proposal; or
- authorize or permit any of its subsidiaries or representatives to take any
such action.
AverStar has further agreed to notify Titan of any inquiries or proposals
regarding an acquisition proposal received by AverStar or any of its
subsidiaries or representatives.
The merger agreement provides that none of these restrictions will prohibit
the AverStar board of directors from furnishing information to, or entering into
discussions or negotiations with, any person or entity that makes a BONA FIDE
acquisition proposal to AverStar if each of the following requirements is
satisfied:
- the board of directors of AverStar determines in good faith, taking into
account the advice of outside counsel, that such action is reasonably
likely to be required for the board of directors of AverStar to comply
with its fiduciary duties to the AverStar stockholders under applicable
law;
- before furnishing information to, or entering into discussions or
negotiations with, the person or entity, AverStar provides written notice
to Titan of the identity of the person or entity making such acquisition
proposal and of its intention to furnish information to, or enter into
discussions or negotiations with, such person or entity;
- AverStar enters into a customary confidentiality agreement with such
person or entity;
- AverStar keeps Titan informed on a timely basis of the status of such
negotiations and all material terms and conditions of any agreement and
promptly provides Titan with copies of all written inquiries or proposals
related to the acquisition proposal; and
- the acquisition proposal was not solicited in violation of the merger
agreement.
For purposes of the merger agreement, "acquisition proposal" means any of
the following involving AverStar or its subsidiaries, other than the
transactions contemplated by the merger agreement:
- any merger, consolidation, share exchange, business combination or other
similar transaction;
- any sale, lease, license, exchange, mortgage, pledge, transfer or other
disposition of 15% or more of the fair market value of the business or
assets of AverStar and its subsidiaries, taken as a whole, in a single
transaction or series of transactions;
- any tender offer or exchange offer for outstanding shares of AverStar
capital stock or the filing of a registration statement under the
Securities Act in connection therewith;
- any solicitation of proxies in opposition to approval by the AverStar
stockholders of the merger;
- the acquisition by any person, after the date of the merger agreement, of
beneficial ownership, or the right to acquire beneficial ownership of, or
the formation of any "group" (as such term is defined under Section 13(d)
of the Exchange Act and the rules and regulations thereunder) that
beneficially owns or has the right to acquire beneficial ownership of, 5%
or more of the then outstanding shares of capital stock of AverStar, or
the acquisition by any person or "group" that, as of the date of the
merger agreement, beneficially owns 5% or more of the outstanding shares
of capital stock of AverStar or beneficial ownership or the right to
acquire beneficial ownership of any additional shares of capital stock of
AverStar;
- the adoption by AverStar of a plan of liquidation, the declaration or
payment by AverStar of an extraordinary dividend on any of its shares of
capital stock or the effectuation by AverStar of a recapitalization or
other type of transaction that would involve either a change in AverStar's
52
<PAGE>
outstanding capital stock or a distribution of assets of any kind to the
holders of such capital stock;
- the repurchase by AverStar or any of its subsidiaries of any shares of
AverStar common stock other than pursuant to the Stockholders Agreement,
dated February 27, 1998, by and among AverStar and its stockholders who
are signatories thereto; or
- any resolution or agreement to, or public announcement by AverStar or any
other person or entity of a proposal, plan or intention to do any of the
foregoing.
CONDITIONS TO COMPLETION OF THE MERGER
CONDITIONS TO EACH PARTY'S OBLIGATION TO COMPLETE THE MERGER. Each party's
obligation to complete the merger is subject to the satisfaction or waiver,
where permissible, of the following conditions:
- the merger agreement and the merger have been approved by the AverStar
stockholders;
- the registration statement of which this proxy statement/prospectus forms
a part has become effective, and no stop order suspending its
effectiveness has been issued and no proceedings for that purpose have
been initiated or, to the knowledge of Titan or AverStar, threatened by
the SEC;
- no governmental entity or court has enacted, issued, promulgated, enforced
or entered any statute, rule, regulation, executive order, decree,
judgment, injunction or other order that prevents or prohibits completion
of the merger, so long as Titan and AverStar use their reasonable best
efforts to cause any order of this nature to be vacated or lifted; and
- the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act has expired or been terminated.
CONDITIONS TO THE OBLIGATIONS OF TITAN AND V T ACQUISITION CORP. TO COMPLETE
THE MERGER. The obligations of Titan and V T Acquisition Corp. to complete the
merger is subject to the satisfaction or waiver, where permissible, of the
following additional conditions:
- AverStar's representations and warranties in the merger agreement were
true and correct when made and, except for representations and warranties
made as of a specified date or changes permitted under the merger
agreement, are true and correct on and as of the merger closing date;
- AverStar will have performed or complied in all respects with the
agreements and covenants required to be performed or complied with by it
on or before the effective date of the merger;
- Titan has received a legal opinion from AverStar's counsel, dated as of
the merger closing date, in a form required by the merger agreement;
- there will not be pending any enforcement action or similar proceeding by
any state or federal governmental entity that is likely to have a material
adverse effect on the business, operations, condition (financial or
otherwise), assets or liabilities of AverStar and any AverStar
subsidiaries, taken as a whole, or, if such action arises in connection
with the transactions contemplated by the merger agreement, a material
adverse effect on Titan;
- since December 31, 1999, there will not have occurred a material adverse
effect on the business, operations, condition (financial or otherwise),
assets or liabilities of AverStar and any AverStar subsidiaries, taken as
a whole (or any development that, insofar as reasonably can be foreseen,
is reasonably likely to cause such an effect) not disclosed pursuant to
AverStar's disclosure letter under the merger agreement;
53
<PAGE>
- there will not be pending or threatened any suit, action, proceeding or
investigation that:
-- challenges or seeks to prohibit or restrain the completion of the
merger,
-- relates to the merger and seeks to obtain from Titan or any of its
subsidiaries damages that may be material to Titan,
-- seeks to prohibit or limit in any respect Titan's ability to vote,
receive dividends or otherwise exercise ownership rights with respect
to the stock of the surviving corporation,
-- materially and adversely affects the right of AverStar, as the
surviving corporation of the merger, to own the assets or operate the
business of AverStar, or
-- if adversely determined, could have a material adverse effect on
AverStar or Titan;
- Titan and V T Acquisition Corp. will have procured all consents of third
parties and governmental entities required under the merger agreement;
- the delivery to Titan and AverStar of a letter from AverStar's independent
auditors, addressed to Titan and AverStar and dated as of the merger
closing date, setting forth a statement that AverStar's independent
auditors, after reasonable investigation, are not aware of any fact
concerning AverStar or its stockholders or affiliates that could preclude
Titan from accounting for the merger as a pooling of interests, such
condition to be satisfied by the delivery to Titan and AverStar of a
letter from AverStar's independent auditors stating that they concur with
AverStar management's conclusion that certain criteria relating to pooling
of interests accounting have been met;
- the delivery to Titan of a letter from Titan's independent public
accountants, addressed to Titan and dated as of the merger closing date,
setting forth the concurrence of Titan's independent public accountants
with Titan's conclusion that Titan may account for the merger as a pooling
of interests in accordance with generally accepted accounting principles
and the rules, policies and regulations of the SEC;
- the holders of no more than five percent (5%) of the AverStar common stock
will have dissented from and exercised appraisal rights in connection with
the merger;
- Titan has received a legal opinion from its counsel, dated as of the
merger closing date, to the effect that the merger will constitute a
reorganization under section 368(a) of the Internal Revenue Code;
- Titan will have received from AverStar two days prior to the merger
closing date a certificate of AverStar's chief financial officer of
AverStar's estimated net debt as of the merger closing date, prepared on a
good faith basis consistent with AverStar's financial statements delivered
to Titan under the merger agreement;
- all of the consulting agreements with and of Westgate Capital Co., Joel N.
Levy, Peter M. Schulte and Joel N. Levy/Peter M. Schulte, L.L.C. will have
been terminated and all parties to these agreements will have released
AverStar (in a form satisfactory to Titan) from any liability as a result
of such termination;
- no approval or adoption or consent of the Titan stockholders with respect
to the transactions contemplated by this merger agreement shall be
required pursuant to the rules of the NYSE; and
- AverStar will have prepared and delivered to Titan and V T Acquisition
Corp. a certificate signed by its chief financial officer in which
AverStar represents and warrants to Titan and V T Acquisition Corp. that
AverStar has delivered to Titan and V T Acquisition Corp. a true and
complete copy of its 1999 audited financial statements, that such
financial statements, including,
54
<PAGE>
without limitation, the notes thereto, have been prepared in accordance
with the books and records of AverStar and its subsidiaries and fairly
present in all material respects the consolidated financial position of
AverStar and its subsidiaries at the date thereof and their consolidated
results of operations and cash flows for the period indicated, in
accordance with generally accepted accounting principles applied
throughout the periods involved (except as noted therein).
CONDITIONS TO THE OBLIGATION OF AVERSTAR TO COMPLETE THE MERGER. The
obligation of AverStar to complete the merger is subject to the satisfaction or
waiver, where permissible, of the following additional conditions:
- the representations and warranties of Titan and V T Acquisition Corp. in
the merger agreement were true and correct when made and, except for
representations and warranties made as of a specified date or changes
permitted under the merger agreement, are true and correct on and as of
the merger closing date;
- Titan and V T Acquisition Corp. will have performed or complied in all
respects with the agreements and covenants required to be performed or
complied with by it on or before the effective date of the merger except
for such noncompliance that does not have a material adverse effect on
Titan;
- AverStar has received a legal opinion from Titan's counsel, dated as of
the merger closing date, in a form required by the merger agreement;
- the shares of Titan common stock to be issued in the merger will have been
approved for listing on the NYSE, subject to official notice of issuance;
- AverStar and the AverStar stockholders will have received a legal opinion
from AverStar's counsel, dated as of the merger closing date, to the
effect that the merger will constitute a reorganization under
section 368(a) of the Internal Revenue Code;
- there will not be pending any enforcement action or similar proceeding by
any state or federal governmental entity that is likely to have a material
adverse effect on Titan;
- there will not be pending or threatened any suit, action, proceeding or
investigation that:
-- challenges or seeks to prohibit or restrain the completion of the
merger, or
-- if adversely determined, could have a material adverse effect on
Titan; and
- Titan and V T Acquisition Corp. will have procured all consents of third
parties and governmental entities required under the merger agreement.
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEE
The merger agreement may be terminated at any time prior to the effective
time of the merger:
(1) by mutual written consent of Titan and AverStar;
(2) by Titan, if any of the conditions precedent to the obligations of
Titan to close the merger, other than the conditions relating to the
approval of the merger agreement and the merger by the AverStar stockholders
or the percentage of dissenting AverStar stockholders, are not satisfied as
of the scheduled merger closing date and such failure has not been cured
within 20 business days following receipt by AverStar of written notice of
such failure, or to the extent permitted by applicable law, such conditions
have not been waived in writing by Titan;
(3) by AverStar, if any of the conditions precedent to the obligations
of AverStar to close the merger, other than the condition relating to the
approval of the merger agreement and the merger
55
<PAGE>
by the AverStar stockholders, are not satisfied as of the scheduled merger
closing date and such failure has not been cured within 20 business days
following receipt by Titan of written notice of such failure, or to the
extent permitted by applicable law, such conditions have not been waived in
writing by AverStar;
(4) by either Titan or AverStar, if any decree, permanent injunction,
judgment, order or other action by any court of competent jurisdiction or
any other federal or state (but not county or municipal) governmental entity
preventing or prohibiting consummation of the merger will have been filed or
in effect;
(5) by Titan, if the average Titan stock price is greater than $61.60
per share unless AverStar makes an AverStar floating rate election;
(6) by AverStar, if the average Titan stock price is less than $39.60
per share unless Titan makes a Titan floating rate election;
(7) by either Titan or AverStar, if the merger has not occurred on or
before September 20, 2000, except that this right to terminate the merger
agreement is not available to any party whose failure to fulfill its
obligations was the cause of the failure of the merger to occur;
(8) by Titan, if (i) the AverStar board of directors (a) fails to
recommend approval of the merger agreement and the merger, or withdraws or
modifies any such recommendation or (b) recommends to the AverStar
stockholders approval or acceptance of an "acquisition proposal," or
(ii) the holders of more than five percent (5%) of the AverStar common stock
dissent from and exercise appraisal rights in connection with the merger; or
(9) by either Titan or AverStar, if the vote of the stockholders of
AverStar required by the merger agreement has not been obtained.
If the merger agreement is terminated for the reasons set forth in
paragraph (8) above, or if the merger agreement is terminated for the reasons
set forth in paragraph (9) above and at the time of the AverStar stockholder
meeting an acquisition proposal from a person other than Titan will have been
made and disclosed to the AverStar stockholders, AverStar will be required to
pay Titan an amount equal to $2 million within one business day after such
termination.
If the merger agreement is terminated for the reasons set forth in
paragraph (8) above, or if the merger agreement is terminated for the reasons
set forth in paragraph (9) above and at the time of the AverStar stockholder
meeting an acquisition proposal from a person other than Titan will have been
made and disclosed to the AverStar stockholders, and AverStar (i) enters into a
definitive agreement in connection with an acquisition proposal within nine
months after the date of such termination (regardless of when such definitive
agreement is consummated) or (ii) consummates an acquisition proposal within
nine months after the date of such termination, AverStar will be required to pay
Titan, in addition to the amounts set forth in the prior paragraph, an amount
equal to $2 million within five business days after the consummation of such
definitive agreement or such acquisition proposal, as the case may be.
WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
WAIVER. At any time before the effective time of the merger, the parties to
the merger agreement may agree to do any of the following:
- extend the time for the performance of any obligation or other act
required to be performed under the merger agreement;
- waive any inaccuracies in the representations and warranties contained in
the merger agreement or in any document delivered in connection with it;
and
56
<PAGE>
- waive compliance with any of the agreements or conditions contained in the
merger agreement.
AMENDMENT. The merger agreement may be amended by the parties through
action authorized by their respective boards of directors at any time before the
effective time of the merger. The merger agreement may not be amended except by
an instrument in writing signed by the parties.
EXPENSES
Except as described under "Termination of the Merger Agreement; Termination
Fee" above, Titan and AverStar generally will bear their own costs and expenses
incurred in connection with the merger agreement, except that if the merger is
not completed, Titan and AverStar will each pay one-half the costs (other than
attorneys' and auditors' fees) up to $100,000 incurred in:
- filing the registration statement of which this proxy statement/prospectus
forms a part;
- printing and mailing this proxy statement/prospectus;
- all SEC and other regulatory filing fees incurred in connection with this
proxy statement/ prospectus and the registration statement of which it is
a part; and
- the fees required under the applicable foreign laws, if any, incurred in
connection with the transactions contemplated under the merger agreement.
Titan will bear all such costs and expenses in excess of $100,000.
AVERSTAR VOTING AGREEMENT
AVERSTAR VOTING AGREEMENT. On March 24, 2000, as an essential condition and
inducement to Titan and V T Acquisition Corp. entering into the merger
agreement, Titan, V T Acquisition Corp. and several AverStar stockholders,
referred to as the AverStar Principal Stockholders, entered into a Voting
Agreement. Under the Voting Agreement, the AverStar Principal Stockholders have
agreed to vote, or cause the record holders of their AverStar securities to
vote, the AverStar common stock beneficially owned by them as of March 24, 2000
and any other voting interests in AverStar acquired by them after March 24, 2000
in the following manner:
- in favor of the merger and adoption of the merger agreement;
- in favor of other actions contemplated by the merger agreement in
connection with any meeting of, or solicitation of consents from, AverStar
stockholders where such matters are submitted to a vote of AverStar
stockholders;
- against approval or adoption of any extraordinary transaction (other than
the merger) including, without limitation, the sale or transfer of all or
substantially all of AverStar's capital stock or assets, a reorganization
or liquidation or AverStar or the creation of a new class of AverStar
securities;
- against approval or adoption of resolutions which would have the effect of
preventing or materially delaying completion of the merger or AverStar
from performing its obligations under the merger agreement; and
- against any other action which would constitute a material breach of any
provision of the merger agreement.
The AverStar common stock beneficially owned by the AverStar Principal
Stockholders represented approximately 31.3% of the AverStar voting common stock
outstanding as of May 19, 2000. The AverStar Principal Stockholders consist of
the following persons:
- Michael B. Alexander, AverStar's Chairman and Chief Executive Officer of
AverStar;
57
<PAGE>
- AFH Partners, L.P.;
- Peter J. Dwyer, AverStar's Chief Financial Officer;
- Nicholas A. Pettinella;
- John C. Rennie, AverStar's Vice Chairman;
- Sigmund H. Goldblum, AverStar's President of Applications Group;
- Joseph A. Saponaro, AverStar's President and Chief Operating Officer;
- Peter M. Shulte;
- Levy Family Partnership; and
- Bruce A. Burton
Under the Voting Agreement, each AverStar Principal Stockholder delivered an
irrevocable proxy to Titan to vote the AverStar shares of such AverStar
Principal Stockholder in favor of the merger, as described under "Irrevocable
Proxies" below.
The AverStar Principal Stockholders have agreed not to take any of the
following actions until the effective time of the merger or, if earlier
terminated, the termination of the Voting Agreement, and to use their reasonable
efforts not to allow any of their representatives to take any of the following
actions:
- initiate, solicit, facilitate or encourage the submission of an
acquisition proposal for AverStar;
- participate in any discussions with respect to an acquisition proposal for
AverStar;
- agree to, approve or recommend or authorize any representative of AverStar
to approve or recommend any acquisition proposal for AverStar;
- execute any proxies or other voting arrangements with respect to AverStar
capital stock or rights to acquire AverStar capital stock; or
- transfer or otherwise dispose of any shares of capital stock beneficially
owned by the AverStar Principal Stockholders.
The Voting Agreement will terminate on the earlier to occur of the effective
time of the merger or on the date the merger agreement is validly terminated.
IRREVOCABLE PROXIES. Under the Voting Agreement, and as a condition and
inducement to Titan's entering into the merger agreement, each AverStar
Principal Stockholder granted an irrevocable proxy dated March 24, 2000 to
Titan, with power of substitution and resubstitution. Under the terms of each
proxy, Titan has the authority to vote the AverStar common stock owned by the
applicable AverStar Principal Stockholder as of March 24, 2000, together with
all other shares of AverStar capital stock the AverStar Principal Stockholder
acquires after March 24, 2000, in favor of the approval and adoption of the
merger agreement and the transactions contemplated by the merger agreement. Each
proxy authorizes Titan to vote these shares at any meeting of stockholders of
AverStar, or in connection with any solicitation of written consents from
stockholders of AverStar, called or solicited for the purpose of voting on the
merger agreement, the merger and the other actions contemplated by the merger
agreement. Each proxy is coupled with an interest and is irrevocable. The proxy
and the rights contained in it will terminate upon the termination of the Voting
Agreement.
58
<PAGE>
THE TITAN CORPORATION AND AVERSTAR, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
We expect that the merger of Titan and AverStar will be accounted for under
the pooling of interests method of accounting, which means that, for accounting
and financial reporting purposes, Titan and AverStar will be treated as if they
had always been combined. We have presented below unaudited pro forma condensed
combined financial data that reflect the pooling of interests method of
accounting and are intended to give you a better picture of what the businesses
of Titan and AverStar might have looked like if the merger between the two
companies had occurred on January 1, 1997, the first day of the first period for
which financial information is presented here. We have combined the Titan
unaudited pro forma condensed statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and for the three months ended March 31, 2000
with the AverStar consolidated statements of operations for the years ended
December 31, 1997, 1998 and 1999 and for the three months ended March 31, 2000
to reflect the proposed merger of Titan and AverStar. Titan and AverStar might
have performed differently if they had been combined.
The unaudited pro forma condensed combined statement of operations data for
Titan for the year ended December 31, 1999 assumes that Titan completed the
acquisitions of JB Systems, Inc., doing business as Mainsaver, Assist
Cornerstone Technologies, Inc. ("Assist") and SFG Technologies, Inc. ("SFG") as
of the beginning of such period. The unaudited pro forma condensed combined
financial data presented below have been derived from, and should be read in
conjunction with, the "The Titan Corporation Unaudited Pro Forma Condensed
Combined Financial Information" and related notes herein and the financial
statements of Mainsaver, Assist and SFG incorporated by reference herein. You
should not rely on the unaudited pro forma condensed combined financial data as
being indicative of the results that would have occurred or of the future
results that will occur after the merger.
Unaudited condensed combined balance sheets have been prepared as of
December 31, 1999 and March 31, 2000 giving effect to the merger with AverStar
as though it had been consummated on those dates.
59
<PAGE>
THE TITAN CORPORATION AND AVERSTAR, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO
TITAN ADJUSTMENTS FORMA
PRO FORMA AVERSTAR (NOTE 3) COMBINED
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $650,119 $184,336 $ -- $834,455
Costs and expenses:
Cost of revenues................................ 475,377 145,130 -- 620,507
Selling, general and administrative expense..... 120,172 28,919 -- 149,091
Research and development expense................ 10,551 -- -- 10,551
Acquisition related charges and other........... (28,880) 845 -- (28,035)
-------- -------- -------- --------
Total costs and expenses...................... 577,220 174,894 -- 752,114
Operating profit.................................. 72,899 9,442 -- 82,341
Interest expense.................................. (19,540) (4,582) -- (24,122)
Interest income................................... 1,187 -- -- 1,187
-------- -------- -------- --------
Income from continuing operations before income
taxes........................................... 54,546 4,860 -- 59,406
Income tax provision.............................. 22,763 2,284 -- 25,047
-------- -------- -------- --------
Income from continuing operations................. $ 31,783 $ 2,576 $ -- $ 34,359
======== ======== ======== ========
Basic earnings per share:
Income from continuing operations(a)............ $ 0.70 $ 0.37 $ -- $ 0.70
======== ======== ======== ========
Weighted average shares......................... 44,246 6,877 (3,335)(c) 47,788
======== ======== ======== ========
Diluted earnings per share:
Income from continuing operations(a)............ $ 0.61 $ 0.34 $ -- $ 0.63
======== ======== ======== ========
Weighted average shares......................... 51,030 7,500 (3,637)(c) 54,893
======== ======== ======== ========
</TABLE>
- ------------------------
Note (a): Calculation of Titan Pro Forma and Pro Forma Combined earnings per
share includes dividend requirements on preferred stock of $695.
60
<PAGE>
THE TITAN CORPORATION AND AVERSTAR, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO
TITAN ADJUSTMENTS FORMA
PRO FORMA AVERSTAR (NOTE 3) COMBINED
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $411,180 $121,056 $ -- $532,236
Costs and expenses:
Cost of revenues................................ 301,888 93,604 -- 395,492
Selling, general and administrative expense..... 66,387 20,581 -- 86,968
Research and development expense................ 5,590 -- -- 5,590
Acquisition related charges and other........... 9,891 -- -- 9,891
-------- -------- ------- --------
Total costs and expenses...................... 383,756 114,185 -- 497,941
Operating profit.................................. 27,424 6,871 -- 34,295
Interest expense.................................. (9,295) (2,269) -- (11,564)
Interest income................................... 474 -- -- 474
-------- -------- ------- --------
Income from continuing operations before income
taxes and cumulative effect of change in
accounting principle............................ 18,603 4,602 -- 23,205
Income tax provision.............................. 7,016 2,168 -- 9,184
-------- -------- ------- --------
Income from continuing operations before
cumulative effect of change in accounting
principle....................................... $ 11,587 $ 2,434 $ -- $ 14,021
======== ======== ======= ========
Basic earnings per share:
Income from continuing operations(a)............ $ 0.28 $ 0.38 $ -- $ 0.31
======== ======== ======= ========
Weighted average shares......................... 38,995 6,428 (3,117)(c) 42,306
======== ======== ======= ========
Diluted earnings per share:
Income from continuing operations(a)............ $ 0.27 $ 0.36 $ -- $ 0.30
======== ======== ======= ========
Weighted average shares......................... 40,336 6,847 (3,321)(c) 43,862
======== ======== ======= ========
</TABLE>
- ------------------------
Note (a): Calculation of Titan Pro Forma and Pro Forma Combined earnings per
share includes dividend requirements on preferred stock of $778.
61
<PAGE>
THE TITAN CORPORATION AND AVERSTAR, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO
TITAN ADJUSTMENTS FORMA
PRO FORMA AVERSTAR (NOTE 3) COMBINED
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues........................................... $328,117 $53,646 $ -- $381,763
Costs and expenses:
Cost of revenues................................. 254,240 41,685 -- 295,925
Selling, general and administrative expense...... 47,859 10,403 -- 58,262
Research and development expense................. 7,466 -- -- 7,466
Acquisition related charges and other............ 8,510 -- -- 8,510
-------- ------- ------- --------
Total costs and expenses....................... 318,075 52,088 -- 370,163
Operating profit................................... 10,042 1,558 -- 11,600
Interest expense................................... (6,779) (1,206) -- (7,985)
Interest income.................................... 1,025 -- -- 1,025
-------- ------- ------- --------
Income from continuing operations before income
taxes............................................ 4,288 352 -- 4,640
Income tax provision............................... 3,934 154 -- 4,088
-------- ------- ------- --------
Income from continuing operations.................. $ 354 $ 198 $ -- $ 552
======== ======= ======= ========
Basic earnings per share:
Income (loss) from continuing operations(a)...... $ (0.01) $ 0.05 $ -- $ (0.01)
======== ======= ======= ========
Weighted average shares.......................... 35,539 3,865 (1,874)(c) 37,530
======== ======= ======= ========
Diluted earnings per share:
Income (loss) from continuing operations(a)...... $ (0.01) $ 0.04 $ -- $ (0.01)
======== ======= ======= ========
Weighted average shares.......................... 35,539 4,552 (2,561)(c) 37,530
======== ======= ======= ========
</TABLE>
- ------------------------
Note (a): Calculation of Titan Pro Forma and Pro Forma Combined earnings per
share includes dividend requirements on preferred stock of $875.
62
<PAGE>
THE TITAN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN AVERSTAR (NOTE 3) COMBINED
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues............................................ $175,499 $46,167 $ -- $221,666
Costs and expenses:
Cost of revenues.................................. 128,503 36,510 -- 165,013
Selling, general and administrative expense....... 39,224 7,609 46,833
Research and development expense.................. 2,247 -- -- 2,247
Acquisition related charges and other............. 18,070 -- -- 18,070
-------- ------- ------- --------
Total costs and expenses........................ 188,044 44,119 -- 232,163
Operating profit (loss)............................. (12,545) 2,048 -- (10,497)
Interest expense.................................... (5,968) (1,447) -- (7,415)
Interest income..................................... 927 -- -- 927
-------- ------- ------- --------
Income (loss) from continuing operations before
income taxes...................................... (17,586) 601 -- (16,985)
Income tax provision................................ (4,397) 270 -- (4,127)
Income (loss) before minority interest and
extraordinary loss................................ (13,189) 331 -- (12,858)
Minority interest................................... 1,378 -- -- 1,378
-------- ------- ------- --------
Income (loss) before extraordinary loss............. $(11,811) $ 331 $ -- $(11,480)
======== ======= ======= ========
Basic earnings per share
Income (loss) before extraordinary loss (a)....... $ (0.25) $ 0.05 $ -- $ (0.23)
======== ======= ======= ========
Weighted average shares........................... 49,600 6,839 (3,317)(c) 53,122
======== ======= ======= ========
Diluted earnings per share..........................
Income (loss) before extraordinary loss (a)....... $ (0.25) $ 0.04 $ -- $ (0.23)
======== ======= ======= ========
Weighted average shares........................... 49,600 7,560 (4,038)(c) 53,122
======== ======= ======= ========
</TABLE>
Note(a):Calculation of Titan and Pro Forma Combined earnings per share includes
dividend requirements on preferred stock of $174.
63
<PAGE>
THE TITAN CORPORATION AND AVERSTAR, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN AVERSTAR (NOTE 2) COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 13,364 $ 105 $ -- $ 13,469
Accounts receivable--net........................ 220,040 46,948 -- 266,988
Inventories..................................... 15,640 -- -- 15,640
Prepaid expenses and other...................... 9,381 2,843 -- 12,224
Deferred income taxes........................... 11,001 1,347 3,480 (a) 15,828
-------- -------- ------- --------
Total current assets.......................... 269,426 51,243 3,480 324,149
Property and equipment--net....................... 43,269 4,287 -- 47,556
Goodwill--net..................................... 210,894 29,212 -- 240,106
Other assets...................................... 21,753 4,017 -- 25,770
Net assets of discontinued operations............. 557 -- -- 557
-------- -------- ------- --------
Total assets.................................... $545,899 $ 88,759 $ 3,480 $638,138
======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.................................. $ 10,035 $ 8,600 $ -- $ 18,635
Accounts payable................................ 44,760 7,642 -- 52,402
Acquisition debt................................ 4,800 -- -- 4,800
Current portion of long-term debt............... 3,791 2,700 -- 6,491
Income taxes payable............................ 9,857 -- -- 9,857
Accrued compensation and benefits............... 28,551 10,850 -- 39,401
Other accrued liabilities....................... 53,797 7,795 -- 61,592
Net liabilities of discontinued operations...... 7,142 -- -- 7,142
-------- -------- ------- --------
Total current liabilities..................... 162,733 37,587 -- 200,320
-------- -------- ------- --------
Line of credit.................................... 175,187 -- -- 175,187
Long-term debt.................................... 10,136 45,466 11,600 (a) 67,202
Other non-current liabilities..................... 31,851 -- -- 31,851
Minority interest................................. 5,350 -- -- 5,350
Redeemable common stock........................... -- 4,961 -- 4,961
STOCKHOLDERS' EQUITY:
Preferred stock:
Cumulative convertible........................ 695 -- -- 695
Series A junior participating................. -- -- -- --
Common stock.................................... 504 5 34 (b) 543
Capital in excess of par value.................. 147,296 11,665 (635)(b) 158,326
Deferred compensation........................... (738) (53) -- (791)
Retained earnings (deficit)..................... 15,554 (10,271) (8,120)(a) (2,837)
Cumulative foreign currency translation
adjustment.................................... (33) -- -- (33)
Treasury stock, at cost......................... (2,636) (601) 601 (b) (2,636)
-------- -------- ------- --------
Total stockholders' equity.................. 160,642 745 (8,120) 153,267
-------- -------- ------- --------
Total liabilities and stockholders' equity...... $545,899 $ 88,759 $ 3,480 $638,138
======== ======== ======= ========
</TABLE>
64
<PAGE>
THE TITAN CORPORATION AND AVERSTAR, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
TITAN AVERSTAR (NOTE 2) PRO FORMA
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 65,131 $ 81 $ -- $ 65,212
Accounts receivable--net............................. 242,141 53,518 -- 295,659
Inventories.......................................... 19,867 -- -- 19,867
Prepaid expenses and other........................... 19,442 1,733 -- 21,175
Deferred income taxes................................ 19,422 1,347 3,480 (a) 24,249
-------- -------- ------- --------
Total current assets............................... 366,003 56,679 3,480 426,162
Property and equipment--net............................ 54,099 4,438 -- 58,537
Goodwill--net.......................................... 255,084 36,243 -- 291,327
Other assets........................................... 33,567 3,858 -- 37,425
Net assets of discontinued operations.................. 463 -- -- 463
-------- -------- ------- --------
Total assets......................................... $709,216 $101,218 $ 3,480 $813,914
======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit....................................... $ 1,000 $ 20,500 $ -- $ 21,500
Accounts payable..................................... 45,191 9,625 -- 54,816
Acquisition debt..................................... 4,000 -- -- 4,000
Current portion of long-term debt.................... 3,609 2,925 -- 6,534
Income taxes payable................................. 1,174 -- -- 1,174
Accrued compensation and benefits.................... 30,809 10,152 -- 40,961
Other accrued liabilities............................ 54,094 7,555 -- 61,649
Net liabilities of discontinued operations........... 5,692 -- -- 5,692
-------- -------- ------- --------
Total current liabilities.......................... 145,569 50,757 -- 196,326
-------- -------- ------- --------
Line of credit......................................... 99,000 -- -- 99,000
Long-term debt......................................... 15,699 44,591 11,600 (a) 71,890
Other non-current liabilities.......................... 36,115 -- -- 36,115
Company obligated mandatory redeemable preferred
securities of a subsidiary trust whose sole assets
are senior subordinated debentures of Titan.......... 250,000 -- -- 250,000
Minority interest...................................... 12,345 -- -- 12,345
Redeemable common stock................................ -- 4,961 -- 4,961
STOCKHOLDERS' EQUITY:
Preferred stock:
Cumulative convertible............................. 693 -- -- 693
Series A junior participating...................... -- -- -- --
Common stock......................................... 506 5 34 (b) 545
Capital in excess of par value....................... 151,750 11,665 (808)(b) 162,607
Deferred compensation................................ (2,104) (47) -- (2,151)
Retained earnings (deficit).......................... 1,467 (9,940) (8,120)(a) (16,593)
Cumulative foreign currency translation adjustment... (30) -- -- (30)
Treasury stock, at cost.............................. (1,794) (774) 774 (b) (1,794)
-------- -------- ------- --------
Total stockholders' equity....................... 150,488 909 (8,120) 143,277
-------- -------- ------- --------
Total liabilities and stockholders' equity........... $709,216 $101,218 $ 3,480 $813,914
======== ======== ======= ========
</TABLE>
65
<PAGE>
THE TITAN CORPORATION AND AVERSTAR, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined statements of operations combine
the unaudited pro forma condensed combined statements of operations for Titan
for the years ended December 31, 1999, 1998 and 1997 and the three months ended
March 31, 2000 with the historical statements of operations of AverStar for the
years ended December 31, 1999, 1998 and 1997 and the three months ended
March 31, 2000.
NOTE 2. BALANCE SHEET
(a) Titan estimates that Titan and AverStar will incur direct transaction
costs and employee termination costs of approximately $11.6 million associated
with the Merger, the direct transaction costs consisting primarily of investment
banking, filings with regulatory agencies, accounting, legal, financial printing
and other related costs.
These estimates are preliminary and are therefore subject to change. These
costs will be charged to operations as incurred. The unaudited pro forma
combined balance sheets give effect to such charges as if they had been incurred
as of December 31, 1999 and as of March 31, 2000, but the effect has not been
reflected in the unaudited pro forma condensed combined statements of operations
as they are nonrecurring in nature.
The income tax effect of these charges has also been reflected as a pro
forma adjustment.
(b) Titan has eliminated AverStar's treasury stock and reflected the
estimated impact to common stock and capital in excess of par value for the
estimated Titan shares to be issued.
NOTE 3. STATEMENTS OF OPERATIONS
(c) Titan bases the unaudited pro forma combined net income (loss) from
continuing operations per common share on the weighted average number of common
and equivalent shares of Titan outstanding for each period with an assumed
3,863,000 Titan shares issued for shares of AverStar common stock issued and
stock options issued and outstanding. The exchange assumes the sum of
transaction value of $205 million plus approximately $3.7 million, which is the
sum of the exercise of all vested AverStar options issued and outstanding less
one-half of the exercise of all unvested AverStar options issued and
outstanding, less estimated net debt of approximately $61 million the sum of
which is multiplied by .90, then divided by an assumed Titan average stock price
of $34.39 per share, the trailing ten-day average assuming a close date of
May 19, 2000. The assumed Titan shares to be issued equals an approximate .5150
exchange ratio (calculated as the quotient of the 3,863,000 Titan shares to be
issued divided by the total diluted outstanding AverStar shares of 7,500,000 as
of December 31, 1999) per AverStar share outstanding as of December 31, 1999.
The estimated exchange ratio calculated using the total AverStar outstanding
shares and options as of May 19, 2000 of 8,214,000, assuming 3,863,000 of Titan
shares issued is approximately .470195.
The effect of the estimated direct transaction costs are not reflected in
the pro forma condensed combined statements of operations included herein. These
costs will be charged to operations in the period in which they are incurred,
which is estimated to be in the quarter ended June 30, 2000.
66
<PAGE>
THE TITAN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed combined financial statements
should be read in conjunction with the notes to consolidated financial
statements contained in Titan's Annual Report on Form 10-K/A for the year ended
December 31, 1999, the notes to the financial statements of JB Systems, Inc.
(d.b.a. "Mainsaver"), Assist Cornerstone Technologies, Inc. ("Assist") and SFG
Technologies, Inc. ("SFG Technologies") incorporated by reference herein.
Mainsaver, Assist and SFG Technologies are collectively referred to hereinafter
as the "acquired companies."
The following unaudited pro forma condensed combined statements of
operations have been prepared to illustrate the estimated effects of the
acquisitions of the acquired companies, for the year ended December 31, 1999.
The operating results of Mainsaver, Assist and SFG Technologies from their
respective dates of acquisition through December 31, 1999 are included in
Titan's operating results for the year ended December 31, 1999. The unaudited
pro forma condensed combined statements of operations for 1999 combine Titan's
revenues and expenses for the year ended December 31, 1999 with the acquired
companies' revenues and expenses from January 1, 1999 through their respective
dates of acquisition in November and December 1999.
The unaudited pro forma adjustments are based upon available information and
upon certain assumptions that management believes are reasonable in the
circumstances. The unaudited pro forma condensed combined statements of
operations include the recurring items which are directly attributable to
acquisitions, such as amortization of additional goodwill, increase in interest
expense and the related tax effects thereof. The unaudited pro forma condensed
combined statements of operations give effect to the acquisitions of the
acquired companies as if they had occurred on January 1, 1999. The unaudited pro
forma condensed combined statements do not purport to represent what Titan's
financial position or results of operations would actually have been if the
acquisitions in fact had occurred on the date or at the beginning of the periods
indicated, nor do they purport to project our financial position or results of
operations for any future date or period.
67
<PAGE>
THE TITAN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN MAINSAVER ASSIST SFG (NOTE 4) COMBINED
-------- --------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $624,803 $ 6,698 $11,869 $6,749 $ -- $650,119
Costs and expenses:
Cost of revenues............................. 465,929 1,835 6,265 1,348 -- 475,377
Selling, general and administrative
expense.................................... 102,960 5,526 5,915 3,234 2,537(b) 120,172
Research and development expense............. 6,690 1,004 612 2,245 -- 10,551
Acquisition related charges and other........ (28,880) -- -- -- -- (28,880)
-------- ------- ------- ------ ------- --------
Total costs and expenses................... 546,699 8,365 12,792 6,827 2,537 577,220
-------- ------- ------- ------ ------- --------
Operating profit (loss)........................ 78,104 (1,667) (923) (78) (2,537) 72,899
Interest expense............................... (14,125) (383) (454) (337) (4,241)(c) (19,540)
Interest income................................ 1,187 -- -- -- -- 1,187
-------- ------- ------- ------ ------- --------
Income (loss) from continuing operations before
income taxes................................. 65,166 (2,050) (1,377) (415) (6,778) 54,546
Income tax provision (benefit)................. 24,385 -- (138) -- (1,484)(d) 22,763
-------- ------- ------- ------ ------- --------
Income (loss) from continuing operations....... $ 40,781 $(2,050) $(1,239) $ (415) $(5,294) $ 31,783
======== ======= ======= ====== ======= ========
Basic earnings per share:
Income from continuing operations(a)......... $ 0.91 $ -- $ -- $ -- $ -- $ 0.70
======== ======= ======= ====== ======= ========
Weighted average shares...................... 44,246 -- -- -- -- 44,246
======== ======= ======= ====== ======= ========
Diluted earnings per share:
Income from continuing operations(a)......... $ 0.80 $ -- $ -- $ -- $ -- $ 0.61
======== ======= ======= ====== ======= ========
Weighted average shares...................... 51,030 -- -- -- -- 51,030
======== ======= ======= ====== ======= ========
</TABLE>
Note (a): Calculation of Titan and Pro Forma Combined earnings per share
includes dividend requirements on preferred stock of $695.
68
<PAGE>
THE TITAN CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Cayenta, Inc. ("Cayenta"), a majority owned subsidiary of The Titan
Corporation ("Titan"), acquired substantially all of the assets and liabilities
of Transnational Partners in January 1999. Thereafter, Cayenta acquired
Mainsaver in November 1999, and Assist and SFG Technologies in December 1999.
(See Note 3--The Acquired Companies).
2. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combined financial statements
are based on adjustments to Titan's historical consolidated financial statements
to give effect to the acquisitions described in Note 3 below. The pro forma
combined statements of operations assume the acquisitions were consummated as of
the beginning of the periods presented. The pro forma combined statements of
operations are not necessarily indicative of results that would have occurred if
the acquisitions had been consummated as of the beginning of the periods
presented or the results that may be attained in the future.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the SEC. The pro forma combined
financial statements should be read in conjunction with the historical
consolidated financial statements of Titan and the historical financial
statements of the acquired companies.
The information in the unaudited pro forma combined statements of operations
for the year ended December 31, 1999 was derived from (i) the audited statements
of operations of Titan, and each of the acquired companies for the year ended
December 31, 1999, and Mainsaver, Assist and SFG Technologies from January 1,
1999 through the respective dates of acquisition in November and December 1999.
The financial statements of SFG Technologies are translated from Canadian
dollars to U.S. dollars based on the end of the period exchange rate for balance
sheet items and average for the period rates for statement of operations data.
There are no significant differences between U.S. and Canadian generally
accepted accounting principles relative to SFG Technologies.
3. ACQUISITIONS
All acquisitions were accounted for as purchases. Accordingly the operating
results are reflected in the consolidated results of Cayenta from the date of
acquisition. Summary information on the acquisitions follows:
THE ACQUIRED COMPANIES
TRANSNATIONAL PARTNERS. In January 1999, Cayenta acquired substantially all
of the assets of Transnational Partners, an enterprise application integration
consulting company. Cayenta acquired these assets for an initial installment of
$7 million in cash and 2,345,000 shares of Cayenta's convertible stock. Cayenta
paid an additional $2.8 million note that was issued as part of its acquisition
of Transnational Partners, plus 7% interest thereon, in February 2000.
69
<PAGE>
THE TITAN CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. ACQUISITIONS (CONTINUED)
MAINSAVER. In November 1999, Cayenta acquired Mainsaver, an enterprise
asset management company. Cayenta acquired Mainsaver for $11.7 million in cash,
of which $8.2 million was paid at the closing. Of the $3.5 million withheld at
the closing, $500,000 was due in March 2000 and $3.0 million is due in May 2001,
after satisfaction of possible working capital adjustments or indemnification
obligations. In addition, Cayenta paid approximately $3.4 million to reduce
outstanding indebtedness of Mainsaver.
ASSIST CORNERSTONE. In December 1999, Cayenta acquired Assist, an
e-commerce solutions and software company. Cayenta acquired Assist for 516,458
shares of its Class A common stock and approximately $12.9 million in cash, of
which $9.9 million was paid at the closing. Of the $3.0 million withheld at the
closing, $1.7 million was due and paid in March 2000 and $1.3 million is due in
June 2001, after satisfaction of possible working capital adjustments or
indemnification obligations. In addition, Cayenta paid approximately
$3.2 million to retire outstanding indebtedness of Assist and redeem all of its
outstanding redeemable preferred stock.
SFG TECHNOLOGIES. In December 1999, Cayenta acquired SFG Technologies, a
solutions and software provider focusing on revenue cycle services for the
utility industry. Cayenta acquired SFG Technologies for $11.6 million in cash,
less a $2.0 million holdback. Of the $2.0 million holdback placed into escrow at
the closing, approximately $0.4 million was paid in March 2000, $0.1 million was
offset against post closing adjustments in March 2000 and $1.5 million is due in
June 2001, after satisfaction of certain working capital adjustments or
indemnification obligations. In addition, Cayenta paid approximately
$3.1 million to retire outstanding indebtedness of SFG Technologies.
Acquisition costs related to the acquired companies approximated $5.1
million, which includes approximately $2.1 million of estimated fair value
assigned to 495,800 warrants granted to an investment advisor for certain
advisory services performed in connection with these acquisitions. Goodwill
related to these acquisitions amounted to approximately $55.8 million and is
being amortized over their estimated useful lives.
4. ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
condensed consolidated statements of operations as if the acquisitions of the
acquired companies were consummated at January 1, 1999
STATEMENTS OF OPERATIONS
Acquisitions:
(b) To reflect incremental amortization of goodwill related to the
purchase of Mainsaver, Assist and SFG Technologies.
(c) To reflect incremental interest expense on advances under Titan's
line of credit to fund the cash portion of the purchase prices of the
purchases of Mainsaver, Assist and SFG Technologies and to reflect interest
expense related to holdback amounts for the Mainsaver, Assist and SFG
Technologies acquisitions.
(d) To reflect (i) the change in income taxes related to pro forma
adjustments.
70
<PAGE>
INFORMATION ABOUT TITAN
GENERAL
Titan is a leading diversified technology company that provides information
technology, communications, and electron beam food pasteurization and medical
product sterilization systems and services. Through extensive government-funded
contract and research and development activities since 1981 under contracts
totaling in excess of $2 billion, Titan has accumulated a broad portfolio of
technologies, intellectual property and expertise from which Titan has developed
many of its commercial businesses. The core technologies supporting the SureBeam
and Titan Wireless segments were derived from technologies originally developed
for government applications. Titan believes that its government-funded contract
and research and development activities enhance its technical expertise with
sophisticated technologies and facilitate its ability to develop commercial
applications. Titan funds the development of commercial technologies from its
technology base both internally as well as in conjunction with partners. In
1997, for example, Titan contributed the core technology to form IPivot, Inc., a
company which designs and manufactures Internet commerce equipment that improves
the performance of server farms, web sites and software applications. In
November 1999, Titan received approximately $42 million in cash for its 8.1%
equity interest when IPivot was acquired by Intel Corporation. Titan plans to
continue building its technology portfolio, identifying commercial applications
and entering into strategic relationships to further its growth.
Titan has organized its business into five segments that reflect the
specific markets and industries in which Titan operates:
<TABLE>
<CAPTION>
SEGMENT SEGMENT DESCRIPTION
- ------- ---------------------------------------------
<S> <C>
Titan........................ Information technology and communications
solutions for defense, intelligence, and
other U.S. and allied government agencies
Cayenta...................... Total services provider of comprehensive
information technology solutions for its
customers' business functions, including
e-business, finance, accounting, customer
billing and collection, contract management,
supply chain integration and enterprise asset
management
SureBeam..................... Electron beam food pasteurization and medical
product sterilization systems and services
Titan Wireless............... Satellite communication systems and services
which support telephony in developing
countries
Emerging Technologies and Development of commercial applications for
Businesses................... technologies created by Titan's other
business segments through
government-sponsored research and development
programs
</TABLE>
Each of Titan's segments has a management team with significant relevant
experience in the segment's particular business and market area. Consistent with
its strategy of aligning management motivation with stockholder interests, each
of Titan's segments other than Emerging Technologies, which is not a separate
subsidiary, has its own key employee stock option plan to foster an
entrepreneurial environment.
71
<PAGE>
Titan believes that the markets in which it operates are large and growing:
<TABLE>
<CAPTION>
SEGMENT TARGET MARKET PROFILE
- ------- ---------------------------------------------
<S> <C>
Titan Systems................ The U.S. government is among the largest
buyers of information technology systems and
services in the world. According to the
Government Electronic Industries Alliance,
the U.S. government's information technology
budget for its fiscal year 2000 is expected
to be approximately $34 billion. In a
statement to the House Committee on National
Security, Secretary of Defense William S.
Cohen stated that the defense budget will
emphasize advanced information technologies
related to Command, Control, Communications,
Computers, Intelligence, Surveillance and
Reconnaissance, or CAISR. Titan Systems
provides a full range of CAISR capabilities.
Cayenta...................... Forrester Research projects that the market
for business to business e-business will grow
from $43 billion in 1998 to $1.3 trillion in
2003. In addition, International Data
Corporation estimates that the worldwide
market for consulting, design, systems
integration, support, management and
outsourcing services associated with the
development, deployment and management of
Internet sites will grow at a five year
compounded annual growth rate of 59% from
$7.8 billion 1998 to $78.5 billion in 2003.
SureBeam..................... With 75.4 billion pounds of meat, including
beef, pork and poultry, produced in the
United States in 1999, SureBeam estimates
that the market for food pasteurization
systems and services could develop to be in
excess of $3.0 billion annually if irradiated
foods gain consumer acceptance. If such
consumer acceptance occurs, SureBeam believes
that meat producers will initially elect to
pasteurize a portion of their ground beef and
poultry production. According to a market
research report, the global market for
sterilization services for medical products
was approximately $368 million in 1999.
Titan Wireless............... In Titan's targeted markets, telephone
availability is relatively low. In 1998,
according to the International
Telecommunication Union, countries in Titan's
targeted markets, which represent
approximately one-third of the world's
population, had fewer than two subscriber
lines per 100 inhabitants compared to 66.13
in the United States.
</TABLE>
72
<PAGE>
RECENT DEVELOPMENTS
ACQUISITIONS BY TITAN SYSTEMS. On June 9, 1999, Titan Systems acquired
System Resources Corporation, an information technology government contractor,
through a stock purchase for a purchase price of $35 million, subject to certain
post-closing adjustments, consisting of $33 million in cash paid at closing,
less a $500,000 holdback, and $2 million in promissory notes which bear interest
at 7% per annum and become fully payable on June 9, 2000. In addition, Titan
agreed to pay the System Resources stockholders one-half of approximately
$1.5 million in System Resources receivables aged more than 720 days to the
extent that any of those receivables are collected within the two year period
following the closing date. The transaction was accounted for as a purchase.
On July 22, 1999, Titan Systems acquired all of the outstanding stock of
Atlantic Aerospace Electronics Corporation, a defense and commercial technology
and systems company which focuses on applied research and development in
information technologies, for cash of approximately $18 million, subject to
certain post-closing adjustments, plus potential payments of up to $3 million
contingent upon certain future contract awards. The transaction was accounted
for as a purchase.
On February 25, 2000, Titan completed a merger with Advanced Communication
Systems, Inc., a government information technology services company, in a
stock-for-stock transaction. Titan issued approximately 5,082,000 shares of
Titan common stock for all the outstanding shares of Advanced Communication
Systems, Inc. and assumed Advanced Communication Systems, Inc. stock options
representing approximately 263,000 shares of Titan common stock, based on an
exchange ratio of approximately .57 shares of Titan common stock for each share
of Advanced Communication Systems, Inc. common stock. The merger constituted a
tax-free reorganization and was accounted for as a pooling of interests.
On March 24, 2000, Titan acquired all the outstanding stock of Pulse
Engineering ("Pulse") for a purchase price of approximately $27.4 million in
cash, subject to certain post-closing adjustments and indemnification
obligations, less a $1 million holdback and a $2 million deferred payment. The
holdback is due approximately 90 days from the closing date and the deferred
payment is due one year from the closing date. Pulse provides highly specialized
security and signal intelligence systems and services to the intelligence
community. The transaction was accounted for as a purchase.
On March 30, 2000, Titan acquired all of the stock of LinCom Corporation,
("LinCom") for a purchase price of approximately $23 million in cash, subject to
certain post-closing adjustments and indemnification obligations, less a
$1 million holdback and a $2 million promissory note. The $1 million holdback is
due approximately 60 days after the closing date, and the $2 million note is due
one year after the closing date and accrues interest at 7%. LinCom is a
developer of wireless communications and information systems for both commercial
and government customers. The transaction was accounted for as a purchase.
