Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report on Form 10-K 55 341K
2: EX-21 Subsidiaries of the Titan Corporation 1 6K
3: EX-23 Consent of Independent Public Accountants 1 7K
4: EX-27 Exhibit 27.1 FDS 2± 9K
5: EX-27 Exhibit 27.2 FDS 1 10K
6: EX-27 Exhibit 27.3 FDS 1 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1998
-OR-
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to
__________
Commission File No. 1-6035
THE TITAN CORPORATION
(Exact name of registrant as specified in its charter)
__________
Delaware 95-2588754
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3033 Science Park Road
San Diego, California 92121-1199
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (619) 552-9500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
$1.00 Cumulative Convertible New York Stock Exchange
Preferred Stock, $1.00 par value
Common Stock, $.01 par value
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 22, 1999: $173,561,859.
Number of shares of Common Stock outstanding as of March 22, 1999 was:
36,235,133
Documents Incorporated By Reference:
Proxy Statement for the 1999 Annual Meeting of Stockholders on May 18, 1999.
(The Company has filed a definitive proxy statement with the Commission within
120 days after the close of the fiscal year pursuant to Regulation 14A). With
the exception of those portions which are incorporated by reference in this Form
10-K Annual Report, the Proxy Statement for the 1999 Annual Meeting of
Stockholders is not deemed to be filed as part of this Report, Part III.
[Enlarge/Download Table]
FORM 10-K
INDEX
PART I
Page
ITEM 1 Business........................................................................... 3
ITEM 2 Properties......................................................................... 13
ITEM 3 Legal Proceedings.................................................................. 14
ITEM 4 Submission Of Matters To a Vote of Security Holders................................ 14
PART II
ITEM 5 Market for the Company's Common Equity And Related Stockholder Matters............. 14-15
ITEM 6 Selected Financial Data............................................................ 16
ITEM 7 Management's Discussion and Analysis of Results of Operations and Financial
Condition.......................................................................... 16-23
ITEM 8 Financial Statements and Supplementary Data........................................ 25-46
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure......................................................................... 47
PART III
ITEM 10 Directors and Executive Officers of the Company.................................... 47
ITEM 11 Executive Compensation............................................................. 47
ITEM 12 Security Ownership of Certain Beneficial Owners and Management..................... 47
ITEM 13 Certain Relationships and Related Transactions..................................... 47
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K................... 47-49
Signatures......................................................................... 50
PART I
Item 1. Business
Except for the historical information contained in this Annual Report
on Form 10-K, the information contained herein constitutes forward looking
information within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, including, in particular, statements about the
Company's plans, strategies and prospects. These statements, which may include
words such as "may," "will," "expect," "believe," "intend," "plan,"
"anticipate," "estimate," or similar words, are based on the Company's current
beliefs, expectations and assumptions and are subject to a number of risks and
uncertainties. Although the Company believes that its beliefs, expectations and
assumptions reflected in these statements are reasonable, the Company's actual
results and financial performance may prove to be very different from what the
Company might have predicated on the date of this Annual Report on Form 10-K.
Some of the risks and uncertainties that might cause such differences are
discussed below and others are discussed under the headings "Business-Government
Contracts," "Business-Backlog," and "Risk Factors."
General Development and Description of Business
The Titan Corporation ("the Company" or "Titan") is a leading provider of
state-of-the-art communications and information solutions to U.S. military and
allied government agencies and commercial customers. The Company'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. The Company has organized its business into five segments:
(i) Information Technologies ("Titan Technologies and Information Systems" or
"TTIS"), which provides information systems solutions to defense and
intelligence-related government agencies; (ii) Software Systems ("Titan Software
Systems"), primarily a systems integrator that provides a broad range of
information technology services and solutions for commercial and non-defense
government customers; (iii) Medical Sterilization and Food Pasteurization
("Titan Scan"), which provides turnkey sterilization systems and outsourced
sterilization services primarily for medical device manufacturers; (iv)
Communications Systems, which provides advanced satellite ground terminals,
satellite voice/data modems, networking systems and other products to defense
and commercial customers; and (v) Emerging Technologies and Businesses, which
leverages the Company's extensive technology portfolio and superior research and
development capabilities to create solutions to technology-related problems
which the Company can then sell to commercial markets.
Operating Segments
INFORMATION TECHNOLOGIES SEGMENT
The Company's core defense contracting business is conducted primarily by
subsidiaries and affiliates of Titan Technologies and Information Systems
("TTIS"). TTIS provides comprehensive information systems solutions to defense
and intelligence-related government agencies with large data management,
information manipulation, information fusion, knowledge-based systems and
communications requirements. TTIS also develops and manufactures digital imaging
products, electro-optical systems, threat simulation/training systems and
intelligence electronic hardware primarily used by the defense and intelligence
communities. TTIS installs, tests and maintains all of these specialized
products.
The U.S. government is the largest single buyer of information systems and
services in the world. The U.S. government's focus on information systems
reflects the critical role that those systems play both in national security and
in improving government efficiency. The U.S. military is placing greater
emphasis on increasing productivity while using fewer resources by employing
systems that act as "force multipliers." To further this strategy, military
agencies are relying on communications products and systems that provide secure,
reliable and efficient transmission of voice and data in demanding environments.
TTIS markets its services to military and intelligence agencies of the U.S.
government, countries within NATO and other U.S. defense partners worldwide.