ACQUISITIONS BY CAYENTA. On January 1, 1999, Cayenta acquired substantially
all of the assets of Transnational Partners II, LLC, an enterprise application
integration consulting company. Cayenta acquired these assets for an initial
installment of $7 million in cash and 2,345,000 shares of Cayenta's convertible
preferred stock. Cayenta paid an additional $2.8 million note that was issued as
part of its acquisition of Transnational Partners, plus 7% interest on the note,
in February 2000.
On November 2, 1999, Cayenta acquired JB Systems, Inc., an enterprise asset
management company doing business under the name Mainsaver. Cayenta acquired
Mainsaver for $11.7 million in cash, of which $8.2 million was paid at the
closing. Of the $3.5 million withheld at the closing, $500,000 was due in
March 2000 and $3 million is due in May 2001, after satisfaction of possible
working capital adjustments or indemnification obligations. In addition, Cayenta
paid approximately $3.4 million to reduce outstanding indebtedness of Mainsaver.
73
<PAGE>
On December 7, 1999, Cayenta acquired Assist Cornerstone
Technologies, Inc., ("Assist") an e-commerce solutions and software company.
Cayenta acquired Assist for 516,458 shares of its Class A common stock and
approximately $12.9 million in cash, of which $9.9 million was paid at the
closing. Of the $3.0 million withheld at the closing, $1.7 million was due and
paid in March 2000 and $1.3 million is due in June 2001, after satisfaction of
possible working capital adjustments or indemnification obligations. In
addition, Cayenta paid approximately $3.2 million to retire outstanding
indebtedness of Assist and redeem all of its outstanding redeemable preferred
stock.
On December 23, 1999, Cayenta acquired SFG Technologies, Inc., ("SFG
Technologies") solutions and software provider focusing on revenue cycle
services for the utility industry. Cayenta acquired SFG Technologies for
$11.6 million in cash, less a $2.0 million holdback. Of the $2.0 million
holdback placed into escrow at the closing, $0.4 million was paid in
March 2000, $0.1 million was offset against post-closing adjustments in March
2000 and $1.5 million is due in June 2001, after satisfaction of certain working
capital adjustments or indemnification obligations. In addition, Cayenta paid
approximately $3.1 million to retire outstanding indebtedness of SFG
Technologies.
Each of Cayenta's acquisitions was accounted for using the purchase method.
74
<PAGE>
INFORMATION ABOUT AVERSTAR
GENERAL
AverStar provides information technology, or IT, services and software
products for the mission-critical systems of a significant number of civilian
and defense agencies of the United States government.
AverStar provides an integrated offering of services and products in three
areas of IT:
- IT ASSURANCE. AverStar provides independent analysis, testing and
verification of critical information systems under development or being
upgraded. AverStar also provides security for customers' information
systems.
- IT DEVELOPMENT. AverStar offers a full range of software and systems
development services for customer-specific applications and Internet
applications.
- IT OPERATIONS. AverStar manages and operates information system networks
and data centers at our customers' facilities.
AverStar provides IT assurance services for many of the United States
government's mission-critical systems. Our key IT assurance contracts include
NASA's space shuttle, space station and ground systems, the Health Care Finance
Administration's Medicare transactions system and the United States Postal
Service's automation systems.
AverStar's current business and operations result from a series of strategic
acquisitions of well established IT companies, executed by its current
management team. In February 1998, AverStar was formed to combine the businesses
of Intermetrics, Inc. and Pacer Infotec, Inc. Previously, Pacer acquired Infotec
Development, Inc. in July 1996. Founded in 1969, Intermetrics brought AverStar
expertise in IT assurance and IT development services for United States civilian
and defense agencies and for commercial organizations. Founded in 1968, Pacer
broadened AverStar's base of contracts for IT assurance and IT development
services for United States defense and civilian agencies. In March 1999,
AverStar acquired Computer Based Systems, Inc. Founded in 1978, CBSI
strengthened AverStar's IT operations services and broadened AverStar's customer
base among civilian agencies of the federal government. In March 2000, AverStar
acquired MJR for $9.6 million in cash, plus a maximum contingent future
consideration of $3.75 million based on MJR's year 2000 financial results. MJR
is an IT service company supporting New York city area clients, primarily in the
financial services industry.
AVERSTAR'S SERVICES AND PRODUCTS
AverStar provides its customers with an integrated offering of services and
products in three areas: IT assurance, IT development and IT operations. Through
these offerings, AverStar is able to support customers during all or any
particular phase of the life cycle of an information system.
IT ASSURANCE
AverStar's IT assurance services include the independent analysis, review,
testing, verification and validation of information systems under development or
being upgraded. Customers increasingly view more of their information systems as
being critical to their operations. This growth in the number of critical
systems, which must operate correctly and be delivered within schedule and cost
constraints, has increased the market demand for our IT assurance services.
AverStar provides the following types of IT assurance services:
SYSTEMS ASSURANCE. AverStar's systems assurance services involve
independent assessment of the specification, design, implementation and testing
of information systems being developed for our
75
<PAGE>
customers. AverStar focuses on early detection of problems so that
cost-effective corrections can be made early in the development cycle. AverStar
also evaluates the processes and tools being used by the systems developer and
provide oversight in tracking the customer's schedule and budget. AverStar's
systems assurance methodologies, tools and services verify its customers'
information systems and provide them with comprehensive technical reports
detailing any and all tracking and reporting problems.
INFORMATION ASSURANCE. AverStar's information assurance services include
providing customers with security risk assessments, security policy and
architecture design, and certification and accreditation of IT systems.
AverStar's solutions help customers automate highly secure transmissions of data
across communications networks. With more information systems migrating to
Internet and Intranet applications, the potential threat from computer viruses
and computer hackers increases the demand for these services. AverStar also
offers products that provide customers with the ability to control a user's
access to network systems in a multi-level, secure environment.
COMPLIANCE ASSESSMENTS. Customers retain AverStar to determine whether a
specific component of an information system complies with their specifications.
The scope of AverStar's compliance assessment services may vary from assessing
the readiness of software for operational implementation, to assessing the
process, cost and schedule for an information system upgrade.
IT DEVELOPMENT
AverStar's IT development services include specification and design, coding
and implementation, system integration, testing and verification, training and
operational deployment of IT systems. AverStar uses both its proprietary and
commercially available tools, together with well established procedures, to
develop and implement IT systems. AverStar's many years of experience in
performing IT assurance services on major systems provide it with a competitive
advantage as an IT developer through the use of processes that avoid common
development problems and through the utilization of project management
disciplines to control the cost, schedule and performance of our projects.
AverStar's IT development services specialize in the following:
MISSION APPLICATIONS. Mission applications involve developing and
maintaining software and systems to support customer-specific programs or
operations.
ELECTRONIC BUSINESS. Applications for electronic business involve enabling
legacy systems for web-based access and building new Internet and intranet
applications for government and commercial customers.
IT OPERATIONS
AverStar's IT operations include network and desktop operations and complete
data center operations at its customers' facilities. AverStar installs,
maintains and supports its customers' network and desktop operations. AverStar's
data center operations include software development, data collection and input,
database archives, report generation and hardware maintenance. AverStar also
supports customers in incorporating new technologies and requirements into their
operations. As a provider of end-to-end services for these operations, AverStar
frequently calls upon its expertise in IT assurance and IT development to
fulfill particular requirements of an IT operations contract.
AverStar recently expanded its IT operations services through the
acquisition of CBSI, a company that has significant expertise in providing IT
operations services to several civilian agencies of the federal government.
76
<PAGE>
AVERSTAR'S MARKETS AND CUSTOMERS
AverStar's primary customers are agencies of the United States government.
AverStar's ten largest contracts by revenues are all with United States
government agencies and accounted for approximately 49% of AverStar's 1999 pro
forma revenues. In 1999, the United States Navy accounted for approximately 12%
of AverStar's pro forma revenues and NASA accounted for approximately 12% of
AverStar's pro forma revenues. These revenues are the result of various
contracts awarded by several procurement offices within these agencies.
AverStar's experience has indicated that particular contracts are subject to the
discretion of each procurement office. Of the 20 government agencies with the
largest IT budgets for the government's 1999 fiscal year, AverStar has contracts
with 16. The breadth of AverStar's government contract base and service
offerings provides it with less dependence on any one agency and more
opportunities to sell additional services to AverStar's customers.
CONTRACTS
GOVERNMENT CONTRACTS
Typically, the government purchases AverStar's IT services and products
through one of the following contract vehicles: single-agency contracts,
multiple award contracts, government wide acquisition contracts, or GWACs, or
Government Services Agency Schedule contracts. A single agency contract is
awarded by one government agency to one or more IT service providers to perform
a specific task. Multiple award contracts, GWACs and Government Services Agency
Schedule contracts permit government agencies to purchase IT services and
products at pre-approved prices, terms and conditions without any additional
competitive bidding. Multiple award contracts and GWACs are awarded by one
government agency to several IT service providers. Government Services Agency
Schedule contracts are awarded by one government agency to one IT service
provider, covering multiple services and products. Even government agencies that
are not parties to the contract may purchase IT services and products through
any GWAC or Government Services Agency Schedule contract. The term of AverStar's
current Government Services Agency Schedule contract expires in September 2002.
AverStar has several multi-year contracts with United States government
agencies, typically for three to five years. These contracts require AverStar to
provide a broad range of requested services. AverStar receives specific
assignments under a given contract through the issuance by the government of
task orders. Task orders describe the specific assignment, the number of
employees allocated to the assignment and the estimated cost, fee and travel
allocated to the assignment.
AverStar serves as the prime contractor on a majority of AverStar's
contracts. Prime contracts accounted for approximately 76% of AverStar's 1999
pro forma revenues. AverStar believes that its position as prime contractor
allows it to develop closer relationships with its customers, to control the
quality of services and products delivered to the customer and to expand its
customer relationships.
COMMERCIAL CONTRACTS
Typically, commercial contracts require AverStar to complete a specific task
or provide a defined range of services and support. Payments are usually made
incrementally during the performance of each specific work assignment.
Currently, AverStar is working to expand its customer base and increase the
sales of AverStar's products and services in the commercial IT market. Most of
AverStar's existing commercial contracts are time and materials contracts.
BACKLOG
Backlog represents AverStar's management's estimate of AverStar's aggregate
realizable revenues over the term of all of AverStar's contracts, including any
option periods. However, backlog is not
77
<PAGE>
necessarily indicative of future revenues. AverStar's contract backlog was
approximately $350 million as of December 31, 1999. AverStar's backlog is
composed of:
- Customer authorized contract values for which the customer has set aside,
appropriated or committed funds for specifically identified services,
products, tasks or delivery orders; and
- AverStar's management's estimate, based on AverStar's past experience and
long-term relationships with many of AverStar's customers, of the
realizable contract values for all expected future services, products,
tasks or delivery orders under AverStar's commercial contracts and single
agency, Government Service Administration schedule, multiple award and
government-wide acquisition contracts, for which funds have not yet been
set aside, appropriated or committed, even if AverStar's customer is not
obligated to request any services under a contract.
The actual timing of AverStar's receipt of revenues, if any, on projects
included in its backlog could change because many factors affect the scheduling
of projects. In addition, cancellations or adjustments to contracts may occur.
AverStar's backlog is subject to large variations from quarter to quarter as
existing contracts are renewed or new contracts are awarded. Additionally,
virtually all of AverStar's backlog represents contracts with the United States
government which may be terminated at any time for any reason.
COMPETITION
AverStar experiences significant competition in all areas of its business.
In general, the markets in which AverStar competes are not dominated by a single
company or a small number of companies. Rather, a large number of companies
offer services that overlap and are competitive with AverStar's services and
products. However, AverStar competes regularly with approximately seven
different competitors in its IT assurance service offerings, 18 in its IT
development service offerings and six in its IT operation service offerings.
AverStar believes that the principal competitive factors in its business are
technical understanding, management capability, past contract performance,
personnel qualifications and price. While AverStar has considerable experience,
there are many other contractors that have comparable skills. Many of AverStar's
competitors are significantly larger and have greater financial resources than
AverStar does. In addition, many of AverStar's competitors have significantly
more experience in the commercial IT market than AverStar does.
PROPRIETARY INFORMATION
Although much of AverStar's work is performed for the United States
government, wherever possible AverStar attempts to retain proprietary rights in
its products. AverStar relies on copyright, patent and trade secret laws and
internal non-disclosure safeguards, as well as restrictions incorporated into
software product license agreements and other contractual provisions to protect
its proprietary rights. However, AverStar does not have any patents, trademarks
or licenses that are material to its business. In addition, AverStar's efforts
to protect its proprietary rights may not prevent the unauthorized disclosure or
use of AverStar's technical knowledge, practices or procedures, or prevent
others from independently developing similar knowledge, practices or procedures.
Further, the government may acquire proprietary rights to software programs and
other products that AverStar develops while performing services under government
contracts. The government may disclose this information to others, including
AverStar's competitors. Disclosure or loss of control over AverStar's
proprietary information could have a material adverse effect on AverStar's
business, financial condition and results of operations.
78
<PAGE>
EMPLOYEES
As of December 31, 1999, AverStar had a total of 1,713 employees, consisting
of 1,557 full-time and 156 part-time or temporary employees. Of AverStar's total
full-time employees, approximately 1,420 are in engineering, technical and
technical support positions, 109 are in general and administrative positions and
28 are in sales and marketing positions. None of AverStar's employees are
covered by a collective bargaining agreement.
AverStar has several full-time employees dedicated to recruiting technical
and administrative professionals and managing its human resources. As part of
AverStar's retention efforts, AverStar seeks to minimize turnover by emphasizing
its reputation, the nature of its work, its work environment, its encouragement
of technical publications, its participation in professional societies and its
competitive compensation packages.
REGULATORY MATTERS
United States government contracts are subject to the Federal Acquisition
Regulations, or FAR, and other agency FAR supplements. Major United States
government contracts are also subject to the Truth in Negotiations Act, or TIN
Act, and Cost Accounting Standards, or CAS. Among other procurement regulations,
the FAR contains the cost principles for setting contract prices while the TIN
Act requires AverStar to provide current, accurate and complete cost or pricing
data in connection with the negotiation of a contract. CAS requires consistency
of accounting practices over time and compliance with specific cost accounting
criteria.
To the extent that a company fails to comply with procurement requirements,
the United States government may adjust contract prices. Additionally, changes
in cost accounting practices are subject to a required procedure for negotiation
of the cost of the change. The United States government is protected from paying
increased costs resulting from accounting changes. Finally, the United States
government has the right to audit contractors for three years after final
payment. Accordingly, Averstar's revenues from United States government
contracts are subject to adjustment.
United States law and regulations restrict and regulate the export of
technology as well as goods and commodities provided by United States businesses
to controlled foreign subsidiaries and affiliates. AverStar is subject to
regulations applicable to its technology that is sold to non-United States
customers.
LEGAL PROCEEDINGS
AverStar is not involved in any material litigation.
79
<PAGE>
AVERSTAR'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW. AverStar provides IT services and products to the United States
government and to commercial companies. Through both internal growth and a
series of acquisitions, AverStar has increased its revenues from $53.3 million
for the fiscal period ended February 28, 1997 to $195 million in pro forma
revenues for the fiscal period ended December 31, 1999. AverStar's growth has
resulted in a broader base of long-term contracts and a more diverse group of
established customers.
AverStar is the result of a series of strategic acquisitions executed by
AverStar's current management. In February 1998, AverStar combined the
businesses of Intermetrics and Pacer. In March 1999, AverStar acquired CBSI for
$26 million in cash, $25 million of which was paid to the former CBSI
stockholders at the closing and $1 million of which will be paid ratably over
the next five years. In March 2000, AverStar acquired MJR for $9.6 million in
cash, plus a maximum contingent future consideration of $3.75 million based on
MJR's year 2000 financial results. All three transactions were accounted for as
purchases. During 1997, AverStar changed its fiscal year to a
December 31 year-end in anticipation of the merger with Pacer. As a result, the
fiscal period ended December 31, 1997 is a ten-month period.
A substantial portion of AverStar's revenues are derived from contracts with
the United States government. Approximately 91% of AverStar's pro forma revenues
in the fiscal period ended December 31, 1999, were derived from government
contracts, either directly with government customers or indirectly through
government prime contractors.
AverStar enters into three types of contracts: cost-reimbursable,
time-and-materials and fixed-price contracts. Of AverStar's total pro forma
revenues for 1999, cost-reimbursable contracts represented approximately 41%,
time-and-materials contracts approximately 49% and fixed-price and licensing
contracts approximately 10%. Cost-reimbursable contracts provide for the
reimbursement of costs plus the payment of a fixed fee. Under time-and-materials
contracts, AverStar is reimbursed for labor hours at negotiated hourly billing
rates and reimbursed for travel and other direct expenses at actual cost plus
applied indirect, general and administrative expenses. Under fixed-price
contracts, AverStar agrees to perform an assignment for a fixed price and,
accordingly, realize a benefit or detriment to the extent that our actual cost
of performing the work differs from the negotiated price.
AverStar assumes greater financial risk on fixed-price contracts than on
either time-and-materials or cost-reimbursable contracts. AverStar believes that
an increasing percentage of its contracts will be time and materials contracts
as its commercial business increases and as the government increases its
procurement under AverStar's GSA Schedule and GWAC's. Failure to anticipate
technical problems, estimate costs accurately or control costs during
performance of a fixed-price contract may reduce AverStar's profits or cause
AverStar to suffer a loss. If AverStar is successful in providing its services
at a reduced cost, however, AverStar expects that fixed-price contracts will
result in greater profitability. In addition, greater risks are involved under
time-and-materials contracts than under cost-reimbursement contracts because
AverStar assumes the responsibility for the delivery of specified skills at a
fixed hourly rate. AverStar's management believes that adequate reserves for its
fixed-price and time-and-materials contracts are reflected in its financial
statements.
AverStar recognizes revenues on government and commercial contracts under
the percentage-of-completion method. This method involves a periodic assessment
of the estimated total cost to complete each contract. The
percentage-of-completion method is determined by relating the actual costs
incurred to date to the estimated total costs at completion. The cumulative
effects resulting from revisions of estimated total costs and revenues are
recorded in the period in which the facts requiring revisions become known. When
a loss is anticipated on a contract, the full amount of the anticipated loss is
provided for at that time.
80
<PAGE>
Revenues from standard software products are recognized upon shipment in
accordance with Statement of Position 97-2, "Software Revenue Recognition," as
amended by the Statement of Position 98-4. Revenues from maintenance agreements
are deferred and amortized over the life of the maintenance agreements.
AverStar's royalty income is derived from licensing agreements that AverStar has
with commercial companies. Typically, the amount of AverStar's royalty income is
based on a percentage of AverStar's customer's revenues for the products that
incorporate AverStar's technology. Per unit royalties earned from the license of
standard software products are recognized when received from the customer.
AverStar's royalty income does not represent a significant portion of its
revenues.
RESULTS OF OPERATIONS. The following table sets forth, for each period
indicated, the percentage of items in the consolidated statement of operations
in relation to revenues and the percentage increase (decrease) of each item for
the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
--------------------------------------------------------------------------
TWELVE TWELVE TWELVE THREE
MONTHS TEN MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
FEBRUARY 28, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1997 1998 1999 2000
------------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues............. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..... 76.4 77.7 77.3 78.7 79.4
Selling, general &
administrative
expense............ 21.1 19.4 17.0 15.7 14.6
----- ----- ----- ----- -----
Income from
operations......... 2.5 2.9 5.7 5.6 6.1
Interest expense,
net................ 2.4 2.2 1.9 2.5 2.1
Offering expense..... -- -- -- 0.5 --
----- ----- ----- ----- -----
Income from
continuing
operations before
taxes.............. 0.1 0.7 3.8 2.6 4.0
Provision for income
taxes.............. -- 0.3 1.8 1.2 1.8
----- ----- ----- ----- -----
Net income from
continuing
operations......... 0.1 0.4 2.0 1.4 2.2
Loss from
discontinued
operations......... -- (3.2) (4.2) -- --
Net income (loss).... 0.1 (2.8) (2.2) 1.4 2.2
<CAPTION>
PERIOD TO PERIOD INCREASE (DECREASE)
------------------------------------------------------------
FEBRUARY 28, DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1997 1998 1999
COMPARED TO COMPARED TO COMPARED TO COMPARED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999 2000
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues............. 1% 126% 52% 27%
Cost of revenues..... 2 125 55 27
Selling, general &
administrative
expense............ (7) 98 40 44
Income from
operations......... 17 341 50 (7)
Interest expense,
net................ (6) 88 102 90
Offering expense..... -- -- 100 --
Income from
continuing
operations before
taxes.............. 682 1,207 6 (59)
Provision for income
taxes.............. 756 1,308 5 (59)
Net income from
continuing
operations......... 633 1,129 6 (58)
Loss from
discontinued
operations.........
Net income (loss)....
</TABLE>
FISCAL PERIODS ENDED DECEMBER 31, 1997, DECEMBER 31, 1998, AND DECEMBER 31, 1999
REVENUES. For the 12 months ended December 31, 1999, AverStar's revenues
were $184.3 million compared to $121.1 million for the 12 months ended
December 31, 1998 and $53.6 million for the 10 months ended December 31, 1997,
representing a 244% increase over this period. Of the approximately $68 million
increase in revenues from December 31, 1997 to December 31, 1998, approximately
$39 million, or 57% of the increase, was the result of the acquisition of Pacer
which became effective February 27, 1998. Approximately $12 million, or 18% of
the increase, resulted from AverStar winning two contracts with the United
States Postal Service in mid-1997. AverStar benefited from the first full-year
effect of these contracts in 1998. The increased work under a contract awarded
by NASA in 1996 accounted for approximately $9 million, or 13% of the increase.
Revenues were also positively affected by increased business with commercial
customers, by new contracts with the National Institute of Health and the United
States Navy and by increased royalty income. Of the approximately $63 million
increase from December 31, 1998 to December 31, 1999, approximately $41 million
or 65% of the increase was the result of the acquisition of CBSI which became
effective March 18, 1999.
81
<PAGE>
Approximately $7.5 million, or 12% of the increase, was attributable to the
inclusion of 12 months of Pacer's operations during 1999 compared to 10 months
in 1998. The remaining $14.5 million, or 23% of the increase, was a result of
internal growth and further expansion of the contracts listed above.
COST OF REVENUES. For the 12 months ended December 31, 1999, AverStar's
cost of revenues was $145.1 million compared to $93.6 million for the 12 months
ended December 31, 1998 and $41.7 million for the 10 months ended December 31,
1997, representing a 248% increase over this period. The increase primarily
resulted from higher labor costs to support a larger number of contracts due to
the acquisitions of Pacer and CBSI. As a percentage of revenues, cost of
revenues has not changed significantly: 78.7% for the period ended December 31,
1999, 77.3% for the period ended December 31, 1998 and 77.7% for the period
ended December 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the 12 months ended
December 31, 1999, AverStar's selling, general and administrative expense,
including amortization expense, was $28.9 million compared to $20.6 million for
the 12 months ended December 31, 1998, and $10.4 million for the 10 months ended
December 31, 1997, representing an increase of $18.5 million, or 178%, over this
period. This increase is attributed to increased staff related to the
acquisition of Pacer and CBSI, and additional hiring of sales and marketing
staff. In addition, over this period, amortization expense increased from
$150,000 for the 10 months ended December 31, 1997 to $3.5 million for the
12 months ended December 31, 1999 due to the acquisitions of Pacer and CBSI. As
a percentage of revenues, SG&A expense decreased to 16% in the 12 months ended
December 31, 1999, from 17% in the 12 months ended December 31, 1998 and from
19% in the 10 months ended December 31, 1997, primarily because SG&A expense was
spread over a larger revenue base in 1999.
INCOME FROM OPERATIONS. For the 12 months ended December 31, 1999,
AverStar's income from operations was $10.3 million compared to $6.9 million for
the 12 months ended December 31, 1998, and $1.6 million for the 10 months ended
December 31, 1997, representing a 544% increase over this period. Of the
$8.7 million increase in income from operations over this period, approximately
$4.3 million of the increase was attributable to the acquisition of Pacer,
$3.3 million was attributable to the acquisition of CBSI, and $4.6 million was
attributable to internal growth. These increases were offset by $3.5 million of
amortization related to the acquisitions of Pacer and CBSI.
NET INCOME FROM CONTINUING OPERATIONS. For the 12 months ended
December 31, 1999, net income from continuing operations was $2.6 million
compared to $2.4 million for the 12 months ended December 31, 1998 and $198,000
for the 10 months ended December 31, 1997. The increase in net income from
continuing operations of $2.4 million over this period resulted from the
increase in income from operations of $8.7 million offset by a $3.4 million net
increase in interest expense, a one time offering expense of $845,000 and an
increase in taxes of $2.1 million. The increase in interest expense is
attributed to additional borrowing to partially fund the acquisition of Pacer
and CBSI and to support working capital needs. The increase in taxes resulted
from the increased operating income.
NET INCOME. For the 12 months ended December 31, 1999, AverStar's net
income was $2.6 million, compared to a net loss of $2.7 million for the
12 months ended December 31, 1998, and net loss of $1.5 million for the
10 months ended December 31, 1997. The net loss for 1998 resulted from income
from continuing operations of $2.4 million offset by a net loss from the
discontinued operations of $2.5 million and by a net loss on the disposal of
discontinued operations of $2.6 million. Similarly, the net loss for the ten
months ended December 31, 1997 was the result of income from continuing
operations of $198,000 and a net loss from discontinued operations of
$1.7 million.
LIQUIDITY AND CAPITAL RESOURCES. In March 1999, AverStar refinanced its
outstanding debt in conjunction with the purchase of CBSI. AverStar obtained a
$75.0 million credit facility from a group of lenders led by First Union
Commercial Corporation. This facility comprised $45.0 million in senior debt and
$30.0 million in revolving credit. In addition, AverStar maintains a
$5.0 million subordinated
82
<PAGE>
debt agreement, which AverStar obtained in August 1995, with MassMutual.
AverStar's total debt capacity has a face value of $80 million. At December 31,
1999, AverStar's outstanding debt under these agreements was approximately
$57.1 million. The availability of approximately $20.6 million under the
revolving credit agreement is subject to covenants and collateral limitations.
At December 31, 1999, about $20.0 million of additional borrowing under the
revolving credit facility was available to AverStar based on the covenants and
limitations. AverStar's First Union Credit Facility is secured by the stock of
AverStar's subsidiaries, AverStar's accounts receivable and substantially all
AverStar's other assets. The agreements expire in March 2004 and March 2005.
Loans outstanding under these agreements bear interest at variable rates
generally based on LIBOR approximating 8.5% per year.
BACKLOG. Backlog represents management's estimate of AverStar's aggregate
realizable revenues over the term of all of AverStar's contracts, including any
option periods. However, backlog is not necessarily indicative of future
revenues. AverStar's contract backlog was approximately $350 million as of
December 31, 1999. AverStar's backlog is composed of:
- Customer authorized contract values for which the customer has set aside,
appropriated or committed funds for specifically identified services,
products, tasks or delivery orders; and
- Management's estimate, based on AverStar's past experience and long-term
relationships with many of AverStar's customers, of the realizable
contract values for all expected future services, products, tasks or
delivery orders under our commercial contracts and single agency,
Government Service Administration Schedule, multiple award and
government-wide acquisition contracts, for which funds have not yet been
set aside, appropriated or committed, even if our customer is not
obligated to request any services under a contract.
The actual timing of AverStar's receipt of revenues, if any, on projects
included in its backlog could change because many factors affect the scheduling
of projects. In addition, cancellations or adjustments to contracts may occur.
AverStar's backlog is subject to large variations from quarter to quarter as
existing contracts are renewed or new contracts are awarded. Additionally,
virtually all of AverStar's backlog represents contracts with the United States
government which may be terminated at any time for any reason.
DISCONTINUED OPERATIONS. In August 1997, AverStar combined its computer and
video game business with the operations of Looking Glass Technologies, Inc. to
form Intermetrics Entertainment Software, LLC, or IES. After the combination,
AverStar owned 66% of IES and consolidated the results of IES' operations with
AverStar's operations for AverStar's financial reporting purposes. In
December 1998, AverStar approved a plan of divestiture of IES by means of a
distribution of AverStar's interest in IES to AverStar's stockholders. AverStar
completed the distribution in March 1999. Please see note 3 to AverStar's
consolidated financial statements. As part of AverStar's plan of divestiture,
AverStar structured financial arrangements with IES that included the conversion
of $1.3 million of capital contributed to IES into a term loan, and the
establishment of a $2.0 million revolving credit facility for use by IES through
December 31, 1999. The term loan is equal to AverStar's capital contributed to
IES, reduced by the operating losses of IES during AverStar's ownership period.
AverStar converted the contributed capital to a term loan because the term loan
provides it with the possibility to recover some of the advances AverStar made
to IES without creating adverse tax consequences. The revolving credit facility
obligates AverStar to advance up to $2.0 million to IES through December 31,
1999. These advances must be made available at any time, for any amount up to
$2.0 million, as long as IES has not filed for bankruptcy and is not in the
process of liquidation or the equivalent. Amounts advanced under the term loan
and revolving credit facility and an additional $400,000 in term loans mature on
December 31, 2001. If not prepaid, AverStar will pursue collection of all
amounts due. However, AverStar presently does not believe that it will be
successful in its collection efforts.
83
<PAGE>
As a result of the plan of divestiture approved by AverStar in
December 1998 and completed in March 1999, AverStar has accounted for its
investment in IES as a discontinued operation in 1997 and 1998. For the five
months ended December 31, 1997, IES recorded revenues of $1.9 million and a net
loss from operations of $1.7 million. For the twelve months ended December 31,
1998, IES recorded revenues of $7.2 million and a net loss from operations of
$2.5 million. The increase in revenues in 1998 over 1997 was the result of a
full year of operations and a higher level of development activities supported
by advances of royalties from publishers of the games under development. The
increased loss in 1998 over 1997 is primarily attributable to the full year of
operations in 1998. The operating losses in both years were the result of the
increasing number of game development projects, for some of which the estimated
costs to complete the development exceeded the expected advances from
publishers, resulting in the recording of losses in current periods. The net
losses in both 1997 and 1998 are accounted for in AverStar's statement of
operations as losses from discontinued operations. In addition, AverStar
incurred a net loss from the disposal of IES of $2.6 million, $3.9 million on a
pre-tax basis, representing the write-off of $1.7 million of term loans,
$200,000 of professional fees, $500,000 of estimated operating losses through
the disposal date and the accrual of our remaining estimated funding commitment
of $1.5 million described in the preceding paragraph.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. AverStar's
exposure to market risk relates to changes in interest rates for borrowings
under its senior term loans and its revolving credit facility. These borrowings
bear interest at variable rates. The unsecured notes bear interest at a fixed
rate. Based on AverStar's borrowings during 1998, a hypothetical 10% increase in
interest rates would have increased AverStar's annual interest expense by
approximately $250,000 and would have decreased AverStar's annual cash flow from
operations by approximately $150,000.
IMPACT OF YEAR 2000. In late 1999, the Company completed its remediation
and testing of systems to determine that such systems were Year 2000 ready. As a
result of those planning and implementation efforts, the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company expensed approximately
$200,000 during 1999 in connection with remediating its systems. The Company is
not aware of any material problems resulting from Year 2000 issues, either with
its products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year 2000 to
ensure that any latent Year 2000 matters that may arise are addressed promptly.
PENDING ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued Statement No. 133 (FAS 133), "Accounting for Derivative
Investments and Hedging Activities," which required adoption for fiscal years
beginning after June 15, 1999. FAS 133 was subsequently amended by Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging activities--Deferral of the Effective Date of FASB Statement
No. 133," and now will be effective for fiscal years beginning after June 15,
2000, with earlier adoption permitted. The adoption of FAS 133 is not expected
to have a material impact on the results of operations or financial position of
AverStar.
In December 1999, the Securities Exchange Commission issued Staff Accounting
Bulletin 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements. On March 24, 2000, the SEC issued
an Amendment to SAB 101 (SAB 101A), delaying the effective date for certain
companies. AverStar will adopt SAB 101 in the second quarter of fiscal 2000 and
is presently analyzing what impact, if any, SAB 101 will have on the results of
operations or financial position of AverStar.
84
<PAGE>
THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
The results of operations for the three months ended March 31, 2000 include
the activity of MJR Associates, Inc., since the date of acquisition, March 10,
2000. The results of operations for the three months ended March 31, 1999
include the activity of Computer Based System, Inc., or CBSI, since the date of
acquisition, March 18, 1999.
REVENUES. For the three months ended March 31, 2000 AverStar's revenues were
$46.2 million compared to $36.3 million for the three months ended March 31,
1999. Of the $9.9 million increase, approximately $12.6 million related to the
acquisition of CBSI and approximately $1.2 million related to the acquisition of
MJR. These increases were offset by a reduction of approximately $3.9 million in
Year 2000 readiness services.
COST OF REVENUES. For the three months ended March 31, 2000 AverStar's cost
of revenues was $36.5 million compared to $28.8 million for the three months
ended March 31, 1999. The increase of $7.7 million is primarily attributable to
the CBSI and MJR acquisitions. As a percentage of revenues, cost of revenues was
essentially flat at 79.1% for the three months ended March 31, 2000 compared to
79.4% for the three months ended March 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended
March 31, 2000 AverStar's selling, general and administrative expense was $7.6
million compared to $5.3 million for the three months ended March 31, 1999, an
increase of $2.3 million. Amortization of goodwill increased to $968,000 for the
three months ended March 31, 2000, compared to $357,000 for the three months
ended March 31, 1999. This increase reflects three months of amortization for
CBSI and 21 days of amortization for MJR for the three months ended March 31,
2000 compared to 10 days of amortization for CBSI for the three months ended
March 31, 1999. The remaining increase of $1.7 million is associated with the
increase in staff from the CBSI and MJR acquisitions and growth in the sales and
marketing functions during 1999.
INCOME FROM OPERATIONS. For the three months ended March 31, 2000,
AverStar's income from operations was $2.0 million compared with $2.2 million
for the three months ended March 31, 1999. Income from operations related to
CBSI and MJR activities were approximately $1,053,000 and $173,000 for the three
months ended March 31, 2000, respectively, compared to none for the three months
ended March 31, 1999. This increase was offset by the increase in amortization
expense of $611,000, investment of approximately $300,000 in the development of
the eTective business and a reduction of approximately $500,000 in Year 2000
related services.
INCOME BEFORE INCOME TAXES. For the three months ended March 31, 2000.
AverStar's income before income taxes was $601,000 compared to $1.4 million for
the three months ended March 31, 1999. This decrease is attributable to the
lower income from operations and an increase in interest expense of $687,000 for
the three months ended March 31, 2000 compared to the three months ended
March 31, 1999. The increase in interest expense for the three months ended
March 31, 2000 resulted from additional borrowings to fund the acquisitions of
CBSI and MJR, and to support working capital requirements.
NET INCOME. For the three months ended March 31, 2000, AverStar's net income
was $331,000 compared to $792,000 for the three months ended March 31, 1999. The
income tax provision reflects a 45% effective tax rate for the three months
ended March 31, 2000 and 1999. The effective tax rate is higher than the
statutory rate of 40% primarily because of non-deductible amortization of
goodwill.
LIQUIDITY AND CAPITAL RESOURCES. In March 1999, AverStar obtained a $75.0
million credit facility from a group of lenders led by First Union Commercial
Corporation. This facility is comprised of $45.0 million in senior debt and
$30.0 million in revolving credit. In addition, AverStar maintains a $5.0
million subordinated debt agreement, which AverStar obtained in August 1995,
with MassMutual. AverStar's total debt capacity has a face value of $80 million.
At March 31, 2000, AverStar's outstanding debt under these agreements was
approximately $68.3 million. At March 31, 2000, approximately $8.7 million of
additional borrowing under the revolving credit facility was available to
AverStar based on the covenants and limitations. AverStar's First Union Credit
Facility is secured by the stock of AverStar's subsidiaries and substantially
all of AverStar's assets. The agreements expire in March 2004 and March 2005.
Loans outstanding under these agreements bear interest at variable rates
generally based on LIBOR (9% at March 31, 2000).
85
<PAGE>
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of AverStar's common stock as of May 19, 2000.
- Each of AverStar's directors and named executive officers;
- All of AverStar's directors and executive officers as a group; and
- Each person, or group of affiliated persons, who AverStar knows
beneficially owns 5% or more of the common stock.
In accordance with the SEC's rules, the following table gives effect to the
shares of common stock that could be issued upon the exercise of outstanding
options and warrants within 60 days of May 19, 2000. The following table also
gives effect to the shares of common stock that could be issued upon the
exercise of outstanding options that will become fully vested upon the closing
of this offering. Unless otherwise indicated in the footnotes to the table, the
following individuals have sole voting and sole investment control with respect
to the shares they beneficially own.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF BEFORE THE
BENEFICIAL OWNER SHARES MERGER
- ---------------- --------- ----------
<S> <C> <C>
DIRECTORS AND OFFICERS:+
Michael B. Alexander(1)..................................... 1,119,854 13.7%
John C. Rennie(2)........................................... 320,908 3.9
Joseph A. Saponaro(3)....................................... 281,328 3.5
Sigmund H. Goldblum(4)...................................... 138,510 1.7
Peter M. Schulte(5)......................................... 73,176 0.9
Joel N. Levy(5)(6).......................................... 54,882 0.7
Peter J. Dwyer(7)........................................... 73,510 0.9
Mary Ann Gilleece........................................... -- *
All Directors and Executive Officers as a group (10
persons)(8)............................................... 2,062,168 25.3%
OTHER 5% STOCKHOLDERS:
J. Fernando Niebla(9)....................................... 672,315 8.2%
Richards Capital Fund, L.P.(10)............................. 548,817 6.7
AFH Partners(11)............................................ 537,841 6.6
Massachusetts Mutual Life Insurance Company
--Pension Management(12).................................. 276,695 3.4
Massachusetts Mutual Life Insurance Company
--IMF Traditional(12)..................................... 276,695 3.4
MassMutual Corporate Investors(12).......................... 147,499 1.8
MassMutual Corporate Value Partners (Gerlach & Co.)(12)..... 147,499 1.8
MassMutual Participation Investors(12)...................... 73,748 0.9
</TABLE>
- ------------------------
* Less than 1%
+ Unless otherwise indicated, the address of AverStar's directors and
officers is c/o AverStar, Inc., 23 Fourth Avenue, Burlington, Massachusetts
01803.
(1) Includes options to purchase 387,831 shares of common stock for $1.37 per
share. Includes 537,841 shares of common stock held by AFH Partners.
Includes 267 shares of common stock held for the benefit of Mr. Alexander
in the AverStar Profit Sharing & Savings Plan.
86
<PAGE>
(2) Includes options to purchase 24,453 shares of common stock at $3.78 per
share. Includes 2,978 shares of common stock held in the Pacer Infotec
Employee Stock Bonus Plan, or ESBP, for the benefit of Mr. Rennie and 51
shares of common stock held for the benefit of Mr. Rennie in the AverStar
Profit Sharing and Savings Plan.
(3) Includes options to purchase 116,349 shares of common stock for $1.37 per
share. Includes 334 shares of common stock held for the benefit of
Mr. Saponaro in the AverStar Profit Sharing & Savings Plan.
(4) Includes options to purchase 48,906 shares of common stock at $3.78 per
share. Includes 2,943 shares of common stock held for the benefit of
Mr. Goldblum in the ESBP and 51 shares of common stock held for the benefit
of Mr. Goldblum in the AverStar Profit Sharing and Savings Plan.
(5) Excludes approximately 179,062 additional shares of AverStar common stock
to be received by Messrs. Levy and Schulte pursuant to the conversion of
all classes of AverStar common stock into one class of common stock as
required by AverStar's certificate of incorporation and stockholders
agreement. The address of Messrs. Levy and Schulte is CM Equity Partners,
135 East 57th Street, 27th Floor, New York, New York 10022.
(6) Includes 54,882 shares of common stock owned by Levy Family 2/14/96 Limited
Partnership, of which Mr. Levy is the general partner.
(7) Includes 334 shares of common stock held for the benefit of Mr. Dwyer in
the AverStar Profit Sharing and Savings Plan.
(8) Includes options to purchase 580,539 shares of common stock.
(9) The address of Mr. Niebla is 7524 Saddlehill Trail, Orange, California
92869.
(10) The general partner of Richards Capital Fund L.P. is Richards Managers
L.P. The general partner of Richards Managers L.P. is Richards LLC. The
address of Richards Capital Fund L.P. is c/o James C. Richards, 303
Peachtree Street, N.E., Suite 4100, Atlanta, GA 30308.
(11) Mr. Alexander is the President of Bronto, Inc., which is the general
partner of AFH Partners. The address of AFH Partners is c/o Bronto, Inc.,
127 Farm Road, Sherborn, Massachusetts 01770.
(12) The address of these stockholders is c/o Michael P. Hermsen, CFA,
MassMutual Life Insurance Co., 1295 State Street, Springfield,
Massachusetts 01111.
87
<PAGE>
OWNERSHIP OF TITAN COMMON STOCK
The following table presents information regarding the beneficial ownership
of Titan common stock as of May 19, 2000, and as adjusted to reflect the
issuance by Titan of 3,862,281 shares of common stock in connection with the
merger, using an assumed exchange ratio of .47028, by stockholders that include:
- each person known by Titan to be the beneficial owner of more than 5% of
the outstanding Titan common stock;
- each person or entity known by Titan to be a beneficial owner of AverStar
common stock that would become a beneficial owner of more than 5% of the
outstanding Titan common stock as a result of the merger;
- each director of Titan;
- Titan's chief executive officer and the four most highly compensated
executive officers of Titan in 1999 other than the chief executive
officer;
- the directors and executive officers of AverStar who are expected to serve
as directors or executive officers of Titan following completion of the
merger; and
- all such directors and executive officers of Titan and AverStar as a
group.
The information in the following table concerning ownership of Titan common
stock after the merger assumes an exchange ratio of .47028, which is based on
the average of closing sale prices of the Titan common stock on the NYSE for the
ten consecutive trading days ending two trading days before May 19, 2000 and an
AverStar stock value of $17.97.
<TABLE>
<CAPTION>
BEFORE THE MERGER AFTER THE MERGER
----------------------------- ----------------------------------
SHARES SHARES
NAME AND ADDRESS BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE
OF BENEFICIAL OWNER(1) OWNED(2) OF CLASS(3) OWNED(2) OF CLASS(3)
- ---------------------- ------------ ----------- ----------------- -----------
<S> <C> <C> <C> <C>
Michael B. Alexander.......................... -- * 514,094(4) *
Charles R. Allen.............................. 47,420(5) * 47,420(5) *
Mellon C. Baird............................... 250,137(6) * 250,137(6) *
Herbert L. Bradley............................ 11,033(7) * 11,033(7) *
Joseph F. Caligiuri........................... 38,500(8) * 38,500(8) *
Eric M. DeMarco............................... 106,924(9) * 106,924(9) *
Daniel J. Fink................................ 37,584(10) * 37,584(10) *
Robert I. Hanisee............................. 55,419(11) * 55,419(11) *
Robert E. La Blanc............................ 30,500(12) * 30,500(12) *
David P. Porreca.............................. 8,020(13) * 8,020(13) *
Thomas G. Pownall............................. 62,048(14) * 62,049(14) *
Gene W. Ray................................... 809,748(15) 1.58% 809,748(15) 1.47%
George Robinson............................... 159,123 * 159,123 *
James E. Roth................................. 12,500(16) * 12,500(16) *
All directors and executive officers as a
group (19 persons before the merger and 20
persons after the merger)................... 1,984,128(17) 3.80% 2,498,222(17) 4.44%
</TABLE>
- ------------------------
* Less than 1%.
(1) Except as otherwise provided, the address of each owner is c/o The Titan
Corporation, 3033 Science Park Road, San Diego, California 92121.
88
<PAGE>
(2) The information regarding beneficial ownership of Titan common stock has
been presented according to rules of the SEC and is not necessarily
indicative of beneficial ownership for any other purpose. Under the SEC
rules, beneficial ownership of Titan common stock includes any shares as to
which a person has sole or shared voting power or investment power and also
any shares which a person has the right to acquire within 60 days through
the exercise of any stock option or other right. Under California and some
other state laws, personal property owned by a married person may be
community property that either spouse may manage and control. Titan has no
information as to whether any shares shown in this table are subject to
such community property laws.
(3) Percentage of beneficial ownership as to any person as of a particular date
is calculated by dividing the number of shares beneficially owned by that
person by the sum of the number of shares outstanding as of such date and
the number of shares as to which that person has the right to acquire
voting or investment power with respect to their shares. Information with
respect to beneficial owners of more than 5% of the common stock is based
upon the most recent Schedule 13D or Schedule 13G on file with the SEC.
(4) Includes outstanding options to purchase 182,356 shares of Titan common
stock that are exercisable within 60 days, after giving effect to the
merger. Includes 243,735 shares held by AFH Partners after giving effect to
the merger. Mr. Alexander is the President of Bronto, Inc., which is the
general partner of AFH Partners. The address of AFH Partners is c/o Bronto,
Inc., 127 Farm Road, Sherborn, MA 01770.
(5) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 27,500 shares.
(6) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 249,502 shares and 635 shares held by the trustees of Titan's
401(k) Retirement Plan and Employee Stock Ownership Plan.
(7) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 10,000 shares and 1,033 shares held by the trustees of Titan's
401(k) Retirement Plan and Employee Stock Ownership Plan.
(8) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 22,500 shares.
(9) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 90,000 shares and 2,023 shares held by the trustees of Titan's
401(k) Retirement Plan and Employee Stock Ownership Plan.
(10) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 27,500 shares.
(11) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 2,500 shares.
(12) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 22,500 shares.
(13) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 7,500 shares and 520 shares held by the trustees of Titan's
401(k) Retirement plan and Employee Stock Ownership Plan.
(14) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 21,250 shares.
89
<PAGE>
(15) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 501,400 shares and 86,826 shares held by the trustees of
Titan's 401(k) Retirement Plan and Employee Stock Ownership Plan.
(16) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 2,500 shares.
(17) Includes outstanding options exercisable within 60 days after May 19, 2000
to purchase 1,280,777 shares before the merger and outstanding options to
purchase 1,463,133 shares that are exercisable within 60 days, after
giving effect to the merger and 140,671 shares held by the trustees of
Titan's 401(k) Retirement Plan and Employee Stock Ownership Plan.
90
<PAGE>
DESCRIPTION OF TITAN CAPITAL STOCK
Titan's authorized capital stock currently consists of 100,000,000 shares of
common stock, par value $.01 per share, of which 50,737,637 shares were
outstanding as of May 19, 2000, and 2,500,000 shares of preferred stock, par
value $1.00 per share. Of the 2,500,000 authorized shares of Titan preferred
stock, 250,000 shares have been designated as series A junior participating
preferred stock, none of which have been issued as of the date hereof, and
1,068,102 shares have been designated as $1.00 cumulative convertible preferred
stock, $1.00 par value per share, 692,900 of which were issued and outstanding
as of May 19, 2000. If passed by the required number of votes at Titan's annual
meeting to be held on May 30, 2000, Titan will amend its certificate of
incorporation to increase the number of authorized shares of Titan's common
stock to 200,000,000 and to increase the number of authorized shares of Titan
preferred stock to 5,000,000.
The following summary description of Titan's capital stock and its
shareholder rights plan is not complete and is subject to the provisions of the
Titan certificate of incorporation and bylaws, the rights agreement described
below and the provisions of applicable law. Copies of these documents have been
filed as part of, or incorporated by reference as exhibits to, the registration
statement of which this proxy statement/prospectus is a part and may be obtained
as described under "Where You Can Find More Information."
COMMON STOCK
DIVIDENDS. Subject to the right of the holders of any class of preferred
stock, holders of shares of Titan common stock are entitled to receive dividends
that may be declared by Titan's board of directors out of legally available
funds. No dividend may be declared or paid in cash or property on any share of
any class of common stock unless sumultaneously the same dividend is declared or
paid on each share of that and every other class of common stock; provided,
that, in the event of stock dividends, holders of a specific class of common
stock shall be entitled to receive only additional shares of that class.
VOTING RIGHTS. Holders of Titan common stock are entitled to one vote for
each share held. Holders do not have cumulative voting rights.
LIQUIDATION RIGHTS. Upon Titan's liquidation, dissolution or winding-up,
the holders of Titan common stock are entitled to share ratably in all assets
avaible for distribution after payment in full to creditors and holders of Titan
preferred stock, if any.
OTHER PROVISION. The holders of Titan common stock are not entitled to
preemptive or similar rights.
PREFERRED SHARE PURCHASE RIGHTS
Each outstanding share of Titan common stock has or will have attached to it
one preferred share purchase right, which we refer to as a right. Each right
entitles the registered holder of common stock to purchase from Titan, upon the
occurrence of specified events, one one-hundredth of a share of series A junior
participating preferred stock of Titan, which we refer to as the participating
preferred shares, at a price of $42 per one one-hundredth of a participating
preferred share, subject to adjustment. The terms of the rights are set forth in
a rights agreement dated as of August 21, 1995 between Titan and American Stock
Transfer and Trust Company, as rights agent.
Until the distribution date described below, Titan will not issue separate
certificates evidencing the rights. Until that date, the rights will be
evidenced, with respect to any common stock certificate, by
91
<PAGE>
that common stock certificate. The rights will detach from the common stock and
a distribution date will occur upon the earlier of the following dates:
- subject to the exceptions described below, the tenth day following a
public announcement that an "acquiring person," which, subject to the
exceptions listed in the following sentence, includes a person or "group"
of affiliated or associated persons, has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding common
stock, or
- the tenth day following the commencement, or the first public announcement
by any person or group of an intention to commence, a tender offer or
exchange offer that would result in beneficial ownership by a person or
group of 15% or more of the outstanding common stock.
The Titan board of directors, with the concurrence of a majority of the
continuing directors, may postpone the distribution date by determining a later
distribution date before the time any person or group becomes an acquiring
person. Any board member who is not an acquiring person or an affiliate or
associate of an acquiring person, or an employee, director, representative,
nominee or designee of an acquiring person, or its affiliate or associate, but
who:
- was a member of the Titan board of directors before any person becomes an
acquiring person; or
- became a member of the Titan board of directors after any person becomes
an acquiring person if the member was nominated for election or elected to
the Titan board of directors upon the recommendation or approval of a
majority of the continuing directors,
is considered to be a continuing director of Titan.
The term "acquiring person" does not include Titan, any subsidiary of Titan,
any employee benefit plan of Titan or of any subsidiary of Titan, or any entity
holding Titan common stock for or under an employee benefit plan of Titan or any
of its subsidiaries. In addition, a person who would otherwise be an acquiring
person will not be considered an acquiring person if the Titan board of
directors determines in good faith that such person inadvertently became the
beneficial owner of 15% or more of the Titan common stock and such person
divests itself, as promptly as practicable, of beneficial ownership of a
sufficient number of shares of Titan common stock so that it would no longer
otherwise qualify as an acquiring person.
The rights agreement provides that, until the distribution date, or earlier
redemption or expiration of the rights, the rights will be transferred only with
the Titan common stock. The rights will be evidenced, with respect to any common
stock certificate outstanding as of September 7, 1995, by that common stock
certificate with a summary of the rights attached to it. Until the distribution
date, or earlier redemption or expiration of the rights, new common stock
certificates issued after September 7, 1995 upon transfer or new issuances of
common stock will contain a notation incorporating the rights agreement by
reference. Until the distribution date, the surrender for transfer of any
certificates for common stock, even without a summary of the rights attached to
it, also will constitute the transfer of the rights associated with the common
stock represented by that certificate. As soon as practicable after the
distribution date, separate certificates evidencing the rights will be mailed to
holders of record of the Titan common stock as of the close of business on the
distribution date, and the separate right certificates alone will evidence the
rights. Only Titan common stock issued before the distribution date will be
issued with rights.
The rights are not exercisable until the distribution date. The rights will
expire on August 17, 2005, unless the expiration date is extended or unless the
rights are earlier redeemed or exchanged by Titan, in each case as described
below.
The purchase price payable for the participating preferred shares, and the
number of participating preferred shares or other securities or property
issuable, upon exercise of the rights, as well as the
92
<PAGE>
number of rights outstanding, are subject to adjustment from time to time to
prevent dilution in the following circumstances:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of the participating preferred shares,
- upon the grant to holders of the participating preferred shares of rights
or warrants to subscribe for or purchase participating preferred shares at
a price, or securities convertible into participating preferred shares
with a conversion price, less than the current market price of the
participating preferred shares, or
- upon the distribution to holders of the participating preferred shares of
evidences of indebtedness, securities or assets, excluding regular
periodic cash dividends at a rate not in excess of 125% of the last cash
dividend paid or, in the case that regular cash dividends have not been
paid, at a rate not in excess of 50% of the average net income per share
of the four quarters ended immediately before the payment of the dividend,
or dividends payable in participating preferred shares or of subscription
rights or warrants, other than those referred to above.
The number of outstanding rights and the number of one one-hundredths of a
participating preferred share issuable upon exercise of each right are also
subject to adjustment in the event of a dividend or other distribution on the
common stock payable in common stock or subdivisions, consolidations or
combinations of Titan common stock occurring, in any of those cases, before the
distribution date.
Participating preferred shares purchasable upon exercise of the rights will
not be redeemable. Each participating preferred share will be entitled to a
minimum preferential quarterly dividend payment of $1.00 per share, but will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of Titan common stock. If there is a liquidation, the holders of the
participating preferred shares will be entitled to a minimum preferential
liquidation payment of $100 per share, but will be entitled to an aggregate
payment of 100 times the payment made per share of Titan common stock. Each
participating preferred share will have 100 votes, voting together with the
Titan common stock. If there is a merger, consolidation or other transaction in
which Titan common stock is exchanged, each participating preferred share will
be entitled to receive 100 times the amount received per share of Titan common
stock. These rights are protected by customary antidilution provisions.
Because of the nature of the dividend, liquidation and voting rights of the
participating preferred shares, the value of the one one-hundredth interest in a
participating preferred share purchasable upon exercise of each right should
approximate the value of one share of Titan common stock.
If any person or group becomes an acquiring person, except pursuant to
specified cash offers for all outstanding shares of Titan common stock approved
by the Titan board of directors, or if Titan is the surviving corporation in a
merger with an acquiring person or any affiliate or associate of an acquiring
person and Titan common stock is not changed or exchanged, proper provision will
be made so that each holder of a right, other than rights beneficially owned by
the acquiring person, which will become null and void, will have the right to
receive upon exercise of the right at the then-current market price, instead of
participating preferred shares, that number of shares of Titan common stock
having a market value of two times the exercise price of the right. If Titan
does not have sufficient common stock issued but not outstanding, or authorized
but unissued, to permit the exercise in full of the rights, Titan will be
required to take all action necessary to authorize additional common stock for
issuance upon exercise of the rights. If, after a good-faith effort, Titan is
unable to take all necessary action, Titan will substitute, for each share of
common stock that would otherwise be issuable upon exercise of a right, a number
of participating preferred shares, or fractional participating preferred shares,
with the same market value as that share of common stock.
93
<PAGE>
If, after a person or group has become an acquiring person, Titan is
acquired in a merger or other business combination transaction or 50% or more of
its consolidated assets or earning power are sold, proper provision will be made
so that each holder of a right, other than rights beneficially owned by the
acquiring person, which will become null and void, will have the right to
receive, upon the exercise of the right at its then-current exercise price and
instead of participating preferred shares, that number of shares of common stock
of the acquiring company, or its parent, which at the time of the transaction
will have a market value of two times the exercise price of the right.
The exercise price of a right at any date will be equal to the purchase
price at that date multiplied by the number of one one-hundredths of a
participating preferred share for which a right is exercisable at that date.
At any time after any person or group becomes an acquiring person and before
the acquisition by that person or group of 50% or more of the outstanding Titan
common stock, the Titan board of directors may exchange the rights, in whole or
in part, for a number of shares of Titan common stock, per right, having an
aggregate value equal to the excess of the value of the shares of Titan common
stock issuable upon exercise of a right after a person or group becomes an
acquiring person over the purchase price, subject to adjustment. The Titan board
of directors will not exchange the rights owned by the acquiring person or
group, which will have become null and void.
With specified exceptions, no adjustments in the purchase price for the
preferred shares will be required until cumulative adjustments require an
adjustment of at least 1% of that purchase price. No fractional participating
preferred shares will be issued, other than fractions which are integral
multiples of one one-hundredth of a participating preferred share, which may, at
the election of Titan, be evidenced by depositary receipts. Instead of issuing
fractional participating preferred shares, Titan will make an adjustment in cash
based on the market price of the participating preferred shares on the last
trading day before the date of exercise.
Upon approval by its board of directors, Titan may redeem the rights, in
whole, but not in part, at a price of $.01 per right at any time until ten days
following the public announcement that a person or group has become an acquiring
person. The Titan board of directors, with the concurrence of a majority of the
continuing directors, may extend the period during which the rights are
redeemable beyond the ten days following the public announcement that a person
or group has become an acquiring person. Under circumstances described in the
rights agreement, the decision to redeem will require the concurrence of a
majority of the continuing directors. Immediately upon the determination of the
Titan board of directors to redeem the rights, Titan will make an announcement
of the redemption. Upon the redemption, the right to exercise the rights will
terminate and the only right of right holders will be to receive the redemption
price.
Until a right is exercised, the holder of the right, in the capacity of a
holder, will have no rights as a stockholder of Titan, including, without
limitation, the right to vote or to receive dividends. Although the distribution
of the rights will not be taxable to stockholders or to Titan, stockholders may,
depending upon the circumstances, recognize taxable income in the event that the
rights become exercisable for Titan common stock or other consideration, or for
common stock of the acquiring company or its parent as set forth above.
Any of the provisions of the rights agreement may be amended or supplemented
by the Titan board of directors before the distribution date. From and after the
distribution date, Titan and the rights agent may amend or supplement the rights
agreement from time to time without the approval of any holders of rights
- to cure any ambiguity, to correct or supplement any defective or
inconsistent provisions,
94
<PAGE>
- to shorten or lengthen any time period under the rights agreement relating
to when the rights may be redeemed, so long as, under specified
circumstances, a majority of the continuing directors approve the
shortening or lengthening, or
- to make any other provisions with respect to the rights which Titan and
the rights agent may deem necessary or desirable.
Notwithstanding this right to amend or supplement, from and after the
distribution date, the rights agreement may not be amended in any manner which
would adversely affect the interest of the holders of rights.
PREFERRED STOCK
Under the Titan certificate of incorporation, the board of directors has the
authority, without further action by Titan stockholders, to issue up to
2,500,000 shares of preferred stock in one or more series and to fix the voting
powers, designations, preferences and the relative participating, optional or
other special rights and qualifications, limitations and restrictions of each
series, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series. Of the preferred stock currently outstanding, the board of directors has
fixed the terms of the participating preferred shares issuable upon exercise of
the rights and the $1.00 cumulative convertible preferred stock. Because the
board of directors has the power to establish the preferences and rights of the
shares of any additional series of preferred stock, it may afford holders of any
preferred stock preferences, powers and rights, including voting rights, senior
to the rights of holders of the common stock, which could adversely affect the
holders of the common stock.
CUMULATIVE CONVERTIBLE PREFERRED STOCK
DIVIDENDS. Each share of cumulative convertible preferred stock accrues
dividends at the rate of $1.00 per share per annum.
VOTING RIGHTS. Holders of Titan cumulative convertible preferred stock are
entitled to one-third of one vote for each share held. Holders do not have
cumulative voting rights.
LIQUIDATION RIGHTS. Upon Titan's liquidation, dissolution or winding-up,
the holders of cumulative convertible preferred stock are entitled to a
liquidation preference of $20 per share plus any unpaid cumulative dividends
before any distribution to holders of Titan common stock.
CONVERSION RIGHTS. Each outstanding share of cumulative convertible
preferred stock is convertible into Titan common stock, at the option of the
holder, at a rate of two-thirds shares of common stock for each share of
cumulative convertible preferred stock.
REDEMPTION. Each share of cumulative convertible preferred stock is
redeemable, but only at Titan's option, at a redemption price of $20 per share
plus any accrued and unpaid dividends.
OTHER PROVISIONS. The holders of Titan cumulative convertible preferred
stock are not entitled to preemptive or similar rights.
ANTI-TAKEOVER EFFECT OF TITAN'S BYLAW PROVISIONS
The Titan bylaws contain provisions that could make it more difficult to
consummate an acquisition of Titan by means of a tender offer, a proxy contest
or otherwise.
STOCKHOLDER ACTION BY WRITTEN CONSENT. The Titan bylaws provide that
stockholder action may be taken by written consent instead of a meeting, but
only upon compliance with advance notice and other procedural requirements
specified in the bylaws. Any Titan stockholder of record seeking to have the
stockholders authorize or take corporate action by written consent must, by
written notice to Titan's
95
<PAGE>
secretary, request the Titan board of directors to fix a record date for the
purpose of determining the stockholders entitled to consent to the action in
writing without a meeting. Within ten days of receiving the notice, the Titan
board of directors must adopt a resolution fixing the record date, which must
not precede, or be more than ten days after, the date of the resolution. If the
Titan board of directors does not fix a record date in this manner, the record
date:
- when no prior action by the Titan board of directors is required by
applicable law, will be the first date on which a signed written consent
describing the action taken or proposed to be taken is delivered to Titan;
or
- when prior action by the Titan board of directors is required by
applicable law, will be at the close of business on the date on which the
Titan board of directors adopts the resolution taking the prior action.
In addition, the bylaws provide that no stockholder action by written consent is
effective until nationally recognized inspectors of election certify to Titan
that the consents properly delivered to Titan represent at least the minimum
number of votes that would be necessary to take the corporate action. All
stockholder consents must be properly delivered to Titan within 60 days of the
date that the earliest dated written consent was received by Titan.
Compliance with these requirements or the failure of Titan stockholders to
satisfy any of the requirements could delay, prevent or invalidate stockholder
action.
STOCKHOLDER ADVANCE NOTICE PROCEDURE. The Titan bylaws establish an advance
notice procedure for stockholders to make nominations of candidates for election
as directors before an annual or special meeting of Titan stockholders or to
bring other business before an annual meeting of Titan stockholders. Titan
stockholders are not authorized to bring other business before a special meeting
of Titan stockholders and are only authorized to make nominations of candidates
for election as directors before a special meeting when the election of
directors at the special meeting has been authorized by or at the direction of
the Titan board of directors.
The stockholder notice procedures provide that only persons who are
nominated by or at the direction of the Titan board of directors or by a
stockholder who has given timely written notice to the secretary of Titan before
the meeting at which directors are to be elected will be eligible for election
as directors. The notices required for a stockholder to nominate a person for
election as a director at any annual meeting or at special meetings which the
Titan board of directors has determined that directors will be elected include
specified information about the stockholder and each proposed director nominee,
a description of all arrangements or understandings between the stockholder and
each proposed nominee and any other persons, other information regarding each
proposed nominee that would be required to be included in a proxy statement
filed under SEC rules and regulations, and the written consent of each proposed
nominee to serve as a director if elected. The stockholder notice procedure also
provides that the only business that may be conducted at an annual meeting is
business which has been brought before the meeting by, or at the direction of,
the board of directors or by a stockholder who has given timely written notice
to the secretary of Titan. This notice is required to include a brief
description of the business desired to be brought before the meeting, any
material interest of the stockholder in that business, and specified information
about the stockholder and the stockholder's ownership of Titan capital stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Titan is subject to section 203 of the Delaware General Corporation Law,
which, with specified exceptions, prohibits a Delaware corporation from engaging
in any "business combination" with any
96
<PAGE>
"interested stockholder" for a period of three years following the time that the
stockholder became an interested stockholder unless:
- before that time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon completion of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will he tendered in a tender or exchange
offer; or
- at or after that time, the business combination is approved by the board
of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Section 203 defines "business combination" to include the following:
- any merger or consolidation of the corporation with the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to specified exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- any receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, section 203 defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by that entity or person.
DIRECTOR LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law provides that a corporation may
eliminate or limit the personal liability of each director to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a director
except for liability for any breach of the director's duty of loyalty to the
corporation or its stockholders, for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, in respect of
unlawful dividend payments or stock redemptions or repurchases, and for any
transaction from which the director derives an improper personal benefit. The
Titan certificate of incorporation provides for the elimination and limitation
of the personal liability of directors for monetary damages to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
certificate of incorporation provides that if the Delaware General Corporation
Law is amended to authorize the further elimination or limitation of the
liability of a director, then the liability of the directors will be eliminated
or limited to the fullest extent permitted by the Delaware General Corporation
Law, as so amended. The effect of this provision is to eliminate the rights of
Titan and its stockholders, through stockholder derivative suits on behalf of
97
<PAGE>
Titan, to recover monetary damages against a director for breach of the
fiduciary duty of care as a director, including breaches resulting from
negligent or grossly negligent behavior, except in the situations described
above. The provision does not limit or eliminate the rights of Titan or any
stockholder to seek non-monetary relief such as an injunction or rescission upon
breach of a director's duty of care. This provision is consistent with
section 102(b)(7) of the Delaware General Corporation Law, which is designed,
among other things, to encourage qualified individuals to serve as directors of
Delaware corporations.
The Titan bylaws provide that, to the full extent permitted by Delaware
General Corporation Law, Titan will indemnify, and advance expenses to, each of
its currently acting and former directors and officers, employees and agents.
LISTING OF COMMON STOCK
The Titan common stock is listed on the New York Stock Exchange under the
symbol "TTN."
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company serves as transfer agent and
registrar for the Titan common stock.
98
<PAGE>
COMPARATIVE RIGHTS OF TITAN STOCKHOLDERS
AND AVERSTAR STOCKHOLDERS
AverStar is a Delaware corporation and a private company, and your rights as
an AverStar stockholder are governed by the Delaware General Corporation Law and
AverStar's certificate of incorporation, bylaws and the Stockholders Agreement
between AverStar and the stockholders listed therein. Following the merger,
AverStar stockholders will be common stockholders of Titan, which is a Delaware
corporation and a public company. Your rights as a Titan stockholder will
continue to be governed by the Delaware General Corporation Law, but also will
be governed by Titan's certificate of incorporation, bylaws and shareholder
rights agreement, which is referred to as the rights agreement. For more
information on Titan's organizational documents, see "Description of Titan
Capital Stock."
Significant differences, which Titan and AverStar believe are all the
material differences, between the rights of Titan stockholders and AverStar
stockholders are summarized below. This summary is not an exhaustive list or
detailed description of the provisions discussed and is qualified in its
entirety by Titan's certificate of incorporation, bylaws and rights agreement,
and AverStar's certificate of incorporation, bylaws and Stockholders Agreement,
each of which you should review carefully. Copies of these documents may be
obtained as described under "Where You Can Find More Information."
The following summary describes the rights of AverStar stockholders prior to
the consolidation of all classes of AverStar common stock into one class of
common stock. See "Terms of the Merger Agreement and Related
Transactions--General--Conversion of AverStar Common Stock." In addition, the
Stockholders Agreement will terminate upon the completion of the merger.
AUTHORIZED SHARES OF CAPITAL STOCK; DIVIDEND RIGHTS; OTHER DISTRIBUTIONS
TITAN. Titan's authorized capital stock currently consists of 100,000,000
shares of common stock, par value $.01 per share, and 2,500,000 shares of
preferred stock, par value $1.00 per share. As of May 19, 2000,
50,737,637 shares of Titan common stock were issued and outstanding. Under
Titan's certificate of incorporation, Titan's board of directors currently has
the authority, without further action by Titan stockholders, to issue up to
2,500,000 authorized shares of Titan preferred stock in one or more series and
to fix the voting powers, designations, preferences and the relative
participating, optional or other special rights and qualifications, limitations
and restrictions of each series, including dividend rights, conversion rights,
voting rights, terms of redemption, liquidation preferences and the number of
shares constituting any series. Of the authorized shares of Titan preferred
stock, Titan's board of directors has designated 250,000 shares as series A
junior participating preferred stock, none of which have been issued as of the
date hereof, and 1,068,102 shares as $1.00 cumulative convertible preferred
stock, of which 692,900 shares were issued and outstanding as of May 19, 2000.
For additional information on Titan's capital stock, see "Description of Titan
Capital Stock."
During the time that any series of Titan preferred stock is outstanding, if
the terms of the series so provide, no dividends may be declared or paid by
Titan's board of directors on Titan common stock, unless dividends on all
outstanding shares of the relevant class or series of Titan preferred stock for
the current and all past dividend periods have been declared and paid or
provision made for the payment of those dividends.
AVERSTAR. AverStar's authorized capital stock consists of 17,000,000 shares
of common stock, par value $.001 per share, of which 2,280,471 shares are
designated Voting Class A Common Stock, 105,190 shares are designated Non-Voting
Class A Common Stock, 1,867,808 shares are designated Voting Class B Common
Stock, 290,873 shares are designated share Non-Voting Class B Common Stock,
182,939 shares are designated Voting Class C Common Stock, 3,861,251 shares are
designated Voting Class D Common Stock, 756,608 shares are designated Non-Voting
Class D Common Stock, 91,470 shares are designated Voting Class E Common Stock,
6,000,000 shares are designated Voting Class F Common Stock and 756,608 shares
are designated Non-Voting Class G Common Stock. The remaining
99
<PAGE>
shares of common stock may be issued from time to time by the AverStar board of
directors in one or more series, with the designations, preferences, rights and
qualifications, limitations or restrictions as provided in a resolution adopted
by AverStar's board of directors. As of May 19, 2000, 1,824,382 shares of Voting
Class A Common Stock were issued and outstanding, 84,152 shares of Non-Voting
Class A Common Stock were issued and outstanding, 1,494,246 shares of Voting
Class B Common Stock were issued and outstanding, 232,698 shares of Non-Voting
Class B Common Stock were issued and outstanding, 146,352 shares of Voting
Class C Common Stock were issued and outstanding, 186,619 shares of Voting
Class D Common Stock were issued and outstanding, no shares of Non-Voting
Class D Common Stock were issued and outstanding, 73,176 shares of Voting
Class E Common Stock were issued and outstanding, 2,219,413 shares of Voting
Class F Common Stock were issued and outstanding and 605,286 shares of
Non-Voting Class G Common Stock were issued and outstanding.
Under certain circumstances, holders of certain classes of AverStar common
stock receive more than, and holders of certain other classes of AverStar common
stock receive less than, their pro rata share of distributions made on AverStar
common stock.
Certain classes of AverStar's common stock are subject to allocations, as
provided in AverStar's certificate of incorporation and Stockholders Agreement,
upon the occurrence of certain events, including the proposed merger.
VOTING RIGHTS
TITAN. Subject to the voting rights of holders of any then outstanding
Titan preferred stock, each share of Titan common stock is entitled to one vote
on each matter submitted to a vote of the stockholders of Titan. Shares of Titan
common stock are not entitled to any cumulative voting rights.
Each holder of Titan's $1.00 cumulative convertible preferred stock is
entitled to one-third vote per share of such stock. Holders of the common stock
and the $1.00 cumulative convertible preferred stock generally vote as a single
class.
AVERSTAR. The AverStar certificate of incorporation and bylaws provide that
the holders of Voting Class A Common Stock, Voting Class B Common Stock, Voting
Class C Common Stock, Voting Class D Common Stock, Voting Class E Common Stock
and Voting Class F Common Stock shall vote together as one class on all matters
presented to the stockholders. Each share of AverStar common stock is entitled
to one vote. Any non-voting common stock may be converted at any time at the
option of the holder for one share of voting common stock of the same class
except that each share of Class G Non-Voting Common Stock may be converted into
shares of Voting Class D Common Stock or shares of Non-Voting Class D Common
Stock at any time at the option of the holder, initially at a rate of one share
of Class D Common Stock for one share of Class G Common Stock, as such rate may
be adjusted from time to time by certain anti-dilution provisions. Shares of
AverStar common stock are not entitled to any cumulative voting rights.
PREEMPTIVE RIGHTS
TITAN. Titan common stock has no preemptive rights enabling a holder to
subscribe for or receive shares of any class of stock of Titan or any other
securities convertible into shares of any class of stock of Titan under Titan's
certificate of incorporation.
AVERSTAR. Each AverStar stock holder is entitled to preemptive rights under
AverStar's Stockholders Agreement to purchase on a pro rata basis any "new
securities" or "new stock" that AverStar proposes to issue for the purpose of
raising additional private capital. New securities and new stock include any
shares of AverStar common stock, any rights or options to purchase shares of
100
<PAGE>
common stock and any securities that may be converted into shares of common
stock, except that the definitions of new securities and new stock do not
include securities or stock issued:
- pursuant to any employment agreement;
- for the purpose of acquiring another company;
- pursuant to any incentive stock option plans; or
- by reason of the provisions with respect to the Class G Common Stock in
AverStar's certificate of incorporation.
BUSINESS COMBINATIONS; SUPERMAJORITY VOTING REQUIREMENTS
Titan and AverStar are subject to section 203 of the Delaware General
Corporation Law, which, with specified exceptions, prohibits a Delaware
corporation from engaging in any "business combination" with any "interested
stockholder" for a period of three years following the time that the stockholder
became an interested stockholder unless:
- before that time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon completion of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- at or after that time, the business combination is approved by the board
of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Section 203 defines "business combination" to include the following:
- any merger or consolidation of the corporation with the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to specified exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- any receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, section 203 defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by that entity or person.
TITAN. Titan's certificate of incorporation and bylaws do not have
supermajority or other special voting requirements for business combinations or
other transactions.
101
<PAGE>
AVERSTAR. Averstar's Stockholders Agreement requires that a majority of
AverStar's board of directors, including at least one of the designees of John
C. Rennie and/or Signmund Goldblum, approve an extraordinary transaction.
AverStar's certificate of incorporation and bylaws also do not have
supermajority or other special voting requirements for business combinations or
other transactions.
APPRAISAL RIGHTS
TITAN. Titan's certificate of incorporation does not provide for appraisal
rights other than those rights designated by the Delaware General Corporation
Law. The Delaware General Corporation Law provides for appraisal rights only in
the case of specified mergers or consolidations and not, unless the certificate
of incorporation of a corporation so provides, in the case of other mergers, a
sale or transfer of all or substantially all of its assets or an amendment to
its certificate of incorporation. In addition, the Delaware General Corporation
Law does not provide appraisal rights in connection with a merger or
consolidation, unless the certificate of incorporation of a corporation so
provides, to the holders of shares of a constituent corporation listed on a
national securities exchange, or designated as a national market system security
by the National Association of Securities Dealers, Inc., or held of record by
more than 2,000 stockholders, unless the applicable agreement of merger or
consolidation requires the holders of those shares to receive, in exchange for
those shares, any property other than shares of stock of the resulting or
surviving corporation, shares of stock of any other corporation listed on a
national securities exchange or designated as described above, or held of record
by more than 2,000 holders, cash in lieu of fractional shares or any combination
of the foregoing. The Delaware General Corporation Law also denies appraisal
rights to the stockholders of the surviving corporation in a merger if such
merger did not require approval by the stockholders of the surviving
corporation.
AVERSTAR. AverStar's certification of incorporation does not provide for
appraisal rights other than those rights designated by the Delaware General
Corporation Law, as summarized above.
SPECIAL MEETINGS OF STOCKHOLDERS
TITAN. Titan's bylaws provide that special meetings may be called by Titan
pursuant to Titan's notice of meeting provisions. The stockholders of Titan do
not have the right to request or call a special meeting of stockholders, but a
stockholder may nominate persons for election as directors at a special meeting
called by Titan for the purpose of electing directors if the stockholder
complies with the advance notice provisions of the bylaws. For information on
these procedures, see "Description of Titan Capital Stock--Stockholder Advance
Notice Procedures."
AVERSTAR. The AverStar bylaws provides that special meetings of
stockholders may be called by the president, a vice-president, the secretary,
chairman of the board of directors, vice-chairman of the board of directors, a
majority of the board of directors or by written request of the holders of a
majority of the outstanding shares of AverStar common stock entitled to vote
(voting together as a single class if more than one class of voting common stock
is outstanding).
STOCKHOLDER ACTION WITHOUT A MEETING
TITAN. Titan's bylaws provide that stockholder action may be taken by
written consent instead of a meeting, but only upon compliance with advance
notice and other procedural requirements specified in Titan's bylaws. Any Titan
stockholder of record seeking to have Titan's stockholders authorize or take
corporate action by written consent must, by written notice to Titan's
secretary, request Titan's board of directors to fix a record date for the
purpose of determining the stockholders entitled to consent to the action in
writing without a meeting. Within ten days of receiving the notice, Titan's
board of directors must adopt a resolution fixing the record date, which must
not precede, or be more than ten days after,
102
<PAGE>
the date of the resolution. If the Titan board of directors does not fix a
record date in this manner, the record date:
- when no prior action by the Titan board of directors is required by
applicable law, will be the first date on which a signed written consent
describing the action taken or proposed to be taken is delivered to Titan;
or
- when prior action by the Titan board of directors is required by
applicable law, will be at the close of business on the date on which the
Titan board of directors adopts the resolution taking the required action.
In addition, Titan's bylaws provide that no stockholder action by written
consent is effective until nationally recognized inspectors of election certify
to Titan that the consents properly delivered to Titan represent at least the
minimum number of votes that would be necessary to take the corporate action.
All stockholder consents must be properly delivered to Titan within 60 days of
the date that the earliest dated written consent was received by Titan.
AVERSTAR. The AverStar bylaws permit any action required or permitted at
any meeting of the stockholders to be taken without a meeting, without prior
notice, and without a vote, if one or more written consents describing the
action to be taken are signed by the holders of at least that number of shares
of outstanding stock necessary to approve the matter at a meeting at which the
holders of all shares entitled to vote were present and voted.
STOCKHOLDER PROPOSAL PROCEDURES
TITAN. Titan's bylaws require that notice of proposals by stockholders to
be brought before any annual meeting must be delivered to Titan not later than
the 60th day nor earlier than the 90th day before the first anniversary of the
preceding year's annual meeting. If, however, the annual meeting is more than
30 days before or more than 60 days after the anniversary date, the notice must
be delivered not earlier than the 90th day nor later than the 60th day before
the annual meeting, or the 10th day following the date on which Titan first
publicly announces the annual meeting date. The notice must include, as to each
matter the stockholder proposes to bring before the annual meeting:
- a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting that business at the annual
meeting;
- the name, age and business and residential addresses, as they appear on
Titan's records, of the stockholders proposing such business;
- the class and number of Titan's capital stock which are beneficially owned
by the stockholder; and
- any material interest of the stockholder in the proposed business.
AVERSTAR. The AverStar bylaws do not include any provisions regarding
shareholder proposal procedures.
SHAREHOLDER RIGHTS PLAN
TITAN. Titan is a party to the rights agreement with American Stock
Transfer and Trust Company, as rights agent. For information on the rights
agreement, see "Description of Titan Capital Stock--Preferred Share Purchase
Rights."
AVERSTAR. AverStar is not a party to any shareholder rights plan.
103
<PAGE>
CLASSIFIED BOARD OF DIRECTORS
TITAN. Titan's certificate of incorporation and bylaws do not provide for a
classified board of directors. The size of Titan's board of directors is
currently fixed by the Titan bylaws at nine directors.
AVERSTAR. AverStar's certificate of incorporation and bylaws do not provide
for a classified board of directors. The size of the AverStar board of directors
was initially set by the bylaws at seven and may thereafter be increase or
decreased (but not decreased to less than three directors) as determined by a
majority of the AverStar board of directors or stockholders. The number of
directors of AverStar is currently seven.
NOMINATIONS OF DIRECTORS
TITAN. Subject to the rights of holders of Titan's $1.00 cumulative
convertible preferred stock described below, Titan's bylaws provide that
nominations for the election of directors may be made by Titan's board of
directors or Titan's stockholders. Titan's bylaws provide that any stockholder
wishing to nominate persons for election as directors at an annual meeting must
deliver to the secretary of Titan, at Titan's principal office in San Diego, a
written notice of the stockholder's intention to make a director nomination. The
stockholder is required to furnish the notice not later than 60 days nor earlier
than 90 days before the first anniversary of the preceding year's annual
meeting. If, however, the annual meeting is more than 30 days before or more
than 60 days after the anniversary date, the notice must be delivered not
earlier than the 90th day nor later than the 60th day before the annual meeting,
or the 10th day following the date on which Titan first publicly announces the
annual meeting date. The notice must set forth the following information:
- the name and address of record of the stockholder who intends to make the
nomination;
- a representation that the stockholder is a holder of record of Titan
common stock and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
- the name, age, business and residential addresses and principal occupation
or employment of each nominee;
- a description of all arrangements or understandings between the
stockholder and each proposed nominee and any other person or persons,
naming such person or persons, pursuant to which the nomination or
nominations are to be made by the stockholder;
- other information regarding each proposed nominee as would be required to
be included in a proxy statement filed pursuant to the rules and
regulations of the SEC; and
- the written consent of each proposed nominee to serve as a director of
Titan if so elected.
Holders of Titan's $1.00 cumulative preferred stock are entitled to elect
two directors to Titan's board of directors in the event of a default in the
payment of dividends on the $1.00 cumulative convertible preferred stock. The
size of Titan's board in this event would be increased by two directors.
AVERSTAR. The AverStar bylaws provide that the terms of election and
nomination of directors, other than the initial directors, will be determined in
accordance with AverStar's Stockholders' Agreement. The Stockholders Agreement
provides that AverStar will take all necessary actions to elect and re-elect as
directors of AverStar the following:
- two nominees designated by Michael B. Alexander (or in the event of
Mr. Alexander's death or inability to act, the majority of the holders of
Class A and Class D Voting Common Stock);
- two nominees designated by Joel N. Levy/Peter M. Shulte, L.L.C.; and
104
<PAGE>
- three nominees designated by John C. Rennie and/or Sigmund H. Goldblum (or
in the event of Mr. Rennie's and Mr. Sigmund's death or inability to act,
the majority of the holders of the Class F Common Stock); provided,
however that J. Fernando Niebla has the right to designate one of
Mr. Rennie's and Mr. Goldblum's nominees subject to the reasonable
approval of the remaining members of AverStar's board of directors.
In addition, the Stockholders Agreement grants various parties the right to
designate certain persons to act as an observer at, and to attend all the
meetings of, the AverStar board of directors, but without the right to vote as a
director at any such meeting.
REMOVAL OF DIRECTORS
TITAN. Under Titan's bylaws, Titan's directors may be removed at any time,
either with or without cause, by the affirmative vote of stockholders having a
majority of the voting power of Titan. This bylaw provision is subject to rights
under Titan's certificate of incorporation of holders of Titan's $1.00
cumulative convertible preferred stock during any period in which Titan defaults
on the payment of dividends on the $1.00 cumulative convertible preferred stock.
AVERSTAR. The AverStar bylaws provides that any director may be removed,
with or without cause, at any time, by the nominee who elected such director in
accordance with AverStar's Stockholders Agreement.
VACANCIES IN THE BOARD OF DIRECTORS
TITAN. Titan's bylaws provide that, when any vacancy occurs in the Titan
board of directors, whether by reason of an increase in the number of members
composing the Titan board of directors, or otherwise, a majority of the
remaining members of the Titan board of directors, even though less than a
quorum may appoint a director or directors to fill such vacancy or vacancies.
The bylaws further provide, however, that if a vacancy is caused by removal,
then the successor must be elected by Titan stockholders at a special meeting
called for that purpose. This bylaw provision is subject to rights under Titan's
certificate of incorporation of holders of Titan's $1.00 cumulative convertible
preferred stock during any period in which Titan defaults on the payment of
dividends on the $1.00 cumulative convertible preferred stock.
AVERSTAR. The AverStar bylaws provide that any vacancy in the AverStar
board of directors, arising from the removal of a director or otherwise, may be
filled by the nominee who elected or who has the right to elect such director in
accordance with Averstar's Stockholders Agreement. Any vacancy in the AverStar
board of directors arising by an increase in the number of members composing the
AverStar board of directors may be filled by a majority of the board of
directors, including at least one of the designees of John C. Rennie and/or
Sigmund Goldblum.
INDEMNIFICATION
TITAN. Titan's bylaws provide for indemnification by Titan, to the fullest
extent permitted by law, of its officers, directors, employees and agents.
AVERSTAR. The AverStar certificate of incorporation provides for
indemnification by AverStar, to the fullest extent permitted by law, of its
officers, directors and any other persons with respect of service to AverStar to
the extent the AverStar board of directors specifies that such persons are
entitled to indemnification.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
TITAN. Titan's certificate of incorporation provides for the elimination
and limitation of the personal liability of directors for monetary damages to
the fullest extent permitted by the Delaware
105
<PAGE>
General Corporation Law. In addition, Titan's certificate of incorporation
provides that if the Delaware General Corporation Law is amended to authorize
the further elimination or limitation of the liability of a director, then the
liability of the directors will be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended. The effect of
this provision is to eliminate the rights of Titan and its stockholders, through
stockholder derivative suits on behalf of Titan, to recover monetary damages
against a director for breach of the fiduciary duty of care as a director,
including breaches resulting from negligent or grossly negligent behavior,
except in certain situations. The provision does not limit or eliminate the
rights of Titan or any stockholder to seek non-monetary relief such as an
injunction or rescission upon breach of a director's duty of care. This
provision is consistent with section 102(b)(7) of the Delaware General
Corporation Law, which is designed, among other things, to encourage qualified
individuals to serve as directors of Delaware corporations.
AVERSTAR. The AverStar certificate of incorporation eliminates the personal
liability of the AverStar directors to the same extent that the Titan
certificate of incorporation eliminates the personal liability of the Titan
directors.
AMENDMENT OF CERTIFICATE OF INCORPORATION
TITAN. Titan's certificate of incorporation may be amended under the
Delaware General Corporation Law by a majority vote of the total number of
shares outstanding and entitled to vote on the amendment. If any amendment of
Titan's certificate of incorporation would adversely affect the rights of any
holders of shares of a class or series of capital stock, or such holders are
entitled to vote on the amendment, the vote of the holders of a majority of all
outstanding shares of the class or series, voting as a class, is also necessary
to authorize the amendment.
AVERSTAR. AverStar's certificate of incorporation may be amended under the
Delaware General Corporation Law by a majority vote of the total number of
shares outstanding and entitled to vote on the amendment. The affirmative vote
of at least 85% of the outstanding shares of each voting class, voting
separately as a class, of Class A Common Stock, Class B Common Stock, Class C
Common Stock, Class D Common Stock, Class E Common Stock and, if the interest of
the holders of Class F Common Stock would be adversely affected by such change,
Class F Common Stock would be required to amend or repeal the provisions of the
certificate of incorporation regarding the rights and privileges of AverStar's
common stock or the provisions of the Stockholders' Agreement regarding
nomination and election of directors. If any amendment of AverStar's certificate
of incorporation would adversely affect the rights of any holders of shares of
Non-Voting Class G Common Stock the vote of the holders of at least 85% of all
outstanding shares of Non-Voting Class G Common Stock, voting as a separate
class, is also necessary to authorize the amendment. In addition, any term,
covenant, agreement or condition in the AverStar certificate of amendment
describing the rights of holders of Non-Voting Class G Common Stock may be
amended or compliance thereof may be waived by a written consent signed by the
holders of 66 2/3% or more in interest of the shares of Class G Common Stock
outstanding at any time (excluding all shares owned by AverStar or any of its
affiliates). If any such amendment or waiver will change the number of Class D
Common Stock issuable upon the conversion of any share of Non-Voting Class G
Common Stock or the manner of conversion, such amendment or waiver will also
require the written consent of such affected share of Non-Voting Class G Common
Stock.
AMENDMENT OF BYLAWS
TITAN. Titan's bylaws may be amended or repealed either by the Titan board
of directors, acting by the affirmative vote of a majority of the Titan
directors, or by Titan's stockholders.
AVERSTAR. AverStar's bylaws may be amended or repealed either by the
AverStar board of directors, acting by the affirmative vote of a majority of the
AverStar directors or by AverStar's stockholders holding a majority of common
stock entitled to vote.
106
<PAGE>
OTHER MATTERS
VALIDITY OF TITAN COMMON STOCK
Hogan & Hartson L.L.P., counsel to Titan, has rendered a legal opinion to
the effect that the Titan common stock offered hereby, when issued in accordance
with the merger agreement, will be validly issued, fully paid and nonassessable.
EXPERTS
The consolidated financial statements of The Titan Corporation as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999, the consolidated financial statements of Advanced
Communication Systems, Inc. as of September 30, 1998 and 1999 and for each of
the three years in the period ended September 30, 1999, the financial statements
of Transnational Partners II, LLC as of December 31, 1997 and 1998 and for the
period from February 9, 1997 (commencement of operations) through December 31,
1997 and for the year ended December 31, 1998 and the financial statements of JB
Systems, Inc. (d.b.a. Mainsaver) as of December 31, 1997 and 1998 and for each
of the three years in the period ended December 31, 1998 and for the ten month
period ended October 31, 1999, incorporated by reference in this proxy
statement/prospectus and elsewhere in the registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements of Assist Cornerstone Technologies, Inc. at
December 12, 1999, December 31, 1998 and December 31, 1997, and for the period
ended December 12, 1999 and the three years in the period ended December 31,
1998, incorporated by reference in this proxy statement/ prospectus have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon and incorporated by reference herein, and are incorporated by
reference in reliance upon such reports given on the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of SFG Technologies, Inc. as of
December 21, 1999, and December 31, 1998 and April 30, 1998 and for the period
from January 1, 1999 to December 21, 1999, eight months ended December 31, 1998
and for the years ended April 30, 1996, 1997 and 1998 have been incorporated by
reference in this prospectus and in the registration statement in reliance upon
the reports of KPMG LLP, independent auditors, incorporated by reference herein
and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of AverStar, Inc. at December 31, 1999
and 1998, and for each of the two years in the period ended December 31, 1999
and the ten-month period ended December 31, 1997 included in the proxy statement
of AverStar, Inc. which is referred to and made a part of this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
107
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Titan has filed the registration statement of which this proxy
statement/prospectus forms a part. The registration statement, including the
attached exhibits and schedules, contains additional information about Titan.
The rules and regulations of the SEC allow Titan to omit from this proxy
statement/prospectus certain information included in the registration statement.
Titan files annual, quarterly and special reports, proxy statements and
other information with the SEC under the Exchange Act. The SEC file number for
Titan's documents filed under the Exchange Act is 1-6035. You may read and copy
any of this information at the following locations of the SEC:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661-2511
</TABLE>
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
Titan files information electronically with the SEC. Our SEC filings are
also available from the SEC's Internet site at http://www.sec.gov, which
contains reports, proxy and information statements and other information
regarding issuers that file electronically.
The SEC allows Titan to "incorporate by reference" in this proxy statement/
prospectus certain documents the companies file with it, which means that Titan
can disclose important information to you by referring you to those documents.
The information incorporated by reference is considered to be part of this proxy
statement/prospectus, and information that Titan file later with the SEC will
automatically update and supersede this information.
Titan incorporates by reference the documents listed below and any future
filings Titan will make with the SEC under section 13(a), 13(c), 14 or 15(d) of
the Exchange Act between the date of this proxy statement/prospectus and the
date of the special meeting of AverStar stockholders:
1. Titan's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, which was filed on March 30, 2000, including information
incorporated by reference in the Form 10-K from the definitive proxy
statement for the 2000 annual meeting of stockholders of Titan, which was
filed on April 4, 2000;
2. Titan's amendment to its Annual Report on Form 10-K which was filed
on Form 10-K/A on May 23, 2000;
3. Titan's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2000, which was filed on May 15, 2000; and
4. Titan's Current Reports on Form 8-K which were filed on January 6,
2000 (as amended by filings on Form 8-K/A on January 19, 2000 and
January 24, 2000), January 24, 2000 (as amended by filing on Form 8-K/A on
January 28, 2000), February 3, 2000, February 4, 2000, February 8, 2000,
March 9, 2000 (as amended by filing on Form 8-K/A on April 17, 2000),
March 20, 2000 and March 31, 2000.
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
108
<PAGE>
You may obtain any of the documents listed above from the SEC, through the
SEC's Web site at the address described above, or from Titan, by requesting
these documents in writing or by telephone at the following addresses:
The Titan Corporation
3033 Science Park Road
San Diego, California 92121
Attn.: Investor Relations
(858) 552-9500
These documents are available from Titan without charge, excluding any
exhibits to them unless the exhibit is specifically listed as an exhibit to the
registration statement of which this proxy statement/ prospectus forms a part.
If you would like to request documents, please do so by June 19, 2000 to receive
them before the special meeting of AverStar's stockholders.
This document is a proxy statement of AverStar and a prospectus of Titan.
AverStar has supplied all information contained in, or considered a part of,
this proxy statement/prospectus relating to AverStar, and Titan has supplied all
such information relating to Titan.
Neither Titan nor AverStar has authorized anyone to give any information or
make any representation about the merger or Titan or AverStar that is different
from, or in addition to, that contained in this proxy statement/prospectus or in
any of the materials that Titan or AverStar has incorporated into this document.
Therefore, if anyone does give you information of this type, you should not rely
on it. The information contained in this proxy statement/prospectus speaks only
as of the date of this document unless the information specifically indicates
that another date applies.
109
<PAGE>
AVERSTAR, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE TEN-MONTH
PERIOD ENDED DECEMBER 31, 1997
Report of Independent Auditors.............................. F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Redeemable Common
Stock and Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Unaudited Consolidated Financial Statements
Unaudited Consolidated Statements of Operations............. F-20
Consolidated Balance Sheets................................. F-21
Unaudited Consolidated Statements of Cash Flows............. F-22
Unaudited Consolidated Statements of Changes in Redeemable
Common Stock and Stockholders' Equity..................... F-23
Notes to Unaudited Consolidated Financial Statements........ F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
AverStar, Inc.
We have audited the accompanying consolidated balance sheets of
AverStar, Inc. (the Company) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in redeemable common stock and
stockholders' equity, and cash flows for the years ended December 31, 1999 and
1998 and the ten-month period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
AverStar, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for the years ended December 31, 1999 and 1998
and the ten-month period ended December 31, 1997, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 24, 2000
F-2
<PAGE>
AVERSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 105 $ 332
Accounts receivable, net of allowances of $296 and $287 at
December 31, 1999 and 1998.............................. 37,394 24,148
Unbilled accounts receivable, net of allowances of $450
and $310 at December 31, 1999 and 1998.................. 9,554 10,261
Other current assets...................................... 1,775 1,100
Refundable income taxes................................... 1,068 1,662
Deferred income taxes..................................... 1,347 734
-------- -------
Total current assets.................................... 51,243 38,237
Property and equipment:
Land...................................................... 90 90
Computers, equipment and furniture........................ 13,982 9,711
Building and improvements................................. 1,746 1,610
-------- -------
15,818 11,411
Less allowances for depreciation............................ 11,531 7,147
-------- -------
4,287 4,264
Other assets:
Deferred income taxes..................................... 1,013 1,794
Intangible assets, net.................................... 29,212 13,589
Other assets.............................................. 3,004 2,004
-------- -------
33,229 17,387
Total assets............................................ $ 88,759 $59,888
======== =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable.......................................... $ 7,642 $ 7,596
Accrued payroll and employee benefits..................... 10,850 7,109
Accrued liabilities....................................... 7,139 9,249
Revolving credit notes payable............................ 8,600 2,500
Current portion of long-term debt......................... 2,700 954
Unearned revenue.......................................... 656 913
-------- -------
Total current liabilities............................... 37,587 28,321
Long-term debt:
Senior debt............................................... 40,800 23,583
Subordinated debt......................................... 4,666 4,573
-------- -------
45,466 28,156
Net liabilities of discontinued operations.................. -- 565
Redeemable common stock, 1,949,595 and 2,202,875 shares
issued and outstanding at December 31, 1999 and 1998...... 4,961 5,598
Stockholders' equity (deficit):
Common stock, $.001 par value per-share; authorized
17,000,000 shares; issued 5,057,150 and 4,766,344 shares
at December 31, 1999 and 1998........................... 5 5
Additional paid-in capital................................ 11,665 10,284
Accumulated deficit....................................... (10,271) (12,847)
Deferred compensation..................................... (53) (80)
Treasury stock at cost, 141,664 and 42,105 shares at
December 31, 1999 and 1998.............................. (601) (114)
-------- -------
Total stockholders' equity (deficit).................... 745 (2,752)
-------- -------
Total liabilities and stockholders' equity.............. $ 88,759 $59,888
======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
AVERSTAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR YEAR TEN-MONTH
ENDED ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenues................................................. $184,336 $121,056 $53,646
Costs and expenses:
Cost of revenues....................................... 145,130 93,604 41,685
Selling, general and administrative.................... 28,919 20,581 10,403
-------- -------- -------
Income from operations................................... 10,287 6,871 1,558
Interest expense, net.................................... 4,582 2,269 1,206
Offering expenses........................................ 845 -- --
-------- -------- -------
Income from continuing operations before income taxes.... 4,860 4,602 352
Provision for income taxes............................... 2,284 2,168 154
-------- -------- -------
Income from continuing operations........................ 2,576 2,434 198
Loss from discontinued operations, net of income tax
benefit of $1,659 in 1998 and $664 in 1997............. -- (2,489) (1,727)
Loss on disposal of discontinued operations, net of
income tax benefit of $1,267........................... -- (2,633) --
-------- -------- -------
Net income (loss)........................................ $ 2,576 $ (2,688) $(1,529)
======== ======== =======
Earnings per share:
Basic:
Income from continuing operations.................... $ 0.37 $ 0.38 $ 0.05
Discontinued operations.............................. -- (0.80) (0.45)
-------- -------- -------
$ 0.37 $ (0.42) $ (0.40)
======== ======== =======
Diluted:
Income from continuing operations.................... $ 0.34 $ 0.36 $ 0.04
Discontinued operations.............................. -- (0.75) (0.38)
-------- -------- -------
$ 0.34 $ (0.39) $ (0.34)
======== ======== =======
Weighted-average shares outstanding:
Basic.................................................. 6,877 6,428 3,865
Diluted................................................ 7,500 6,847 4,552
</TABLE>
See accompanying notes.
F-4
<PAGE>
AVERSTAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------
REDEEMABLE
COMMON STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN ACCUMULATED DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION
-------- -------- -------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 28, 1997...... 1,179 $1,280 2,699 $3 $ 4,129 $ (8,630)
Payment of promissory notes....... 132
Purchase of treasury stock........
Deferred compensation............. 133 $(133)
Stock option vesting.............. 27
Stock contribution to Profit
Sharing Plan.................... 151 240
Net loss.......................... (1,529)
----- ------ ----- -- ------- -------- -----
Balance at December 31, 1997...... 1,179 1,412 2,850 3 4,502 (10,159) (106)
Issuance of shares in connection
with acquisition................ 1,030 4,211 1,831 2 5,670
Options exercised................. 79 87
Purchased treasury stock..........
Redeemed stock.................... (6) (25) 6 25
Deferred compensation............. 26
Net loss.......................... (2,688)
----- ------ ----- -- ------- -------- -----
Balance at December 31, 1998...... 2,203 5,598 4,766 5 10,284 (12,847) (80)
Distribution to shareholders of
net liabilities of discontinued
operations...................... 565
Purchased treasury stock..........
Redeemed stock.................... (49) (200) 49 200
Expired stock redemption.......... (204) (437) 204 437
Stock contribution to Profit
Sharing Plan.................... 33 173
Options exercised................. 5 6
Deferred compensation............. 27
Net income........................ 2,576
----- ------ ----- -- ------- -------- -----
Balance at December 31, 1999...... 1,950 $4,961 5,057 $5 $11,665 $(10,271) $ (53)
===== ====== ===== == ======= ======== =====
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------
TREASURY
STOCK STOCKHOLDERS'
------------------- EQUITY
SHARES COST (DEFICIT)
-------- -------- -------------
<S> <C> <C> <C>
Balance at February 28, 1997...... $(4,498)
Payment of promissory notes.......
Purchase of treasury stock........ 23 $ (35) (35)
Deferred compensation.............
Stock option vesting.............. 27
Stock contribution to Profit
Sharing Plan.................... 240
Net loss.......................... (1,529)
---- ----- -------
Balance at December 31, 1997...... 23 (35) (5,795)
Issuance of shares in connection
with acquisition................ 5,672
Options exercised................. 87
Purchased treasury stock.......... 13 (54) (54)
Redeemed stock.................... 6 (25)
Deferred compensation............. 26
Net loss.......................... (2,688)
---- ----- -------
Balance at December 31, 1998...... 42 (114) (2,752)
Distribution to shareholders of
net liabilities of discontinued
operations...................... 565
Purchased treasury stock.......... 51 (266) (266)
Redeemed stock.................... 49 (221) (21)
Expired stock redemption.......... 437
Stock contribution to Profit
Sharing Plan.................... 173
Options exercised................. 6
Deferred compensation............. 27
Net income........................ 2,576
---- ----- -------
Balance at December 31, 1999...... 142 $(601) $ 745
==== ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
AVERSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR YEAR TEN-MONTH PERIOD
ENDED ENDED ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
----------- ----------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations..................... $ 2,576 $ 2,434 $ 198
Adjustments to derive cash flows from continuing
operating activities:
Depreciation and amortization....................... 6,813 3,228 935
Deferred income taxes............................... 168 (2,384) 29
Loss on disposal of fixed assets.................... 315 5
Change in assets and liabilities:
Accounts receivable............................... (6,847) (8,212) (839)
Unbilled accounts receivable...................... 4,082 209 (1,322)
Other current assets.............................. (440) 861 (110)
Accounts payable.................................. (1,654) (3,226) 2,323
Accrued payroll and employee benefits............. 830 1,491 487
Accrued liabilities............................... (3,702) 6,817 422
Unearned revenue.................................. (257) 378 (71)
Refundable income taxes........................... 594 (612) (1,050)
-------- ------- -------
Net cash provided by continuing operating
activities.......................................... 2,163 1,299 1,007
Net cash used in discontinued operating activities.... -- (8,951) (1,367)
-------- ------- -------
Net cash provided by (used in) operating activities... 2,163 (7,652) (360)
INVESTING ACTIVITIES
Acquisitions net of cash acquired..................... (23,260) (6,749) (400)
Proceeds from sale of division........................ -- 1,000 100
Purchase of equipment and leaseholds.................. (2,546) (2,615) (1,866)
Deposits and investment in other assets............... 610 365 (305)
-------- ------- -------
Net cash used in investing activities................. (25,196) (7,999) (2,471)
FINANCING ACTIVITIES
Issuance of common stock.............................. 6 87 240
Purchase of redeemable common stock and treasury
stock............................................... (487) (79) (35)
Net borrowings of revolving credit.................... 6,100 500 2,000
Repayments of long-term debt.......................... (26,037) (5,011) (1)
Proceeds from issuance of long-term debt.............. 43,224 16,500
Repayment of loan from shareholder.................... -- -- 144
-------- ------- -------
Net cash provided by financing activities of
continuing operations............................... 22,806 11,997 2,348
Net cash provided by financing activities of
discontinued operations............................. -- 3,855 --
-------- ------- -------
Net cash provided by financing activities............. 22,806 15,852 2,348
-------- ------- -------
Net (decrease) increase in cash and cash
equivalents......................................... (227) 201 (483)
Cash and cash equivalents at beginning of period...... 332 131 614
-------- ------- -------
Cash and cash equivalents at end of period............ $ 105 $ 332 $ 131
======== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
NATURE OF OPERATIONS
AverStar, Inc. (AverStar or the Company) provides information technology, or
IT, services and software products for the mission-critical systems of civilian
and defense agencies of the United States government, as well as large
commercial companies.
BASIS OF PRESENTATION
These consolidated financial statements include the accounts of AverStar and
its wholly-owned subsidiary, Computer Based Systems, Inc. (CBSI). The Company
was incorporated in Delaware on February 4, 1998 for the purpose of combining
the businesses of Apollo Holdings, Inc. (Apollo) and Pacer Infotec, Inc.
(Pacer). All material intercompany balances and transactions have been
eliminated.
Prior to February 4, 1998, the Company operated as Apollo, and the financial
statements included herein reflect the operations of Apollo for those periods
presented. On February 4, 1998, the Company was formed by the Apollo
shareholders to acquire the business of Pacer (see Note 2) and to combine the
businesses of Apollo and Pacer. In connection with these activities, the Company
effected exchanges of stock with both Apollo and Pacer shareholders at the time
of the acquisition of Pacer. As described in Note 2, the acquisition of Pacer
has been accounted for as a purchase. The exchange by Apollo shareholders of
their shares in Apollo for their shares in AverStar was accounted for as an
exchange of shares by entities under common control in accordance with
paragraph 5 of APB No. 16. Accordingly, the Apollo operations retained their
historical cost basis. All share and per share data in these financial
statements and related footnotes have been adjusted to reflect such exchanges.
In 1997, the Board of Directors changed Apollo's fiscal year from the last
day of February to the last day of December. For the year ended December 31,
1999, the financial statements include twelve months of operations for AverStar
and approximately nine months of operations of CBSI. For the year ended
December 31, 1998, the financial statements include twelve months of operations
for Apollo and approximately ten months of operations for Pacer. For the period
ended December 31, 1997, the financial statements include ten months of
operations for Apollo.
REVENUE RECOGNITION
Contracts with the Federal Government, or prime contractors of the Federal
Government, are cost reimbursable with a fee that is fixed or awarded based on
performance, and time and materials. Contracts with commercial enterprises are
fixed price and time and materials. Overhead and general and administrative
costs charged on U.S. Government contracts are generally subject to audit by the
Federal Government. These contracts provide for periodic payments as the
services are performed and generally do not represent any unusual burden on the
Company's liquidity. All contracts with the Federal Government are subject to
termination by the customer. The Company has not suffered any adverse effects
from the termination of Government contracts in the past.
The Company recognizes revenue on government and commercial contracts under
the percentage-of-completion method in accordance with Statement of Position
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." The percentage of completion is determined by
relating the costs incurred to date to the estimated total costs at completion.
The cumulative effects resulting from revisions of estimated total contract
costs and
F-7
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
(CONTINUED)
revenues are recorded in the period in which the facts requiring revision become
known. When a loss is anticipated on a contract, the full amount of the
anticipated loss is provided for when it becomes probable. The Company sometimes
recognizes revenue that is not billable to the customer at a given balance sheet
date. Such amounts are included in unbilled receivables.
Revenues from standard software products are recognized upon shipment in
accordance with Statement of Position 97-2, "Software Revenue Recognition," as
amended by the Statement of Position 98-4. Revenues from maintenance agreements
are recognized over the life of the maintenance agreement. Per unit royalties
earned from the license of standard software products are recognized when
received from the customer.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent amounts earned on contracts in
process and retainage that are not billable at the balance sheet date. Such
amounts generally become billable upon completion of a specific phase of the
contract, documentation of approved contract modifications, completion of
government audit or upon customer acceptance, if the Company believes the
acceptance criteria present no risk to the Company. The Company has not
recognized significant revenue relating to customer claims for amounts in excess
of agreed-upon contract prices. To the extent billings exceed costs incurred,
plus fees or less losses, the difference is recorded as unearned revenue.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company provides for
depreciation and amortization over estimated useful lives using the
straight-line method as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- -------------------- --------------------------------------------------------
<S> <C>
Buildings 30 years
Improvements Lesser of lease term or estimated life of improvement
Computers, equipment and furniture 2-7 years
</TABLE>
STOCK COMPENSATION
The Company accounts for grants of stock options in accordance with the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company has adopted the disclosure-only provision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." (See
Note 10).
F-8
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions 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 amounts could differ from those
estimates.
IMPAIRMENT EVALUATION
The Company examines the carrying value of its long-lived assets,
identifiable intangibles and goodwill to determine whether there are any
impairment losses. If indicators of impairment were present in those assets, and
future undiscounted cash flows were not expected to be sufficient to recover the
assets' carrying amounts, an impairment loss would be charged to expense in the
period identified. No event has been identified that would indicate an
impairment of the value of long-lived assets, identifiable intangibles and
goodwill recorded in the accompanying consolidated financial statements.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist of
cash equivalents and accounts receivable. The risk with respect to cash
equivalents is minimized by the Company's policies in which investments are
placed with highly rated issuers with relatively short maturities. The risk with
respect to accounts receivable is minimized due to the fact that customer
accounts and unbilled receivables represent amounts earned under the Company's
contracts, which are principally with U.S. Government agencies.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's cash equivalents, accounts receivable, long-term debt and
redeemable common stock are carried at cost, which approximates fair value.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 financial statements to
conform to the 1999 basis of presentation.
SEGMENTS OF AN ENTERPRISE
The Company has one reportable segment from continuing operations: the
development and delivery of information technology products and services. The
U.S. Government and its prime aerospace, civil and defense contractors accounted
for approximately 90%, 90% and 80% of the Company's revenues for the years ended
December 31, 1999 and 1998 and the ten-month period ended December 31, 1997,
respectively.
F-9
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
(CONTINUED)
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 (FAS 133), "Accounting for Derivative Investments and Hedging
Activities," which required adoption for fiscal years beginning after June 15,
1999. FAS 133 was subsequently amended by Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," and now
will be effective for fiscal years beginning after June 15, 2000, with earlier
adoption permitted. The adoption of FAS 133 is not expected to have a material
impact on the results of operations or financial position of the Company.
In December 1999, the Securities Exchange Commission issued Staff Accounting
Bulletin 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements. On March 24, 2000, the SEC issued
an Amendment to SAB 101 (SAB 101A), delaying the effective date for certain
companies. The Company will adopt SAB 101 in the second quarter of fiscal 2000
and is presently analyzing what impact, if any, SAB 101 will have on the results
of operations or financial position of the Company.
2. ACQUISITIONS
On February 27, 1998, Pacer, a company providing software-engineering
services primarily to government customers, was acquired for a purchase price of
approximately $17,000,000, plus transaction-related expenses of approximately
$1,700,000. Of the total purchase price, approximately $7,000,000 was paid in
cash to Pacer shareholders. The balance was paid by the issuance of
approximately 2,255,000 shares of Class F common stock issued by AverStar and
the fair value of options exchanged in the transaction; said shares and options
having a value of approximately $10,000,000. The acquisition has been accounted
for using the purchase method of accounting, whereby assets and liabilities have
been allocated based upon their respective fair values, resulting in goodwill
and other intangible assets of approximately $12 million, which will be
amortized for periods not to exceed 20 years.
On March 18, 1999, the Company acquired all of the outstanding shares of
Computer Based Systems, Inc. (CBSI) for $26,000,000, plus transaction related
expenses of $261,000. CBSI provides IT network operations services primarily to
government customers. Of the total purchase price, $25,000,000 was paid to the
shareholders at the closing, with the balance paid equally over five years. The
acquisition was accounted for using the purchase method of accounting, whereby
assets and liabilities have been allocated based upon their respective fair
value, resulting in goodwill and other intangibles assets of approximately
$19,100,000, which will be amortized for periods not to exceed 20 years.
F-10
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. ACQUISITIONS (CONTINUED)
Unaudited pro forma results of operations are shown below for the
acquisitions of Pacer and CBSI for the years ended December 31, 1999 and 1998,
as if the acquisitions occurred on January 1, 1998:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenue................................................. $194,938 $169,039
Income from continuing operations....................... 3,186 73
Net income (loss)....................................... 3,186 (5,049)
Net income (loss) per share............................. 0.46 (0.79)
</TABLE>
3. DISCONTINUED OPERATIONS
In December 1998, the Board of Directors of AverStar, Inc. adopted a plan to
divest of its 66% interest in Intermetrics Entertainment Software, Inc.'s (IES)
operations, which developed software games, by distributing such interest to
AverStar shareholders.
As part of the plan to dispose of IES, the Company converted $1.3 million of
contributed capital (representing capital contributed by the Company reduced by
cumulative operating losses) into an 8.5% term loan due on December 31, 2001. In
connection with this conversion, the Company recorded the term loan and fully
reserved the amount and also fully reserved a pre-existing term loan of $400,000
because, based upon forecasted operating results for IES, the Company believed
it was uncollectible. This write-off is part of the loss on disposal of
discontinued operations described below. In addition, the Company was obligated
to provide on demand financing of up to $2 million pursuant to an 8.5% revolving
credit agreement, unless IES filed for bankruptcy, is in the process of
liquidation or the equivalent. Under the terms of the revolving credit
agreement, no new borrowings may occur subsequent to December 31, 1999 and
amounts borrowed are due on December 31, 2001. As of December 31, 1999, the
Company funded the revolving credit agreement up to the maximum $2 million.
Management does not believe such amount will be recoverable and, therefore, has
assigned no value to it in the accompanying consolidated financial statements.
The Company is, however, pursuing collection efforts. Any subsequent recovery of
such amounts due under the term loans or the revolving credit agreement, all of
which are due not later than December 31, 2001, and currently represent a
deferred gain of $3,700,000, will be reflected as a gain from discontinued
operations at the time of such recovery.
The major components of the $3,900,000 loss on disposal of discontinued
operations in 1998 are estimated operating losses through the disposal date of
$500,000, estimated remaining funding commitment of $1,500,000 pursuant to a
$2,000,000 revolving credit agreement, estimated professional fees of $200,000
and write-offs of estimated non-recoverable term loans of $1,700,000.
As of December 31, 1998, the liabilities of IES exceeded its assets by
$565,000, which comprised billed and unbilled accounts receivable of $4,200,000,
other assets and equipment of $2,300,000, bank debt of $3,900,000, accrued
expenses of $1,500,000 and obligations to AverStar of approximately $1,700,000.
Included in the loss on disposal in 1998 is approximately $500,000 of operating
losses from the date the plan was adopted through the date of divestiture, which
occurred on March 18, 1999.
F-11
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. DISCONTINUED OPERATIONS (CONTINUED)
In addition, interest of $293,000 was allocated to the loss from
discontinued operations based on the financing that was specifically attributed
to those operations.
Revenues from discontinued operations were $1,516,000 for the period from
January 1, 1999 through March 18, 1999, $7,232,000 for the year ended
December 31, 1998 and $1,928,000 for the period from August 9, 1997 through
December 31, 1997. Losses from operations for these periods were approximately
$715,000, $3,895,000 and $1,802,000, respectively.
4. INTANGIBLE ASSETS
The following represents the components of net intangible assets at
December 31, 1999 and 1998 that are being amortized using the straight-line
method over their estimated useful lives:
<TABLE>
<CAPTION>
DECEMBER 31
ESTIMATED -------------------
USEFUL LIFE 1999 1998
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost in excess of fair value of net assets
acquired.................................... 15-20 years $26,154 $12,458
Assembled workforce........................... 4-7 years 1,531 875
Contract backlog.............................. 18 months 830 256
Non-compete agreement......................... 5 years 697 --
------- -------
$29,212 $13,589
======= =======
</TABLE>
Accumulated amortization relating to these intangible assets was $3,464,000
and $1,005,000 at December 31, 1999 and 1998, respectively.
5. INCOME TAXES
The provision for (benefit from) income taxes from continuing operations for
the years ended December 31, 1999 and 1998 and the ten-month period ended
December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $1,987 $2,507 $117
State.............................................. 465 502 8
------ ------ ----
2,452 3,009 125
Deferred:
Federal............................................ (148) (715) 63
State.............................................. (20) (126) (34)
------ ------ ----
(168) (841) 29
------ ------ ----
Total............................................ $2,284 $2,168 $154
====== ====== ====
</TABLE>
F-12
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. INCOME TAXES (CONTINUED)
The following table reconciles the provision for income taxes to the amount
computed by applying the statutory federal income tax rate to income from
continuing operations before income taxes for the years ended December 31, 1999
and 1998 and the ten month period ended December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------------------------
1999 % 1998 % 1997 %
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at
statutory rate.............. $1,652 34.0% $1,564 34.0% $120 34.0%
State income tax (net)........ 292 6.0 276 6.0 21 6.0
Non-deductible items.......... 340 7.0 328 7.1 13 4.0
------ ---- ------ ---- ---- ----
Total......................... $2,284 47.0% $2,168 47.1% $154 44.0%
====== ==== ====== ==== ==== ====
Income taxes paid............. $1,521 $1,481 $418
====== ====== ====
</TABLE>
Deferred income taxes arise from temporary differences between the tax bases
of assets and liabilities and their reported amounts in the financial
statements. The significant temporary differences included in net deferred tax
assets at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued liabilities....................................... $ 3,297 $ 3,195
Accounts and unbilled receivables......................... (1,770) (1,511)
Depreciation and amortization............................. 982 766
Other..................................................... (149) 78
------- -------
Net deferred income tax asset............................. $ 2,360 $ 2,528
======= =======
</TABLE>
6. BENEFIT PLANS
The Company has a 401(k) Profit Sharing and Savings Plan (the Plan) that
covers substantially all employees and provides for a Company matching
contribution. As defined under the Plan, employees are allowed to contribute the
maximum established by law, and the Company may match 50% of an employee's
contribution, up to 4% of an employee's eligible compensation. Expenses relating
to the Plan amounted to $1,771,000 and $1,405,000 for the years ended
December 31, 1999 and 1998 and $784,000 for the ten-month period ended
December 31, 1997. In 1999, $120,000 of forfeitures from unvested benefits of
terminated employees were used to reduce the expenses of the Plan.
7. BORROWINGS
On March 18, 1999, simultaneous with the CBSI closing described in Note 2,
the Company entered into an agreement to provide up to $75,000,000 of secured
financing, based upon availability, comprised of $45,000,000 in Senior Term
Loans A and B and a $30,000,000 revolving credit facility note. The Senior Term
Loans and revolving credit facility note are secured by substantially all of the
Company's
F-13
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. BORROWINGS (CONTINUED)
tangible and intangible assets. Expenses associated with the financing amounted
to approximately $1,800,000. Proceeds from the financing agreement were used to
pay CBSI shareholders, retire existing debt and provide for working capital
requirements.
Senior Term A Note of $15,000,000 matures on March 17, 2004 and carries a
variable interest rate of up to LIBOR plus 2.75% with three days notice of
renewal, or up to Prime plus 1.50% for same day notice of renewal. Senior Term B
Note of $30,000,000 matures on March 17, 2005 and carries a variable interest
rate of LIBOR plus 3% with three days notice of renewal or Prime plus 1.75% for
same day notice of renewal. The six-month LIBOR rate on December 31, 1999 was
6.17%. The revolving facility note matures on March 17, 2004 and carries a
variable interest rate of up to LIBOR plus 2.75% with three days notice of
renewal or up to Prime plus 1.50% for same day notice of renewal. The weighted
average interest rate on the revolving facility note was 8.47% in 1999. At
December 31, 1999, the Company had $5,000,000 of unsecured subordinated notes.
The interest rate on the subordinated notes is fixed at 13% per annum.
These agreements contain covenants pertaining to consolidated net worth and
certain ratios and restrictions including: current assets to current liabilities
ratio, fixed charge and interest coverage ratio, limitations on liens,
restricted payments and investments, transactions with affiliates, sale of
assets, sale and leaseback transactions, and mergers and consolidations.
At December 31, 1999, the Company had $43,500,000, $8,600,000 and $5,000,000
payable under the senior term loans, revolving credit facility note and
subordinated notes, respectively. The interest paid on all borrowings was
$4,896,000 and $2,809,000 for the years ended December 31, 1999 and 1998 and
$1,255,000 for the ten-month period ended December 31, 1997.
The following represents aggregate maturities of long-term debt pursuant to
these borrowing arrangements:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
2000........................................................ $ 2,700,000
2001........................................................ 3,600,000
2002........................................................ 4,200,000
2003........................................................ 4,500,000
Thereafter.................................................. 33,500,000
-----------
$48,500,000
===========
</TABLE>
F-14
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. CAPITAL STOCK
The following summarizes the classes of stock the Company has authorized and
issued as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
SHARES AUTHORIZED SHARES ISSUED
DECEMBER 31 DECEMBER 31
----------------------- ---------------------
CLASS OF COMMON STOCK 1999 1998 1999 1998
- --------------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
A--Voting....................... 2,280,471 2,280,471 1,847,687 1,847,687
A--Non-voting................... 105,190 105,190 84,152 84,152
B--Voting....................... 1,867,808 1,867,808 1,494,246 1,494,246
B--Non-voting................... 290,873 290,873 232,698 232,698
C--Voting....................... 182,939 182,939 146,352 146,352
D--Voting....................... 3,681,251 3,681,251 188,448 150,925
D--Non-voting................... 756,608 756,608 -- --
E--Voting....................... 91,470 91,470 73,176 73,176
F--Voting....................... 6,000,000 6,000,000 2,334,700 2,334,697
G--Non-voting................... 756,608 756,608 605,286 605,286
H--Not designated............... 986,782 986,782 -- --
---------- ---------- --------- ---------
Total shares.................. 17,000,000 17,000,000 7,006,745 6,969,219
========== ========== ========= =========
</TABLE>
In connection with the merger of Apollo and Pacer (as described in Note 2),
the Apollo stockholders agreed to exchange their shares of Class A, B, C, D, E
and G into shares of AverStar at a ratio of approximately 4.6:1. Pacer
stockholders were given the choice of receiving $2.00 per share in cash or
exchanging their shares of Pacer into Class F shares of AverStar at a ratio of
approximately 0.5:1. Such issuance and exchanges are reflected in the table.
Certain classes of common stock have provisions which require the holders,
in certain circumstances, to share a portion of proceeds received upon the sale
of such shares with holders of other classes of common stock.
9. REDEEMABLE COMMON STOCK
In connection with the Pacer acquisition (as described in Note 2), the
Company granted certain shareholders rights that require the Company to purchase
up to a maximum number of shares of Class F--voting common stock held by the
shareholders at $4.09 per share over a four-year period. Shares that are not
redeemed in a year convert to shareholders' equity and the shareholders' rights
to redeem these shares expire. The 1999 activity and schedule of
Class F--voting redeemable shares are as follows:
<TABLE>
<CAPTION>
SHARES
--------
<S> <C>
Balance at December 31, 1998................................ 454,035
Redeemed in 1999............................................ 30,562
-------
Balance at December 31, 1999................................ 423,473
=======
</TABLE>
F-15
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
9. REDEEMABLE COMMON STOCK (CONTINUED)
Class F--voting redeemable shares and related maximum amounts redeemable
annually as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
-------- ----------
<S> <C> <C>
2000................................................... 229,218 $ 937,500
2001................................................... 194,255 794,500
------- ----------
Total................................................ 423,473 $1,732,000
======= ==========
</TABLE>
Certain Class F--voting, redeemable shares serve as collateral on a note
receivable of approximately $850,000 issued to the Company by a former employee.
The note bears interest at 6.36% per annum with scheduled repayments through
May 2001. In the event the Class F shareholder presents certain shares to the
Company for redemption, the proceeds from such redemption are required to be
remitted to the Company in satisfaction of this note, which is included in other
assets in the accompanying consolidated balance sheet.
In addition to the redemption features of the Class F--voting shares, the
Company has also granted to certain management shareholders the right to have
the Company redeem shares of Class A-F stock at certain amounts, as defined. As
of December 31, 1999, management shareholders held approximately 1,526,000
shares with an estimated redemption of fair value of $3,429,000. The redemption
of such shares is limited in the first five years by amounts stipulated in the
Stockholder Agreements. Upon the occurrence of certain events, including an
initial public offering, the redemption features for all classes of stock lapse.
The Company holds promissory notes of $200,000 issued by certain employees
for the purchase of Class A common stock. The promissory notes, which are fully
recourse to the issuers and have been classified as a reduction of redeemable
common stock, bear interest at 7% per annum. Interest is payable semiannually or
annually, and the principal is scheduled for payment from March 2000 through
August 2005.
10. STOCK OPTIONS
The Company has a Long-Term Incentive Plan (the Plan) pursuant to which the
Company may grant Incentive Stock Options, Non-qualified Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights or
Other Stock-Based Awards. The maximum aggregate number of shares of stock
reserved and available for distribution under the Plan shall be 3,349,447,
reduced by the number of shares of stock subject to being issued from time to
time upon the exercise of outstanding awards granted under the Plan. At
December 31, 1999, there were 1,779,834 shares of stock reserved and available
for distribution.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," and will continue to account for option grants to employees under
the Plan in accordance with APB No. 25, "Accounting for Stock Issued to
Employees." Adoption of SFAS No. 123 did not have a material impact on the
Company's financial statements and, accordingly, no pro forma net income has
been disclosed for the years ended December 31, 1999 and 1998 and the ten-month
period ended December 31, 1997 for the
F-16
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. STOCK OPTIONS (CONTINUED)
compensation expense of option grants which otherwise would be required under
the disclosure requirements of SFAS No. 123.
The fair market value of each option grant is estimated on the date using
the Minimum Value option-pricing model with the following weighted-average
assumptions used for grants issued in the years ended December 31, 1999 and 1998
and the ten-month period ended December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield................................ 0% 0% 0%
Expected lives (years)........................ 5 5 5
Range of risk-free interest rates............. 5.09-5.38% 6.22-6.36% 5.70-6.37%
</TABLE>
A summary of the status of the Company's stock compensation plan as of
December 31, 1999, 1998 and 1997 and changes during the periods ending on those
dates is presented below:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
FIXED OPTIONS
Outstanding at beginning of
year............................ 1,323,433 $2.58 588,789 $1.37 533,908 $ 1.37
Granted........................... 190,000 5.25 -- -- 54,881 1.37
Exchanged......................... -- -- 845,086 3.29 -- --
Exercised......................... (4,573) 1.37 (79,473) 1.10 -- --
Forfeited......................... (23,293) 2.20 (30,969) 2.70 -- --
--------- --------- -------
Outstanding at end of year........ 1,485,567 2.93 1,323,433 2.58 588,789 1.37
========= ========= =======
Options exercisable at year end... 763,458 757,055 100,836
Weighted-average fair market value
of options granted/exchanged
during the year................. $ 1.20 $ 0.94 $ 0.34
</TABLE>
F-17
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- --------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
- ------------------------ --------- ----------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
$1.37 to $2.11 593,050 7.8 years $ 1.41 55,941 $1.82
$2.44 to $2.99 103,719 6.6 2.52 103,719 2.52
$3.15 to $3.91 586,681 7.3 3.78 586,681 3.78
$4.05 to $5.25 202,117 4.6 5.15 17,117 4.08
--------- -------
1,485,567 7.2 2.93 763,458 3.47
========= =======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and operating facilities under
non-cancelable operating leases expiring at various dates through May 2009.
Major facilities have leases with options to renew of between three and five
years. Facilities and equipment rental expense charged to operations was
approximately $4,321,000 and $3,273,000 for the years ended December 31, 1999
and 1998 and $1,766,000 for the ten-month period ended December 31, 1997,
respectively.
As of December 31, 1999, future minimum rental commitments under operating
leases were as follows:
<TABLE>
<CAPTION>
FACILITIES
FACILITIES SUBLEASES EQUIPMENT TOTAL
---------- ---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
2000................................... $ 5,191 $(1,165) $344 $ 4,370
2001................................... 4,898 (1,050) 90 3,938
2002................................... 4,394 (575) 49 3,868
2003................................... 4,364 (377) 15 4,002
2004................................... 2,761 -- -- 2,761
Thereafter............................. 12,218 -- -- 12,218
------- ------- ---- -------
Total................................ $33,826 $(3,167) $498 $31,157
======= ======= ==== =======
</TABLE>
As of December 31, 1999, the Company has outstanding letters of credit
totaling $803,000 in favor of certain landlords.
Certain shareholders are entitled to receive fees for ongoing business
planning and consulting services under the terms of consulting agreements
between such shareholders and the Company, up to an aggregate annual amount of
$300,000. These consulting agreements terminate on August 31, 2002. Such fees
totaled approximately $300,000 and $263,000 for the years ended December 31,
1999 and 1998 and $106,000 for the ten-month period ended December 31, 1997,
respectively.
F-18
<PAGE>
AVERSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
12. EARNINGS PER SHARE
The calculations of earnings per share are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator:
Income from continuing operations.................. $2,576 $2,434 $ 198
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding.............. 6,877 6,428 3,865
Effect of dilutive securities:
Employee stock options............................. 623 419 82
Warrants........................................... -- -- 605
------ ------ -----
623 419 687
Dilutive potential common shares:
Denominator for diluted earnings per share:
Adjusted weighted-average shares outstanding and
assumed conversions............................ 7,500 6,847 4,552
====== ====== =====
Basic earnings per share............................. $ 0.37 $ 0.38 $0.05
====== ====== =====
Diluted earnings per share........................... $ 0.34 $ 0.36 $0.04
====== ====== =====
</TABLE>
13. SUBSEQUENT EVENTS
On March 10, 2000, the Company acquired all of the outstanding shares of
common stock of MJR Associates, Inc., an IT firm that provides information
technology staffing solutions to major corporations. Consideration paid for the
acquisition amounted to $9.6 million in cash plus contingent consideration up to
a maximum of $3.75 million based upon fiscal year 2000 performance. The
acquisition will be accounted for as a purchase. Contingent consideration, when
and if due, will be recorded by the Company as goodwill.
On March 24, 2000, the Company entered into a definitive agreement to
exchange all of the outstanding shares of its common stock for shares of common
stock of The Titan Corporation.
F-19
<PAGE>
AVERSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues.................................................... $46,167 $36,346
Cost of revenues............................................ 36,510 28,841
Selling, general and administrative expense................. 7,609 5,297
------- -------
Income from operations...................................... 2,048 2,208
Interest expense, net....................................... 1,447 760
------- -------
Income before taxes......................................... 601 1,448
Provision for income taxes.................................. 270 656
------- -------
Net income.................................................. $ 331 $ 792
======= =======
Earnings per share:
Basic..................................................... $ 0.05 $ 0.11
Diluted................................................... $ 0.04 $ 0.11
Weighted-average shares outstanding:
Basic..................................................... 6,839 6,927
Diluted................................................... 7,560 7,440
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-20
<PAGE>
AVERSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 81 $ 105
Accounts receivable, net.................................. 41,471 37,394
Unbilled receivables, net................................. 12,047 9,554
Other current assets...................................... 1,433 1,775
Refundable income taxes................................... 300 1,068
Deferred income taxes..................................... 1,347 1,347
-------- --------
Total current assets.................................. 56,679 51,243
PROPERTY AND EQUIPMENT:
Land...................................................... 90 90
Computer, equipment and furniture......................... 14,879 13,982
Building and improvements................................. 1,841 1,746
-------- --------
16,810 15,818
Less allowances for depreciation.......................... 12,372 11,531
-------- --------
4,438 4,287
OTHER ASSETS:
Deferred income taxes..................................... 1,013 1,013
Intangible assets, net.................................... 36,243 29,212
Other assets.............................................. 2,845 3,004
-------- --------
40,101 33,229
-------- --------
Total assets.......................................... $101,218 $ 88,759
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 9,625 $ 7,642
Accrued payroll and employee benefits..................... 10,152 10,850
Accrued liabilities....................................... 6,899 7,139
Revolving credit notes payable............................ 20,500 8,600
Current portion of long-term debt......................... 2,925 2,700
Unearned revenue.......................................... 656 656
-------- --------
Total current liabilities............................. 50,757 37,587
LONG-TERM DEBT:
Senior debt............................................... 39,900 40,800
Subordinated debt......................................... 4,691 4,666
-------- --------
44,591 45,466
Redeemable common stock issued and outstanding, 1,949,595
shares.................................................... 4,961 4,961
STOCKHOLDERS' EQUITY:
Common Stock, $.001 par value per share, authorized
17,000,000 shares: issued and outstanding: 5,057,150
shares.................................................. 5 5
Additional paid in capital................................ 11,665 11,665
Accumulated deficit....................................... (9,940) (10,271)
Deferred compensation..................................... (47) (53)
Treasury stock (169,330 and 141,664 shares at March 31,
2000 and December 31, 1999), at cost.................... (774) (601)
-------- --------
Total stockholders' equity.............................. 909 745
-------- --------
Total liabilities and stockholders' equity............ $101,218 $ 88,759
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-21
<PAGE>
AVERSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations........................... $ 331 $ 792
Adjustments to derive cash flows from operating
activities:
Depreciation and amortization............................. 1,457 838
Changes in assets and liabilities
Accounts receivable....................................... (962) (1,535)
Unbilled receivables...................................... (2,493) (253)
Other current assets...................................... 385 1
Accounts payable.......................................... 590 (1,639)
Accrued payroll and employee benefits..................... (797) 985
Accrued liabilities....................................... (987) 1,082
Refundable income taxes................................... 768 656
------- --------
Net cash provided by (used in) operating activities......... (1,708) 927
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... (9,023) (23,260)
Purchase of equipment and leaseholds........................ (474) (693)
Deposits and investment in other assets..................... 129 (214)
------- --------
Net cash used in investing activities....................... (9,368) (24,167)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock.................................. (173) --
Net borrowings of revolving credit.......................... 11,900 6,245
Repayments of long term debt................................ (675) (24,658)
Proceeds from issuance of long term debt.................... -- 43,098
------- --------
Net cash provided by financing activities................... 11,052 24,685
------- --------
Net increase (decrease) in cash and cash equivalents........ (24) 1,445
Cash and cash equivalents at beginning of year.............. 105 332
------- --------
Cash and cash equivalents at end of period.................. $ 81 $ 1,777
======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-22
<PAGE>
AVERSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE COMMON STOCK
AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-----------------------------------
REDEEMABLE
COMMON STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- -------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1999...... 1,950 $4,961 5,057 $5 $11,665 $(10,271)
Purchased treasury stock.........
Deferred compensation............
Net income....................... 331
----- ------ ----- -- ------- --------
BALANCES AT MARCH 31, 2000......... 1,950 $4,961 5,057 $5 $11,665 $ (9,940)
===== ====== ===== == ======= ========
<CAPTION>
STOCKHOLDERS' EQUITY
----------------------------------
TREASURY
STOCK
DEFERRED ------------------- STOCKHOLDERS'
COMPENSATION SHARES COST EQUITY
------------ -------- -------- -------------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1999...... $(53) 142 $(601) $ 745
Purchased treasury stock......... 27 (173) (173)
Deferred compensation............ 6 6
Net income....................... 331
---- --- ----- -----
BALANCES AT MARCH 31, 2000......... $(47) 169 $(774) $ 909
==== === ===== =====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-23
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The information at March 31, 2000 and for the three months ended March 31,
2000 and 1999 is unaudited, but includes all adjustments, consisting only of
normal recurring adjustments, which the management of AverStar, Inc. ("AverStar"
or "the Company) considers necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the periods
presented. The results of the interim periods are not necessarily indicative of
results for the full year.
The financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1999.
NOTE 2. ACQUISITION
On March 10, 2000, the Company acquired all of the outstanding shares of
common stock of MJR Associates, Inc., an IT firm that provides information
technology staffing solutions to major corporations. Consideration paid for the
acquisition amounted to $9.6 million in cash plus contingent consideration up to
a maximum of $3.75 million based upon fiscal year 2000 performance. The
acquisition will be accounted for as a purchase. Contingent consideration, when
and if due, will be recorded by the Company as goodwill.
NOTE 3. EARNINGS PER SHARE
The calculations of earnings per share are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Numerator:
Net income................................................ $ 331 $ 792
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding..................... 6,839 6,927
Effect of dilutive securities:
Employee stock options.................................... 721 513
------ ------
Dilutive potential common shares:
Denominator for diluted earnings per share:
Adjusted weighted-average shares outstanding and assumed
conversions........................................... 7,560 7,440
====== ======
Basic earnings per share.................................... $ 0.05 $ 0.11
====== ======
Diluted earnings per share.................................. $ 0.04 $ 0.11
====== ======
</TABLE>
NOTE 4. MERGER
On March 24, 2000, the Company entered into a definitive agreement to
exchange all of the outstanding shares of its common stock for shares of common
stock of The Titan Corporation.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-24
<PAGE>
APPENDIX A
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
THE TITAN CORPORATION,
V T ACQUISITION CORP.
AND
AVERSTAR, INC.
DATED AS OF MARCH 24, 2000
<PAGE>
TABLE OF CONTENTS
ARTICLES
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ARTICLE I THE MERGER........................................ 2
SECTION 1.01 The Merger................................... 2
SECTION 1.02 Effective Time; Closing Date................. 2
SECTION 1.03 Effect of the Merger......................... 2
SECTION 1.04 Certificate of Incorporation; Bylaws......... 2
SECTION 1.05 Directors and Officers....................... 2
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF
CERTIFICATES.............................................. 3
SECTION 2.01 The Merger................................... 3
SECTION 2.02 Exchange of Certificates..................... 5
SECTION 2.03 Stock Options................................ 7
SECTION 2.04 Certain Adjustments.......................... 8
SECTION 2.05 Closing...................................... 8
SECTION 2.06 Escrow Stock; Determination of Closing
Adjustment.............................................. 9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF COMPANY....... 12
SECTION 3.01 Organization and Qualification............... 12
SECTION 3.02 Subsidiaries................................. 12
SECTION 3.03 Articles of Incorporation and Bylaws......... 12
SECTION 3.04 Capitalization............................... 12
SECTION 3.05 Authority; Binding Obligation................ 13
SECTION 3.06 No Conflict; Required Filings and Consents... 14
SECTION 3.07 Intellectual Property........................ 15
SECTION 3.08 Financial Statements and Condition........... 16
SECTION 3.09 Absence of Certain Developments.............. 16
SECTION 3.10 Absence of Undisclosed Liabilities........... 17
SECTION 3.11 Litigation; Disputes......................... 18
SECTION 3.12 Real Property Leases; Real Property.......... 18
SECTION 3.13 Other Agreements; No Default................. 19
SECTION 3.14 Labor Relations.............................. 19
SECTION 3.15 Pension and Benefit Plans.................... 20
SECTION 3.16 Taxes and Tax Matters........................ 21
SECTION 3.17 Insurance.................................... 22
SECTION 3.18 Arrangements with Related Parties............ 22
SECTION 3.19 Books and Records............................ 22
SECTION 3.20 Assets....................................... 22
SECTION 3.21 Board Recommendation......................... 23
SECTION 3.22 Directors and Officers....................... 23
SECTION 3.23 [Intentionally Omitted]...................... 23
SECTION 3.24 Environmental Matters........................ 23
SECTION 3.25 [Intentionally Omitted]...................... 23
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
SECTION 3.26 Government Contracts and Other Commitments... 23
SECTION 3.27 Relations with Governments................... 24
SECTION 3.28 Broker's Fees................................ 25
SECTION 3.29 Registration Statement; Proxy
Statement/Prospectus.................................... 25
SECTION 3.30 [Intentionally Omitted]...................... 25
SECTION 3.31 Interest Rate and Foreign Exchange
Contracts............................................... 25
SECTION 3.32 Pooling/Tax Matters.......................... 26
SECTION 3.33 Disclosure................................... 26
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND
ACQUIROR SUB.............................................. 26
SECTION 4.01 Organization and Qualification............... 26
SECTION 4.02 Certificate or Articles of Incorporation and
Bylaws.................................................. 27
SECTION 4.03 Capitalization............................... 27
SECTION 4.04 Authority; Binding Obligation................ 27
SECTION 4.05 No Conflict; Required Filings and Consents... 27
SECTION 4.06 No Prior Activities of Acquiror Sub.......... 28
SECTION 4.07 SEC Filings; Financial Statements............ 28
SECTION 4.08 No Undisclosed Liabilities................... 29
SECTION 4.09 Absence of Certain Changes or Events......... 29
SECTION 4.10 Absence of Litigation........................ 29
SECTION 4.11 Certain Practices............................ 29
SECTION 4.12 Government Contracts......................... 30
SECTION 4.13 Intellectual Property........................ 30
SECTION 4.14 Interest Rate and Foreign Exchange
Contracts............................................... 31
SECTION 4.15 Brokers...................................... 31
SECTION 4.16 Pooling/Tax Matters.......................... 31
SECTION 4.17 Registration Statement; Proxy
Statement/Prospectus.................................... 31
SECTION 4.18 Board Recommendation......................... 32
SECTION 4.19 Disclosure................................... 32
ARTICLE V PRE-CLOSING COVENANTS............................. 32
SECTION 5.01 Conduct of Business of Company Until
Effective Time.......................................... 32
SECTION 5.02 Best Efforts to Satisfy Conditions........... 34
SECTION 5.03 Other Actions................................ 34
SECTION 5.04 Certain Tax Matters.......................... 34
SECTION 5.05 Access and Information....................... 34
SECTION 5.06 Notification Filing Required Under HSR Act... 35
SECTION 5.07 Related Party Matters........................ 35
SECTION 5.08 Proxy Statement/Prospectus and Registration
Statement; Company Stockholders Meeting................. 35
SECTION 5.09 [Intentionally Omitted]...................... 36
SECTION 5.10 No Solicitation.............................. 36
SECTION 5.11 NYSE Listing................................. 37
SECTION 5.12 Affiliates................................... 37
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
SECTION 5.13 Tax Treatment................................ 38
SECTION 5.14 Pooling...................................... 38
SECTION 5.15 Negative Covenants of Acquiror............... 38
ARTICLE VI ADDITIONAL AGREEMENTS............................ 39
SECTION 6.01 Stockholder Approval......................... 39
SECTION 6.02 Appropriate Action; Consents; Filings........ 39
SECTION 6.03 Disclosure................................... 40
SECTION 6.04 Public Announcements......................... 40
SECTION 6.05 Obligations of Acquiror Sub.................. 40
SECTION 6.06 Transaction Expenses......................... 41
SECTION 6.07 Board of Directors........................... 41
SECTION 6.08 Company Common Stock......................... 41
ARTICLE VII CONDITIONS PRECEDENT............................ 41
SECTION 7.01 Conditions to Obligations of Each Party Under
This Merger Agreement................................... 41
SECTION 7.02 Additional Conditions to Obligations of
Acquiror and Acquiror Sub............................... 42
SECTION 7.03 Additional Conditions to Obligations of
Company................................................. 44
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER.............. 45
SECTION 8.01 Termination.................................. 45
SECTION 8.02 Effect of Termination........................ 46
SECTION 8.03 Transaction Fees, Termination Fees, Expenses
and Other Payments...................................... 46
SECTION 8.04 Amendment.................................... 46
SECTION 8.05 Extension; Waiver............................ 46
ARTICLE IX SURVIVAL OF REPRESENTATIONS; REMEDIES............ 47
SECTION 9.01 Survival of Representations.................. 47
SECTION 9.02 Indemnification by Company Stockholders...... 47
SECTION 9.03 Third Party Claims........................... 48
SECTION 9.04 No Recourse Against the Company.............. 49
SECTION 9.05 Specific Performance......................... 49
SECTION 9.06 Remedies Cumulative.......................... 49
ARTICLE X GENERAL PROVISIONS................................ 49
SECTION 10.01 Notices..................................... 49
SECTION 10.02 Headings.................................... 50
SECTION 10.03 Severability................................ 51
SECTION 10.04 Entire Agreement............................ 51
SECTION 10.05 Assignment.................................. 51
SECTION 10.06 Parties in Interest......................... 51
SECTION 10.07 Mutual Drafting............................. 51
SECTION 10.08 Governing Law............................... 51
SECTION 10.09 Counterparts................................ 52
SECTION 10.10 Singular and Plural......................... 52
ARTICLE XI DEFINITIONS...................................... 52
</TABLE>
A-iii
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Certificate of Merger
Exhibit B Initial Officers and Directors of Surviving Corporation
Exhibit C Form of Exchange Agreement
Exhibit D Form of Escrow Agreement
Exhibit E Form of Company Affiliate Letter
Exhibit F Form of Acquiror Affiliate Letter
Exhibit G Form of Company's Counsel Opinion
Exhibit H Form of Acquiror's Counsel Opinion
</TABLE>
A-iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of March 24, 2000 (this "Merger
Agreement"), is entered into by and among The Titan Corporation, a corporation
organized under the laws of the State of Delaware ("Acquiror"), V T Acquisition
Corp., a corporation organized under the laws of the State of Delaware
("Acquiror Sub"), and AverStar, Inc., a corporation organized under the laws of
the State of Delaware ("Company") ("Acquiror," "Acquiror Sub" and "Company"
individually hereinafter referred to as "Party" and collectively hereinafter
referred to as the "Parties");
WHEREAS, Acquiror Sub, upon the terms and subject to the conditions of this
Merger Agreement and in accordance with the Delaware General Corporation Law
("Delaware Law"), will merge with and into Company (the "Merger");
WHEREAS, the Board of Directors of Company has (i) determined that the
Merger is advisable and fair to the holders of Company Common Stock (as defined
in Section 3.04 of this Merger Agreement) and is in the best interests of such
stockholders, (ii) advised, authorized, approved and adopted this Merger
Agreement and the transactions contemplated hereby and (iii) recommended
approval and adoption of this Merger Agreement by the stockholders of Company
(the "Company Stockholders");
WHEREAS, the Board of Directors of Acquiror has determined that the Merger
is advisable and in the best interests of Acquiror and its stockholders, the
Board of Directors of Acquiror Sub has determined that the Merger is advisable
and in the best interests of Acquiror Sub and its stockholder, and the Boards of
Directors of Acquiror and Acquiror Sub and the sole stockholder of Acquiror Sub
have advised, authorized, approved and adopted this Merger Agreement and the
transactions contemplated hereby;
WHEREAS, as a condition and inducement to Acquiror's and Acquiror Sub's
entering into this Merger Agreement and incurring the obligations set forth
herein, concurrently with the execution and delivery of this Merger Agreement,
Acquiror and Acquiror Sub are entering into a Stockholders Agreement with
certain stockholders of the Company (the "Company Stockholders Agreement"),
pursuant to which, among other things, such stockholders have agreed to vote
their shares of Company Common Stock in favor of the Merger and have granted
Acquiror an irrevocable proxy to vote such shares of Company Common Stock;
WHEREAS, for United States federal income tax purposes, it is intended that
the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code (as defined in Article XI) and that this Merger
Agreement qualifies as a "plan of reorganization" as defined in Treasury
Regulation 1.368-2(g); and
WHEREAS, for accounting purposes it is intended that the Merger shall be
accounted for as a "pooling of interests" under GAAP (as defined in
Article XI).
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this Merger
Agreement, and intending to be legally bound hereby, the Parties agree as
follows.
A-1
<PAGE>
ARTICLE I
THE MERGER
SECTION 1.01 THE MERGER
Upon the terms and subject to the conditions set forth in this Merger
Agreement, and in accordance with Delaware Law, at the Effective Time (as
defined in Section 1.02 of this Merger Agreement) Acquiror Sub shall be merged
with and into Company, with Company being the surviving corporation (hereinafter
sometimes called "Surviving Corporation") in the Merger. Upon consummation of
the Merger, the separate corporate existence of Acquiror Sub shall cease, and
Surviving Corporation shall continue to exist as a Delaware corporation.
SECTION 1.02 EFFECTIVE TIME; CLOSING DATE
Subject to the provisions of Section 2.05 of this Merger Agreement, as
promptly as practicable after the satisfaction or, if permissible, waiver of the
conditions set forth in Article VII of this Merger Agreement, the Parties shall
cause the Merger to be consummated by filing the Certificate of Merger, attached
hereto as Exhibit A (the "Certificate of Merger"), and any other appropriate
documents with the Delaware Secretary of State, in such form as required by, and
executed in accordance with the relevant provisions of, Delaware Law (the date
and time of such filing being the "Effective Time"). The day on which the
Effective Time shall occur shall hereinafter be referred to as the "Closing
Date."
SECTION 1.03 EFFECT OF THE MERGER
At the Effective Time, the effect of the Merger shall be as provided in
Section 259 and other applicable provisions of Delaware Law. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time, all
the property, rights, privileges, powers and franchises of Company and Acquiror
Sub shall vest in Surviving Corporation, and all debts, liabilities and duties
of Company and Acquiror Sub shall become the debts, liabilities and duties of
Surviving Corporation.
SECTION 1.04 CERTIFICATE OF INCORPORATION; BYLAWS
(a) Unless otherwise determined by Acquiror prior to the Effective Time, at
the Effective Time, the certificate of incorporation of Acquiror Sub shall
continue unchanged and shall be the certificate of incorporation of Surviving
Corporation until thereafter amended as provided by Law and such certificate of
incorporation, except that Acquiror Sub's certificate of incorporation shall be
amended at the Effective Time to reflect that the name of the Surviving
Corporation shall be AverStar, Inc.
(b) Unless otherwise determined by Acquiror prior to the Effective Time, at
the Effective Time, the bylaws of Acquiror Sub shall continue unchanged and
shall be the bylaws of Surviving Corporation until thereafter amended as
provided by Law, the certificate of incorporation of Surviving Corporation and
such bylaws.
SECTION 1.05 DIRECTORS AND OFFICERS
At the Effective Time, the initial officers and directors of Surviving
Corporation shall be the persons listed on Exhibit B, each to hold office in
accordance with the certificate of incorporation and bylaws of Surviving
Corporation, in each case until their respective successors are duly elected or
appointed and qualified.
A-2
<PAGE>
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01 THE MERGER
At the Effective Time, by virtue of the Merger and without any action on the
part of Acquiror, Acquiror Sub, the Company or the holders of any of the
securities referred to in this Section 2.01:
(a) COMMON STOCK. Subject to Section 2.06, (i) each share of Company
Common Stock (excluding any shares described in Section 2.01(c) and (f)) issued
and outstanding immediately prior to the Effective Time shall cease to be
outstanding and shall be converted into and exchanged for the right to receive a
portion of a share of common stock, par value $0.01, of Acquiror ("Acquiror
Common Stock") equal to the Exchange Ratio (as defined below). The shares of
Acquiror Common Stock issuable to the holders of Company Common Stock pursuant
hereto is sometimes referred to herein, collectively, as the "Merger
Consideration". All such shares of Company Common Stock shall cease to be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each certificate previously evidencing any such shares shall
thereafter represent only the right to receive the Merger Consideration. Except
as otherwise provided herein or by applicable law, the holders of certificates
previously evidencing such shares of Company Common Stock outstanding
immediately prior to the Effective Time shall cease to have any rights with
respect to such shares of Company Common Stock. Each such certificate previously
evidencing such shares of Company Common Stock shall be exchanged for the number
of shares indicated in the certificate provided by the Company pursuant to
Section 6.08 in accordance with the provisions of Section 2.02 multiplied by the
Exchange Ratio, rounded up to the nearest whole number.
The "Exchange Ratio" shall be determined as follows:
(i) if the Acquiror Stock Price is less than or equal to $56.00 per
share and greater than or equal to $44.00 per share, the Exchange Ratio
shall be equal to the quotient obtained by dividing the Company Stock Value
by the Acquiror Stock Price;
(ii) if the Acquiror Stock Price is less than $44.00 per share and
greater than or equal to $39.60 per share, the Exchange Ratio shall be equal
to the quotient obtained by dividing the Company Stock Value by $44.00;
(iii) if the Acquiror Stock Price is greater than $56.00 per share and
less than or equal to $61.60 per share, the Exchange Ratio shall be equal to
the quotient obtained by dividing the Company Stock Value by $56.00;
(iv) if the Acquiror Stock Price is greater than $61.60 per share,
(A) Acquiror may terminate this Merger Agreement pursuant to
Section 8.01(d)(i), unless the Company makes a "Company Floating Rate
Election" prior to the Scheduled Closing Date, in which case the Exchange
Ratio shall be equal to the quotient obtained by dividing (x) the product of
the Company Stock Value multiplied by 1.10 by (y) the Acquiror Stock Price
or (B) in the event that Acquiror does not terminate this Agreement pursuant
to clause (A) and the Company does not make a Company Floating Rate
Election, the Exchange Ratio shall be equal to the quotient obtained by
dividing the Company Stock Value by $56.00;
(v) if the Acquiror Stock Price is less than $39.60 per share,
(A) Company may terminate this Merger Agreement pursuant to
Section 8.01(d)(ii), unless the Acquiror makes an "Acquiror Floating Rate
Election" prior to the Scheduled Closing Date, in which case the Exchange
Ratio shall be equal to the quotient obtained by dividing (x) the product of
the Company Stock Value multiplied by 0.90 by (y) the Acquiror Stock Price
or (B) in the event that Company does not terminate this Agreement pursuant
to clause (A) and Acquiror does not make the Acquiror
A-3
<PAGE>
Floating Rate Election, the Exchange Ratio shall be equal to the quotient
obtained by dividing the Company Stock Value by $44.00.
(b) CERTAIN DEFINITIONS. For purposes of this Merger Agreement, (i) the
term "Acquiror Stock Price" shall mean the average of the closing sale prices of
a share of Acquiror Common Stock as reported on the New York Stock Exchange
("NYSE") for the ten (10) consecutive trading days ending with and including the
second trading day immediately preceding the date of the Scheduled Closing Date;
(ii) the term "Acquiror Floating Rate Election" shall mean an election made by
Acquiror to use the Exchange Ratio calculated pursuant to
Section 2.01(a)(v)(A); and (iii) the term "Company Floating Rate Election" shall
mean an election made by the Company to use the Exchange Ratio calculated
pursuant to Section 2.01(a)(iv)(A).
(c) TREASURY STOCK. All shares of capital stock of the Company held in the
treasury of the Company immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof and no amount shall be
delivered or deliverable in exchange therefor.
(d) ACQUIROR SUB STOCK. Each share of common stock, par value $.01 per
share, of Acquiror Sub issued and outstanding immediately prior to the Effective
Time ("Acquiror Sub Stock") shall be converted into and exchanged for one
(1) duly and validly issued, fully paid and nonassessable share of common stock
of the Surviving Corporation.
(e) [Intentionally Omitted].
(f) DISSENTING SHARES. Notwithstanding anything in this Merger Agreement
to the contrary and unless otherwise provided by applicable law, shares of
Company Common Stock that are issued and outstanding immediately prior to the
Effective Time and that are owned by Company Stockholders who have properly
demanded payment of the fair value of their stock (the "Dissenting Shares")
within the meaning of Section 262 of Delaware Law shall not be converted into
the right to receive the Merger Consideration unless and until such Company
Stockholders shall have failed to perfect or shall have effectively withdrawn
their demand, or lost their right of payment under applicable law. If any such
Company Stockholder shall have failed to perfect or shall have effectively
withdrawn or lost such right of payment, each share of Company Common Stock held
by such Company Stockholder shall thereupon be deemed converted into the right
to receive and exchangeable for, at the Effective Time, the Merger Consideration
pursuant to Section 2.02 of this Merger Agreement. Subject to the terms and
conditions of this Merger Agreement, at and after the Effective Time, any holder
of shares of Company Common Stock who complies with Section 262 of Delaware Law
(a "Company Dissenting Stockholder") shall be entitled to obtain payment from
Surviving Corporation of the fair value of such Company Dissenting Stockholder's
shares of Company Common Stock as determined pursuant to Delaware Law; PROVIDED,
HOWEVER, that, to the extent permissible under Delaware Law, no such payment
shall be made unless and until such Company Dissenting Stockholder has
surrendered to the Exchange Agent the Certificate representing the shares of
Company Common Stock for which payment is being made.
(g) PROCEDURE WITH RESPECT TO DISSENTING SHARES. Company shall give
Acquiror (i) prompt notice of any written notice of intent to demand payment for
shares filed pursuant to Section 262 of Delaware Law received by Company,
withdrawals of such notices, and any other instruments served in connection with
such notices pursuant to the relevant provisions of Delaware Law and received by
Company and (ii) the opportunity to direct all negotiations and proceedings with
respect to such notices under Delaware Law consistent with the obligations of
Company thereunder. Company shall not, except with the prior written consent of
Acquiror (which shall not be unreasonably withheld), (A) make any payment with
respect to any such notice, (B) offer to settle or settle any such notices or
(C) waive any failure to timely deliver a written notice in accordance with the
Delaware Law.
A-4
<PAGE>
(h) FLOATING RATE ELECTION. The Company and the Acquiror shall deliver the
Company Floating Rate Election or the Acquiror Floating Rate Election, as the
case may be, by notice to the other Party prior to the Scheduled Closing Date.
The Company Floating Rate Election and the Acquiror Floating Rate Election may
be delivered notwithstanding the fact that the other Party has not then elected
to terminate this Merger Agreement pursuant to Section 2.01(a) and
Section 8.01(d), in which event the other Party shall not be entitled to
terminate this Merger Agreement pursuant to Section 2.01(a) or Section 8.01(d).
SECTION 2.02 EXCHANGE OF CERTIFICATES
(a) EXCHANGE AGENT. As soon as reasonably practicable after the Effective
Time, but in no event later than four (4) business days after the Effective Time
(assuming the Company has provided to Acquiror an electronic list of the names,
addresses, and tax identification numbers of the Company Stockholders and the
information provided in the certificate in Section 6.08 at least one
(1) business day prior to the Effective Time), Acquiror shall deposit with an
exchange agent designated by Acquiror and reasonably acceptable to Company (the
"Exchange Agent") pursuant to an exchange agreement in the form attached hereto
as Exhibit C, for the benefit of the former holders of shares of Company Common
Stock (excluding any shares described in Section 2.01(c)), for issuance and
payment in accordance with this Article II the shares of Acquiror Common Stock
(but not including the Escrow Stock) issuable pursuant to Section 2.01(a) (such
shares of Acquiror Common Stock being hereinafter referred to as the "Exchange
Fund"). Acquiror shall cause the Exchange Agent, pursuant to irrevocable
instructions, to deliver Acquiror Common Stock contemplated to be delivered
pursuant to Section 2.01(a) out of the Exchange Fund within three (3) business
days of the Exchange Agent's receipt of all information and documentation
required pursuant to Section 2.02(b). The Exchange Fund shall not be used for
any purpose other than as set forth in this Section 2.02(a).
(b) PAYMENT PROCEDURES. As soon as reasonably practicable after the
Effective Time, but in no event later than four (4) business days after the
Effective Time (assuming the Company has provided to Acquiror an electronic list
of the names, addresses, and tax identification numbers of the Company
Stockholders and the information provided in the certificate in Section 6.08 at
least one (1) business day prior to the Effective Time), Acquiror shall cause
the Exchange Agent to mail to each record holder, as of the Effective Time, of
an outstanding certificate or certificates (each a "Certificate" and
collectively, the "Certificates") that immediately prior to the Effective Time
evidenced outstanding shares of Company Common Stock (excluding any shares
described in Sections 2.01(c)): (i) a form letter of transmittal and
(ii) instructions for use in effecting the surrender of the Certificates for
payment therefor. The Exchange Agent shall provide to the Company (for delivery
to the Company Stockholders) all such documentation in advance of the Effective
Time, but in any event not less than one (1) week prior to the Closing Date.
Upon surrender to the Exchange Agent of a Certificate, together with such letter
of transmittal duly executed and any other required documents, the holder of
such Certificate shall be entitled to receive in exchange therefor the
applicable consideration set forth in Section 2.01, and such Certificate shall
forthwith be canceled. In the event of a surrender of a Certificate representing
shares of Company Common Stock which are not registered in the transfer records
of the Company under the name of the Person surrendering such Certificate, a
certificate representing the proper number of shares of Acquiror Common Stock
may be issued to a Person other than the Person in whose name the Certificate so
surrendered is registered if (x) such Certificate shall be properly endorsed or
otherwise be in proper form for transfer to the Person surrendering such
Certificate and requesting such issuance, (y) such Person surrendering such
Certificate and requesting such issuance shall pay any transfer or other Taxes
required by reason of the issuance of shares of Acquiror Common Stock to a
Person other than the registered holder of such Certificate or shall establish
to the satisfaction of Acquiror that such Taxes have been paid or are not
applicable, and (z) such Person surrendering such certificate shall, if required
by Acquiror, have such Person's signature
A-5
<PAGE>
guaranteed by a bank, brokerage firm or other financial intermediary that is a
member of a medallion guarantee program. Until surrendered in accordance with
the provisions of this Section 2.02, each Certificate shall represent for all
purposes only the right to receive the applicable consideration set forth in
Section 2.01, without any interest thereon.
(c) ISSUANCES TO AFFILIATES. Notwithstanding anything herein to the
contrary, any Certificate surrendered for exchange by any "affiliate" of the
Company (as that term is used in SEC Accounting Series Release Nos. 130 and 135
and Rule 145 of the rules and regulations of the SEC under the Securities Act)
shall not be exchanged until Acquiror shall have received a signed agreement
from such "affiliate" as provided in Section 5.12 hereof.
(d) NO FURTHER RIGHTS IN STOCK. All shares of Acquiror Common Stock issued
upon the surrender for exchange of Certificates in accordance with the terms of
Sections 2.01 and 2.02 hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to the shares of Company Common Stock
theretofore represented by such Certificates, and there shall be no further
registration of transfer on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock represented by such
Certificates which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, any such Certificates are presented to Acquiror, the
Surviving Corporation or the Exchange Agent for any reason, they shall be
canceled and exchanged as provided in this Article II, except as otherwise
provided by law.
(e) [Intentionally Omitted]
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund that
remains undistributed to the holders of Company Common Stock for twelve
(12) months after the Effective Time shall be delivered to Acquiror, upon
demand, and any holder of Company Common Stock that has not theretofore complied
with this Article II shall thereafter look only to the Surviving Corporation and
Acquiror for the Merger Consideration to which such holder is entitled pursuant
hereto.
(g) NO LIABILITY. Neither Acquiror nor the Surviving Corporation shall be
liable to any holder of shares of Company Common Stock for any Acquiror Common
Stock or cash delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(h) WITHHOLDING OF TAX. Acquiror or the Exchange Agent shall be entitled
to deduct and withhold from the applicable amount of the Merger Consideration
otherwise issuable to any former holder of Company Common Stock such amounts as
Acquiror (or any Affiliate thereof) or the Exchange Agent are required to deduct
and withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign Tax law. To the extent that amounts are so
withheld by Acquiror (or any Affiliate thereof) or the Exchange Agent, such
withheld amounts shall be treated for all purposes of this Merger Agreement as
having been paid to the former holder of Company Common Stock in respect of whom
such deduction and withholding was made by Acquiror (or any Affiliate thereof)
or the Exchange Agent.
(i) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificate
evidencing shares of Company Common Stock shall have been lost, stolen or
destroyed, upon the making of an affidavit setting forth that fact by the Person
claiming such lost, stolen or destroyed Certificate and the granting of a
reasonable indemnity against any claim that may be made against Acquiror or the
Exchange Agent with respect to such Certificate (and if required by Acquiror in
the case of any Certificate or Certificates from any Company Stockholder
representing more than seven thousand five hundred (7,500) shares of Company
Common Stock, the posting by such Person of a bond, in such reasonable amount as
Acquiror may direct), Acquiror shall cause the Exchange Agent to pay to such
Person the applicable amount of the Merger Consideration with respect to such
lost, stolen or destroyed Certificate.
A-6
<PAGE>
(j) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES OF ACQUIROR COMMON
STOCK. No dividends or other distributions declared or made after the Effective
Time with respect to Acquiror Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Acquiror Common Stock evidenced thereby until the
holder of such Certificate shall properly surrender such Certificate in
accordance with the requirements of Section 2.02(b). Subject to the effect of
escheat, tax or other applicable laws, following surrender of any such
Certificate, there shall be paid to the holder of the certificates evidencing
whole shares of Acquiror Common Stock issued in exchange therefor, without
interest, (i) promptly the amount of dividends or other distributions with a
record date after the Effective Time and theretofore paid with respect to such
whole shares of Acquiror Common Stock, and (ii) at the appropriate payment date,
the amount of dividends or other distributions, with a record date after the
Effective Time but prior to surrender and a payment date occurring after
surrender, payable with respect to such whole shares of Acquiror Common Stock.
(k) APPOINTMENT OF STOCKHOLDERS' REPRESENTATIVES. Michael B. Alexander,
Sigmund H. Goldblum and Peter Schulte shall, by virtue of the Merger, be
appointed attorneys-in-fact and authorized and empowered to act, for and on
behalf of any or all of the Company Stockholders (with full power of
substitution in the premises), in connection with the provisions of Article IX
as they relate to the Company and the Company Stockholders generally, and such
other matters as are reasonably necessary for the consummation of the
transactions contemplated hereby including, without limitation, (i) to
compromise on their behalf with Acquiror any claims asserted thereunder,
(ii) to execute and deliver on behalf of the Company Stockholders any documents
or agreements contemplated by or necessary or desirable in connection with this
Merger Agreement and (iii) to take such further actions including coordinating
and administering post-closing matters related to the rights and obligations of
the Company Stockholders as are authorized in this Merger Agreement (the above
named representatives, as well as any subsequent representative(s) of the
Company Stockholders appointed by the Company Stockholders being referred to
herein as the "Stockholders' Representatives"). The Stockholders'
Representatives shall not be liable to any Company Stockholder, Acquiror, the
Surviving Corporation or their respective Affiliates or any other Person with
respect to any action taken or omitted to be taken by the any of Stockholders'
Representatives in their role as Stockholders' Representatives under or in
connection with this Merger Agreement unless such action or omission results
from or arises out of fraud, gross negligence, willful misconduct or bad faith
on the part of the Stockholders' Representatives. Acquiror, Acquiror Sub and the
Surviving Corporation shall be entitled to rely on such appointment and treat
such Stockholders' Representatives, or any one of them, as the duly appointed
attorney-in-fact of each Company Stockholder. Each Company Stockholder who votes
in favor of the Merger pursuant to the terms hereof, by such vote and without
any further action, and each Company Stockholder who receives Merger
Consideration in connection with the Merger, by acceptance thereof and without
any further action, confirms such appointment and authority. In the event
Acquiror receives conflicting instructions from different Stockholders'
Representatives, Acquiror shall be permitted to take no action with respect
thereto until it receives written instructions signed by all Stockholders'
Representatives or directed by court order.
SECTION 2.03 STOCK OPTIONS
(a) As of the Effective Time, each outstanding Option shall be converted
into an option to acquire Acquiror Common Stock as provided in this
Section 2.03. Following the Effective Time, each Option shall continue to have,
and shall be subject to, the terms and conditions of each agreement pursuant to
which such Option was subject immediately prior to the Effective Time
(including, in the case of each Option granted under the Company's 1998 Long
Term Incentive Plan, the terms and conditions of the Company's 1998 Long Term
Incentive Plan under which such Option was granted), except that: (i) each
Option (as converted pursuant to this Section 2.03) shall be exercisable for
that number of whole shares of Acquiror Common Stock equal to the product of
(A) the aggregate number
A-7
<PAGE>
of shares of Company Common Stock for which such Option was exercisable at the
Effective Time, multiplied by (B) the Exchange Ratio, rounded up to the nearest
whole share (provided that all references in such Company Stock Option Plans and
the agreement under which such Option was granted to the Company shall be
references to Acquiror and references to the Company's Common Stock shall be
references to Acquiror Common Stock); and (ii) the exercise price per share of
Acquiror Common Stock issuable pursuant to each Option (as converted pursuant to
this Section 2.03) shall be equal to the exercise price per share of Company
Common Stock under such Option at the Effective Time divided by the Exchange
Ratio, rounded to the nearest whole cent.
(b) The assumption and substitution of Options as provided herein shall not
give the holders of such Options additional benefits or additional (or
accelerated) vesting rights that they did not have immediately prior to the
Effective Time or relieve the holders of such Options from any obligations or
restrictions applicable to their Options or the shares obtainable upon exercise
of the Options. The adjustment provided herein with respect to any Options that
are "incentive stock options" (as defined in Section 422 of the Code) shall be
and is intended to be, effected in a manner that is consistent with continued
treatment of such Options as "incentive stock options" under Section 424(a) of
the Code. The duration and other terms of the converted options provided for in
this Section 2.03 shall be the same as the Options except that all references to
the Company shall be references to Acquiror and references to the Company's
Common Stock shall be references to Acquiror Common Stock. Acquiror shall take
all corporate action necessary to reserve for issuance, at all times any
converted Options provided for in this Section 2.03 are outstanding, a
sufficient number of shares of Acquiror Common Stock for delivery upon the
exercise of such converted Options. The Company will take such action as shall
be reasonably necessary (including but not limited to obtaining waivers from
holders of Options) so that each Option that was unvested or subject to a
repurchase option, risk of forfeiture or other condition under any applicable
Company Stock Option Plans immediately prior to the Effective Time shall
continue to be subject to such vesting, repurchase, forfeiture or other
conditions with respect to the Acquiror Common Stock that may be issuable with
respect thereto after the occurrence of the Effective Time or the consummation
of the transactions contemplated by this Merger Agreement. As of the Effective
Time, the Company shall effect the termination of each other outstanding
unexpired and unexercised option to purchase shares of Company Common Stock.
SECTION 2.04 CERTAIN ADJUSTMENTS
If between the date hereof and the Effective Time, the outstanding shares of
Company Common Stock or of Acquiror Common Stock shall be changed into a
different number of shares by reason of any reclassification, recapitalization,
split-up, combination or exchange of shares, or any dividend payable in stock or
other securities shall be declared thereon with a record date within such
period, the Exchange Ratio (and any other references herein to a price per share
of Acquiror Common Stock) shall be adjusted accordingly to provide the same
economic effect as contemplated by this Merger Agreement prior to such
reclassification, recapitalization, split-up, combination, exchange or dividend.
SECTION 2.05 CLOSING
Subject to the terms and conditions of this Merger Agreement, the closing of
the Merger (the "Closing" and the date of such Closing, the "Scheduled Closing
Date") will take place on the second Business Day after the satisfaction of the
latest to occur or, if permissible, waiver of the conditions set forth in
Article VII of this Merger Agreement at the offices of Hogan & Hartson L.L.P.,
8300 Greensboro Drive, Suite 1100, McLean, Virginia 22102, unless another date
or place is agreed to in writing by the Parties.
A-8
<PAGE>
SECTION 2.06 ESCROW STOCK; DETERMINATION OF CLOSING ADJUSTMENT
(a) ESCROW STOCK. When making the issuances of Acquiror Common Stock
pursuant to Section 2.01(a) above, Acquiror shall withhold from the Company
Stockholders a number of shares of Acquiror Common Stock equal to the quotient
of five percent (5%) of the Transaction Value divided by the Acquiror Stock
Price (the "Escrow Stock"). The Escrow Stock will be placed in escrow as
security for the performance of the indemnity obligations of the Company
Stockholders under Section 9.02 of this Merger Agreement and to pay Acquiror any
Closing Adjustment required to be paid to Acquiror pursuant to this
Section 2.06, all pursuant to the terms and conditions of an escrow agreement
among Acquiror, the Surviving Corporation, the Stockholders' Representatives and
First Union National Bank or another escrow agent designated by Acquiror and
reasonably acceptable to the Company (the "Escrow Agent"), in form attached
hereto as Exhibit D (the "Escrow Agreement"). The Escrow Stock shall be
registered in the name of the Escrow Agent as nominee for the Company
Stockholders. The Merger Consideration otherwise distributable as of the
Effective Time to each Company Stockholder in connection with the Merger as
provided in Section 2.01(a) shall be proportionately reduced to reflect the
Escrow Stock required to be deposited in Escrow pursuant to this
Section 2.06(a) and the Escrow Agreement, and such Escrow Stock shall be
released to the Company Stockholders or Acquiror, as the case may be, only in
accordance with the terms of this Merger Agreement and the Escrow Agreement. The
fees of the Escrow Agent shall be paid by Acquiror. On the earlier to occur of
(i) five (5) business days after the final determination of the Closing
Adjustment and the Loss Adjustment pursuant to Section 2.06(b) (including,
without limitation, final resolution of any disputes with respect thereto) or
(ii) ninety (90) days after Closing, the Escrow Agent shall deliver to the
Company Stockholders, pro-rata in accordance with the number of shares of
Company Common Stock held by each such Company Stockholder immediately prior to
the Effective Time, the Escrow Stock, after deducting therefrom an amount of
Escrow Stock having a value equal to the sum (which shall not be less than zero)
of the Closing Adjustment, if any, and the Loss Adjustment, if any, and shall
deliver to Acquiror an amount of Escrow Stock having a value equal to such sum;
PROVIDED, HOWEVER, that in the event of any dispute over the sum of the Closing
Adjustment and the Loss Adjustment pursuant to Section 2.06(b), the Escrow Stock
having a value equal to the amount of any disputed Closing Adjustment and Loss
Adjustment (together with a number of shares of Escrow Stock which are, in
Acquiror's reasonable judgment, necessary to cover any expenses of Acquiror
necessary to resolve such dispute) need not be delivered until such dispute is
finally resolved. For purposes of this Section 2.06, the value of each share of
Escrow Stock shall be equal to the Closing Acquiror Stock Price.
(b) DETERMINATION OF CLOSING ADJUSTMENT AND LOSS ADJUSTMENT. The "Closing
Adjustment" shall equal (i) the amount by which the Net Debt of the Company and
the Company Subsidiaries as of the Closing Date is greater or less than
(ii) the Estimated Net Debt as set forth in the certificate required to be
delivered pursuant to Section 7.02(k) of this Merger Agreement. The "Loss
Adjustment" shall equal the amount of any Losses for which Acquiror Indemnified
Persons are entitled to indemnification pursuant to Section 9.02. The Company
will use its best efforts to close its books and records for the period ending
on the Closing Date within five (5) days after the Closing Date and shall
deliver to the Acquiror or, at the request of the Acquiror, to Acquiror and
Arthur Andersen LLP, such books and records as shall be requested by Acquiror or
Arthur Andersen LLP to enable Arthur Andersen LLP to perform an audit of the
consolidated financial statements of the Company as of the Closing Date and to
determine the amount of the Closing Adjustment and the Loss Adjustment. Upon
receipt of such books and records, the Acquiror shall use its best efforts to
cause Arthur Andersen LLP to complete an audit of the consolidated financial
statements of the Company in order to provide Acquiror the information necessary
to calculate the amount of the Closing Adjustment and the Loss Adjustment within
sixty (60) days following receipt of the books and records of the Company.
Acquiror shall deliver to the Stockholders' Representatives a draft copy of such
audited financial statements and the draft
A-9
<PAGE>
determination of the amount of the Closing Adjustment and the Loss Adjustment
promptly upon receipt of such items from Arthur Andersen LLP. The Stockholders'
Representatives shall have the right to review and copy the computations and
review workpapers used in connection with the preparation of the audited
financial statements after providing Arthur Andersen LLP with written releases
reasonably acceptable to Arthur Andersen LLP and the computation of the Closing
Adjustment and the Loss Adjustment. If the Stockholders' Representatives
disagree with the determination of the Closing Adjustment or the Loss
Adjustment, the Stockholders' Representatives shall so notify the Acquiror in
writing within ten (10) days after the date of their receipt of the audited
financial statements and the computation of the Closing Adjustment and the Loss
Adjustment, specifying in detail any point of disagreement; PROVIDED, HOWEVER,
that if the Stockholders' Representatives fail to notify the Acquiror in writing
of the Stockholders' Representatives' disagreement within such ten (10) day
period, the determination of the Closing Adjustment and the Loss Adjustment
shall be final, conclusive and binding on the Parties for purposes of
determining the amount of the Escrow Stock to be delivered to Company
Stockholders pursuant to this Section 2.06, PROVIDED, FURTHER, HOWEVER, that the
sum of the Closing Adjustment and the Loss Adjustment shall not exceed five
percent (5%) of the Transaction Value. The Acquiror and the Stockholders'
Representatives shall negotiate in good faith to resolve any such disagreement.
It is the intent of the Parties hereto that upon final determination of the
Closing Adjustment, if any, and the Loss Adjustment, if any, the net amount of
such adjustments, provided such amount is in Acquiror's favor, shall be paid to
Acquiror from the Escrow Stock pursuant to this section. There shall be no
adjustment in the case of a net sum in the Company's favor but the escrow stock
shall be distributed to the Company Stockholders as provided above.
(c) RESOLUTION OF CLOSING ADJUSTMENT. If any such disagreement with
respect to the Closing Adjustment cannot be resolved by the Acquiror and the
Stockholders' Representatives within fifteen (15) days after the Stockholders'
Representatives have received notice from the Acquiror in accordance with
Section 2.06(b) of the existence of such disagreement, the Acquiror and the
Stockholders' Representatives shall jointly select a nationally recognized
independent public accounting firm (which has not performed any service since
January 1, 1996 for either the Company or the Acquiror or any of their
respective Affiliates (the "Accounting Firm")), to act as an arbitrator to
resolve as expeditiously as possible all points of disagreement with respect to
the Closing Adjustment (or, in the event they are unable to agree, either may
request the San Diego, CA office of the American Arbitration Association to make
such selection, which shall be final and binding on the Parties). All
determinations made by the Accounting Firm with respect to the Closing
Adjustment shall be final, conclusive and binding on the Parties hereto. Each
party shall be responsible for its fees and expenses, as well as one-half of the
fees and expenses of the Accounting Firm, incurred in connection with the
resolution of the Closing Adjustment; PROVIDED, HOWEVER, that any such fees and
expenses incurred on behalf of the Company Stockholders may be paid from any
excess Escrow Stock (that is, any Escrow Stock remaining after the final
distribution to Acquiror of Escrow Stock, if any, in respect of the Closing
Adjustment or the Loss Adjustment) pursuant to the Escrow Agreement.
(d) RESOLUTION OF LOSS ADJUSTMENT. If any such disagreement with respect
to the Loss Adjustment cannot be resolved by the Acquiror and the Stockholders'
Representatives within fifteen (15) days after the Stockholders' Representatives
have received notice from the Acquiror in accordance with Section 2.06(b) of the
existence of such disagreement, the Acquiror and the Stockholders'
Representatives shall submit the matter to the San Diego, CA office of the
American Arbitration Association ("AAA") for binding arbitration to be conducted
in accordance with the AAA commercial arbitration rules in effect at the time
such matter is submitted. If any such matter is submitted to the AAA as provided
herein, (A) each of the Acquiror and the Stockholders' Representatives will
furnish to AAA such workpapers and other documents and information as AAA may
request and will be afforded the opportunity to present to AAA any material
relevant to the matter, (B) the determination by AAA, as set forth in a notice
delivered to the Acquiror and the Stockholders' Representatives by
A-10
<PAGE>
AAA, will be binding and conclusive on such parties and (C) the non-prevailing
party shall be responsible for the fees and expenses incurred in connection with
the resolution of the Loss Adjustment; provided, however, that any such fees and
expenses that are to be paid by the Company Stockholders may be paid from any
excess Escrow Stock (that is, any Escrow Stock remaining after the final
distribution to Acquiror of Escrow Stock, if any, in respect of the Closing
Adjustment or Loss Adjustment) pursuant to the Escrow Agreement.
A-11
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as specifically set forth in the Disclosure Letter delivered by
Company to Acquiror prior to the execution and delivery of this Merger Agreement
(the "Company Disclosure Letter") and referenced in the Company Disclosure
Letter to the Section(s) of this Article III to which such disclosure applies,
Company hereby represents, warrants to and agrees with Acquiror and Acquiror Sub
as follows, in each case as of the date of this Merger Agreement and as of the
Closing Date:
SECTION 3.01 ORGANIZATION AND QUALIFICATION
Company is a corporation duly organized, validly existing and in good
standing under Delaware Law, and has the corporate power and authority to own,
operate and lease its Assets, to carry on its business as currently conducted,
to execute and deliver this Merger Agreement and to carry out the transactions
contemplated hereby. Company is duly qualified to conduct business as a foreign
corporation and is in good standing in the states, countries and territories
listed in the Company Disclosure Letter and in each jurisdiction where the
nature of its business or the ownership, operation or leasing of its Assets
makes such qualification necessary except where failure to so qualify would not
have a Company Material Adverse Effect.
SECTION 3.02 SUBSIDIARIES
Section 3.02 of the Company Disclosure Letter lists each Company Subsidiary.
Neither Company nor any Company Subsidiary has any equity investment or other
interest in, nor has Company or any Company Subsidiary made advances or loans to
any Person (other than intra-company transactions between or among Company and a
Company Subsidiary). Section 3.02 of the Company Disclosure Letter sets forth
(a) the authorized capital stock or other equity interests of each Company
Subsidiary and (b) the percentage of the issued and outstanding capital stock or
other equity interests of each Company Subsidiary owned by Company. All of such
shares of capital stock or other equity interests of each Company Subsidiary
have been duly authorized and validly issued and are outstanding, fully paid and
nonassessable and are owned by Company free and clear of all Encumbrances other
than Encumbrances arising under applicable securities Laws. Each Company
Subsidiary is a corporation duly organized, validly existing and in good
standing under the Laws of its state or jurisdiction of incorporation (as listed
in Section 3.02 of the Company Disclosure Letter), and has the requisite
corporate power and authority to own, operate and lease its Assets and to carry
on its business as currently conducted. Each Company Subsidiary is duly
qualified to conduct business as a foreign Person and is in good standing in
each jurisdiction where the nature of its business or the ownership, operation
or the leasing of its Assets makes such qualification necessary except where
failure to so qualify would not have a Company Material Adverse Effect.
SECTION 3.03 ARTICLES OF INCORPORATION AND BYLAWS
Company has furnished to Acquiror a true and complete copy of the
certificate or articles of incorporation of Company and each Company Subsidiary,
as currently in effect on the date of this Merger Agreement, and a true and
correct copy of Company's bylaws and the bylaws of each Company Subsidiary, as
currently in effect on the date of this Merger Agreement. Neither the Company
nor any Company Subsidiary is in violation of any of the provisions of its
respective articles of incorporation or bylaws.
SECTION 3.04 CAPITALIZATION
The authorized capital stock of the Company consists of Seventeen Million
(17,000,000) shares of Company Common Stock, of which (i) 2,280,471 shares are
designated as Voting Class A Common
A-12
<PAGE>
Stock and 105,190 shares are designated as Non-Voting Class A Common Stock,
(ii) 1,867,808 shares are designated as Voting Class B Common Stock and 290,873
shares are designated as Non-Voting Class B Common Stock, (iii) 182,939 shares
are designated as Voting Class C Common Stock, (iv) 3,681,251 are designated as
Voting Class D Common Stock and 756,608 are designated as Non-Voting Class D
Common Stock, (v) 91,470 shares are designated as Voting Class E Common Stock,
(vi) 6,000,000 shares are designated as Voting Class F Common Stock,
(vii) 756,608 shares are designated as Non-Voting Class G Common Stock, and
(viii) 986,782 shares of additional classes of stock which may be issued in one
or more series, from time to time, with such designations, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions thereon (including, without limitation, voting
rights) as may be provided in a resolution or resolutions adopted by the Board
of Directors of the Company. Section 3.04 of the Company Disclosure Letter sets
forth the names and addresses of all holders of record of Company Common Stock
and the number and class of shares held by each such stockholder. No other
shares of Company Common Stock have been reserved for any purpose. There are no
outstanding securities convertible into or exchangeable for Company Common
Stock, any other securities of Company, or any capital stock or other securities
of any Company Subsidiary and no outstanding options, rights (preemptive or
otherwise), or warrants to purchase or to subscribe for any shares of such stock
or other securities of Company or any Company Subsidiary. There are no
outstanding Agreements affecting or relating to the voting, issuance, purchase,
redemption, registration, repurchase or transfer of Company Common Stock, any
other securities of Company, or any capital stock or other securities of any
Company Subsidiary, except as contemplated hereunder. Each of the outstanding
shares of Company Common Stock and of capital stock of, or other equity
interests in, each Company Subsidiary was issued in compliance with all
applicable federal and state Laws concerning the issuance of securities. There
are no obligations, contingent or otherwise, of Company or any Company
Subsidiary to provide funds to, make any investment (in the form of a loan,
capital contribution or otherwise) in, or provide any guarantee with respect to,
any Person other than Company or any Company Subsidiary. There are no Agreements
pursuant to which any Person (other than Company or any Company Subsidiary) is
or may be entitled to receive any of the revenues or earnings, or any payment
based thereon or calculated in accordance therewith, of Company or any Company
Subsidiary. As of the Effective Time, Company shall have only one class of
capital stock.
SECTION 3.05 AUTHORITY; BINDING OBLIGATION
The execution and delivery by Company of this Merger Agreement, the
execution and delivery by Company of all other Agreements, documents,
certificates or other instruments contemplated hereby, and the consummation by
Company of the transactions contemplated hereby and thereby, have been duly
authorized by all necessary corporate action, and no other corporate proceedings
on the part of Company are necessary to authorize this Merger Agreement and the
other Agreements, documents, certificates or other instruments contemplated
hereby, or to consummate the transactions contemplated hereby and thereby, other
than approval by the Company Stockholders and the approval and adoption of this
Merger Agreement by Company in accordance with Delaware Law and Company's
certificate of incorporation and bylaws. This Merger Agreement has been duly
executed and delivered by Company and constitutes a legal, valid and binding
obligation of Company (assuming the Merger Agreement has been duly executed and
delivered by Acquiror and Acquiror Sub and constitutes a legal, valid and
binding obligation of Acquiror and Acquiror Sub), enforceable in accordance with
its terms, except as such enforceability may be subject to the effects of any
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar Laws affecting creditors' rights generally and subject to
the effects of general equitable principles (whether considered in a proceeding
in equity or at law).
A-13
<PAGE>
SECTION 3.06 NO CONFLICT; REQUIRED FILINGS AND CONSENTS
(a) The execution, delivery and performance by Company of this Merger
Agreement and all other Agreements, documents, certificates or other instruments
contemplated hereby, the fulfillment of and compliance with the respective terms
and provisions hereof and thereof, and the consummation by Company of the
transactions contemplated hereby and thereby, do not and will not: (i) conflict
with, or violate any provision of, the certificate of incorporation or bylaws of
Company; (ii) subject to (A) obtaining the requisite approval and adoption of
this Merger Agreement by Company Stockholders in accordance with Delaware Law
and Company's certificate of incorporation and bylaws and (B) obtaining the
consents, approvals, authorizations and permits of, and making filings with or
notifications to, the applicable Governmental Entity pursuant to the applicable
requirements, if any, of the HSR Act, and the filing and recordation of the
Certificate of Merger as required by Delaware Law, conflict with or violate any
Law applicable to Company or any Company Subsidiary, or any of their Assets;
(iii) conflict with, result in any breach of, or constitute a default (or an
event that with notice or lapse of time or both would become a default) or
result in the termination or acceleration, or create in another Person, a put
right, purchase obligation or similar right under any Agreement to which Company
or any Company Subsidiary is a party or by which Company or any Company
Subsidiary, or any of their Assets, may be bound; or (iv) result in or require
the creation or imposition of, or result in the acceleration of, any
indebtedness or any Encumbrance of any nature upon, or with respect to, Company
or any Company Subsidiary or any of the Assets now owned or hereafter acquired
by Company; except for any such conflict or violation described in clause (ii)
above, any such conflict, breach or default described in clause (iii) above, or
any such creation, imposition or acceleration described in clause (iv) above
that would not have a Company Material Adverse Effect and that would not prevent
Company from consummating the Merger on a timely basis.
(b) The execution, delivery and performance by Company and each Company
Subsidiary of this Merger Agreement and all other Agreements, documents,
certificates or other instruments contemplated hereby, the fulfillment of and
compliance with the respective terms and provisions hereof and thereof, and the
consummation by Company and each Company Subsidiary of the transactions
contemplated hereby and thereby, do not and will not: (i) require any consent,
approval, authorization or permit of, or filing with or notification to, any
Person not party to this Merger Agreement, except (A) pursuant to the applicable
requirements, if any, of the HSR Act and Laws of other Governmental Entities,
(B) the filing and recordation of the Certificate of Merger as required by
Delaware Law and (C) where the failure to obtain any consent, approval,
authorization or permit or to make any filing or notification otherwise required
to be disclosed hereunder would not have a Company Material Adverse Effect; or
(ii) result in or give rise to any penalty, forfeiture, Agreement termination,
right of termination, amendment or cancellation, or restriction on business
operations of Company or any Company Subsidiary that would have a Company
Material Adverse Effect.
(c) All returns (other than Tax Returns), reports (other than reports
required to be filed pursuant to the terms of any Government Contract),
statements and other documents required to be filed by the Company or any
Company Subsidiary with any Governmental Entity have been filed in a timely
manner and complied with and are true, correct and complete in all material
respects, except for returns, reports, statements and other documents where the
failure to so file would not be reasonably expected to have a Company Material
Adverse Effect. All material records of every type and nature relating to the
business, operations or Assets of the Company and each Company Subsidiary have
been maintained in all material respects in accordance with good business
practices and are maintained at the Company or Company Subsidiary.
(d) No Governmental Entity or any other Person has notified Company or any
Company Subsidiary in writing that such Governmental Entity or other Person
intends to object to the transactions contemplated hereunder which shall include
for this purpose any objection to the operations of the business of Company or
any Company Subsidiary as part of Acquiror. The Company
A-14
<PAGE>
is not aware of any fact or circumstance related to it or to any Company
Subsidiary that would reasonably be expected to (i) cause the filing of any
objection to any application for any Governmental consent required hereunder,
(ii) lead to any delay in processing such application or (iii) require any
waiver of any Governmental rule, policy or other applicable law, in each case
which would reasonably be expected to materially delay the consummation of the
transaction contemplated hereunder.
SECTION 3.07 INTELLECTUAL PROPERTY
(a) Section 3.07 of the Company Disclosure Letter sets forth an accurate,
correct and complete list, as of the date hereof, of (i) all Intellectual
Property (other than non-registered copyrights) of Company or any Company
Subsidiaries, (ii) all Software of Company or any Company Subsidiary that has
been expensed, if the cost of such Software was greater than $100,000, and all
Software of Company or any Company Subsidiary capitalized on Company's books and
records at any time within the last three (3) fiscal years, (iii) all Software
of Company or any Company's Subsidiary sold or licensed to Persons by Company or
any Company Subsidiary at any time within the last three (3) fiscal years and
(iv) all pending Software development projects approved by senior management of
Company which, if completed as currently anticipated by Company, would be
required to be listed on Section 3.07 of the Company Disclosure Letter pursuant
to clauses (ii) and (iii) above, together with an identification of the division
undertaking such projects. Prior to the Closing, Company will provide to
Acquiror an accurate, correct and complete list and make available to Acquiror
at Company's offices, accurate, correct and complete copies of all written
Agreements with respect to Intangible and Other Property and written summaries
of each oral Agreement with respect to Intangible and Other Property entered
into by Company or any Company Subsidiary from the date hereof through the
Closing Date of a type that is described in this Section 3.07(a).
(b) Company and Company Subsidiaries own, have licensed or otherwise have
the right to use all Intangible and Other Property used in the business of
Company and Company Subsidiaries, as presently conducted or as proposed to be
conducted, except for such Intangible and Other Property the loss of the use of
which is not reasonably likely, individually or in the aggregate (together with
the items set forth in Section 3.07 of the Company Disclosure Letter), to have a
Company Material Adverse Effect. To the knowledge of Company, except as
specifically noted in Section 3.07 of the Company Disclosure Letter, none of the
Software owned, licensed or used by Company or any Company Subsidiary is owned
by or licensed from any employees of Company or any Company Subsidiary.
(c) (i) The use of the Intangible and Other Property by Company or any
Company Subsidiary does not infringe upon or otherwise violate the rights of any
third party in or to such Intangible and Other Property (except as any
Commercial Software licensed or sold to Company or any Company Subsidiary by
unrelated Persons may involve such infringement or violation) and (ii) no claim
has been asserted, and Company is not aware of any claim which can be asserted,
by any Person against Company or Company Subsidiaries with respect to the use of
any item of Intangible and Other Property challenging or questioning the
validity or effectiveness of such use of any such item, except for such
infringements, violations or claims which are not reasonably likely,
individually or in the aggregate (together with the items set forth in
Section 3.07 of the Company Disclosure Letter), to have a Company Material
Adverse Effect. Unless specifically noted in Section 3.07 of the Company
Disclosure Letter, no employee of Company or any Company Subsidiary has a right
to receive a royalty or similar payment, or has any other monetary rights, in
respect of any item of Intangible and Other Property of Company or any Company
Subsidiary. Unless specifically noted in Section 3.07 of the Company Disclosure
Letter, no Person (other than employees of Company or any Company Subsidiary)
has a right to receive a royalty or similar payment, or has any other monetary
rights, in respect of any item of Intangible and Other Property, except for such
rights which are not reasonably likely, individually or in the aggregate
(together with the items set forth in Section 3.07 of the Company Disclosure
Letter),
A-15
<PAGE>
to have a Company Material Adverse Effect. The Merger will not violate any
provision of any Agreements relating to any of the Intangible or Other Property.
Each of Company and Company Subsidiaries has taken reasonable measures to
protect the proprietary nature of each item of Intellectual Property and
Software, and to maintain the confidentiality of all confidential information,
that it owns or uses and are not aware of any unauthorized disclosure of
confidential information.
SECTION 3.08 FINANCIAL STATEMENTS AND CONDITION
(a) Company has prepared the audited consolidated balance sheets of Company
and the Company Subsidiaries as of the end of the fiscal periods ending
February 28, 1997, December 31, 1997, December 31, 1998 and December 31, 1999
(collectively, the "Company Audited Balance Sheet") and the audited consolidated
statements of income, Company's and the Company Subsidiaries' equity and changes
in financial position for each of such fiscal years in each case audited by
Ernst & Young LLP, the Company's independent public accountants, in accordance
with generally accepted auditing standards (other than the report and notes
thereto in the case of the fiscal period ending December 31, 1999) and
accompanied by the related report of Ernst & Young LLP (such balance sheets and
such consolidated statements of income, Company's equity and changes in
financial position are hereinafter referred to collectively as the "Company
Financial Statement"). A true and complete copy of the Company Financial
Statement has been delivered to Acquiror and is attached as an exhibit to, and
constitutes an integral part of, the Company Disclosure Letter.
(b) The Company Financial Statement, including, without limitation, the
notes thereto (other than the notes to the December 31, 1999 financial statement
which will be provided to Acquiror prior to the Effective Time), (i) has been
prepared in accordance with the books and records of Company and its
Subsidiaries and (ii) presents fairly in all material respects the consolidated
financial position of Company and its Subsidiaries at the respective dates
thereof and their consolidated results of operations and cash flows for the
periods indicated, in accordance with GAAP applied throughout the periods
involved (except as noted therein).
SECTION 3.09 ABSENCE OF CERTAIN DEVELOPMENTS
Since December 31, 1999:
(a) the business of Company and each Company Subsidiary has been conducted
in all material respects only in the Ordinary Course of Business;
(b) neither Company nor any Company Subsidiary has become liable in respect
of any guarantee or has incurred or otherwise become liable in respect of any
debt, except for borrowings, letters of credit and bankers' acceptances in the
Ordinary Course of Business under credit facilities in existence on
December 31, 1999;
(c) neither Company nor any Company Subsidiary has mortgaged, pledged or
subjected to any lien any of their respective property, business or assets,
except for Permitted Encumbrances or purchase money or similar security
interests granted in connection with the purchase of equipment or supplies in
the Ordinary Course of Business in an amount not exceeding $100,000 in the
aggregate;
(d) neither Company nor any Company Subsidiary has made any declaration,
setting aside or payment of any dividend or other distribution with respect to,
or repurchase of, any of their respective capital stock or other equity
interests;
(e) neither Company nor any Company Subsidiary has (i) acquired or leased
from any other Person any material assets, or sold or leased to any other Person
or otherwise disposed of any material assets (in each case except for assets
acquired or sold in the Ordinary Course of Business in connection with goods and
services provided to customers); (ii) entered into any contractual obligation
relating to (A) the purchase or sale of any capital stock, partnership interest
or other equity interest in any
A-16
<PAGE>
Person, (B) the purchase of assets constituting a business or (C) any merger,
consolidation or other business combination; (iii) entered into or amended any
lease of real property or material personal property (whether as lessor or
lessee); (iv) canceled or compromised any debt or claim other than accounts
receivable in the Ordinary Course of Business; (v) sold, transferred, licensed
or otherwise disposed of any material intangible assets other than in the
Ordinary Course of Business; (vi) waived or released any right of substantial
value; (vii) instituted, settled or agreed to settle any material action; or
(viii) entered into or consummated any transaction with any Affiliate;
(f) there has been no loss, destruction or damage to any material item of
property of Company or any Company Subsidiary, whether or not insured, which has
had or could reasonably be expected to have a Company Material Adverse Effect;
(g) other than in the Ordinary Course of Business and consistent with past
practices, neither Company nor any Company Subsidiary has made any changes in
the rate of compensation payable or paid, or agreed or orally promised to pay,
conditionally or otherwise, any extra compensation, or severance or vacation
pay, to any director, officer, employee, consultant or agent of Company or any
Company Subsidiary;
(h) neither Company nor any Company Subsidiary has made any change in
(x) its methods of accounting or accounting practices, except as required by
GAAP, or (y) its pricing policies or payment or credit practices or failed to
pay any creditor any amount owed to such creditor when due or granted any
extensions or credit other than in the Ordinary Course of Business;
(i) neither Company nor any Company Subsidiary has terminated or closed any
facility, business or operation which is material to the Company and the Company
Subsidiaries, taken as a whole;
(j) neither Company nor any Company Subsidiary has made any loan, advance or
capital contributions to, or any other investment in, any Person other than
loans in the Ordinary Course of Business;
(k) neither Company nor any Company Subsidiary has adopted or increased any
benefits under any Plan in any material manner;
(l) neither Company nor any Company Subsidiary has written up or written
down any of its respective material assets; and
(m) neither Company nor any Company Subsidiary has entered into any
contractual obligation to do any of the things referred to elsewhere in this
Section 3.09.
SECTION 3.10 ABSENCE OF UNDISCLOSED LIABILITIES
To the knowledge of Company, there are no liabilities or obligations
(whether absolute or contingent, matured or unmatured, known or unknown) of
Company or any Company Subsidiary, including but not limited to liabilities for
Taxes and that are not reflected, or reserved against, in the Company Financial
Statement, except for those that may have been incurred after December 31, 1999
in the Ordinary Course of Business or that would not be reasonably be expected
to have a Company Material Adverse Effect. Since December 31, 1999, neither
Company nor any Company Subsidiary has incurred any liabilities or obligations
(whether absolute or contingent, matured or unmatured, known or unknown) other
than in the Ordinary Course of Business or those which would not reasonably be
expected to have a Company Material Adverse Effect.
A-17
<PAGE>
SECTION 3.11 LITIGATION; DISPUTES
(a) Company has not received notice of, and there is no pending, or, to the
knowledge of Company, threatened, action, suit, claim, arbitration, proceeding
or investigation against, affecting or involving Company or any Company
Subsidiary or their respective businesses or Assets, or the transactions
contemplated by this Merger Agreement, at law or in equity, or before or by any
domestic or foreign court, arbitrator or Governmental Entity that, alone or in
the aggregate, would have a Company Material Adverse Effect. Neither Company nor
any Company Subsidiary is (i) operating under or subject to any order, award,
writ, injunction, decree or judgment of any court, arbitrator or Governmental
Entity which would reasonably be expected to have a Company Material Adverse
Effect or that would prevent or enjoin, or delay in any material respect,
consummation of the Merger or the transactions contemplated hereby or (ii) in
default with respect to any order, award, writ, injunction, decree or judgment
of any court, arbitrator or Governmental Entity which default would reasonably
be expected to have a Company Material Adverse Effect.
(b) Company and each Company Subsidiary have complied and are in compliance
in all material respects with all laws, ordinances, regulations, awards, orders,
judgments, decrees and injunctions applicable to Company and each Company
Subsidiary and their respective businesses or Assets, including all federal,
state and local laws, ordinances, regulations and orders pertaining to
employment or labor, safety, health, zoning and other matters, the failure to
comply with which, in each case, or in the aggregate would reasonably be
expected to have a Company Material Adverse Effect. Company and each Company
Subsidiary have obtained and hold all permits, licenses and approvals (none of
which has been materially modified or rescinded and all of which are in full
force and effect) from all government authorities necessary in order to own, use
and maintain their respective Assets and to conduct their respective businesses
as presently conducted, which the failure to obtain and hold would reasonably be
expected to have a Company Material Adverse Effect.
SECTION 3.12 REAL PROPERTY LEASES; REAL PROPERTY
(a) Section 3.12 of the Company Disclosure Letter lists each real property
lease under which Company or any Company Subsidiary is the lessee or lessor.
Company and each Company Subsidiary are the owners and holders of the leasehold
estates purported to be granted to them by the leases listed in Section 3.12 of
the Company Disclosure Letter. Each such lease is in full force and effect and,
to the knowledge of Company, constitutes a legal, valid and binding obligation
of, and is legally enforceable in all material respects against, the respective
parties thereto. Company and each Company Subsidiary have in all material
respects performed all material obligations thereunder required to be performed
by any of them to date. To the knowledge of Company, no party is in default in
any material respect under any of the foregoing, and there has not occurred any
event which (whether with or without notice, lapse of time or the happening or
occurrence of any other event) would constitute such a material default.
Section 3.12 of the Company Disclosure Letter lists and describes any Real
Property in which Company or any Company Subsidiary holds an interest.
(b) Section 3.12 of the Company Disclosure Letter lists and sets forth a
description for all the Real Property, specifying the owner of each parcel
thereof, and all such Real Property is suitable and adequate for the uses for
which it is currently devoted.
(c) Company and the Company Subsidiaries are the sole owners of good, valid,
fee simple, marketable and insurable (at standard rates) title to the Real
Property respectively owned by them, including, without limitation, all
buildings, structures, fixtures and improvements thereon and all equipment,
machinery and personal property therein, in each case free and clear of all
Encumbrances, except as would not materially detract from the use of the Real
Property.
(d) All buildings, structures, fixtures and other improvements on the Real
Property are in good repair, free of defects (latent or patent), and fit for the
uses to which they are currently devoted. All
A-18
<PAGE>
such buildings, structures, fixtures and improvements on the Real Property
conform to all Laws. The buildings, structures, fixtures and improvements on
each parcel of the Real Property lie entirely within the boundaries of such
parcel of the Real Property, and no structures of any kind encroach on the Real
Property, except as would not materially detract from the use of the Real
Property.
(e) None of the Real Property is subject to any Agreement or other
restriction of any nature whatsoever (recorded or unrecorded) preventing or
limiting Company's or any Company Subsidiary's right to convey or to use it for
its intended use.
(f) The Real Property has direct and unobstructed access to electric, gas,
water, sewer and telephone lines, all of which are adequate for the uses to
which the Real Property is currently devoted and intended to be devoted.
SECTION 3.13 OTHER AGREEMENTS; NO DEFAULT
Sections 3.12 and 3.13 of the Company Disclosure Letter list each Agreement
(other than (w) Agreements solely between Company and any Company Subsidiary,
(x) Government Contracts, (y) Agreements which are purchase or task orders under
a Company Contract and (z) real property leases identified in Section 3.12, to
which Company or any Company Subsidiary is a party or by which Company or any
Company Subsidiary, or any of their respective Assets, is bound, and which
(i) involves expenditures or receipts by Company or any Company Subsidiary
(other than contracts, commitments or Agreements which do not require payments
or yield receipts of more than $250,000 in any twelve (12) month period or more
than $1,000,000 in the aggregate); or (ii) contain covenants that limit the
freedom of Company or any Company Subsidiary to engage in a line of business or
to compete with any third party (Agreements listed pursuant to clauses (i) and
(ii) above, collectively the "Company Contracts"). Each Company Contract is in
full force and effect, constitutes a valid and binding obligation of and is
legally enforceable in accordance with its terms against Company and, to the
knowledge of Company, the Company Contracts are valid, binding and enforceable
obligations of the other parties thereto, except as such enforceability may be
subject to the effects of any applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or similar Laws affecting creditors'
rights generally or subject to the effects of general equitable principles
(whether considered in a proceeding in equity or at law). Company has complied
with all of the provisions of such Company Contracts and is not in default
thereunder, and there has not occurred any event which (whether with or without
notice, lapse of time, or the happening or occurrence of any other event) would
constitute such a default, and the execution of this Merger Agreement by Company
and its performance hereunder will not cause, or result in, a breach or default
under any Company Contract in each case which would reasonably be expected to
have a Company Material Adverse Effect. There has not been (A) any failure by
Company or, to the knowledge of Company, any other party to any such Company
Contract to comply with all material provisions thereof which default or failure
to perform would reasonably be expected to have a Company Material Adverse
Effect, (B) any default by Company or, to the knowledge of Company, any other
party thereunder, which default or failure to perform would reasonably be
expected to have a Company Material Adverse Effect or (C) to the knowledge of
Company (X) any cancellation thereof in writing which has not been cured or
(Y) any outstanding dispute thereunder which has not been cured. Neither Company
nor any Company Subsidiary is a guarantor or otherwise liable for any liability
or obligation (including indebtedness) of any other Person other than any
Company Subsidiary.
SECTION 3.14 LABOR RELATIONS
There are no collective bargaining or other labor union Agreements to which
Company or any Company Subsidiary is a party. There are, and for the past two
(2) years have been, no strikes, work stoppages, union organization efforts or
lawsuits (other than grievance proceedings) pending or, to the knowledge of
Company, threatened between Company or any Company Subsidiary and (a) any
current
A-19
<PAGE>
or former employees of Company or any Company Subsidiary except where such
activity or lawsuits would not reasonably be expected to have a Company Material
Adverse Effect or (b) any union or other collective bargaining unit representing
such employees. Company and each Company Subsidiary have complied and are in
compliance with all Laws relating to employment or the workplace, including,
without limitation, Laws relating to wages, hours, collective bargaining, safety
and health, work authorization, equal employment opportunity, immigration,
withholding, unemployment compensation, worker's compensation, employee privacy
and right to know, except where the failure so to comply would not reasonably be
expected to have a Company Material Adverse Effect.
SECTION 3.15 PENSION AND BENEFIT PLANS
(a) Company has delivered to Acquiror prior to the execution of this Merger
Agreement true and complete copies (or written descriptions, where no written
plan exists) (and, where applicable, the most recent actuarial, valuation or
annual (Form 5500 with attachments) reports with respect thereto) of all
pension, retirement, profit-sharing, deferred compensation, stock option,
employee stock ownership, severance pay, vacation, bonus or other incentive
plans, employment agreements of executive officers or change in control
agreements, medical, vision, dental or other health plans, life insurance plans
and other employee benefit plans or fringe benefit plans, programs, arrangements
or Agreements, including, without limitation, all Company Benefit Plans. No
Company Benefit Plan is or has been a Multiemployer Plan or could subject
Company or any Company Subsidiary to liability under Sections 4063 or 4064 of
ERISA. Company has set forth in the Company Disclosure Letter (i) a list of all
of the Company Benefit Plans, (ii) a list of the Company Benefit Plans that are
Company Pension Plans, (iii) a list of the Company Benefit Plans that are
Company Stock Plans, and (iv) a list of the number of shares covered by,
exercise prices for, and holders of, all stock options granted and available for
grant under the Company Stock Plans.
(b) From their inception, all Company Benefit Plans have been and are in
material compliance (in form and in operation) with the applicable terms of
ERISA and the Code and any other applicable Laws, including the terms of such
plans.
(c) All liabilities (contingent or otherwise) under any Company Benefit Plan
are fully accrued or reserved against in the Company Financial Statement in
accordance with GAAP. Each Company Pension Plan that is subject to Title IV of
ERISA or Section 412 of the Code satisfies the minimum funding standards
(without regard to any waiver) provided for in Section 412 of the Code.
(d) Neither Company nor any Company Subsidiary has any obligations for
retiree health or other welfare benefits for retirees under any Company Benefit
Plan or otherwise except as required by Section 4908(b) of the Code and Sections
601-608 of ERISA, and there are no restrictions on the rights of Company or any
Company Subsidiary to unilaterally amend or terminate any such Company Benefit
Plan at any time without incurring any material liability thereunder.
(e) Neither the execution and delivery of this Merger Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including, without limitation, severance, golden parachute or
otherwise) becoming due to any person under any Company Benefit Plan or
otherwise, (ii) increase any benefits otherwise payable under any Company
Benefit Plan or (iii) result in any acceleration of the time of payment or
vesting of any such benefits.
(f) Each Company Benefit Plan which is intended to be qualified under
Section 401(a) or 401(k) of the Code or qualified as a voluntary employees'
beneficiary association under Sections 501(a) and 501(c)(9) of the Code has
received a favorable determination letter from the IRS that it is so qualified
and so exempt, and no fact or event has occurred that could adversely affect
such qualified or exempt status.
A-20
<PAGE>
(g) Company and each Company Subsidiary have not incurred any material
liability under, and have complied in all material respects with, the Worker
Adjustment Retraining Notification Act and the regulations promulgated
thereunder and do not reasonably expect to incur any such material liability as
a result of actions taken or not taken prior to the consummation of the Merger.
SECTION 3.16 TAXES AND TAX MATTERS
(a) The Company and each Company Subsidiary have paid, or reserved in
accordance with GAAP, all Taxes due and payable by any of them for or with
respect to all periods up to and including the date hereof (without regard to
whether or not such Taxes are or were disputed), whether or not shown on any Tax
Return.
(b) The Company and each Company Subsidiary have filed on a timely basis all
material Company Tax Returns that it was required to file. All such Company Tax
Returns were accurate and complete in all material respects. None of Company or
any Company Subsidiary is the beneficiary of any extension of time within which
to file any Tax Return which has not yet been filed. No written claim has ever
been made (which has not been satisfactorily resolved) by an authority in a
jurisdiction where Company or any Company Subsidiary does not file Company Tax
Returns that any one of them is or may be subject to taxation by that
jurisdiction. None of Company or any Company Subsidiary has given any currently
effective waiver of any statute of limitations in respect of Taxes or agreed to
any currently effective extension of time with respect to a Tax assessment or
deficiency. There are no security interests on any of the assets of Company or
any Company Subsidiary that arose in connection with any failure (or alleged
failure) to pay any Tax except for Permitted Encumbrances.
(c) Company and each Company Subsidiary has withheld and paid all material
Taxes required to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, stockholder or other
third party.
(d) None of Company or any Company Subsidiary has knowledge of any facts or
circumstances which could give rise to a reasonable expectation that any
authority may assess any additional Taxes for any period for which Company Tax
Returns have been filed. There is no dispute or claim concerning any liability
for Taxes of Company or any Company Subsidiary either (i) claimed or raised by
any authority in writing or (ii) as to which Company has knowledge based upon
personal contact with any agent of such authority. Company and each Company
Subsidiary has delivered to the Acquiror copies of, and Section 3.16 of the
Company Disclosure Letter sets forth a complete and accurate list of, Company
Tax Returns filed with respect to the taxable periods of Company and any Company
Subsidiary ended on or after December 31, 1996; indicates those Company Tax
Returns that have been audited; and indicates those Company Tax Returns that
currently are the subject of an audit.
(e) The unpaid Taxes of Company and any Company Subsidiary (i) did not, as
of the date of any financial statements of Company and the Company Subsidiaries
furnished to Acquiror pursuant to Section 3.08 of this Merger Agreement, exceed
the reserve for any Tax Liability (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) set forth
on the face of the such financial statements (rather than in any notes thereto)
and (ii) do not exceed that reserve as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of Company or
any Company Subsidiary in filing their Company Tax Returns.
(f) None of Company or any Company Subsidiary has filed a consent under
Section 341(f) of the Code, concerning collapsible corporations. None of Company
or any Company Subsidiary has been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code. The Company
and each Company Subsidiary has disclosed on its federal income Company Tax
Returns all positions taken therein that could reasonably be expected to give
rise to a substantial understatement of federal income
A-21
<PAGE>
Tax within the meaning of Section 6662 of the Code. None of Company or any
Company Subsidiary is a party to any Tax allocation or sharing agreement. None
of Company or any Company Subsidiary (A) has been a member of an "affiliated
group," as defined in Section 1504(a) of the Code, filing a consolidated federal
income Tax Return (other than a group the common parent of which was Company) or
(B) has any Liability for the Taxes of any Person (other than any of Company)
under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract or otherwise.
SECTION 3.17 INSURANCE
Section 3.17 of the Company Disclosure Letter lists all policies of title,
asset, fire, hazard, casualty, liability, life, worker's compensation and other
forms of insurance of any kind owned or held by Company or any Company
Subsidiary. All such policies: (a) are with insurance companies reasonably
believed by Company to be financially sound and reputable; (b) to the knowledge
of Company are in full force and effect; (c) are sufficient for compliance in
all material respects by Company and by each Company Subsidiary with all
requirements of Law and of all Agreements to which Company or any Company
Subsidiary is a party; (d) to the knowledge of the Company are valid and
outstanding policies enforceable against the insurer; (e) insure against risks
of the kind customarily insured against and in amounts customarily carried by
companies similarly situated and by companies engaged in similar businesses and
owning similar Assets; and (f) have the policy expiration dates set forth in
Section 3.17 of the Company Disclosure Letter.
SECTION 3.18 ARRANGEMENTS WITH RELATED PARTIES
No present or former officer, director, stockholder or Person known by the
Company to be an Affiliate of the Company or the any Company Subsidiary, nor any
Person known by the Company to be an Affiliate of such Person, is currently a
party to any transaction or agreement with the Company or any Company
Subsidiary, including any agreement providing for any loans, advances, the
employment of, furnishing of services by, rental of its Assets from or to, or
otherwise requiring payments to, any such officer, director, stockholder or
affiliate.
SECTION 3.19 BOOKS AND RECORDS
The books of account, stock records, minute books and other corporate and
financial records of Company and each Company Subsidiary are complete and
correct in all material respects and have been maintained in accordance with
reasonable business practices for companies similar to Company and each Company
Subsidiary (except where the failure to do so would not reasonably be expected
to have a Company Material Adverse Effect), and Company and each Company
Subsidiary will have prior to Closing prepared and made available to Acquiror
the minutes for all meetings of the Board of Directors and/or stockholders of
the Company and each Company Subsidiary held as of the date hereof (or written
consents in lieu of such meetings).
SECTION 3.20 ASSETS
Company and each Company Subsidiary have good, valid and marketable title to
all Assets respectively owned by them, including, without limitation, all
material Assets reflected in the Company Financial Statement and all Assets
acquired by Company or by any Company Subsidiary since December 31, 1999 (except
for Assets reflected in the Company Financial Statement or acquired since such
date which have been sold or otherwise disposed of in the Ordinary Course of
Business), free and clear of all Encumbrances other than Permitted Encumbrances.
All material personal property of Company and each Company Subsidiary is in good
operating condition and repair, ordinary wear and tear excepted, and is suitable
and adequate for the uses for which it is intended or is being used. All
material Inventory of Company and each Company Subsidiary (i) consists of items
which are good and
A-22
<PAGE>
merchantable and of a quality and quantity presently usable and salable in the
Ordinary Course of Business and (ii) have been reflected in the Company
Financial Statement in accordance with GAAP.
SECTION 3.21 BOARD RECOMMENDATION
The Board of Directors of Company has unanimously adopted, in compliance
with Delaware Law, a resolution advising, authorizing, approving and adopting
this Merger Agreement and the transactions contemplated hereby, and recommending
approval and adoption of this Merger Agreement and the transactions contemplated
hereby by the Company Stockholders.
SECTION 3.22 DIRECTORS AND OFFICERS
Section 3.22 of the Company Disclosure Letter lists all current directors
and officers of Company and each Company Subsidiary, showing each such person's
name, positions, annual remuneration, bonuses and fringe benefits paid by
Company or any Company Subsidiary for the current fiscal year and the most
recently completed fiscal year.
SECTION 3.23 [INTENTIONALLY OMITTED]
SECTION 3.24 ENVIRONMENTAL MATTERS
Each of the Company and each Company Subsidiary is in material compliance
with all Environmental Laws except where the failure to comply would not
reasonably be expected to have a Company Material Adverse Effect. Neither the
Company nor any Company Subsidiary has any material liability under any
Environmental Law, nor is any of the Company or any Company Subsidiary
responsible for any liability of any other person under any Environmental Law
except for any material liability which would not reasonably be expected to have
a Company Material Adverse Effect. There are no pending or, to the knowledge of
the Company, threatened actions, suits, claims, legal proceedings or other
proceedings based on, and neither the Company nor any Company Subsidiary
directly or indirectly received any notice of any complaint, order, directive,
citation, notice of responsibility, notice of potential responsibility, or
information request from any Governmental Entity or any other person arising out
of or attributable to: (i) the current or past presence at any part of the real
property owned or leased by the Company or any Company Subsidiary (the "Real
Property") of Hazardous Materials (as defined below) or any substances that pose
a hazard to human health or an impediment to working conditions; (ii) the
current or past release or threatened release into the environment from the Real
Property (including, without limitation, into any storm drain, sewer, septic
system or publicly owned treatment works) of any Hazardous Materials or any
substances that pose a hazard to human health or an impediment to working
conditions; (iii) the off-site disposal of Hazardous Materials originating on or
from the Real Property; or (iv) any violation of Environmental Laws at any part
of the Real Property or otherwise arising from the Company's or any Company
Subsidiary's activities involving Hazardous Materials, which in each case, or in
the aggregate, would reasonably be expected to have a Company Material Adverse
Effect.
SECTION 3.25 [INTENTIONALLY OMITTED]
SECTION 3.26 GOVERNMENT CONTRACTS AND OTHER COMMITMENTS
(a) Except as disclosed in Section 3.26 of the Company Disclosure Letter, to
the knowledge of the Company, with respect to Government Contracts held by the
Company or any of its Subsidiaries, there is, as of the date hereof, no
(i) civil fraud or criminal investigation by any government investigative
agency, (ii) suspension or debarment proceeding (or equivalent proceeding)
against the Company or
A-23
<PAGE>
any Company Subsidiaries, (iii) request by the government for a contract price
adjustment based on a claimed disallowance by any governmental agency or at the
direction of a governmental entity or written notice of defective pricing other
than as reserved for on the Company Financial Statement in accordance with GAAP,
(iv) claim or equitable adjustment by the Company or any Company Subsidiaries
against the U.S. Government or any third party in excess of $500,000,
(v) written notice challenging, questioning or disallowing any cost(s) in excess
of $500,000, or (vi) notice of contract termination, cure notice or show cause
notice.
(b) Each Government Contract is in full force and effect, constitutes a
valid and binding obligation of and is legally enforceable in accordance with
its terms against Company and, to the knowledge of Company, the Government
Contracts are valid, binding and enforceable obligations of the other parties
thereto, except as such enforceability may be subject to the effects of any
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar Laws affecting creditors' rights generally or subject to
the effects of general equitable principles (whether considered in a proceeding
in equity or at law). Company has complied with all of the provisions of such
Government Contracts and is not in default thereunder, and there has not
occurred any event which (whether with or without notice, lapse of time, or the
happening or occurrence of any other event) would constitute such a default, and
the execution of this Merger Agreement by Company and its performance hereunder
will not cause, or result in, a breach or default under any Government Contract
in each case. There has not been (A) any failure by Company or, to the knowledge
of Company, any other party to any such Government Contract to comply with all
material provisions thereof which default or failure to perform would have a
Company Material Adverse Effect, (B) any default by Company or, to the knowledge
of Company, any other party thereunder, which default or failure to perform
would not have a Company Material Adverse Effect or (C) to the knowledge of
Company (X) any written cancellation thereof which has been cured or (Y) any
outstanding dispute thereunder which has not been cured. Neither Company nor any
Company Subsidiary is a guarantor or otherwise liable for any liability or
obligation (including indebtedness) of any other Person other than any Company
Subsidiary.
(c) For the purposes of this Merger Agreement, with respect to any party,
"Government Contract" means any prime contract, subcontract, teaming agreement
or arrangement, joint venture, basic ordering agreement, pricing agreement,
letter contract, purchase order, delivery order, change order, Bid or other
arrangement of any kind between such party or any of its Subsidiaries and
(i) the U.S. Government (acting on its own behalf or on behalf of another
country or international organization), (ii) any prime contractor of the U.S.
Government or (iii) any subcontractor with respect to any contract of a type
described in clauses (i) or (ii) above. For the purposes of this Merger
Agreement, with respect to any party, "Bid" means any quotation, bid or proposal
made by such party or any of its Subsidiaries that if accepted or awarded would
lead to a contract with the U.S. Government or any other person for the design,
manufacture and sale of products or the provision of services.
SECTION 3.27 RELATIONS WITH GOVERNMENTS
Neither the Company, any Company Subsidiary nor, to the knowledge of the
Company, any of the Company's or any Company Subsidiary's officers, directors,
employees or agents (or stockholders, distributors, representatives or other
persons acting on the express, implied or apparent authority of the Company or
any Company Subsidiary) have paid, given or received or have offered or promised
to pay, give or receive, any bribe or other unlawful payment of money or other
thing of value, any unlawful discount, or any other unlawful inducement, to or
from any person or Governmental Entity in the United States or elsewhere in
connection with or in furtherance of the business of the Company or any Company
Subsidiary (including, without limitation, any offer, payment or promise to pay
money or other thing of value (a) to any foreign official, political party (or
official thereof) or candidate for
A-24
<PAGE>
political office for the purposes of influencing any act, decision or omission
in order to assist the Company or any Company Subsidiary in obtaining business
for or with, or directing business to, any person, or (b) to any person, while
knowing that all or a portion of such money or other thing of value will be
offered, given or promised to any such official or party for such purposes);
except for minimal payments, discounts or inducements which would not reasonably
be expected to have a Company Material Adverse Effect. Neither the business of
the Company nor any Company Subsidiary is in any manner dependent upon the
making or receipt of such payments, discounts or other inducements except for
minimal payments, discounts or inducements which would not reasonably be
expected to have a Company Material Adverse Effect. Neither the Company nor any
Company Subsidiary has otherwise taken any action that would cause the Company
or any Company Subsidiary to be in violation of the Foreign Corrupt Practices
Act of 1977, as amended, or any applicable Laws of similar effect.
SECTION 3.28 BROKER'S FEES
Neither the Company nor any Company Subsidiary has any liability or
obligation to pay any fees or commissions to any broker, finder, or similar
agent with respect to the transactions contemplated by this Merger Agreement.
SECTION 3.29 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS
The information supplied by the Company or required to be supplied by the
Company (except to the extent revised or superseded by amendments or
supplements) for inclusion in the registration statement on Form S-4, or any
amendment or supplement thereto, pursuant to which the shares of Acquiror Common
Stock to be issued in the Merger will be registered under the Securities Act
(including any amendments or supplements, the "Registration Statement") shall
not, at the time the Registration Statement (including any amendments or
supplements thereto) is declared effective by the SEC, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The information
supplied by the Company or required to be supplied by the Company (except to the
extent revised or superseded by amendments or supplements) for inclusion in the
proxy statement relating to the Company Stockholders Meeting (such proxy
statement, together with the prospectus relating to the shares of Acquiror
Common Stock to be issued in the Merger, in each case as amended or supplemented
from time to time, the "Proxy Statement/ Prospectus") shall not, on the date the
Proxy Statement/Prospectus is first mailed to the Company's stockholders, at the
time of the Company Stockholders Meeting and at the Effective Time, contain any
statement which, at such time, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they are
made, not false or misleading, or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies by or on behalf of the Company for the Company
Stockholders Meeting which has become false or misleading. Notwithstanding the
foregoing, the Company makes no representation, warranty or covenant with
respect to any information supplied or required to be supplied by Acquiror which
is contained in or omitted from any of the foregoing documents.
SECTION 3.30 [INTENTIONALLY OMITTED]
SECTION 3.31 INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS
All material interest rate swaps, caps, floors and option agreements and
other interest rate risk management arrangements and foreign exchange contracts
to hedge the Company's investments in foreign subsidiaries, whether entered into
for the account of the Company or any Company Subsidiary,
A-25
<PAGE>
were entered into in the Ordinary Course of Business and, to the Company's
knowledge, in accordance with prudent business practice and applicable rules,
regulations and policies of any Governmental Entity and with counterparties
believed to be financially responsible at the time and at the date hereof, and
in all material respects are valid and binding obligations of the Company or a
Company Subsidiary enforceable in accordance with their terms (except as may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting the rights of creditors generally and the availability of equitable
remedies), and are in full force and effect in all material respects. The
Company and each Company Subsidiary has duly performed in all material respects
its material obligations thereunder to the extent that such obligations to
perform have accrued, and, to the Company's knowledge, there are no material
breaches, violations or defaults or allegations or assertions of such by any
other party thereunder.
SECTION 3.32 POOLING /TAX MATTERS
(a) Neither Company nor any of its "affiliates" (as defined in
Section 5.12) has taken or has agreed to take any action or failed to take any
action that would prevent the Merger from (i) being treated for financial
accounting purposes as a "pooling of interests" in accordance with GAAP and the
regulations and interpretations of the SEC, or (ii) from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
(b) At or prior to the date hereof, Company has received a draft of the
letter described in Section 7.02(h)(i).
SECTION 3.33 DISCLOSURE
No representation or warranty of the Company in this Merger Agreement when
read together with the information in the Section of the Company Disclosure
Letter applicable thereto is misleading with respect to any material fact or
omits to state a material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF ACQUIROR AND ACQUIROR SUB
Except as specifically set forth in the Disclosure Letter delivered by
Acquiror and Acquiror Sub to Company prior to the execution and delivery of this
Merger Agreement (the "Acquiror Disclosure Letter") and referenced in the
Acquiror Disclosure Letter to the Section(s) of this Article IV to which such
disclosure applies, Acquiror and Acquiror Sub hereby jointly and severally
represent, warrant to and agree with Company as follows, in each case as of the
date of this Merger Agreement and as of the Closing Date:
SECTION 4.01 ORGANIZATION AND QUALIFICATION
Acquiror and each Subsidiary of Acquiror (each a "Titan Subsidiary" and
collectively the "Titan Subsidiaries") is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, and has the corporate power and authority to own, operate and
lease its Assets, and to carry on its business as currently conducted. Acquiror
and each Titan Subsidiary is duly qualified to conduct business as a foreign
corporation and is in good standing in the states, countries and territories
listed in the Acquiror Disclosure Letter and in each jurisdiction where the
nature of its business or the ownership, operation or leasing of its Assets
makes such qualification necessary except where failure to so qualify would not
reasonably be expected to have an Acquiror Material Adverse Effect.
A-26
<PAGE>
SECTION 4.02 CERTIFICATE OR ARTICLES OF INCORPORATION AND BYLAWS
Acquiror has furnished to Company a true and complete copy of the
certificate of incorporation of Acquiror and the certificate of incorporation of
Acquiror Sub, as currently in effect on the date of this Merger Agreement,
certified as of a recent date by the Secretary of State of Delaware and a true
and complete copy of the bylaws of Acquiror and Acquiror Sub. Neither Acquiror
nor Acquiror Sub is in violation of any of the provisions of its respective
certificate of incorporation or bylaws.
SECTION 4.03 CAPITALIZATION
The authorized capital stock of Acquiror consists of one hundred million
(100,000,000) shares of Acquiror Common Stock and two million five hundred
thousand (2,500,000) shares of preferred stock, par value $.01 per share
("Acquiror Preferred Stock"). As of March 15, 2000: (i) 50,618,107 shares of
Acquiror Common Stock were issued and outstanding; (ii) 693,300 shares of
Acquiror Preferred Stock were issued and outstanding; (iii) 1,000,000 shares of
Acquiror Common Stock were reserved for issuance upon the exercise of
outstanding employee stock options or other rights to purchase or receive
Acquiror Common Stock granted under Acquiror's Stock Option Plan of 1997 or
under any other Acquiror Employee Stock Option Plan (collectively, the "Acquiror
Stock Option Plan"); (iv) 500,000 shares of Acquiror Common Stock were reserved
for issuance pursuant to Acquiror's Employee Stock Purchase Plan (the "Acquiror
Stock Purchase Plan"); and (v) 1,119,465 shares of Acquiror Common Stock were
held by Acquiror in Acquiror's treasury. No other shares of Acquiror Common
Stock have been reserved for any purpose. Except as described above, there are
no outstanding securities convertible into or exchangeable for Acquiror Common
Stock, any other securities of any Acquiror, or any capital stock or other
securities of any Acquiror Subsidiary and no outstanding options, rights
(preemptive or otherwise), or warrants to purchase or to subscribe for any
shares of such stock or other securities of Acquiror or any Acquiror Subsidiary.
SECTION 4.04 AUTHORITY; BINDING OBLIGATION
The execution and delivery by Acquiror and Acquiror Sub of this Merger
Agreement and all other Agreements, documents, certificates or other instruments
contemplated hereby, and the consummation by Acquiror and Acquiror Sub of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate action, and no other corporate proceedings on the part of
Acquiror or Acquiror Sub are necessary to authorize this Merger Agreement and
the other Agreements, documents, certificates or other instruments contemplated
hereby, or to consummate the transactions contemplated hereby and thereby. This
Merger Agreement has been duly executed and delivered by Acquiror and Acquiror
Sub and constitutes a legal, valid and binding obligation of each of Acquiror
and Acquiror Sub (assuming the Merger Agreement has been duly executed and
delivered by Company and constitutes a legal, valid and binding obligation of
Company), enforceable in accordance with its terms, except as such
enforceability may be subject to the effect of any applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or similar Laws
affecting creditors' rights generally and subject to the effect of general
equitable principles (whether considered in a proceeding in equity or at law).
SECTION 4.05 NO CONFLICT; REQUIRED FILINGS AND CONSENTS
(a) The execution, delivery and performance by Acquiror and Acquiror Sub of
this Merger Agreement and all other Agreements, documents, certificates or other
instruments contemplated hereby, the fulfillment of and compliance with the
respective terms and provisions hereof and thereof, and the consummation by
Acquiror and Acquiror Sub of the transactions contemplated hereby and thereby,
do not and will not: (i) conflict with, or violate any provision of, the
certificate of incorporation or the bylaws of Acquiror, or the certificate of
incorporation or the bylaws of Acquiror
A-27
<PAGE>
Sub; (ii) subject to obtaining the consents, approvals, authorizations and
permits of, and making filings with or notifications to, the applicable
Governmental Entity pursuant to the applicable requirements, if any, of the HSR
Act and the filing and recordation of the Certificate of Merger as required by
Delaware Law, conflict with or violate any Law applicable to Acquiror or
Acquiror Sub or any of their respective Assets; (iii) conflict with, result in
any breach of, constitute a default (or an event that with notice or lapse of
time or both would become a default) under any Agreement to which Acquiror or
Acquiror Sub is a party or by which Acquiror or Acquiror Sub or any of their
respective Assets may be bound; or (iv) result in or require the creation or
imposition of, or result in the acceleration of, any indebtedness or any
Encumbrance of any nature upon, or with respect to, Acquiror or Acquiror Sub;
except for any such conflict or violation described in clause (ii) above, any
such conflict, breach or default described in clause (iii) above, or any such
creation, imposition or acceleration described in clause (iv) above that would
not have an Acquiror Material Adverse Effect and that would not prevent Acquiror
or Acquiror Sub from consummating the Merger on a timely basis.
(b) The execution, delivery and performance by Acquiror and Acquiror Sub of
this Merger Agreement and all other Agreements, documents, certificates or other
instruments contemplated hereby, the fulfillment of and compliance with the
respective terms and provisions hereof and thereof, and the consummation by
Acquiror and Acquiror Sub of the transactions contemplated hereby and thereby,
do not and will not: (i) require any consent, approval, authorization or permit
of, or filing with or notification to, any Person not party to this Merger
Agreement, except (A) pursuant to the applicable requirements, if any, of the
HSR Act, (B) the filing and recordation of the Certificate of Merger as required
by Delaware Law and (C) where the failure to obtain any consent, approval,
authorization or permit or to make any filing or notification otherwise required
to be disclosed hereunder would not have an Acquiror Material Adverse Effect; or
(ii) result in or give rise to any penalty, forfeiture, Agreement termination,
right of termination, amendment or cancellation, or restriction on business
operations of Acquiror or Surviving Corporation that would have an Acquiror
Material Adverse Effect.
SECTION 4.06 NO PRIOR ACTIVITIES OF ACQUIROR SUB
Acquiror Sub was formed solely for the purpose of engaging in the
transactions contemplated by this Merger Agreement and has engaged in no other
business activities and has conducted its operations only as contemplated
hereby.
SECTION 4.07 SEC FILINGS; FINANCIAL STATEMENTS
(a) Acquiror has filed all forms, reports, statements and other documents
required to be filed with the SEC since January 1, 1997, and has heretofore
delivered to the Company, in the form filed with the SEC since such date,
together with any amendments thereto, all of its (i) Annual Reports on
Form 10-K, (ii) Quarterly Reports on Form 10-Q, (iii) proxy statements relating
to meetings of stockholders (whether annual or special), (iv) reports on
Form 8-K and (v) other reports or registration statements filed by Acquiror and
such Acquiror Subsidiaries (collectively, the "Acquiror SEC Reports"). As of
their respective filing dates, the Acquiror SEC Reports (i) complied as to form
in all material respects with the requirements of the Exchange Act and the
Securities Act, as applicable, and (ii) did not at the time they were filed
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
A-28
<PAGE>
(b) The audited consolidated financial statements and unaudited interim
financial statements of Acquiror included in the Acquiror SEC Reports, including
all related notes and schedules, complied in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto. The financial statements, including all related
notes and schedules, contained in the Acquiror SEC Reports (or incorporated by
reference therein) present fairly in all material respects the consolidated
financial position of Acquiror and the Acquiror Subsidiaries as at the
respective dates thereof and the consolidated results of operations and cash
flows of Acquiror and the Acquiror Subsidiaries for the periods indicated, in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be noted therein) and subject in the case of interim
financial statements to normal year-end adjustments.
SECTION 4.08 NO UNDISCLOSED LIABILITIES
To the knowledge of Acquiror, neither Acquiror nor any of the Titan
Subsidiaries has any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, except: (a) liabilities or obligations
reflected in the Acquiror SEC Reports; (b) liabilities or obligations incurred
since September 30, 1999, in the Ordinary Course of Business that have not had,
and are not reasonably likely to have (without taking into account the effects
of the consummation of the Merger), an Acquiror Material Adverse Effect; and
(c) liabilities or obligations that have not had, and are not reasonably likely
to have (without taking into account the effects of the consummation of the
Merger), an Acquiror Material Adverse Effect.
SECTION 4.09 ABSENCE OF CERTAIN CHANGES OR EVENTS
Since September 30, 1999, except as contemplated by this Merger Agreement or
as disclosed in any Acquiror SEC Report filed since September 30, 1999, Acquiror
and the Titan Subsidiaries have conducted their businesses only in the ordinary
course and in a manner consistent with past practice and, since such date, there
has not been (a) any change in the business, operations, properties, condition
(financial or otherwise), assets or liabilities (including, without limitation,
contingent liabilities) of Acquiror or any Titan Subsidiary having, individually
or in the aggregate, an Acquiror Material Adverse Effect, (b) any declaration,
setting aside or payment of any dividend or distribution in respect of the
shares of its capital stock or any redemption, purchase or other acquisition of
any of its securities, or (c) any agreement by Acquiror or any Titan Subsidiary
to take any of the actions described in this Section 4.09 except as expressly
contemplated by this Merger Agreement.
SECTION 4.10 ABSENCE OF LITIGATION
Except as set forth in the Acquiror SEC Reports, there are: (a) no claims,
actions, suits, investigations, or proceedings pending or, to Acquiror's
knowledge, threatened against Acquiror or any of the Titan Subsidiaries before
any court, administrative, governmental, arbitral, mediation or regulatory
authority or body, domestic or foreign, that would be reasonably likely to have
an Acquiror Material Adverse Effect or that would prevent or enjoin, or delay in
any material respect, consummation of the Merger or the transactions
contemplated hereby; and (b) no orders of any Governmental Entity or arbitrator
outstanding against Acquiror or any Titan Subsidiary that would reasonably be
likely to have an Acquiror Material Adverse Effect or that would prevent or
enjoin, or delay in any material respect, consummation of the Merger or the
transactions contemplated hereby.
SECTION 4.11 CERTAIN PRACTICES
Except as would not, individually or in the aggregate, reasonably be
expected to have an Acquiror Material Adverse Effect, none of Acquiror or any
Titan Subsidiary or any director, officer, agent, consultant or employee of
Acquiror or any Titan Subsidiary has: (a) used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity; (b) directly or
A-29
<PAGE>
indirectly, paid or delivered any fee, commission or other sum of money or item
or property, however characterized, to any finder, agent, government official or
other party, in the United States or any other country, which is in any manner
related to the business or operations of Acquiror or any Titan Subsidiary, that
was illegal under any federal, state or local Laws of the United States or any
other country having jurisdiction; (c) made any payment to any customer or
supplier of Acquiror or any Titan Subsidiary or any officer, director, partner,
employee, consultant or agent of any such customer or supplier, for the unlawful
sharing of fees or to any such customer or supplier or any such officer,
director, partner, employee, consultant or agent for the unlawful rebating of
charges, or engaged in any other unlawful reciprocal practice, or made any other
unlawful payment or given any other unlawful consideration to any such customer
or supplier or any such officer, director, partner, employee, consultant or
agent, in respect of the business of Acquiror or any Titan Subsidiary; (d) made
any other unlawful payment; or (e) established or maintained any fund or asset
that has not been appropriately recorded in the books and records of Acquiror
that would be in violation of law.
SECTION 4.12 GOVERNMENT CONTRACTS
To the knowledge of Acquiror, with respect to Government Contracts held by
Acquiror or any of the Titan Subsidiaries, there is, as of the date hereof, no
(i) civil fraud or criminal investigation by any government investigative agency
that is reasonably likely to have an Acquiror Material Adverse Effect,
(ii) suspension or debarment proceeding (or equivalent proceeding) against the
Acquiror or any Titan Subsidiaries that is reasonably likely to have an Acquiror
Material Adverse Effect, (iii) request by the government for a contract price
adjustment based on a claimed disallowance by Defense Contract Audit Agency or
claim of defective pricing, (iv) claim or equitable adjustment by the Acquiror
or any Titan Subsidiaries against the U.S. Government or any third party in
excess of $500,000, (v) written notice challenging, questioning or disallowing
any cost(s) in excess of $500,000, or (vi) notice of contract termination, cure
notice or show cause notice.
SECTION 4.13 INTELLECTUAL PROPERTY
(a) Acquiror and Titan Subsidiaries own, have licensed or otherwise have the
right to use all Intangible and Other Property used in the business of Acquiror
and Titan Subsidiaries, as presently conducted or as proposed to be conducted,
except for such Intangible and Other Property the loss of the use of which is
not reasonably likely, individually or in the aggregate, to have a Acquiror
Material Adverse Effect. To the knowledge of Acquiror, except as specifically
noted in Section 4.13 of the Acquiror Disclosure Letter, none of the Software
owned, licensed or used by Acquiror or any Titan Subsidiary is owned by or
licensed from any employees of Acquiror or any Titan Subsidiary.
(b) (i) The use of the Intangible and Other Property by Acquiror or any
Titan Subsidiary does not infringe upon or otherwise violate the rights of any
third party in or to such Intangible and Other Property (except as any
Commercial Software licensed or sold to Acquiror or any Titan Subsidiary by
unrelated Persons may involve such infringement or violation) and (ii) except as
set forth in Section 4.13 of the Acquiror Disclosure Letter, no claim has been
asserted, and Acquiror is not aware of any claim which can be asserted, by any
Person against Acquiror or Titan Subsidiaries with respect to the use of any
item of Intangible and Other Property challenging or questioning the validity or
effectiveness of such use of any such item, except for such infringements,
violations or claims which are not reasonably likely, individually or in the
aggregate, to have an Acquiror Material Adverse Effect. No employee of Acquiror
or any Acquiror Subsidiary has a right to receive a royalty or similar payment,
or has any other monetary rights, in respect of any item of Intangible and Other
Property of Acquiror or any Titan Subsidiary. No Person (other than employees of
Acquiror or any Titan Subsidiary) has a right to receive a royalty or similar
payment, or has any other monetary rights, in respect of any item of Intangible
and Other Property, except for such rights which are not reasonably likely,
individually or in the aggregate, to have an Acquiror Material Adverse Effect.
Each of Acquiror and Titan Subsidiaries
A-30
<PAGE>
has taken reasonable measures to protect the proprietary nature of each item of
Intellectual Property and Software, and to maintain the confidentiality of all
confidential information, that it owns or uses and is not aware of any
unauthorized disclosure of confidential information.
SECTION 4.14 INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS
All material interest rate swaps, caps, floors and option agreements and
other interest rate risk management arrangements and foreign exchange contracts
to hedge Acquiror's investments in foreign subsidiaries, whether entered into
for the account of the Acquiror or any Titan Subsidiary, were entered into in
the Ordinary Course of Business and, to the Acquiror's knowledge, in accordance
with prudent business practice and applicable rules, regulations and policies of
any Governmental Entity and with counterparties believed to be financially
responsible at the time and at the date hereof, and in all material respects are
valid and binding obligations of the Acquiror or the applicable Titan Subsidiary
enforceable in accordance with their terms (except as may be limited by
bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the
rights of creditors generally and the availability of equitable remedies), and
are in full force and effect in all material respects. Acquiror and each Titan
Subsidiary has duly performed in all material respects its material obligations
thereunder to the extent that such obligations to perform have accrued, and, to
the Acquiror's knowledge, there are no material breaches, violations or defaults
or allegations or assertions of such by any other party thereunder.
SECTION 4.15 BROKERS
Except for Credit Suisse First Boston, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Merger Agreement based
upon arrangements made by or on behalf of Acquiror.
SECTION 4.16 POOLING/TAX MATTERS
(a) Neither Acquiror nor any of its "affiliates" (as defined in
Section 5.12) has taken or agreed to take any action or failed to take any
action that would prevent the Merger from (i) being treated for financial
accounting purposes as a "pooling of interests" in accordance with GAAP and the
regulations and interpretations of the SEC, or (ii) from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
(b) At or prior to the date hereof, Acquiror has received a draft of the
letter described in Section 7.02(h)(ii).
SECTION 4.17 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS.
The information supplied by Acquiror or required to be supplied by Acquiror
(except to the extent revised or superseded by amendments or supplements) for
inclusion in the Registration Statement, or any amendment or supplement thereto,
shall not, at the time the Registration Statement (including any amendments or
supplements thereto) is declared effective by the SEC, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The information
supplied by Acquiror or required to be supplied by Acquiror (except to the
extent revised or superseded by amendments or supplements) for inclusion in the
Proxy Statement/Prospectus shall not, on the date the Proxy Statement/Prospectus
is first mailed to the Company's stockholders and at the Effective Time, contain
any statement which, at such time, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they are
made, not false or misleading, or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies by or on behalf of Company for the Company Stockholders
Meeting which
A-31
<PAGE>
has become false or misleading. The Registration Statement will comply as to
form in all material respects with the provisions of the Securities Act.
Notwithstanding the foregoing, Acquiror makes no representation, warranty or
covenant with respect to any information supplied or required to be supplied by
the Company which is contained in or omitted from any of the foregoing
documents.
SECTION 4.18 BOARD RECOMMENDATION
The Board of Directors of Acquiror and Acquiror Sub have each unanimously
adopted, in compliance with Delaware law, a resolution advising, authorizing,
approving and adopting this Merger Agreement and the transactions contemplated
hereby, and the resolutions adopted by the Board of Directors of Merger Sub
recommend approval and adoption of this Merger Agreement and the transactions
contemplated hereby by the sole shareholder of Acquiror Sub.
SECTION 4.19 DISCLOSURE
No representation or warranty of the Acquiror in this Merger Agreement when
read together with the information in the Section of the Acquiror Disclosure
Letter applicable thereto is misleading with respect to any material fact or
omits to state a material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading.
ARTICLE V
PRE-CLOSING COVENANTS
SECTION 5.01 CONDUCT OF BUSINESS OF COMPANY UNTIL EFFECTIVE TIME
The Company hereby covenants and agrees that, from the date of this Merger
Agreement until the Effective Time, Company, unless otherwise expressly
contemplated by this Merger Agreement or consented to in writing by Acquiror,
will, and will cause each Company Subsidiary to, carry on their respective
businesses only in the Ordinary Course of Business, use their respective best
efforts to preserve intact their business organizations and Assets, maintain
their rights and franchises, retain the services of their officers and employees
and maintain their relationships with customers, suppliers, licensors, licensees
and others having business dealings with them, and use their respective best
efforts to keep in full force and effect liability insurance and bonds
comparable in amount and scope of coverage to that currently maintained. Except
as set forth on Section 5.01 of the Company Disclosure Letter, without limiting
the generality of the foregoing, neither Company nor any Company Subsidiary
will:
(a) (i) increase in any manner the compensation or fringe benefits of, or
pay any bonus to, any employee (who is not an officer or director) other than in
the Ordinary Course of Business, or to any officer or director; (ii) grant any
severance or termination pay (other than pursuant to the normal severance
practices or existing agreements of the Company in effect on the date of this
Merger Agreement) to, or enter into any severance agreement with, any director,
officer or employee, or enter into any employment agreement with any employee
(who is not an officer or director) (other than in the Ordinary Course of
Business) or with any officer or director or otherwise without the prior written
consent of Acquiror; (iii) establish, adopt, enter into or amend any Company
Benefit Plan or other arrangement, except as may be required to comply with
applicable Law; (iv) pay any benefit not provided for under any Company Benefit
Plan or other arrangement; (v) grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or Company Benefit Plan or
other arrangement (including the grant of stock options, stock appreciation
rights, stock-based or stock-related awards, performance units or restricted
stock, or the removal of existing restrictions in any Company Benefit Plan or
other arrangement or agreement or awards made thereunder), (vi) take any action
to fund or in any other way secure the payment of compensation or benefits under
any
A-32
<PAGE>
agreement or (vii) promote or fire any director or officer, or other than in the
Ordinary Course of Business, any employee (who is not an officer or director);
(b) declare, set aside or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock;
(c) (i) redeem, purchase or otherwise acquire any shares of capital stock of
the Company or any Company Subsidiary or any securities or obligations
convertible into or exchangeable for any shares of capital stock of the Company
or any Company Subsidiary, or any options, warrants or conversion or other
rights to acquire any shares of capital stock of the Company or any Company
Subsidiary or any such securities or obligations, or any other securities
thereof, other than pursuant to the Stockholders Agreement, dated February 27,
1998, by and among the Company and the Company Stockholders who are signatories
thereto; (ii) effect any reorganization, recapitalization, merger or share
exchange; or (iii) split, combine or reclassify any of its capital stock or
issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for, shares of its capital stock;
(d) issue, deliver, award, grant or sell, or authorize the issuance,
delivery, award, grant or sale (including the grant of any limitations in voting
rights or other Encumbrances) of, any shares of any class of its capital stock
(including shares held in treasury but excluding shares issuable upon the
exercise of options outstanding on the date hereof in accordance with their
terms as of the date hereof), any securities convertible into or exercisable or
exchangeable for any such shares, or any rights, warrants or options to acquire,
any such shares, or amend or otherwise modify the terms of any such rights,
warrants or options the effect of which shall be to make such terms more
favorable to the holders thereof;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the Assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any Assets of any other person (other than the purchase of assets from
suppliers or vendors in the Ordinary Course of Business);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise subject
to any Encumbrance or dispose of, or agree to sell, lease, exchange, mortgage,
pledge, transfer or otherwise subject to any Encumbrance or dispose of, any of
its Assets, except for sales, dispositions, pledges, encumbrances or transfers
in the Ordinary Course of Business;
(g) propose or adopt any amendments to its certificate of incorporation,
bylaws or other comparable charter or organizational documents;
(h) make or rescind any express or deemed election relating to Taxes, settle
or compromise any claim, action, lawsuit, litigation, proceeding, arbitration,
investigation, audit or controversy relating to Taxes (except where the amount
of such settlements or controversies, individually or in the aggregate, does not
exceed $100,000), or change any of its methods of reporting income or deductions
for federal income tax purposes from those employed in the preparation of the
federal income tax returns for the taxable year ended December 31, 1998, except,
as may be required by applicable Law or GAAP;
(i) make or agree to make any new capital expenditures which are not
included in the Company's 2000 capital budget, a copy of which was furnished to
Acquiror, to the extent that such new capital expenditures exceed in the
aggregate $100,000;
(j) (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Company or any Company
Subsidiary, guarantee any debt securities of another person, enter into any
"keep well" or other agreement to maintain any financial statement condition of
another person or enter into any agreement having the economic effect of any of
the foregoing, except for borrowings
A-33
<PAGE>
incurred in the Ordinary Course of Business, or (ii) make any loans, advances or
capital contributions to, or investments in, any other person other than travel,
entertainment, loans for tuition expenses and payroll advances made to employees
in the Ordinary Course of Business;
(k) pay, discharge, settle or satisfy any claims, liabilities or obligations
(whether absolute or contingent, matured or unmatured, known or unknown), other
than the payments, discharges or satisfactions, in the Ordinary Course of
Business which are materially in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the Company Financial
Statement or waive any material benefits of, or agree to modify in any material
respect, any confidentiality, standstill or similar agreements to which the
Company or any Company Subsidiary is a party;
(l) waive, release or assign any rights or claims, or modify, amend or
terminate any agreement to which the Company or any Company Subsidiary is a
party, which would reasonably be expected to have a Company Material Adverse
Effect;
(m) make any change in any method of accounting or accounting practice or
policy other than those required by generally accepted accounting principles or
a Governmental Entity;
(n) take any action or fail to take any action that would reasonably be
expected to result in a Company Material Adverse Effect prior to or after the
Effective Time or that would adversely affect the ability of the Company or any
Company Subsidiary prior to the Effective Time to obtain consents of third
parties or approvals of Government Entities required to consummate the
transactions contemplated in this Merger Agreement; or
(o) authorize, or commit or agree to do any of the foregoing.
SECTION 5.02 BEST EFFORTS TO SATISFY CONDITIONS
Acquiror and Company shall use their respective best efforts to cause all
conditions to the obligations of Acquiror and Company set forth in Article VII
of this Merger Agreement to be satisfied on or before the Closing Date.
SECTION 5.03 OTHER ACTIONS
Acquiror and Company shall not, and shall not permit any of their respective
Affiliates to, take any action that would, or that could reasonably be expected
to, result in (a) any of the representations and warranties of such Party set
forth in this Merger Agreement becoming untrue, or (b) any of the conditions to
the Merger set forth in Article VII of this Merger Agreement not being
satisfied.
SECTION 5.04 CERTAIN TAX MATTERS
From the date hereof until the Effective Time, Company and each Company
Subsidiary (a) will prepare and timely file with the relevant Taxing authority
all Company Tax Returns required to be filed during such period ("Post-Signing
Returns"), which Post-Signing Returns shall be accurate in all material
respects, or permitted extensions with respect thereto, (b) will timely pay all
Taxes due and payable with respect to such Post-Signing Returns, (c) will pay or
otherwise make adequate provision for all Taxes payable by Company and Company
Subsidiary for which no Post-Signing Return is due prior to the Effective Time,
and (d) will promptly notify Acquiror of any action, suit, proceeding, claim or
audit pending against or with respect to Company or any Company Subsidiary in
respect of any Taxes.
SECTION 5.05 ACCESS AND INFORMATION
For so long as this Merger Agreement is in effect, and subject to applicable
Laws, each Party shall, and shall cause each of their respective Subsidiaries
to, (a) afford to the other Party and its officers,
A-34
<PAGE>
employees, accountants, consultants, legal counsel and other representatives
reasonable access during normal business hours, subject to reasonable advance
notice, to all of their respective properties, Agreements, books, records and
personnel and (b) furnish promptly to the other Party (i) a copy of each
Agreement, document, certificate or other instrument filed with, or received
from any Governmental Entity and (ii) all other information concerning their
respective businesses, operations, prospects, conditions (financial or
otherwise), Assets, liabilities and personnel as such other Party may reasonably
request.
SECTION 5.06 NOTIFICATION FILING REQUIRED UNDER HSR ACT
If required, the parties shall make good faith efforts to complete and file
without delay, and in any event within thirty (30) days after the date of this
Merger Agreement, any notification filing required under the HSR Act with
respect to the transactions contemplated by this Merger Agreement. Acquiror and
Company shall in good faith take (or fully cooperate in the taking of) all
actions, and provide any additional information that may be, required or
reasonably requested in order to comply with the requirements of the HSR Act. If
a notification filing is required under the HSR Act, Acquiror shall pay all
filing fees in connection therewith.
SECTION 5.07 RELATED PARTY MATTERS
Company shall use commercially reasonable efforts to have each person
identified on Exhibit I to Section 3.18 of the Company Disclosure Letter execute
an agreement reasonably acceptable to Acquiror to pay-off as soon as practicable
after the Effective Time all indebtedness (including principal and interest)
owed by such person to the Company which is secured by Company Common Stock and
which was issued to such persons to purchase the capital stock of the Company or
any of its predecessors.
SECTION 5.08 PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT; COMPANY
STOCKHOLDERS MEETING
(a) As soon as practicable following the date of this Merger Agreement, the
Company and Acquiror shall prepare and file with the SEC the Proxy
Statement/Prospectus, and Acquiror shall prepare and file with the SEC the
Registration Statement in which the Proxy Statement/Prospectus will be included
as a prospectus. Each of the Company and Acquiror shall use its best efforts to
have the Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing. The Company shall use its best
efforts to cause the Proxy Statement/Prospectus to be mailed to the Company
Stockholders as promptly as practicable after the Registration Statement is
declared effective under the Securities Act. Acquiror also shall take any action
(other than qualifying to do business in any jurisdiction in which it is not now
so qualified or filing a general consent to service of process) required to be
taken under any applicable state securities laws in connection with the issuance
of Acquiror Common Stock in the Merger, and the Company shall furnish all
information concerning the Company and the holders of Company Common Stock as
may be reasonably requested in connection with any such action. No filing of, or
amendment or supplement to, the Registration Statement or the Proxy
Statement/Prospectus will be made by either Acquiror or the Company without the
other party's prior consent (which shall not be unreasonably withheld, delayed
or conditioned) and without providing the other party the opportunity to review
and comment thereon. Acquiror shall advise the Company, promptly after it
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, the issuance of any
stop order, the suspension of the qualification of Acquiror Common Stock
issuable in connection with the Merger for offering or sale in any jurisdiction,
or any request by the SEC for amendment of the Proxy Statement/Prospectus or the
Registration Statement or comments thereon and responses thereto or requests by
the SEC for additional information. If at any time prior to the Effective Time
any
A-35
<PAGE>
information relating to the Company or Acquiror, or any of their respective
"affiliates" (as defined in Section 5.12), officers or directors, should be
discovered by the Company or Acquiror which should be set forth in an amendment
or supplement to any of the Registration Statement or the Proxy Statement/
Prospectus, so that any of such documents would not include any misstatement of
a material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, the party which discovers such information shall promptly notify
the other parties hereto and an appropriate amendment or supplement describing
such information shall be promptly filed with the SEC and, to the extent
required by law, disseminated to the Company Stockholders.
(b) The Company shall, as promptly as practicable after the Registration
Statement is declared effective under the Securities Act, duly call, give notice
of, convene and hold a meeting of its stockholders (the "Company Stockholders
Meeting") in accordance with Delaware Law and its certificate of incorporation
and bylaws for the purpose of obtaining the requisite approval of the Company
Stockholders and shall, through the unanimous action of its Board of Directors,
declare that this Merger Agreement is advisable and recommend to its
stockholders the approval and adoption of this Merger Agreement, the Merger and
the other transactions contemplated hereby.
SECTION 5.09 [INTENTIONALLY OMITTED]
SECTION 5.10 NO SOLICITATION.
(a) From the date of this Merger Agreement until the Effective Time or the
termination of this Merger Agreement pursuant to the terms of this Merger
Agreement, the Company shall not and shall not permit any of its Subsidiaries,
Affiliates, directors, officers, employees, agents or representatives,
including, without limitation, any investment banker, attorney or accountant of
the Company or any of its Subsidiaries (collectively, "Representatives")
directly or indirectly, to (i) initiate, solicit, encourage or knowingly
facilitate (including by way of furnishing information), the making of any
proposal or offer that constitutes, an Acquisition Proposal (as defined below),
(ii) enter into or maintain or continue discussions or negotiate with any Person
in furtherance of such inquiries or to obtain an Acquisition Proposal,
(iii) agree to, approve, recommend, or endorse any Acquisition Proposal,
(iv) disclose any non-public information relating to the Company or any Company
Subsidiary or afford access to the properties, books or records of the Company
or any Company Subsidiary to any person that has made or may reasonably be
expected to make a proposal regarding a Acquisition Proposal or that has advised
the Company that it is or may be interested in making a proposal regarding a
Acquisition Proposal, or (v) authorize or permit any of its or their
Subsidiaries or Representatives to take any such action and, the Company shall
promptly notify Acquiror of any such inquiries and proposals received by the
Company or any of its Subsidiaries or Representatives, relating to any of such
matters
(b) Notwithstanding the foregoing, nothing contained in clause (a) above
shall prohibit the Board of Directors of the Company from furnishing information
to or entering into discussions or negotiations with any Person that makes a
BONA FIDE proposal or offer with respect to the Company that constitutes an
Acquisition Proposal for the Company, if: (A) the Board of Directors of the
Company determines in good faith, taking into account the advice of outside
counsel, that such action is reasonably likely to be required for the Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law; (B) prior to furnishing such information to, or entering into discussions
or negotiations with, such Person, the Company provides written notice to
Acquiror of the identity of the Person making the Acquisition Proposal for the
Company and that it intends to furnish information to, or intends to enter into
discussions or negotiations with, such Person; (C) the Company enters into a
customary confidentiality agreement; (D) the Company keeps Acquiror informed on
a timely basis of the status of such negotiations and all material terms and
conditions thereof and promptly provides Acquiror with
A-36
<PAGE>
copies of any and all written inquiries or proposals relating thereto; and
(E) such Acquisition Proposal for the Company was not solicited in violation of
this Merger Agreement.
(c) For purposes of this Merger Agreement, "Acquisition Proposal" means an
inquiry, offer or proposal regarding any of the following (other than the
transactions contemplated by this Merger Agreement) involving the Company or its
Subsidiaries: (a) any merger, consolidation, share exchange, business
combination, or other similar transaction (other than the Merger); (b) any sale,
lease, license, exchange, mortgage, pledge, transfer or other disposition of 15%
or more of the fair market value of the business or assets of the Company and
the Company Subsidiaries, taken as a whole, in a single transaction or series of
transactions; (c) any tender offer or exchange offer for outstanding shares of
capital stock of the Company or the filing of a registration statement under the
Securities Act in connection therewith; (d) any solicitation of proxies in
opposition to approval by the Company's stockholders of the Merger; (e) the
acquisition by any person, after the date hereof, of beneficial ownership or the
right to acquire beneficial ownership of, or the formation of any "group" (as
such term is defined under Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder) that beneficially owns or has the right to
acquire beneficial ownership of, 5% or more of the then outstanding shares of
capital stock of the Company, or the acquisition by any person or "group" that,
as of the date hereof, beneficially owns 5% or more of the outstanding shares of
capital stock of the Company or beneficial ownership or the right to acquire
beneficial ownership of any additional shares of capital stock of the Company;
(f) the adoption by the Company of a plan of liquidation, the declaration or
payment by the Company of an extraordinary dividend on any of its shares of
capital stock or the effectuation by the Company of a recapitalization or other
type of transaction that would involve either a change in the Company's
outstanding capital stock or a distribution of assets of any kind to the holders
of such capital stock; (g) the repurchase by the Company or any Company
Subsidiary of any shares of Company Common Stock other than pursuant to the
Stockholders Agreement, dated February 27, 1998, by and among the Company and
the Company Stockholders who are signatories thereto; or (h) any resolution or
agreement to, or public announcement by the Company or any other person or
entity of a proposal, plan or intention to, do any of the foregoing.
SECTION 5.11 NYSE LISTING
Acquiror shall use reasonable efforts to cause the Acquiror Common Stock to
be issued pursuant to Section 2.01(a) of this Merger Agreement to be approved
for listing on the NYSE, subject to official notice of issuance, prior to the
Effective Time.
SECTION 5.12 AFFILIATES
(a) Each of the Company and Acquiror: (i) has disclosed to the other in
Section 5.12 of the Company Disclosure Letter or the Acquiror Disclosure Letter,
as the case may be, all Persons who are, or may be, as of the date hereof its
"affiliates" as that term is used in SEC Accounting Series Release Nos. 130 and
135 and Rule 145 of the rules and regulations of the SEC under the Securities
Act; and (ii) shall use all reasonable efforts to cause each Person who is
identified as an "affiliate" of it in Section 5.12 of the Company Disclosure
Letter or the Acquiror Disclosure Letter, as the case may be, to deliver to the
other as promptly as practicable but in no event later than thirty-one
(31) days prior to the Closing Date, a signed agreement substantially in the
form attached hereto as Exhibit E, in the case of the Company, and Exhibit F, in
the case of Acquiror. The Company and Acquiror shall notify each other from time
to time of all other Persons who then are, or may be, such an "affiliate" and
use all reasonable efforts to cause each additional Person who is identified as
an "affiliate" to execute a signed agreement as set forth in this
Section 5.12(a).
A-37
<PAGE>
(b) Shares of Company Common Stock and shares of Acquiror Common Stock held
by the "affiliates" of the Company or Acquiror set forth in Section 5.12 of the
Company Disclosure Letter or the Acquiror Disclosure Letter, as the case may be,
shall not be transferable during the thirty (30) day period prior to the
Effective Time, and shares of Acquiror Common Stock issued to, or as of the
Effective Time held by, such "affiliates" of the Company and Acquiror shall not
be transferable until such time as financial results covering at least thirty
(30) days of combined operations of the Company and Acquiror have been published
within the meaning of Section 201.01 of the SEC's Codification of Financial
Reporting Policies, regardless of whether each such "affiliate" has provided the
signed agreement referred to in Section 5.12(a), except to the extent permitted
by, and in accordance with, SEC Accounting Series Release 135 and SEC Staff
Accounting Bulletins 65 and 76. Any Company Common Stock and any Acquiror Common
Stock held by any such "affiliate" shall not be transferable, regardless of
whether such "affiliate" has provided the applicable signed agreement referred
to in Section 5.12(a), if such transfer, either alone or in the aggregate with
other transfers by "affiliates", would preclude the ability of the parties to
account for the transactions contemplated by this Merger Agreement as a "pooling
of interests" in accordance with GAAP, Accounting Principles Board Opinion
No. 16 and all rules, regulations and policies of the SEC. Acquiror shall not
register the transfer of any shares of Acquiror Common Stock unless such
transfer is made in compliance with the foregoing.
SECTION 5.13 TAX TREATMENT
Each of Acquiror and the Company shall use reasonable efforts to cause the
Merger to qualify as a reorganization under the provisions of Section 368 of the
Code. The parties will characterize the Merger as such a reorganization for
purposes of all Tax Returns and other filings.
SECTION 5.14 POOLING
Each of the Company and Acquiror shall use reasonable efforts to cause the
transactions contemplated by this Merger Agreement, including the Merger, to be
accounted for as a "pooling of interests" in accordance with GAAP Accounting
Principles Board Opinion No. 16 and all published rules, regulations and
policies of the SEC, and each of the Company and Acquiror agrees that it shall
take no action that would cause such accounting treatment not to be obtained.
SECTION 5.15 NEGATIVE COVENANTS OF ACQUIROR
Except as expressly contemplated by this Merger Agreement, from the date
hereof until the Effective Time, without the written consent of the Company
(which consent shall not be unreasonably withheld, delayed or conditioned)
Acquiror shall not, and shall not permit any Acquiror Subsidiary to, do any of
the following:
(a) (i) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of Acquiror Common Stock; (ii) repurchase, redeem
or otherwise acquire any outstanding shares of capital stock or other securities
of, or other ownership interests in, Acquiror or any Acquiror Subsidiary (except
for those repurchases related to shares owned by employees or former employees
of Acquiror or any Acquiror Subsidiary); or (iii) except to the extent not
accounted for in Section 2.06 hereof, split, combine or reclassify any shares of
Acquiror Common Stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of, or in substitution for, shares of Acquiror
Common Stock or other securities;
(b) take any action that is intended or would reasonably be expected to
result in any of Acquiror's representations and warranties set forth in this
Merger Agreement being or becoming untrue in any material respect at any time
prior to the Effective Time, or in any of the conditions to the Merger set forth
in Article VII not being satisfied or in a violation of any provision of this
Merger Agreement;
A-38
<PAGE>
(c) take any action that would, or would be reasonably likely to, prevent
the Merger from being accounted for as a "pooling of interests" in accordance
with GAAP and the rules and regulations of the SEC;
(d) take any action that would, or would be reasonably likely to, prevent
the Merger from qualifying as a reorganization under the provisions of
Section 368(a) of the Code; or
(e) agree in writing or otherwise to do any of the foregoing.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01 STOCKHOLDER APPROVAL
Promptly after the date of this Merger Agreement, Company shall take all
additional action, if any, necessary in accordance with Delaware Law and its
certificate of incorporation and bylaws to secure the vote or consent of Company
Stockholders required by Delaware Law to approve this Merger Agreement and the
transactions contemplated hereby. In all events, this Merger Agreement shall be
submitted to the Company Stockholders whether or not the board of directors of
the Company determines that this Merger Agreement is no longer advisable and
recommends that the Company Stockholders reject it.
SECTION 6.02 APPROPRIATE ACTION; CONSENTS; FILINGS
(a) Upon the terms and subject to the conditions set forth in this Merger
Agreement, the Parties shall use their reasonable best efforts to take, or cause
to be taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the transactions contemplated by this Merger Agreement as
promptly as practicable, including, without limitation, (i) executing and
delivering any additional instruments necessary, proper or advisable to
consummate the transactions contemplated by, and to carry out fully the purposes
of, this Merger Agreement, (ii) obtaining from any Governmental Entities any
material Licenses required to be obtained or made by Acquiror, or any of its
Subsidiaries, or Company, or any Company Subsidiary, in connection with the
authorization, execution and delivery of this Merger Agreement and the
consummation of the transactions contemplated herein, including, without
limitation, the Merger, and (iii) making all necessary filings, and thereafter
making any other required submissions, with respect to this Merger Agreement and
the Merger required under (A) the HSR Act and (B) any other applicable Law;
PROVIDED that Acquiror and Company shall cooperate with each other in connection
with the making of all such filings, including providing copies of all such
documents to the non-filing Party and its advisors prior to filing and
discussing all reasonable additions, deletions or changes suggested in
connection therewith. Company and Acquiror shall furnish to each other all
information required for any application or other filing to be made pursuant to
the rules and regulations of any applicable Law in connection with the
transactions contemplated by this Merger Agreement.
(b) (i) Except as the Parties may otherwise agree, Company, each Company
Stockholder and Acquiror shall give (and, in the case of Company, shall cause
each Company Subsidiary to give, and, in the case of Acquiror, shall cause its
Subsidiaries to give) any notices to third parties, and use (and, in the case of
Company, shall cause each Company Subsidiary to use, and, in the case of
Acquiror, shall cause its Subsidiaries to use) their reasonable best efforts to
obtain any third-party consents, approvals or waivers (A) necessary, proper or
advisable to consummate the transactions contemplated in this Merger Agreement,
(B) disclosed or required to be disclosed in the Company Disclosure Letter or
the Acquiror Disclosure Letter, as the case may be, or (C) required to prevent a
Company Material Adverse Effect or an Acquiror Material Adverse Effect.
A-39
<PAGE>
(ii) In the event that any of Company, any Company Stockholder or
Acquiror shall fail to obtain any third-party consent, approval or waiver
described in Section 6.02(b)(i) of this Merger Agreement, such Party shall
use its reasonable best efforts, and shall take any such actions reasonably
requested by the other Parties, to minimize any adverse effect upon Company
or any Company Subsidiary and Acquiror or its Subsidiaries and their
respective businesses resulting, or which could reasonably be expected to
result after the Effective Time, from the failure to obtain such consent,
approval or waiver.
(c) From the date of this Merger Agreement until the Effective Time, Company
and Acquiror shall promptly notify each other in writing of any pending or, to
the knowledge of Company or any Company Subsidiary or Acquiror or any one of its
Subsidiaries, threatened action, proceeding or investigation by any Governmental
Entity or any other Person (i) challenging or seeking damages in connection with
the Merger or the conversion of Company Common Stock into the Merger
Consideration pursuant to the Merger or the transactions contemplated hereunder
or (ii) seeking to restrain or prohibit the consummation of the Merger or the
transactions contemplated hereunder or otherwise limit the right of Acquiror or
its Subsidiaries to own or operate all or any portion of the businesses or
Assets of Company or any Company Subsidiary. Company and Acquiror shall
cooperate with each other in defending any such action, proceeding or
investigation, including seeking to have any stay or temporary restraining order
entered by any court or other Governmental Entity vacated or reversed.
SECTION 6.03 DISCLOSURE
Prior to the Effective Time, each Party shall notify the other Parties by
written update to its respective Disclosure Letter of (i) any representation or
warranty made by it in connection with this Merger Agreement becoming untrue or
inaccurate, (ii) the occurrence or non-occurrence of any event, the occurrence
or non-occurrence of which would be likely to cause any condition to the
obligations of any Party to effect the Merger and the other transactions
contemplated by this Merger Agreement not to be satisfied or (iii) the failure
of Company, any Company Subsidiary, Acquiror or Acquiror Sub, as the case may
be, to comply with or satisfy any covenant, condition or Agreement to be
complied with or satisfied by it pursuant to this Merger Agreement which would
be likely to result in any condition to the obligations of any Party to effect
the Merger and the other transactions contemplated by this Merger Agreement not
to be satisfied; PROVIDED, HOWEVER, the delivery of any notice pursuant to this
Section 6.03 shall not cure any breach of any representation or warranty
requiring disclosure of such matter as of the date of this Merger Agreement or
otherwise limit or affect the rights and remedies available hereunder to the
Party receiving such notice.
SECTION 6.04 PUBLIC ANNOUNCEMENTS
Acquiror, Acquiror Sub and Company shall consult with each other before
issuing or making, and shall give each other the opportunity to review and
comment upon, any press release or other public statement with respect to the
Merger and the other transactions contemplated in this Merger Agreement, and
shall not issue any such press release or make any such public statement prior
to such consultation, except as may be required by Law or any applicable listing
agreements.
SECTION 6.05 OBLIGATIONS OF ACQUIROR SUB
Acquiror shall take all action necessary to cause Acquiror Sub to perform
its obligations under this Merger Agreement and to consummate the Merger on the
terms and conditions set forth in this Merger Agreement.
A-40
<PAGE>
SECTION 6.06 TRANSACTION EXPENSES
Each Party to this Merger Agreement shall bear their own expenses in
connection herewith, including, without limitation, the fees of each Party's
respective legal counsel, financial advisors, accountants, brokers, finders or
investment bankers.
SECTION 6.07 BOARD OF DIRECTORS
At the first meeting of the Board of Directors of Acquiror after later of
(a) the Effective Time or (b) Acquiror's May 2000 Stockholders Meeting, Acquiror
shall cause Michael B. Alexander to be appointed to the Board of Directors of
Acquiror for a term of approximately one (1) year; PROVIDED, HOWEVER, such term
shall not be less than eleven (11) months.
SECTION 6.08 COMPANY COMMON STOCK
On or prior to the Effective Time, the Company shall deliver to the Acquiror
and the Exchange Agent a calculation, certified as being true, correct and
complete by the Company's chief financial officer, of (a) the number of shares
of Company Common Stock that will be outstanding as of the Effective Time and
(b) the number of shares of Company Common Stock that would be issuable with
respect to Options outstanding as of the Effective Time if such Options were
fully vested and immediately exercisable, when, as of the Effective Time, all
shares of Company Common Stock are converted into a single class of Company
Common Stock.
ARTICLE VII
CONDITIONS PRECEDENT
SECTION 7.01 CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS MERGER AGREEMENT
The respective obligations of each Party to effect the Merger and the other
transactions contemplated herein shall be subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all of which may
be waived by agreement of Acquiror and Company, in whole or in part, to the
extent permitted by applicable Law:
(a) STOCKHOLDER APPROVAL. This Merger Agreement and the Merger shall have
been approved and adopted by the requisite vote or consent of Company
Stockholders.
(b) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement
shall have been declared effective by the SEC under the Securities Act prior to
the mailing of the Proxy Statement/Prospectus by the Company to its stockholders
and no stop order suspending the effectiveness of such Registration Statement
shall have been issued by the SEC and no proceedings for that purpose shall have
been initiated or, to the knowledge of Acquiror or the Company, threatened by
the SEC.
(c) NO ORDER. No Governmental Entity or federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, judgment,
injunction or other order (whether temporary, preliminary or permanent), in any
case which is in effect and which prevents or prohibits consummation of the
Merger; PROVIDED, HOWEVER, that the Parties shall use their reasonable best
efforts to cause any such decree, judgment, injunction or other order to be
vacated or lifted.
(d) HSR ACT. The applicable waiting period with respect to the Merger and
the other transactions contemplated hereby, together with any extensions
thereof, under the HSR Act shall have expired or been terminated.
A-41
<PAGE>
SECTION 7.02 ADDITIONAL CONDITIONS TO OBLIGATIONS OF ACQUIROR AND ACQUIROR SUB
The obligations of Acquiror and Acquiror Sub to effect the Merger and the
other transactions contemplated in this Merger Agreement are also subject to the
satisfaction at or prior to the Effective Time of the following conditions, any
or all of which may be waived by Acquiror, in whole or in part, to the extent
permitted by applicable Law:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Company contained in this Merger Agreement shall be true and
correct as of the date of this Merger Agreement and shall be true and correct
(except that where any statement in a representation or warranty expressly
includes a standard of materiality, such statement shall be true and correct in
all respects giving effect to such standard) as of the Effective Time as though
made as of the Effective Time, except for (i) representations and warranties
which address matters only as of a particular date, which representations and
warranties shall be true and correct in all material respects (except that where
any statement in a representation or warranty expressly includes a standard of
materiality, such statement shall be true and correct in all respects giving
effect to such standard) as of such date and (ii) changes permitted by or
consistent with this Merger Agreement. Acquiror shall have received a
certificate of the chief executive officer or chief financial officer of Company
to the foregoing effect.
(b) AGREEMENTS AND COVENANTS. Company shall have performed or complied in
all respects with all Agreements and covenants required by this Merger Agreement
to be performed or complied with by Company on or prior to the Effective Time.
Acquiror shall have received a certificate of the chief executive officer or
chief financial officer of Company (as to Company) to that effect.
(c) OPINION OF COUNSEL. Acquiror shall have received from Swidler Berlin
Shereff Friedman, LLP, counsel to Company, an opinion dated the Closing Date, in
the form attached hereto as Exhibit G.
(d) NO CHALLENGE. There shall not be pending any enforcement action or
similar proceeding by any state or federal Governmental Entity that is likely to
have a Company Material Adverse Effect or, if such action arises in connection
with the transactions contemplated hereby, an Acquiror Material Adverse Effect.
(e) COMPANY MATERIAL ADVERSE EFFECT. Since December 31, 1999, there shall
not have occurred a Company Material Adverse Effect (or any development that,
insofar as reasonably can be foreseen, is reasonably likely to result in any
Company Material Adverse Effect) not disclosed in the Company Disclosure Letter
as of the date hereof.
(f) NO LITIGATION. There shall be no pending or threatened suit, action,
proceeding or investigation: (i) challenging or seeking to restrain or prohibit
the consummation of the Merger or any of the other transactions contemplated by
this Merger Agreement, (ii) relating to the Merger and seeking to obtain from
Acquiror or any Acquiror Subsidiary any damages that may be material to
Acquiror, (iii) seeking to prohibit or limit in any respect Acquiror's ability
to vote, receive dividends with respect to or otherwise exercise ownership
rights with respect to the stock of the Surviving Corporation; (iv) which would
materially and adversely affect the right of the Surviving Corporation to own
the assets or operate the business of the Company; or (v) which, if adversely
determined, could have a Company Material Adverse Effect or Acquiror Adverse
Effect.
(g) CONSENTS. Company and Company Subsidiary shall have procured all
consents of third-parties and Governmental Entities specified in Section 3.06 of
the Company Disclosure Letter.
(h) ACCOUNTANT LETTER. Acquiror shall have received:
(i) a letter from the Company's independent accountants, dated as of the
Closing Date and addressed to Acquiror, the Company and Acquiror's
independent accountants, reasonably satisfactory in form and substance to
Acquiror and Acquiror's independent accountants, to the
A-42
<PAGE>
effect that, after reasonable investigation, the Company's independent
accountants are not aware of any fact concerning the Company or any of the
Company's stockholders or Affiliates that could preclude Acquiror from
accounting for the Merger as a "pooling of interests" in accordance with
GAAP, Accounting Principles Board Opinion No. 16 and all published rules,
regulations and policies of the SEC; and
(ii) a letter from Acquiror's independent accountants, dated as of the
Closing Date and addressed to Acquiror, reasonably satisfactory in form and
substance to Acquiror, to the effect that Acquiror's independent accountants
concur in Acquiror's management's conclusion that Acquiror may account for
the Merger as a "pooling of interests" in accordance with generally accepted
accounting principles, Accounting Principles Board Opinion No. 16 and all
published rules, regulations and policies of the SEC.
(i) DISSENTING COMPANY STOCKHOLDERS. The Company Dissenting Stockholders
shall not hold more than five percent (5%) of the Company Common Stock.
(j) TAX OPINION. Acquiror shall have received a legal opinion addressed to
Acquiror from Hogan & Hartson LLP, dated as of the Closing Date to the effect
that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code.
(k) ESTIMATED NET DEBT AS OF CLOSING DATE. Acquiror shall have received
from Company two (2) days prior to the Closing Date a certificate of the chief
financial officer of the Company of the Net Debt of the Company estimated as of
the Closing Date (the "Estimated Net Debt") and prepared on a good faith basis
consistent with the Company Financial Statement. The Parties acknowledge and
agree that the amounts set forth on the Estimated Balance Sheet shall be used in
computing an estimate of the Transaction Value as of the Closing Date.
(l) CONSULTING AGREEMENTS. All of the consulting agreements with and of
Westgate Capital Co., Joel N. Levy, Peter M. Schulte and Joel N. Levy/Peter M.
Schulte, L.L.C. shall have been terminated, and each party to each such
agreement shall have released the Company (in a form satisfactory to Acquiror)
from any liability as a result of such termination.
(m) NO ACQUIROR STOCKHOLDER VOTE. No approval or adoption or consent of
the stockholders of Acquiror with respect to the transactions contemplated by
this Merger Agreement shall be required pursuant to the rules of the NYSE.
(n) 1999 FINANCIALS. Company shall have prepared and delivered to Acquiror
and Acquiror Sub, and shall provide a certificate signed by its chief financial
officer in which Company represents and warrants to Acquiror and Acquiror Sub
that Company has prepared and delivered to Acquiror and Acquiror Sub a true and
complete copy of, the audited consolidated balance sheet of Company and the
Company Subsidiaries as of the end of the fiscal period ending December 31, 1999
and the audited consolidated statement of income and the statement of cash flows
and equity and changes in financial position for the Company and the Company's
Subsidiaries for such fiscal year audited by Ernst & Young LLP, the Company's
independent public accountants, in accordance with generally accepted auditing
standards and accompanied by the related report of Ernst & Young LLP (such
balance sheet and such consolidated statement of income, Company's equity and
changes in financial position are hereinafter referred to collectively as the
"1999 Company Financial Statement"). In the certificate to be delivered to
Acquiror and Acquiror Sub pursuant to the immediately preceding sentence,
Company shall also represent and warrant to Acquiror and Acquiror Sub that the
1999 Company Financial Statement, including, without limitation, the notes
thereto, (i) has been prepared in accordance with the books and records of
Company and its Subsidiaries and (ii) presents fairly in all material respects
the consolidated financial position of Company and its Subsidiaries at the date
thereof and their consolidated results of operations and cash flows for the
period indicated, in accordance with GAAP applied throughout the periods
involved (except as noted therein). The representations and warranties
A-43
<PAGE>
contained in such certificate shall survive for the same period of time as the
representations and warranties contained in Section 3.08 survive.
SECTION 7.03 ADDITIONAL CONDITIONS TO OBLIGATIONS OF COMPANY
The obligations of Company to effect the Merger and the other transactions
contemplated by this Merger Agreement are also subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all of which may
be waived by Company, in whole or in part, to the extent permitted by applicable
Law:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Acquiror and Acquiror Sub contained in this Merger Agreement shall
be true and correct as of the date of this Merger Agreement and shall be true
and correct (except that where any statement in a representation or warranty
expressly includes a standard of materiality, such statement shall be true and
correct in all respects giving effect to such standard) as of the Effective Time
as though made as of the Effective Time, except for (i) representations and
warranties which address matters only as of a particular date, which
representations and warranties shall be true and correct in all material
respects (except that where any statement in a representation or warranty
expressly includes a standard of materiality, such statement shall be true and
correct in all respects giving effect to such standard) as of such date and
(ii) changes permitted by or consistent with this Merger Agreement. Company
shall have received a certificate of the chief executive officer or chief
financial officer of Acquiror to the foregoing effect.
(b) AGREEMENTS AND COVENANTS. Acquiror and Acquiror Sub shall have
performed or complied in all respects with all Agreements and covenants required
by this Merger Agreement to be performed or complied with by them on or prior to
the Effective Time except for such noncompliance that does not have an Acquiror
Material Adverse Effect. Company shall have received a certificate of the chief
executive officer or chief financial officer of Acquiror and Acquiror Sub to
that effect.
(c) OPINION OF COUNSEL. The Company shall have received from Hogan &
Hartson L.L.P., counsel to Acquiror, an opinion dated the Closing Date, in the
form attached hereto as Exhibit H.
(d) LISTING. The approval for listing described in Section 5.11 shall have
been received.
(e) LEGAL OPINION. The Company and the Company Stockholders shall have
received a legal opinion addressed to the Company and the Company Stockholders
from Swidler Berlin Shereff Friedman LLP ("Company's Legal Counsel"), dated as
of the Closing Date to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code.
(f) NO CHALLENGE. There shall not be pending any enforcement action or
similar proceeding by any state or federal Governmental Entity that is likely to
have an Acquiror Material Adverse Effect.
(g) NO LITIGATION. There shall be no pending or threatened suit, action,
proceeding or investigation: (i) challenging or seeking to restrain or prohibit
the consummation of the Merger or any of the other transactions contemplated by
this Merger Agreement or (ii) which, if adversely determined, could have an
Acquiror Adverse Effect.
(h) CONSENTS. Acquiror and Acquiror Sub shall have procured all consents
of third-parties and Governmental Entities specified in Section 4.05 of the
Acquiror Disclosure Letter.
A-44
<PAGE>
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01 TERMINATION
This Merger Agreement may be terminated at any time (except where otherwise
indicated) prior to the Effective Time, whether before or after approval of this
Merger Agreement and the Merger by Company Stockholders:
(a) by mutual written consent of Acquiror and Company;
(b) (i) by Acquiror, if any of the conditions provided in Section 7.01
(other than Section 7.01(a)) or Section 7.02 (other than Section 7.02(i)) have
not been met as of the Scheduled Closing Date and such failure has not been
cured within twenty (20) business days following receipt by Company of written
notice of such failure describing the extent and nature thereof in reasonable
detail, or to the extent permitted by applicable law, such conditions have not
been waived in writing by Acquiror;
(ii) by Company, if any of the conditions provided in Section 7.01
(other than Section 7.01(a)) or Section 7.03 have not been met as of the
Scheduled Closing Date and such failure has not been cured within twenty
(20) business days following receipt by Acquiror of written notice of such
failure describing the extent and nature thereof in reasonable detail, or,
to the extent permitted by applicable law, such conditions have not been
waived in writing by Company.
(c) by either Acquiror or Company if any decree, permanent injunction,
judgment, order or other action by any court of competent jurisdiction or any
other federal or state (but not county or municipal) Governmental Entity
preventing or prohibiting consummation of the Merger shall have been filed or in
effect;
(d) subject to the provisions of Section 2.01(h), (i) by Acquiror, if the
Acquiror Stock Price is greater than $61.60 per share unless the Company makes a
Company Floating Rate Election, in which case the Acquiror shall have no right
of termination pursuant to this Section 8.01(d)(i); or
(ii) by Company, if the Acquiror Stock Price is less than $39.60 per
share unless Acquiror makes an Acquiror Floating Rate Election, in which
case the Company shall have no right to a termination pursuant to this
Section 8.01(d)(ii);
PROVIDED, that any such termination pursuant to this Section 8.01(d) shall be
without any liability to the parties hereto solely by virtue of the fact that
Acquiror Stock Price is greater than $61.60 or less than $39.60 per share, as
the case may be.
(e) by either Acquiror or Company if the Merger shall not have been
consummated by the date which is 180 days following the date of this Merger
Agreement; PROVIDED HOWEVER, that the right to terminate this Merger Agreement
under this Section 8.01(d) shall not be available to (i) Acquiror, where
Acquiror's failure to fulfill any obligation under this Merger Agreement has
been the cause of, or resulted in, the failure of the Effective Time to occur on
or before such date, or (ii) Company, where Company's failure to fulfill any
obligation under this Merger Agreement has been the cause of, or resulted in,
the failure of the Effective Time to occur on or before such date;
(f) by Acquiror, if (i) the board of directors of Company (A) fails to make
or withdraws or modifies its recommendation referred to in Section 3.21 of this
Merger Agreement or (B) recommends to the Company Stockholders approval or
acceptance of an Acquisition Proposal, or (ii) the condition set forth in
Section 7.02(i) has not been satisfied; or
(g) by either Acquiror or the Company if the stockholder approval
contemplated by Section 7.01(a) shall not have been received at the Company
Stockholders Meeting.
A-45
<PAGE>
SECTION 8.02 EFFECT OF TERMINATION
In the event of termination of this Merger Agreement by either Acquiror or
Company as provided in Section 8.01 of this Merger Agreement, this Merger
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Acquiror, Acquiror Sub or Company or any of their
respective directors or officers except (i) nothing herein shall relieve any
Party from liability for any breach hereof, (ii) each Party shall be entitled to
any remedies at law or in equity for such breach and (iii) Sections 6.06, 8.02
and 8.03 and Article IX of this Merger Agreement shall remain in full force and
effect and survive any termination of this Merger Agreement.
SECTION 8.03 TRANSACTION FEES, TERMINATION FEES, EXPENSES AND OTHER PAYMENTS
(a) Except as otherwise set forth in this Section 8.03, all costs and
expenses incurred by the parties hereto shall be borne solely and entirely by
the party that has incurred such costs and expenses, whether or not the Merger
is consummated; PROVIDED, HOWEVER, that in the event that the Merger and the
other transactions contemplated hereby are not consummated, Acquiror and the
Company shall share equally all costs and expenses (other than attorneys' and
accountants' fees and expenses) incurred in relation to printing and filing and,
as applicable, mailing the Registration Statement and the Proxy Statement and
any amendments or supplements thereto and all SEC and other regulatory filing
fees incurred in connection with the Registration Statement and the Proxy
Statement and the fees required under the applicable foreign laws, if any,
incurred in connection with the transactions contemplated under this Merger
Agreement up to one hundred thousand dollars ($100,000) and Acquiror shall bear
all such costs and expenses in excess of one hundred thousand dollars
($100,000).
(b) If this Merger Agreement is terminated pursuant to Section 8.01(f), or
if this Merger Agreement is terminated pursuant to Section 8.01(g) and at the
time of the Company Stockholder Meeting an Acquisition Proposal from a Person
other than Acquiror shall have been made and disclosed to the Company
Stockholders, the Company shall pay to Acquiror an amount equal to two million
dollars ($2,000,000) within one (1) Business Day after such termination.
(c) If this Merger Agreement is terminated pursuant to Section 8.01(f), or
if this Merger Agreement is terminated pursuant to Section 8.01(g) and at the
time of the Company Stockholder Meeting an Acquisition Proposal from a Person
other than Acquiror shall have been made and disclosed to the Company
Stockholders, and the Company (i) enters into a definitive agreement in
connection with an Acquisition Proposal within nine (9) months after the date of
such termination (regardless of when such definitive agreement is consummated)
or (ii) consummates an Acquisition Proposal within nine (9) months after the
date of such termination, the Company shall pay to Acquiror, in addition to the
amounts set forth in Section 8.03(b) above, an amount equal to two million
dollars ($2,000,000) within five (5) Business Days after the consummation of
such definitive agreement or such Acquisition Proposal, as the case may be.
SECTION 8.04 AMENDMENT
Subject to applicable Law, this Merger Agreement may be amended by the
Parties at any time prior to the Effective Time. This Merger Agreement may not
be amended except by an instrument in writing signed by the Parties.
SECTION 8.05 EXTENSION; WAIVER
At any time prior to the Effective Time, the Parties may (a) extend the time
for the performance of any of the obligations or other acts of the other
Parties, (b) waive any inaccuracies in the representations and warranties
contained herein or in any Agreements, documents, certificates or other
instruments delivered pursuant hereto and (c) waive compliance with any of the
Agreements or conditions contained in this Merger Agreement. Any such extension
or waiver shall be valid if set forth
A-46
<PAGE>
in an instrument in writing signed by the Party or Parties to be bound thereby.
The failure of any Party to assert any of its rights under this Merger Agreement
or otherwise shall not constitute a waiver of such rights.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS; REMEDIES
SECTION 9.01 SURVIVAL OF REPRESENTATIONS
All representations, warranties, covenants, indemnities and other agreements
made by any party to this Merger Agreement herein shall be deemed made on and as
of the Effective Time as though such representations, warranties, covenants,
indemnities and other agreements were made on and as of such date, and all such
representations, warranties, covenants, indemnities and other agreements shall
survive until the ninetieth (90(th)) day following the Effective Time; PROVIDED,
HOWEVER, that if Acquiror shall have given Stockholders' Representatives notice
of a claim on or prior to such 90(th) day, the representations, warranties,
covenants, indemnities, and other agreements applicable to such claim shall
survive with respect to such claim until such claim is finally resolved, and
provided further that (a) representations and warranties set forth in Sections
3.01 (Organization) and 3.04 (Capitalization) shall survive with the expiration
of the applicable statute of limitations and (b) in the event of fraud all such
representations, warranties, covenants, indemnities and other agreements shall
survive indefinitely.
SECTION 9.02 INDEMNIFICATION BY COMPANY STOCKHOLDERS
(a) The Company Stockholders hereby agree to indemnify, defend and hold
Acquiror, the Surviving Corporation and their respective officers and directors,
and each person, if any, who controls or may control Acquiror or the Surviving
Corporation within the meaning of the Securities Act (all such persons
hereinafter are referred to individually as an "Acquiror Indemnified Person" and
collectively as "Acquiror Indemnified Persons," but in no event shall any
stockholder of the Company prior to the Effective Time be such an Acquiror
Indemnified Person) harmless (pro-rata in accordance with the their respective
beneficial holdings of Escrow Stock) against all Losses resulting from, imposed
upon or incurred by any Acquiror Indemnified Person, directly or indirectly, as
a result of any of the following, anything in this Merger Agreement to the
contrary notwithstanding:
(i) any inaccuracy or breach of a representation or warranty of the
Company given or made by the Company in this Merger Agreement, in the
Certificate of Merger or in the Company Disclosure Letter or in any
certificate, document or agreement delivered by or on behalf of the Company
pursuant hereto; and
(ii) any failure by the Company to perform or comply with any covenant
or agreement contained in this Merger Agreement, in the Certificate of
Merger or in the Company Disclosure Letter or in any certificate, document
or agreement delivered by or on behalf of the Company pursuant hereto.
(b) Notwithstanding anything in this Merger Agreement to the contrary, the
Company Stockholders shall not be responsible for any Loss pursuant to this
Section 9.02 (i) in excess of the Escrow Stock, and (ii) unless and until the
aggregate amount of all of such Losses shall exceed $250,000, in which case the
Company Stockholders severally shall be liable for the aggregate amount of all
such Losses in excess of $100,000.
(c) The indemnity obligations of the Company Stockholders under this
Article IX shall be satisfied through the delivery to the Acquiror Indemnified
Persons of such number of shares of Escrow Stock having a value equal to the
amount of the Loss or Losses for which indemnification or payment is being made.
A-47
<PAGE>
(d) Neither the exercise of nor the failure to exercise any remedy under
this Merger Agreement will constitute an election of remedies or limit Acquiror
in any manner in the enforcement of any other remedies available to Acquiror.
SECTION 9.03 THIRD PARTY CLAIMS.
The obligations and liabilities of the Company Stockholders with respect to
their respective indemnities pursuant to this Article IX, resulting from any
Third Party Claim shall be subject to the following terms and conditions:
(a) The party seeking indemnification (the "Indemnified Party") must give
the party obligated to indemnify (the "Indemnifying Party"), notice of any Third
Party Claim which is asserted against, resulting to, imposed upon or incurred by
the Indemnified Party and which may give rise to liability of the Indemnifying
Party pursuant to this Article IX, stating (to the extent known or reasonably
anticipated) the nature and basis of such Third Party Claim and the amount
thereof; provided that the failure to give such notice shall not affect the
rights of the Indemnified Party hereunder except to the extent (i) that the
Indemnifying Party shall have suffered actual damage by reason of such failure,
or (ii) such failure or delay materially adversely affects the ability of the
Indemnifying Party to defend, settle or compromise such Third Party Claim.
(b) Subject to Section 9.03(c) below, if the Indemnifying Party assumes
responsibility for Losses arising out of such Third Party Claim, then the
Indemnifying Party shall have the right to undertake, by counsel or other
representatives of its own choosing, the defense of such Third Party Claim at
the Indemnifying Party's risk and expense.
(c) In the event that (i) the Indemnifying Party shall elect not to
undertake such defense, (ii) within a reasonable time after notice from the
Indemnified Party of any such Third Party Claim, the Indemnifying Party shall
fail to undertake to defend such Third Party Claim, or (iii) there is a
reasonable probability that such Third Party Claim may materially and adversely
affect the Indemnified Party other than as a result of money damages or other
money payments, then the Indemnified Party (upon further written notice to the
Indemnifying Party) shall have the right to undertake the defense, compromise or
settlement of such Third Party Claim, by counsel or other representatives of its
own choosing, on behalf of and for the account and risk of the Indemnifying
Party. In the event that the Indemnified Party undertakes the defense of a Third
Party Claim under this Section 9.03, the Indemnifying Party shall pay to the
Indemnified Party, in addition to the other sums required to be paid hereunder,
the reasonable costs and expenses incurred by the Indemnified Party in
connection with such defense, compromise or settlement as and when such costs
and expenses are so incurred.
(d) Anything in this Section 9.03 to the contrary notwithstanding,
(i) neither the Indemnified Party nor the Indemnifying Party shall, without the
other party's written consent (which consent shall not be unreasonably withheld
or delayed), settle or compromise such Third Party Claim or consent to entry of
any judgment which does not include as an unconditional term thereof the giving
by the claimant or the plaintiff to the Indemnified Party of a release from all
liability in respect of such Third Party Claim in form and substance
satisfactory to the Indemnified Party; (ii) in the event that a party hereto
undertakes defense of such Third Party Claim in accordance with this
Section 9.03, the other parties, by counsel or other representative of their own
choosing and at their sole cost and expense, shall have the right to participate
in the defense, compromise or settlement thereof and each party and its counsel
and other representatives shall cooperate with the other party and its counsel
and representatives in connection therewith; and (iii) the party that undertakes
the defense of such Third Party Claim in accordance with this Section 9.03 shall
have an obligation to keep the other parties informed of the status of the
defense of such Third Party Claim and furnish the other parties with all
documents, instruments and information that the other parties shall reasonably
request in connection therewith.
A-48
<PAGE>
SECTION 9.04 NO RECOURSE AGAINST THE COMPANY
The Company Stockholders hereby irrevocably waive any and all right to
recourse against the Company and the Surviving Corporation with respect to any
misrepresentation or breach of any representation, warranty or indemnity, or
noncompliance with any conditions or covenants, given or made by the Company in
this Merger Agreement or any other agreements and documents executed or to be
executed by the Parties hereto in order to consummate the transactions
contemplated by this Merger Agreement. No Company Stockholder shall be entitled
to contribution from, subrogation to or recovery against the Company or the
Surviving Corporation with respect to any liability of any Company Stockholder
that may arise under or pursuant to this Merger Agreement or any of the other
agreements and documents executed or to be executed by the Parties hereto in
order to consummate the transactions contemplated by this Merger Agreement or
any other agreements and documents contemplated hereby.
SECTION 9.05 SPECIFIC PERFORMANCE
In addition to any other remedies which the Parties may have at law or in
equity, the Parties hereby acknowledge that the transactions contemplated under
this Merger Agreement are unique, and that the harm to the Parties resulting
from breaches by the other Party of its obligation cannot be adequately
compensated by damages. Accordingly, the Parties agree that each Party shall
have the right prior to the Effective Time to have all obligations,
undertakings, agreements, covenants and other provisions of this Merger
Agreement specifically performed by the other Parties and that the Parties shall
have the right to obtain an order or decree of such specific performance in any
of the courts of the United States of America or any state or other political
subdivision thereof.
SECTION 9.06 REMEDIES CUMULATIVE
Subject to the limitations and qualifications set forth in this Article IX,
the remedies provided herein shall be cumulative and shall not preclude the
assertion by the parties hereto of any other rights or the seeking of any other
remedies against the other parties, or their respective successors or assigns.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01 NOTICES
All notices and other communications given or made pursuant hereto shall be
in writing and shall be deemed to have been duly given or made as of the date
delivered, mailed or transmitted if delivered personally, mailed by registered
or certified mail (postage prepaid, return receipt requested) or sent by
overnight courier (providing proof of delivery) to the Parties at the following
addresses or sent by electronic transmission to the following facsimile numbers
(or at such other address or facsimile number for a Party as shall be specified
by like notice):
(a) If to Acquiror or Acquiror Sub:
The Titan Corporation 3033 Science Park Road
San Diego, California 92121
Facsimile: (619) 552-9759
Attention: Nicholas J. Costanza, Esq.,
General Counsel
A-49
<PAGE>
With a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
8300 Greensboro Drive
Suite 1100
McLean, Virginia 22102
Facsimile: (703) 610-6200
Attention: Richard K.A. Becker, Esq.
(b) If to Company:
AverStar, Inc.
23 Fourth Avenue
Burlington, MA 01803
Telecopier No.: (781) 221-6991
Attention:
With a copy (which shall not constitute notice) to:
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, NY 10174
Telecopier No.: (212) 891-9598
Attention: Gerald Adler, Esq.
(c) If to Stockholders' Representatives:
Michael B. Alexander
AverStar, Inc.
23 Fourth Avenue
Burlington, MA 01803
Telecopier No.: (781) 221-6991
Sigmund H. Goldblum
103 Birkdale Drive
Blue Bell, PA 19422
Telecopier No.: (610) 277-8963
Peter Schulte
CM Equity Partners
135 East 57(th) Street, 27(th) Floor
New York, NY 10022
Telecopier No.: (212)829-0553
With a copy (which shall not constitute notice) to:
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, NY 10174
Telecopier No.: (212) 891-9598
Attention: Gerald Adler, Esq.
SECTION 10.02 HEADINGS
The headings contained in this Merger Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Merger Agreement.
A-50
<PAGE>
SECTION 10.03 SEVERABILITY
If any term or other provision of this Merger Agreement is invalid, illegal
or incapable of being enforced by any rule of Law or public policy, all other
conditions and provisions of this Merger Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any Party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the Parties shall negotiate
in good faith to modify this Merger Agreement so as to effect the original
intent of the Parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
SECTION 10.04 ENTIRE AGREEMENT
This Merger Agreement (together with the Exhibits, Schedules, the Company
Disclosure Letter and the Acquiror Disclosure Letter and the other documents
delivered pursuant hereto) constitute the entire agreement of the Parties and
supersede all prior agreements and undertakings, both written and oral, among
the Parties, or any of them, with respect to the subject matter hereof and,
except as otherwise expressly provided herein, are not intended to confer upon
any other Person any rights or remedies hereunder.
SECTION 10.05 ASSIGNMENT
Neither this Merger Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the Parties hereto (whether by
operation of Law or otherwise) without the prior written consent of the other
Parties; PROVIDED, HOWEVER, that Acquiror and Acquiror Sub shall have the right
to assign this Merger Agreement without the prior written consent of the Company
to a direct or indirect Subsidiary of the Acquiror, but no such assignment shall
relieve Acquiror or Acquiror Sub, as the case may be, of its obligations
hereunder. Subject to the preceding sentence, this Merger Agreement shall be
binding upon, inure to the benefit of and be enforceable by the Parties and
their respective successors and assigns.
SECTION 10.06 PARTIES IN INTEREST
This Merger Agreement shall be binding upon and inure solely to the benefit
of each Party, and nothing in this Merger Agreement, express or implied, other
than the right to receive the Merger Consideration pursuant to Article II of
this Merger Agreement and the rights of the Acquiror Indemnified Persons
pursuant to Article IX, is intended to or shall confer upon any other Person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Merger Agreement.
SECTION 10.07 MUTUAL DRAFTING
Each Party has participated in the drafting of this Merger Agreement, which
each Party acknowledges is the result of extensive negotiations between the
Parties. Consequently, this Merger Agreement shall be interpreted without
reference to any rule or precept of law that states that any ambiguity in a
document be construed against the drafter.
SECTION 10.08 GOVERNING LAW
This Merger Agreement shall be governed by, and construed in accordance
with, the Laws of the State of Delaware, regardless of the Laws that might
otherwise govern under applicable principles of conflicts of law.
A-51
<PAGE>
SECTION 10.09 COUNTERPARTS
This Merger Agreement may be executed and delivered in one or more
counterparts, and by the different Parties in separate counterparts, each of
which when executed and delivered shall be deemed to be an original but all of
which taken together shall constitute one and the same agreement.
SECTION 10.10 SINGULAR AND PLURAL
Any reference in this Merger Agreement to the singular includes a reference
to the plural and VICE VERSA.
ARTICLE XI
DEFINITIONS
For purposes of this Merger Agreement, the following terms, and the singular
and plural thereof, shall have the meanings set forth below:
"Acquiror" is defined in the Preamble to this Merger Agreement.
"Acquiror Common Stock" is defined in Section 2.01(a) of this Merger
Agreement.
"Acquiror Disclosure Letter" is defined in Article IV of this Merger
Agreement.
"Acquiror Material Adverse Effect" means, with respect to Acquiror or
Acquiror Sub, any event, change or effect that, individually or when taken
together with any related events, is or is reasonably likely to be materially
adverse to the business, operations, condition (financial or otherwise), Assets
or liabilities of the Acquiror and its Subsidiaries, taken as a whole, except to
the extent that any such event, change, circumstance, condition, development,
effect or occurrence is directly caused by: (a) the announcement, pendency or
process of effectuating the Merger or the transactions contemplated hereby that
directly results in a delay of, reduction in or cancellation or change in the
terms of customer engagements, projects or relationships; or (b) a change in the
market price or trading volume of the securities of Acquiror.
"Acquiror SEC Reports" is defined in Section 4.07 of this Merger Agreement.
"Acquiror Stock Price" is defined in Section 2.01(b) of the Merger
Agreement.
"Acquiror Floating Rate Election" is defined in Section 2.01(a) of the
Merger Agreement.
"Acquiror Sub" is defined in the Preamble to this Merger Agreement.
"Acquiror Sub Stock" is defined in Section 2.01(d) of this Merger Agreement.
"Acquisition Proposal" is defined in Section 5.10(c) of this Merger
Agreement.
"Affiliate" means: (a) with respect to an individual, any member of such
individual's family residing in the same household; (b) with respect to an
entity, any officer, director, stockholder, partner or investor of or in such
entity or of or in any Affiliate of such entity; and (c) with respect to a
Person, any Person which directly or indirectly, through one or more
intermediaries, Controls, is Controlled by, or is under common Control with such
Person or entity.
"Agreement" means any agreement between or among two or more Persons with
respect to their relative rights and/or obligations or with respect to a thing
done or to be done, including, without limitation, agreements denominated as
contracts, leases, promissory notes, covenants, easements, rights of way,
commitments, arrangements and understandings.
A-52
<PAGE>
"Assets" means assets of every kind and everything that is or may be
available for the payment of liabilities (whether inchoate, tangible or
intangible), including, without limitation, real and personal property.
"business day" means a day other than a Saturday, a Sunday or any other day
on which commercial banks in the City of New York are authorized or obligated to
be closed.
"Certificate" is defined in Section 2.02(b) of this Merger Agreement.
"Certificate of Merger" is defined in Section 1.02 of this Merger Agreement.
"Closing" is defined in Section 2.05 of this Merger Agreement.
"Closing Date" is defined in Section 1.02 of this Merger Agreement.
"Closing Stock Price" means, the average of the closing sale prices of a
share of Acquiror Common Stock as reported on the NYSE for the ten
(10) consecutive trading days ending with and including the Closing Date.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Commercial Software" means Software (other than Software of any Person or
any of its Subsidiaries sold as products) generally commercially available for
license or sale to the public and to such Person, its Subsidiaries and their
competitors and other Persons in the Software industry.
"Company" is defined in the Preamble to this Merger Agreement.
"Company Audited Balance Sheet" is defined in Section 3.08(a) of this Merger
Agreement.
"Company Benefit Plans" means all "employee benefit plans" as that term is
defined in Section 3(3) of ERISA, whether or not terminated.
"Company Common Stock" is defined in Section 3.04 of this Merger Agreement.
"Company Contracts" is defined in Section 3.13 of this Merger Agreement.
"Company Disclosure Letter" is defined in Article III of this Merger
Agreement.
"Company Dissenting Stockholder" is defined in Section 2.02(f) of this
Merger Agreement.
"Company Financial Statement" is defined in Section 3.08(a) of this Merger
Agreement.
"Company Floating Rate Election" is defined in Section 2.01(b) of this
Merger Agreement.
"Company Material Adverse Effect" means any event, change or effect that,
individually or when taken together with any related events, is or is reasonably
likely to be materially adverse to the business, operations, condition
(financial or otherwise), Assets or liabilities of the Company and any Company
Subsidiaries, taken as a whole.
"Company Pension Plan" means any Company Benefit Plan that is an "employee
pension benefit plan," as that term is defined in Section 3(2) of ERISA.
"Company Stockholders" is defined in the Preamble to this Merger Agreement.
"Company Stockholders Meeting" is defined in Section 5.08(d) of this Merger
Agreement.
"Company Stock Plan" means any Company Benefit Plan pursuant to which
Company is or may become obligated to, or obligated to cause Company Subsidiary
or any other Person to, issue, deliver or sell shares of capital stock of
Company or Company Subsidiary, or grant, extend or enter into any option,
warrant, call, right, commitment or agreement to issue, deliver or sell shares,
or any other interest in respect of capital stock of Company or Company
Subsidiary.
A-53
<PAGE>
"Company Stock Value" means the result of dividing the Transaction Value by
the sum of (a) the number of shares of Company Common Stock outstanding as of
the Effective Time (assuming for such purposes, that as of the Effective Time,
all shares of Company capital stock were converted into a single class of
Company Common Stock) and (b) the number of shares of Company Common Stock which
would be issuable with respect to all vested Options outstanding as of the
Effective Time if all of the conditions to exercisability of such Options had
been satisfied at that time and (c) one-half of the number of shares of Company
Common Stock which would be issuable with respect to all unvested Options
outstanding as of the Effective Time if all of the conditions to exercisability
of such Options (including, without limitation, vesting) had been satisfied at
that time.
"Company Subsidiary" means any Subsidiary of Company.
"Company Tax Returns" means all Tax Returns required to be filed by Company
or any Company Subsidiary (without regard to extensions of time permitted by law
or otherwise).
"Control" (including the terms "Controlled by" and "under common Control
with") means, as used with respect to any Person, possession of power (directly
or indirectly or as a trustee or executor) to direct or cause the direction of
management or policies of such Person (whether through ownership of voting
securities, as trustee or executor, by Agreement or otherwise).
"Delaware Law" is defined in the Preamble to this Merger Agreement.
"Effective Time" is defined in Section 1.02 of this Merger Agreement.
"Encumbrance" means any mortgage, lien, pledge, encumbrance, security
interest, deed of trust, option, encroachment, reservation, order, decree,
judgment, condition, restriction, charge, Agreement, claim or equity of any
kind.
"Environmental Laws" means any federal, state or local Law relating to
public health or safety, worker health or safety, or pollution, damage to or
protection of the environment including, without limitation, Laws relating to
emissions, discharges, releases or threatened release of Hazardous Materials
into the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, generation,
disposal, transport or handling of any Hazardous Material.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all regulations promulgated pursuant thereto or in connection
therewith.
"Escrow Agent" is defined in Section 2.06(a) of this Agreement.
"Escrow Agreement" is defined in Section 2.06(a) of this Merger Agreement.
"Escrow Stock" is defined in Section 2.06(a)(ii) of this Merger Agreement.
"Estimated Net Debt" is defined in Section 7.02(k) of this Merger Agreement.
"Exchange Agent" is defined in Section 2.02 of this Merger Agreement.
"Exchange Fund" is defined in Section 2.02 of this Merger Agreement.
"Exchange Ratio" is defined in Section 2.01(a) of this Merger Agreement.
"GAAP" means United States generally accepted accounting principles
consistently applied in accordance with past practices.
"Governmental Entities" (including the term "Governmental") means any
governmental, quasi-governmental or regulatory authority, whether domestic or
foreign.
"Hazardous Material" means (i) any "hazardous substance" as now defined
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. Section9601(14); (ii) any
A-54
<PAGE>
"pollutant or contaminant" as defined in 42 U.S.C. Section9601(33); (iii) any
material now defined as "hazardous waste" pursuant to 40 C.F.R. Part 261;
(iv) any petroleum, including crude oil and any fraction thereof; (v) natural
synthetic gas usable for fuel; (vi) any "hazardous chemical" as defined pursuant
to 29 C.F.R. Part 1910; and (vii) any asbestos, polychlorinated biphenyl
("PCB"), radium, or isomer of dioxin, or any material or thing containing or
composed of such substance or substances.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and all Laws promulgated pursuant thereto or in connection therewith.
"Intangible and Other Property" means all Agreements, certificates of
deposit, bank accounts, securities, partnership or other ownership interests,
rights to receive money or property by assignment, future interests, claims and
rights against third parties, accounts receivable, notes receivable,
Intellectual Property, Software, prepaid expenses, acquisition costs and other
intangible property of any nature owned, leased, licensed, used or held for use,
directly or indirectly, by, on behalf of or for the account of a Person.
"Intellectual Property" means all patents, intellectual property capable of
being protected by a patent, trademarks, trademark rights, service marks,
service mark rights, trade secrets, trade names, product designations, service
marks, copyrights, and applications for any of the foregoing, used, licensed,
leased or owned, directly or indirectly, by, on behalf of or for the account of
a Person.
"Inventory" means all new materials, work in progress, finished goods and
inventoriable supplies.
"knowledge" will be deemed to be present with respect to a Party and each
Subsidiary of that Party when the matter in question is known, or upon
reasonable investigation, should have been known, to the officer, director or
employee primarily responsible for the matter in question.
"Laws" means all foreign, federal, state and local statutes, laws,
ordinances, regulations, rules, resolutions, orders, tariffs, determinations,
writs, injunctions, awards (including, without limitation, awards of any
arbitrator), judgments and decrees applicable to the specified Person and to the
businesses and Assets thereof (including, without limitation, Laws relating to
the protection of classified information; the sale, leasing, ownership or
management of real property; employment practices, terms and conditions, and
wages and hours; building standards, land use and zoning; safety, health and
fire prevention; and environmental protection, including Environmental Laws).
"License" means any franchise, grant, authorization, license, tariff,
permit, easement, variance, exemption, consent, certificate, approval or order
of any Governmental Entity.
"Losses" means all demands, losses, claims, actions or causes of action,
assessments, damages, liabilities, costs and expenses, including, without
limitation, interest, penalties and reasonable attorneys' fees and
disbursements.
"Merger" is defined in the Preamble to this Merger Agreement.
"Merger Consideration" is defined in Section 2.01(a) of this Merger
Agreement.
"Multiemployer Plan" means any "multiemployer plan" within the meaning of
Section 4001(a)(3) of ERISA to which Company or Company Subsidiary contribute,
have an obligation to contribute, or have at any time since September 2, 1974,
contributed or been obligated to contribute.
"Net Debt" means the average for the ten (10) consecutive business days
ending with and including the second business day immediately preceding the
Closing Date of all outstanding debt obligations to banks and financial
institutions on each such business day plus any additional consideration payable
to Mohan Kapani pursuant to the acquisition of CBSI by the Company as identified
in Section 3.10 of the Company Disclosure Letter less the sum of (i) cash
invested in overnight instruments as of 12:01 a.m. the morning of each such
business day, (ii) all receipts received as of such business day which were not
included in the overnight investments, (iii) collateralized notes
A-55
<PAGE>
receivable that have not been written off or reserved on the Company's books,
and (iv) petty cash balances on the day prior to each such date.
"NYSE" is defined in Section 2.01(b) of this Merger Agreement.
"Option Exercise Consideration" means the sum of (a) the total consideration
payable to the Company upon the exercise of all vested Options issued and
outstanding immediately prior to the Effective Time and (b) one-half of the
total consideration payable to the Company upon the exercise of all unvested
Options issued and outstanding immediately prior to the Effective Time.
"Option" means an option to acquire Company Common Stock granted under the
Company's 1998 Long Term Incentive Plan.
"Ordinary Course of Business" means ordinary course of business consistent
with past practices.
"Party" and "Parties" are defined in the Preamble to this Merger Agreement.
"Permitted Encumbrance" means (i) easements, rights of way, minor
irregularities of title, and liens for taxes not yet due and payable,
(ii) landlord, warehouse and materialmen's liens and (ii) other Encumbrances
similar to clauses (i) and (ii); provided, however, that any or all of the
foregoing do not materially affect the utility or value of the Assets or other
matters to which they relate.
"Person" means an individual, corporation, partnership, limited liability
company, joint venture, trust, unincorporated organization or other entity, or a
Governmental Entity.
"Plan" means any plan, program or arrangement, whether or not written, that
is or was an "employee benefit plan" as such term is defined in Section 3(3) of
ERISA and (a) which was or is established or maintained by Company or Company
Subsidiary; (b) to which Company or Company Subsidiary contributed or was
obligated to contribute or to fund or provide benefits; or (c) which provides or
promises benefits to any person who performs or who has performed services for
Company or Company Subsidiary and because of those services is or has been
(i) a participant therein or (ii) entitled to benefits thereunder.
"Post-Signing Returns" is defined in Section 5.04 of this Merger Agreement.
"Proxy Statement/Prospectus" is defined in Section 3.29 of this Merger
Agreement.
"Registration Statement" is defined in Section 3.29 of this Merger
Agreement.
"Representatives" is defined in Section 5.10 of this Merger Agreement.
"SEC" means the United States Securities and Exchange Commission.
"Scheduled Closing Date" is defined in Section 2.05 of this Merger
Agreement.
"Software" means all electronic data processing systems, information
systems, computer software programs, program specifications, designs, charts,
procedures, input data, routines, data bases, report layouts, formats, record
file layouts, written manifestations (in both source code and object code form),
diagrams, functional specifications, narrative descriptions and flow charts,
user manuals and similar documents, and other related material, used, licensed,
leased or owned, directly or indirectly, by, on behalf of or for the account of
a Person.
"Stockholders' Representatives" is defined in Section 2.02(k) of this Merger
Agreement.
"Subsidiary" means a corporation, partnership, joint venture or other entity
of which any Person owns, directly or indirectly, at least fifty percent (50%)
of the outstanding securities or other interests the holders of which are
generally entitled to vote for the election of the board of directors or other
governing body or otherwise exercise control of such entity.
"Surviving Corporation" is defined in Section 1.01 of this Merger Agreement.
A-56
<PAGE>
"Taxes" (including the terms "Tax" and "Taxing") means all federal, state,
local and foreign taxes (including, without limitation, income, profit,
franchise, sales, use, real property, personal property, AD VALOREM, excise,
employment, social security and wage withholding taxes) and installments of
estimated taxes, assessments, deficiencies, levies, imports, duties, license
fees, registration fees, withholdings, or other similar charges of every kind,
character or description imposed by any Governmental Entity, and any interest,
penalties or additions to tax imposed thereon or in connection therewith.
"Tax Liabilities" means any action, suit, proceeding, audit, investigation
or claim pending or threatened in respect of any Taxes for which Company or any
Company Subsidiary is or may become liable, or any deficiency or claim for any
such Taxes that has been to Company's knowledge proposed, asserted or
threatened.
"Tax Returns" means all federal, state, local, foreign and other applicable
returns, declarations, reports and information statements with respect to Taxes
required to be filed with the United States Internal Revenue Service, and its
successors, or any other Governmental Entity or Tax authority or agency,
including, without limitation, consolidated, combined and unitary tax returns.
"Third Party Claim" means any claim or other assertion of liability by any
third party.
"Transaction Value" means Two Hundred Five Million Dollars ($205,000,000)
plus the Option Exercise Consideration less Estimated Net Debt less all payments
made to Company Common Stockholders after the date hereof and prior to the
Effective Time to redeem Company Common Stock.
[Remainder of Page Intentionally Left Blank; Signature Page Follows.]
A-57
<PAGE>
IN WITNESS WHEREOF, The Titan Corporation, VT Acquisition Corp. and
AverStar, Inc. have executed and delivered, or have caused this Merger Agreement
to be duly executed and delivered, as of the date first set forth hereinabove.
THE TITAN CORPORATION
By: /s/ GENE W. RAY
--------------------------------------
Name: Gene W. Ray
Title:
Chairman and Chief Executive Officer
V T ACQUISITION CORP.
By: /s/ GENE W. RAY
--------------------------------------
Name: Gene W. Ray
Title:
Chairman and Chief Executive Officer
AVERSTAR, INC.
By: /s/ MICHAEL B. ALEXANDER
--------------------------------------
Name: Michael B. Alexander
Title: Chairman and Chief Executive
Officer
The undersigned hereby acknowledge their appointment as the Stockholders'
Representatives hereunder and their willingness to fulfill the duties of the
Stockholders' Representatives as contemplated by this Merger Agreement.
/s/ MICHAEL B. ALEXANDER
--------------------------------------
Name: Michael B. Alexander
/s/ SIGMUND H. GOLDBLUM
--------------------------------------
Name: Sigmund H. Goldblum
/s/ PETER SCHULTE
--------------------------------------
Name: Peter Schulte
A-58
<PAGE>
APPENDIX B
FORM OF
ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Escrow Agreement") is entered into as of
, 2000 by and among The Titan Corporation, a Delaware
corporation ("Acquiror"), V T Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Acquiror ("Merger Sub"), Averstar Inc., a Delaware
corporation (the "Company"), First Union National Bank, a national banking
association (the "Escrow Agent"), and , as representatives (the
"Stockholders' Representatives") of and on behalf of the stockholders of the
Company (the "Company Stockholders").
WHEREAS, pursuant to the Agreement and Plan of Merger dated as of March ,
2000 by and among Acquiror, Merger Sub and the Company (as amended, the "Merger
Agreement"), the Merger Sub is being merged with and into the Company (the
"Merger");
WHEREAS, the adoption and approval of the Merger Agreement by the Company
Stockholders also constitutes their approval of the specific terms of the Merger
Agreement provided therein (including this escrow), of the terms and provisions
of this Escrow Agreement, of the appointment of the Escrow Agent, and of the
appointment of each of the Stockholders' Representatives to act on behalf of the
Company Stockholders;
WHEREAS, pursuant to the terms of the Merger Agreement, the parties thereto
have agreed, as a condition to their respective obligations thereunder, to enter
into this Escrow Agreement; and
WHEREAS, the Escrow Agent has agreed to act as Escrow Agent hereunder, in
accordance with the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
1. APPOINTMENT OF ESCROW AGENT; COMPENSATION.
Acquiror, the Company and the Stockholders' Representatives hereby mutually
appoint and designate the Escrow Agent as escrow agent to receive, hold and
disburse the Escrow Stock (as defined in the Merger Agreement), and the Escrow
Agent hereby accepts such appointment and designation. Acquiror shall pay all
reasonable fees and expenses of the Escrow Agent.
2. ESCROW DEPOSIT.
At the Effective Time (as defined in the Merger Agreement), Acquiror shall
deliver to the Escrow Agent the Escrow Stock. In connection with any delivery of
any Escrow Stock pursuant to this Escrow Agreement,
(i) all property ("Escrow Property") that would have been distributed to
the Company Stockholders as a result of any non-taxable stock dividend,
stock split, recapitalization, merger, combination or similar transaction
occurring during the period (the "Post-closing Escrow Period") beginning at
the Effective Time and ending on the date of disbursement of all Escrow
Stock pursuant to Section 2.06 of the Merger Agreement, (the "Adjustment
Date"), which Adjustment Date shall be no later than the date which is
ninety (90) days after the Closing (as defined in the Merger Agreement),
(ii) less any Escrow Stock, and any Escrow Property distributed with
respect thereto, that have been applied as provided in the Merger Agreement
and this Escrow Agreement in
B-1
<PAGE>
satisfaction of any Closing Adjustments or Loss Adjustments, if any (as
defined in Section 2.06 of the Merger Agreement), and
(iii) less any Escrow Stock, and any Escrow Property, the distribution of
which is contested pursuant to Section 3(a);
shall be delivered as soon as practicable after the Adjustment Date as set
forth herein or otherwise in accordance with written instructions provided by
any of the Stockholders' Representatives, for redelivery to the Company
Stockholders based on each such Company Stockholder's proportionate interests
set forth on Exhibit A attached hereto. Notwithstanding such delivery, any
remaining Escrow Stock (and any Escrow Property to be distributed with respect
thereto) held in escrow pursuant to clause (iii) above shall continue to be held
by the Escrow Agent under this Escrow Agreement in accordance with the
provisions of this Escrow Agreement. The Escrow Stock together with any Escrow
Property are sometimes collectively referred to herein as the "Shares." The
Shares shall be registered in the name of the Escrow Agent as escrow agent
hereunder. The Escrow Agent shall hold the Shares for the accounts of the
Company Stockholders in accordance with each Company Stockholder's respective
interest therein, and shall (to the extent legally permissible) vote the Escrow
Stock and any other shares of stock included in the Escrow Property at the
direction of the Stockholders' Representatives. Any cash dividends paid with
respect to the Escrow Stock shall be distributed as, if and when paid to the
Company Stockholders, set forth on Exhibit A attached hereto.
3. CONDITIONS OF ESCROW.
The Escrow Agent shall hold the Shares solely for the benefit of Acquiror
Indemnified Persons and/or the Company Stockholders, as the case may be, as
provided in this Escrow Agreement and the Merger Agreement. The Escrow Agent
shall deliver the Shares to the Acquiror Indemnified Persons and/or the Company
Stockholders only in accordance with the following terms and conditions:
3(a) If an Acquiror Indemnified Person believes he or it is entitled to a
Closing Adjustment or Loss Adjustment pursuant to the Merger Agreement (an
"Indemnification Amount"), then such Acquiror Indemnified Person may provide
written notice (an "Adjustment Notice") to the Escrow Agent and the
Stockholder's Representatives of the amount of such payment, the basis upon
which such payment is required to be made, and the number of shares of Escrow
Stock deliverable to such Acquiror Indemnified Person (calculated pursuant to
Section 2.06 of the Merger Agreement), with respect thereto on or prior to the
Adjustment Date. The date on which the Adjustment Notice is received by Escrow
Agent and the Stockholders' Representatives shall be the adjustment notice date
(the "Adjustment Notice Date").
(i) If the Stockholders' Representatives do not deliver to the Escrow
Agent a notice contesting the determination of the Closing Adjustment or the
Loss Adjustment as specified in the Adjustment Notice within 15 days after
the Adjustment Notice Date, then the Escrow Agent shall deliver to such
Acquiror Indemnified Person the number of Adjustment Escrow Shares specified
in such notice (together with any Escrow Property to be distributed with
respect thereto) on the 16th business day after the Adjustment Notice Date.
(ii) If the Stockholders' Representatives deliver to the Escrow Agent a
notice (with a copy to the relevant Acquiror Indemnified Person) contesting
the determination of the Closing Adjustment or the Loss Adjustment as
specified in the Adjustment Notice within 15 days after the Adjustment
Notice Date, then the Escrow Agent shall notify the Acquiror Indemnified
Person thereof on the 16(th) business day after the Adjustment Notice Date
and the Escrow Agent shall deliver to the Acquiror Indemnified Person only
the number of shares of Escrow Stock not so contested (together with any
Escrow Property to be distributed with respect thereto) on the 15th business
day after the Adjustment Notice Date. Unless the Acquiror Indemnified Person
and the Stockholders' Representatives deliver a notice to the Escrow Agent
modifying the provisions of the
B-2
<PAGE>
Adjustment Notice, the Escrow Stock (together with any Escrow Property to be
distributed with respect thereto and any additional shares of Escrow Stock
which the Acquiror Indemnified Person has notified the Escrow Agent in
writing prior to the 15(th) business day following the Adjustment Notice
Date are, in the Acquiror's reasonable judgment, necessary to cover any
expenses which the Acquiror Indemnified Person may waive in connection with
such dispute ("Expenses Shares")) contested and not so distributed as
provided in the preceding sentence shall either (i) continue to be held by
the Escrow Agent pursuant to the terms hereof until such time as the
(A) Acquiror Indemnified Person and the Stockholders' Representatives shall
have delivered to the Escrow Agent a jointly executed notice advising the
Escrow Agent as to how such Escrow Stock shall be delivered or (B) the
Accounting Firm or the AAA, as the case may be, shall have resolved such
contest pursuant to Sections 2.06(c) and (d) of the Merger Agreement, in
which event the Escrow Stock shall be delivered in accordance with such
resolution.
3(b) As soon as practicable after the Adjustment Date, the Escrow Agent
shall:
(i) Deliver to the respective Acquiror Indemnified Persons any Escrow
Stock to which any Acquiror Indemnified Person remains entitled to under
Section 3(a) above, together with any Escrow Property to be distributed with
respect thereto;
(ii) Set aside for the retention by it for application in accordance
with the terms of Section 3(a) of this Escrow Agreement any Escrow Stock
(together with any Escrow Property to be distributed with respect thereto
and any Expenses Shares) the distribution of which is contested pursuant to
Section 3(a); and
(iii) Deliver any remaining Escrow Stock (together with any Escrow
Property to be distributed with respect thereto) to the Company
Stockholders, in accordance with written instructions provided by such
Stockholders' Representatives, for redelivery to the Company Stockholders
based on each such Company Stockholder's proportionate interest immediately
following the Effective Time in the Acquiror Shares as set forth in
Schedule 3 hereto.
3(c) Notwithstanding the foregoing, in each circumstances under any of the
foregoing provisions in which Acquiror Shares are deliverable to any Acquiror
Indemnified Person, the number of shares so deliverable shall be rounded upward
to the nearest whole number.
4. INDEMNIFICATION OF ESCROW AGENT.
4(a) The Escrow Agent may rely and shall be protected in acting or
refraining from acting upon any certificate or affidavit furnished to it
hereunder and believed by it to be genuine and to have been signed or presented
by the proper party or parties.
4(b) The Escrow Agent shall not be liable for any action taken by it in good
faith and without negligence and believed by it to be authorized or within the
rights or powers conferred upon it by this Escrow Agreement.
4(c) Acquiror hereby agrees to indemnify the Escrow Agent for, and hold it
harmless against, any loss, liability or expense incurred without negligence or
bad faith on the part of the Escrow Agent arising out of or in connection with
its entering into this Escrow Agreement and carrying out its duties hereunder,
including costs and expenses of defending itself from any claims of liability
with respect thereto.
4(d) The Escrow Agent (and any successor Escrow Agent) may at any time
resign as such by delivering the Shares to any successor Escrow Agent jointly
designated in writing by Acquiror and the Stockholders' Representatives or to
any court of competent jurisdiction, whereupon the Escrow Agent shall be
discharged of and from any and all further obligations arising in connection
with this Escrow Agreement. The resignation of the Escrow Agent will take effect
on the earlier of (i) the appointment
B-3
<PAGE>
of a successor (including a court of competent jurisdiction) or (ii) the day
which is 30 days after the date of delivery of its written notice of resignation
to Acquiror and the Stockholders' Representatives. If at that time the Escrow
Agent has not received a designation of a successor Escrow Agent, the Escrow
Agent's sole responsibility after that time shall be to safekeep the Shares
until receipt of a designation of successor Escrow Agent or a joint written
disposition instruction by Acquiror and the Stockholders' Representatives or a
final order of a court of competent jurisdiction.
4(e) This Escrow Agreement expressly sets forth all the duties of the Escrow
Agent with respect to any and all matters pertinent hereto. No implied duties or
obligations shall be read into this Escrow Agreement against the Escrow Agent.
The Escrow Agent shall not be bound by the provisions of any agreement between
Acquiror, the Company and/or the Stockholders' Representatives except this
Escrow Agreement and, solely for the purposes of defining the Escrow Agent's
responsibilities with respect to this Escrow Agreement and the Merger Agreement.
4(f) The Escrow Agent does not have any interest in the Shares, but is
serving as escrow holder only, and only has possession thereof.
5. TERMINATION.
This Escrow Agreement shall be terminated when the Shares have been finally
disbursed as provided in Section 3 hereof and may be terminated prior thereto by
written instruction signed by Acquiror and the Stockholders' Representatives.
6. WAIVER.
The waiver by the Stockholders' Representatives of a breach of this Escrow
Agreement by the Escrow Agent shall not constitute a waiver of any right or
remedy the Company Stockholders may have against Acquiror under the Merger
Agreement or hereunder. The waiver by Acquiror of a breach of this Escrow
Agreement by the Escrow Agent shall not constitute a waiver of any right or
remedy it may have against the Company Stockholders under the Merger Agreement
or hereunder. No delay or failure on the part of any party hereto in exercising
any right, power, or privilege under this Escrow Agreement or under any other
agreement or instrument given or entered into in connection with or pursuant to
this Escrow Agreement shall impair any such right, power, or privilege or be
construed as a waiver of any event of default hereunder or any acquiescence
therein. No single or partial exercise of any such right, power, or privilege
shall preclude the further exercise of such right, power, or privilege, or the
exercise of any other right, power, or privilege. No waiver shall be valid
against any party hereto unless made in writing and signed by the party against
whom enforcement of such waiver is sought and then only to the extent expressly
specified therein.
7. ADDITIONAL ACTIONS AND DOCUMENTS.
Each of the parties hereto hereby agrees to take or cause to be taken such
further actions, to execute, deliver and file or cause to be executed, delivered
and filed such further documents and instruments, and to obtain such consents as
may be necessary or as may be reasonably requested in order to effectuate fully
the purpose, terms and conditions of this Escrow Agreement.
B-4
<PAGE>
8. NOTICES.
All notices, demands, requests, or other communications that may be required
to be given, served or sent by any party to any other party pursuant to this
Escrow Agreement shall be in writing and shall be mailed by first-class,
registered or certified mail, return receipt requested, postage prepaid, sent by
nationally-recognized overnight courier or transmitted by hand-delivery,
telegram, telex or facsimile transmission addressed as follows:
8(a) If to Acquiror or Merger Sub:
The Titan Corporation
3033 Science Park Road
San Diego, CA 92121
Telecopier No.: (858) 552-9759
Attention: Nicholas J. Costanza, Esq.
General Counsel
With a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
8300 Greensboro Drive
Suite 1100
McLean, VA 22102
Telecopier No.: (703) 610-6200
Attention: Richard K.A. Becker, Esq.
8(b) If to the Company:
Averstar Inc.
23 Fourth Avenue
Burlington, MA 01803
Telecopier No.: (781) 221-6991
Attention:
With a copy to the Stockholders' Representatives and with a copy (which
shall not constitute notice) to:
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, NY 10174
Telecopier No.: (212) 891-9598
Attention: Gerald Adler, Esq.
8(c) If to the Stockholders' Representatives:
----------------------------------------------------
[Address]
[Address]
Telecopier No.: ( ) -
With a copy to the Stockholders' Representatives and with a copy (which
shall not constitute notice) to:
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, NY 10174
Telecopier No.: (212) 891-9598
Attention: Gerald Adler, Esq.
B-5
<PAGE>
8(d) If to the Escrow Agent:
First Union National Bank, N.A.
999 Peachtree Street, N.E.
Suite 1100
Atlanta, GA 30309
Telecopier No.: (404) 827-7305
Attention: Brian K. Justice, Assistant Vice President
Each party may designate by notice in writing a new address to which any
notice, demand, request or communication may thereafter be so given, served or
sent. Each notice, demand, request, or communication that shall be mailed,
delivered or transmitted in the manner described above shall be deemed
sufficiently given, served, sent and received for all purposes at such time as
it is delivered to the addressee (with the return receipt, the delivery receipt
or the affidavit of messenger being deemed conclusive evidence of such delivery)
or at such time as delivery is refused by the addressee upon presentation.
9. STOCKHOLDERS' REPRESENTATIVES.
9(a) have each been designated as the Stockholders'
Representatives and in such capacity shall act as representative and agent of
each of the Company Stockholders in connection with this Escrow Agreement.
Should any of the named Stockholders' Representatives fail or cease to serve
hereunder as such, the Company Stockholders who held a majority of the
then-previously issued Company Common Stock shall be entitled to elect a
successor Representative.
9(b) The Stockholders' Representatives shall not be liable to any Company
Stockholder, Acquiror, the Merger Sub or their respective affiliates or any
other person with respect to any action taken or omitted to be taken by the
Stockholders' Representatives in their role as Stockholders' Representatives
under or in connection with this Escrow Agreement unless such action or omission
results from or arises out of fraud, gross negligence or willful misconduct on
the part of the Stockholders' Representatives. Acquiror and the Merger Sub shall
be entitled to rely on such appointment and treat such any of the Stockholders'
Representatives as the duly appointed attorney-in-fact of each Company
Stockholder.
10. BINDING EFFECT; ASSIGNMENT.
This Escrow Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and permitted assigns.
This Escrow Agreement shall not be assignable by any party without the prior
consent of each of the other parties hereto.
11. ENTIRE AGREEMENT; AMENDMENT.
This Escrow Agreement constitutes the entire agreement among the parties
hereto with respect to the escrow of the Shares with the Escrow Agent pursuant
to the Merger Agreement, and supersedes all prior oral or written agreements,
commitments or understandings with respect thereto. This Escrow Agreement shall
not be amended, altered or modified except by instrument in writing duly
executed by each of the parties hereto.
12. HEADINGS.
The headings of the Sections of this Escrow Agreement are inserted for
convenience of reference only and do not form a part or affect the meaning
hereof.
B-6
<PAGE>
13. GOVERNING LAW.
This Escrow Agreement, the rights and obligations of the parties hereto, and
any claims or disputes relating thereto, shall be governed by and in accordance
with the laws of the State of Delaware regardless of the Laws that might
otherwise govern under applicable principles of conflicts of law.
14. COUNTERPARTS.
This Escrow Agreement may be executed and delivered in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed and delivered shall be deemed to be an original but all
of which taken together shall constitute one and the same agreement.
15. CAPITALIZED TERMS.
Capitalized terms used herein which are defined in the Merger Agreement
shall have the meanings set forth in the Merger Agreement, unless otherwise
defined herein.
B-7
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed and delivered
this Escrow Agreement, or caused this Escrow Agreement to be duly executed and
delivered in its name and on its behalf, as of the day and year first
hereinabove set forth.
THE TITAN CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
V T ACQUISITION CORP.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
AVERSTAR INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
FIRST UNION NATIONAL BANK
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
B-8
<PAGE>
--------------------------------------
[NAME], as the Stockholders'
Representatives under the Merger
Agreement and not individually
--------------------------------------
[NAME], as the Stockholders'
Representatives under the Merger
Agreement and not individually
--------------------------------------
[NAME], as the Stockholders'
Representatives under the Merger
Agreement and not individually
B-9
<PAGE>
APPENDIX C
DELAWARE GENERAL CORPORATION LAW
SS. 262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to ss. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to ss.ss. 251,
252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
C-1
<PAGE>
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections
(d) and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of such stockholder's shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of such stockholder's shares. Such demand will
be sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the merger
or consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to ss. 228 or
ss. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of stock of
a constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights
may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent
C-2
<PAGE>
corporation that are entitled to appraisal rights of the effective date of
the merger or consolidation or (ii) the surviving or resulting corporation
shall send such a second notice to all such holders on or within 10 days
after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such
second notice need only be sent to each stockholder who is entitled to
appraisal rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is required to
give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given, provided, that if
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day
on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
C-3
<PAGE>
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
C-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement of such action, suit or proceeding, provided that
amounts paid in settlement of such action, suit or proceeding, provided that
such officer or director acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the corporation's best interest,
and, for criminal proceedings, had no reasonable cause to believe his or her
conduct was illegal. A Delaware corporation may indemnify officers and directors
against expenses (including attorney's fees) in connection with the defense or
settlement of an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is successful on the merits or otherwise in
the defense of any action referred to above, the corporation must indemnify him
or her against the expenses which such officer or director actually and
reasonably incurred.
The Bylaws of Titan contain a provision to limit the personal liability of
the directors of Titan for violations of their fiduciary duty, except to the
extent such limitation of liability is prohibited by the Delaware Law. This
provision eliminates each director's liability to Titan or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
Titan or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The Bylaws of Titan provide that Titan shall indemnify directors and
officers to the fullest extent permitted by law. The effect of these provisions
is to eliminate the personal liability of directors for monetary damages for
actions involving a breach of their fiduciary duty of care, including any such
actions involving gross negligence.
In addition, Titan has entered into indemnity agreements with its executive
officers and directors whereby Titan obligates itself to indemnify such officers
and directors from any amounts which the officer or director becomes obligated
to pay because of any claim made against him or her arising out of any act or
omission committed while he or she is acting in his or her capacity as a
director and/or officer of Titan.
Titan maintains directors and officers liability insurance coverage that
insures its officers and directors against certain losses that may arise out of
their positions with Titan and insures Titan for liabilities it may incur to
indemnity its officers and directors.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits, as required by Item 601 of Regulation S-K, are
filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of March 24, 2000, by
and among Registrant, V T Acquisition Corp. and
AverStar, Inc. (included as Appendix A to the Proxy
Statement/Prospectus contained in this Registration
Statement)
4.1 Registrant's Restated Certificate of Incorporation, as
amended (filed as Exhibit 3.1 to Registrant's Registration
Statement on Form S-4, Registration No. 333-95245, filed
on January 4, 2000 and incorporated by reference herein).
4.2 Registrant's By-laws, as amended (filed as Exhibit 6(a)(3)
to Registrant's Quarterly Report on Form 10-Q dated
November 13, 1995 and incorporated by reference herein).
4.3 Rights Amendment, dated as of August 21, 1995, between The
Titan Corporation and American Stock Transfer and Trust
Company (filed as Exhibit 1 to Registrant's Form 8-A,
dated August 25, 1995, and incorporated by reference
herein).
4.4 Specimen of certificate representing Registrant's Common
Stock, $.01 par value per share filed as Exhibit 4.1 to
Registrant's Registration Statement on Form S-4,
Registration No. 333-95245 and incorporated by reference
herein).
5.1** Legal Opinion of Hogan & Hartson L.L.P. regarding the
validity of the securities registered hereby.
8.1* Legal Opinion of Hogan & Hartson L.L.P. with respect to
certain tax matters.
10.1** Voting Agreement, dated as of March 24, 2000, by and among
The Titan Corporation, V T Acquisition Corp. and each
other person listed on the signature page thereto.
10.2** Irrevocable Proxy of Michael B. Alexander
10.3** Irrevocable Proxy of AFH Partners, L.P.
10.4** Irrevocable Proxy of Peter J. Dwyer
10.5** Irrevocable Proxy of Nicholas A. Pettinella
10.6** Irrevocable Proxy of John C. Rennie
10.7** Irrevocable Proxy of Sigmund H. Goldblum
10.8** Irrevocable Proxy of Joseph A. Saponaro
10.9** Irrevocable Proxy of Peter M. Shulte
10.10** Irrevocable Proxy of Levy Family Partnership
10.11** Irrevocable Proxy of Bruce A. Burton
21** Subsidiaries of Registrant
23.1* Consent of Arthur Andersen LLP, Independent Public
Accountants with respect to Registrant.
23.2* Consent of Ernst & Young LLP, Independent Auditors with
respect to AverStar, Inc.
23.3* Consent of Arthur Andersen LLP, Independent Public
Accountants with respect to Advanced Communication
Systems, Inc.
23.4* Consent of Arthur Andersen LLP, Independent Public
Accountants with respect to Transnational Partners, II,
LLC.
23.5* Consent of Arthur Andersen LLP, Independent Public
Accountants with respect to JB Systems, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
23.6* Consent of Ernst & Young LLP, Independent Auditors with
respect to Assist Cornerstone Technologies, Inc.
23.7* Consent of KPMG LLP, Independent Public Accountants with
respect to SFG Technologies, Inc.
23.8** Consent of Hogan & Hartson L.L.P. (included in
Exhibit 5.1).
23.9* Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1)
24.1** Power of attorney (included in signature pages).
99.1** Consent of Michael B. Alexander.
99.2** Form of AverStar, Inc. Proxy for Special Meeting of
Stockholders.
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
(b) None.
(c) None.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee
II-3
<PAGE>
benefit plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus that is a part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(d) The undersigned registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (c) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(f) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statements through the date
of responding to the request.
(g) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Diego, State of California, on this 24th day of May, 2000.
<TABLE>
<S> <C> <C>
THE TITAN CORPORATION
By: /s/ NICHOLAS J. COSTANZA
-----------------------------------------
Nicholas J. Costanza
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY (DULY AUTHORIZED OFFICER)
</TABLE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities indicated as of the 24th day of May,
2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* President and Chief Executive Officer and
- -------------------------------------------- Director (principal executive officer)
Gene W. Ray
* Senior Vice President and Chief Financial
- -------------------------------------------- Officer (principal financial officer)
Eric M. DeMarco
* Corporate Controller and Vice President
- -------------------------------------------- (principal accounting officer)
Deanna H. Petersen
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
*
- -------------------------------------------- Director
Charles R. Allen
*
- -------------------------------------------- Director
Joseph F. Caligiuri
*
- -------------------------------------------- Director
Daniel J. Fink
*
- -------------------------------------------- Director
Robert M. Hanisee
*
- -------------------------------------------- Director
Robert E. LaBlanc
*
- -------------------------------------------- Director
Thomas G. Pownall
*
- -------------------------------------------- Director
George A. Robinson
*
- -------------------------------------------- Director
James E. Roth
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ NICHOLAS J. COSTANZA
--------------------------------------
Nicholas J. Costanza
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of March 24, 2000, by
and among Registrant, V T Acquisition Corp. and
AverStar, Inc. (included as Appendix A to the Proxy
Statement/Prospectus contained in this Registration
Statement)
4.1 Registrant's Restated Certificate of Incorporation, as
amended (filed as Exhibit 3.1 to Registrant's Registration
Statement on Form S-4, Registration No. 333-95245, filed
on January 4, 2000 and incorporated by reference herein).
4.2 Registrant's By-laws, as amended (filed as Exhibit 6(a)(3)
to Registrant's Quarterly Report on Form 10-Q dated
November 13, 1995 and incorporated by reference herein).
4.3 Rights Amendment, dated as of August 21, 1995, between The
Titan Corporation and American Stock Transfer and Trust
Company (filed as Exhibit 1 to Registrant's Form 8-A,
dated August 25, 1995, and incorporated by reference
herein).
4.4 Specimen of certificate representing Registrant's Common
Stock, $.01 par value per share filed as Exhibit 4.1 to
Registrant's Registration Statement on Form S-4,
Registration No. 333-95245 and incorporated by reference
herein).
5.1** Legal Opinion of Hogan & Hartson L.L.P. regarding the
validity of the securities registered hereby.
8.1* Legal Opinion of Hogan & Hartson L.L.P. with respect to
certain tax matters.
10.1** Voting Agreement, dated as of March 24, 2000, by and among
The Titan Corporation, V T Acquisition Corp. and each
other person listed on the signature page thereto.
10.2** Irrevocable Proxy of Michael B. Alexander
10.3** Irrevocable Proxy of AFH Partners, L.P.
10.4** Irrevocable Proxy of Peter J. Dwyer
10.5** Irrevocable Proxy of Nicholas A. Pettinella
10.6** Irrevocable Proxy of John C. Rennie
10.7** Irrevocable Proxy of Sigmund H. Goldblum
10.8** Irrevocable Proxy of Joseph A. Saponaro
10.9** Irrevocable Proxy of Peter M. Shulte
10.10** Irrevocable Proxy of Levy Family Partnership
10.11** Irrevocable Proxy of Bruce A. Burton
21** Subsidiaries of Registrant
23.1* Consent of Arthur Andersen LLP, Independent Public
Accountants with respect to Registrant.
23.2* Consent of Ernst & Young LLP, Independent Auditors with
respect to AverStar, Inc.
23.3* Consent of Arthur Andersen LLP, Independent Public
Accountants with respect to Advanced Communication Systems
Inc.
23.4* Consent of Arthur Andersen LLP, Independent Public
Accountants with respect to Transnational Partners, II,
LLC.
23.5* Consent of Arthur Andersen LLP, Independent Public
Accountants with respect to JB Systems, Inc.
23.6* Consent of Ernst & Young LLP, Independent Auditors with
respect to Assist Cornerstone Technologies, Inc.
23.7* Consent of KPMG LLP, Independent Public Accountants with
respect to SFG Technologies, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
23.8** Consent of Hogan & Hartson L.L.P. (included in
Exhibit 5.1).
23.9* Consent of Hogan & Hartson L.L.P. (included in
Exhibit 8.1).
24.1** Power of attorney (included in signature pages).
99.1** Consent of Michael B. Alexander.
99.2** Form of AverStar, Inc. Proxy for Special Meeting of
Stockholders.
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
<PAGE>
EXHIBIT 8.1
HOGAN & HARTSON L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
May 24, 2000
Board of Directors
The Titan Corporation
3033 Science Park Road
San Diego, CA 92121
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the
proposed merger of V T Acquisition Corp. ("Acquiror Sub"), a Delaware
corporation and wholly-owned subsidiary of The Titan Corporation ("Acquiror"), a
Delaware corporation, with and into AverStar, Inc. (the "Company"), a Delaware
corporation, with the separate corporate existence of Acquiror Sub ceasing and
the Company continuing as the surviving corporation (the "Merger"). The Merger
will be consummated pursuant to the Agreement and Plan of Merger (the
"Agreement"), dated as of March 24, 2000, by and among Acquiror, Acquiror Sub
and the Company.
In connection with the preparation of this opinion, we have
examined and with your consent relied upon (without any independent
investigation or review thereof) the following documents (including all exhibits
and schedules thereto): (1) the Agreement; (2) the Registration Statement on
Form S-4 to be filed with the Securities and Exchange Commission (the
"Registration Statement") and/or the Proxy Statement/Prospectus of Acquiror and
the Company; (3) representations and certifications made to us by Acquiror
(attached hereto as Exhibit A); (4) representations and certifications made to
us by the Company (attached hereto as Exhibit B); and (5) such other instruments
and documents related to the formation, organization and operation of Acquiror,
Acquiror Sub and the Company or to the consummation of the Merger and the
transactions contemplated thereby as we have deemed necessary or appropriate.1/
- ------------------------
1/ All capitalized terms used herein and not otherwise defined shall have the
same meaning as they have in the Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
<PAGE>
The Titan Corporation
May 24, 2000
Page 2
THE PROPOSED TRANSACTION
Based solely upon our review of the documents set forth above,
and upon such information as Acquiror, Acquiror Sub and the Company have
provided to us (which we have not attempted to verify in any respect), and in
reliance upon such documents and information, we understand that the proposed
transaction and the relevant facts with respect thereto are as follows:
Acquiror is a leading provider of communications and
information solutions to U.S. military and allied government agencies, as well
as to commercial customers. Acquiror Sub was organized solely for the purpose of
accomplishing the merger described below. The Company provides communications
services, information systems and aerospace services predominantly to U.S.
government agencies and commercial customers.
For the reasons set forth in the Registration Statement, it is
proposed that pursuant to the Agreement and the laws of the State of Delaware,
Acquiror Sub merge with and into the Company. Acquiror Sub's separate corporate
existence will cease and the Company will be the surviving corporation (the
"Surviving Corporation"). As the Surviving Corporation, the Company will succeed
to all of the assets and liabilities of Acquiror Sub under Delaware corporate
law.
By virtue of the Merger, each share of Company Common Stock,
excluding any Treasury Shares and any Dissenting Shares, issued and outstanding
at the Effective Time will be converted into the right to receive Acquiror
Common Stock equal to the Exchange Ratio. The Exchange Ratio will be based on
the average of the closing sale prices of the Acquiror Common Stock on the New
York Stock Exchange for the ten consecutive trading days ending two trading days
immediately before the Closing Date. Fractional shares of Acquiror Common Stock
will not be issued in the Merger. Rather, fractional shares will be rounded up
to the nearest whole share of Acquiror Common Stock. Under Delaware General
Corporation Law, stockholders of the Company are entitled to dissent from the
Merger and to exercise appraisal rights in connection with the Merger. It is a
condition to the obligations of Acquiror and Acquiror Sub to effect the Merger
that the Company Dissenting Stockholders not hold more than 5 percent of the
Company Common Stock.
<PAGE>
The Titan Corporation
May 24, 2000
Page 3
ASSUMPTIONS AND REPRESENTATIONS
In connection with rendering this opinion, we have assumed or
obtained representations (and, with your consent, are relying thereon, without
any independent investigation or review thereof, although we are not aware of
any material facts or circumstances contrary to or inconsistent therewith) that:
1. All information contained in each of the documents we have
examined and relied upon in connection with the preparation of this opinion is
accurate and completely describes all material facts relevant to our opinion,
all copies are accurate and all signatures are genuine. We have also assumed
that there has been (or will be by the Effective Time of the Merger) due
execution and delivery of all documents where due execution and delivery are
prerequisites to the effectiveness thereof.
2. The Merger will be consummated in accordance with
applicable state law and will qualify as a statutory merger under applicable
state law.
3. All representations made in the exhibits hereto are true,
correct, and complete in all material respects. Any representation or statement
made "to the best of knowledge" or similarly qualified is correct without such
qualification.
4. The Merger will be consummated in accordance with the
Agreement and as described in the Proxy Statement/Prospectus (including
satisfaction of all covenants and conditions to the obligations of the parties
without amendment or waiver thereof); each of Acquiror, Acquiror Sub and the
Company will comply with all reporting obligations with respect to the Merger
required under the Code and the Treasury Regulations thereunder; and the
Agreement and all other documents and instruments referred to therein or in the
Proxy Statement/Prospectus are valid and binding in accordance with their terms.
OPINION - FEDERAL INCOME TAX CONSEQUENCES
Based upon and subject to the assumptions and qualifications
set forth herein, it is our opinion that for federal income tax purposes: (1)
the Merger will qualify as a reorganization within the meaning of Section 368(a)
of the Code; and (2) the discussion in the Registration Statement under the
heading "Federal Income Tax Consequences," to the extent such discussion
describes applicable federal income tax law, is correct in all material
respects, as of the date hereof.
<PAGE>
The Titan Corporation
May 24, 2000
Page 4
In addition to the assumptions set forth above, this opinion
is subject to the exceptions, limitations and qualifications set forth below:
1. This opinion represents and is based upon our best judgment
regarding the application of relevant current provisions of the Code and
interpretations of the foregoing as expressed in existing court decisions,
administrative determinations (including the practices and procedures of the
Internal Revenue Service (the "IRS") in issuing private letter rulings, which
are not binding on the IRS except with respect to the taxpayer that receives
such a ruling) and published rulings and procedures all as of the date hereof.
An opinion of counsel merely represents counsel's best judgment with respect to
the probable outcome on the merits and is not binding on the IRS or the courts.
There can be no assurance that positions contrary to our opinions will not be
taken by the IRS, or that a court considering the issues would not hold contrary
to such opinions. Acquiror has not requested a ruling from the IRS (and no
ruling will be sought) as to any of the federal income tax consequences
addressed in this opinion. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the opinion
expressed herein. Nevertheless, we undertake no responsibility to advise you of
any new developments in the law or in the application or interpretation of the
federal income tax laws.
2. This letter addresses only the specific tax opinions set
forth above. This letter does not address any other federal, state, local or
foreign tax consequences that may result from the Merger or any other
transaction (including any transaction undertaken in connection with the
Merger).
3. We express no opinion regarding, among other things, the
tax consequences of the Merger (including the opinion set forth above) as
applied to specific stockholders of the Company that may be relevant to
particular classes of the Company shareholders, such as dealers in securities,
corporate shareholders subject to the alternative minimum tax, foreign persons,
and holders of shares acquired upon exercise of stock options or in other
compensatory transactions.
4. Our opinion set forth herein is based upon the description
of the contemplated transactions as set forth above in the section captioned
"The Proposed Transaction," the Agreement and the Proxy Statement/Prospectus. If
the actual facts relating to any aspect of the transactions differ from this
description in any material respect, our opinion may become inapplicable. No
opinion is expressed as to any transaction other than those set forth in the
section captioned "The Proposed Transaction," the Agreement and the Proxy
Statement/Prospectus or to any transaction whatsoever, including the Merger, if
all the transactions described in the section captioned "The Proposed
Transaction," the Agreement and the Proxy Statement/Prospectus are not
consummated in accordance with the terms of the section captioned "The Proposed
<PAGE>
The Titan Corporation
May 24, 2000
Page 5
Transaction," the Agreement and the Proxy Statement/Prospectus and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have relied
to issue this opinion is incorrect, our opinion might be adversely affected and
may not be relied upon.
This opinion is provided to Acquiror only, and without our
prior consent, may not be relied upon, used, circulated, quoted or otherwise
referred to in any manner by any person, firm, governmental authority or entity
whatsoever other than reliance thereon by Acquiror. Notwithstanding the prior
sentence, we hereby consent to the use of the opinion letter as an exhibit to
the Registration Statement and to the use of our name in the Registration
Statement. In giving the consent, we do not thereby admit that we are an
"expert" within the meaning of the Securities Act of 1933, as amended.
Sincerely yours,
/s/ Hogan & Hartson L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated January 31, 2000
(except with respect to matters discussed in Note 16, as to which the date is
March 30, 2000) included in the Company's Form 10-K/A for the year ended
December 31, 1999 and to all references to our Firm included in this
registration statement. Our report dated January 31, 2000 (except with
respect to matters discussed in Note 16, as to which the date is March 24,
2000) included in The Titan Corporation's Form 10-K for the year ended
December 31, 1999 is no longer appropriate since restated financial
statements have been presented giving effect to a business combination
accounted for as a pooling-of-interests.
/S/ Arthur Andersen LLP
San Diego, California
May 24, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 24, 2000, included in the Proxy Statement
of AverStar, Inc. that is made a part of Pre-Effective Amendment No. 1 to the
Registration Statement (Form S-4 No. 333-35188) and Prospectus of The Titan
Corporation for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Boston, Massachusetts
May 23, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated November 12,
1999 related to the financial statements of Advanced Communication Systems,
Inc. for the fiscal year ended September 30, 1999 included in the Titan
Corporation's Form 8-K/A dated April 17, 2000 and to all references to our
Firm included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
May 23, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated December 28,
1999 on the financial statements of Transnational Partners II, LLC
included in The Titan Corporation's Form 8-K/A dated January 24, 2000 and to
all references to our firm included in this registration statement.
/s/ Arthur Andersen LLP
San Diego, California
May 24, 2000
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated February 4,
2000 and December 28, 1999 on the financial statements of JB Systems, Inc.
(d.b.a. Mainsaver), included in The Titan Corporation's Form 8-K/A dated
April 17, 2000 and The Titan Corporation's Form 8-K/A dated January 24, 2000,
respectively, and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
San Diego, California
May 24, 2000
<PAGE>
EXHIBIT 23.6
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of The Titan
Corporation for the registration of its common stock in connection with the
proposed merger with AverStar, Inc. and to the incorporation by reference
therein of our report dated May 28, 1999 (except Note 9, as to which the date
is September 22, 1999), with respect to the financial statements of Assist
Cornerstone Technologies, Inc. for the three years ended December 31, 1998,
included in the Form 8-K/A of The Titan Corporation dated January 24, 2000
and our report dated February 11, 2000, with respect to the financial
statements of Assist Cornerstone Technologies, Inc. for the period ended
December 12, 1999, included in the Form 8-K/A of The Titan Corporation dated
April 17, 2000 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Salt Lake City, Utah
May 22, 2000
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
The Board of Directors
SFG Technologies Inc.
We consent to the use of our report dated January 31, 2000 with respect to
the consolidated balance sheets of SFG Technologies Inc. as at December 21,
1999 and December 31, 1998 and the consolidated statements of operations,
deficit, and cash flows for the period from January 1, 1999 to December 21,
1999, eight months ended December 31, 1998 and the years ended April 30, 1998
and 1997 included in the Form 8-K/A of The Titan Corporation dated April 17,
2000 and of our report dated June 22, 1999 except as to note 13 which is as
of November 26, 1999, with respect to the consolidated balance sheets of SFG
Technologies Inc. as at December 31, 1998 and April 30, 1998 and the
consolidated statements of operations, deficit, and cash flows for the eight
month period ended December 31, 1998 and for each of the years in the three
year period ended April 30, 1998 included in The Titan Corporation 8-K/A
filed on January 24, 2000, both incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
May 23, 2000