TTIS has extensive knowledge of the operations, relationships and information
systems needs of this specialized community and is capable of providing a full
range of systems engineering and technical support for the C4ISR initiatives of
the DoD. This expertise allows TTIS to provide comprehensive solutions that are
compatible with a customer's overall information systems architecture and
strategy, as opposed to narrow solutions that address only the specific problem
presented. This ability to provide full-service solutions enables the Company to
bid on larger, more comprehensive C4ISR defense contracts.
TTIS' services include systems analysis and design, object-oriented
software development services and systems integration. TTIS' initial work in
this area generally involves a joint analysis of the customer's enterprise
structure and processes and information system needs. Once this analysis is
completed, TTIS provides process re-engineering and designs the technology
solution to meet the customer's needs. This process typically involves software
development by TTIS, coupled with integration of off-the-shelf software and
hardware as available. TTIS also provides a variety of professional and
technical support services, including electronics and mechanical design and
fabrication, computer-aided drafting and manufacturing services, technical
documentation and prototyping.
There has been a general consolidation trend among companies in the defense
industry, particularly in the information technology sector. The Company plans
to continue to support TTIS' growth through active participation in the ongoing
defense industry consolidation, taking advantage of synergistic acquisition
opportunities. Four of the Company's recent acquisitions, Delfin Systems
("Delfin"), Horizons Technology, Inc. ("Horizons"), Validity Corporation
("Validity") and DBA Systems, Inc. ("DBA") have been integrated into TTIS. The
increased size of TTIS resulting from this integration is significant because,
as the U.S. government continues to award fewer but larger-scale contracts to
meet its defense-related requirements, companies must now have greater overall
capability, including financial and technical resources, to be competitive in
the bidding process. The Company believes that the increased technical and
personnel resources of TTIS resulting from its acquisitions will enable it to
bid on and perform a greater number of large contracts. The Company also
believes that its acquisitions and the successful execution of its strategy
provide several other benefits. Strategic acquisitions have expanded the
Company's customer base. The four acquisitions the Company completed in 1998
have added significant Army, Air Force and intelligence agencies contracts to
the Company's historically strong Navy business. Furthermore, they have enhanced
the Company's technology and product portfolio by providing it with new
technologies that have significant commercial potential. Additionally, they have
strengthened the Company's already strong management team by allowing it to tap
into the operational expertise of the key individuals involved with the acquired
companies.
SOFTWARE SYSTEMS SEGMENT
Titan Software Systems is primarily a systems integrator that provides a
broad range of end-to-end information technology services and solutions to
customers such as the State of Wyoming, the Federal Aviation Administration, MCI
Worldcom, Sempra Energy and other non-defense government and commercial entities
with large and complex system integration and data management requirements.
Transnational Partners II, LLP ("TNP"), the Company's most recent acquisition,
has been integrated into Titan Software Systems. Titan Software Systems provides
integration services and solutions for companies with distributed computing
environments. Its services include systems integration and package software
implementation services, integration of third party enterprise resource planning
(ERP) software solutions, business process re-engineering, data warehousing and
database administration, client/server application development, Year 2000
solutions, Internet and intranet infrastructure design and development, and
electronic commerce solutions.
Titan Software Systems has assembled a team of software engineers and
technicians with substantial experience in software engineering for
client/server applications, data warehousing, database management and
Internet/intranet technologies. Titan Software Systems' core competencies
include: (1) development of client/server applications utilizing tools and
languages such as PowerBuilder, C, Visual C++, Visual Basic and Oracle's
Developer/2000, (2) networked system expertise and (3) operating system
selection, integration and implementation (including Windows NT and Microsoft
Windows, UNIX, VMS, MVS and Novell NetWare). Titan Software Systems also uses
state-of-the-art tools such as Arbor Essbase, Powerplay, Oracle's Datamart and
MicroStrategy DSS Agent to provide powerful value-added data warehousing
solutions, and develops and operates databases, using leading products such as
Oracle, Sybase, MS SQL Server and Informix, running in a variety of UNIX and
Windows NT networked environments.
To enhance its service offerings and expand its customer base, Titan
Software Systems is actively developing relationships with software companies
which offer products that require integration. For example, Titan Software
Systems and PointCast are approaching large PointCast users and offering Titan
Software Systems' services to install, integrate and develop custom features,
including executive information systems interfaced with PointCast, to add value
to PointCast's push technology.
MEDICAL STERILIZATION AND FOOD PASTEURIZATION SEGMENT
Titan Scan utilizes linear accelerator technology to provide sterilization
systems and services primarily for medical device manufacturers. Titan Scan
developed its proprietary electron beam sterilization process from technology
that Titan developed during Titan's involvement in the Strategic Defense
Initiative program. The Company believes that its sterilization system,
SureBeam(R), offers a superior, reliable, environmentally acceptable and
efficient alternative to the existing technologies in the industry, Gamma and
EtO sterilization.
The market for sterilization systems historically has been dominated by EtO
and Gamma sterilization. The primary drawbacks of Gamma, which uses radioactive
energy, and EtO, which uses gas penetration, are their slow speed and use of
dangerous materials. Gamma sterilization is accomplished by exposing a product
to Cobalt-60, an isotope that emits Gamma radiation. The product processing time
for Gamma sterilization generally requires from 4 to 8 hours. Turnaround time
(measured from receipt of the product to shipment back to the manufacturer)
generally ranges from 3 to 7 days. In addition, the long exposure of the product
to the Gamma source can result in the product becoming discolored, brittle
and/or deformed. Furthermore, supply problems can exist with Cobalt-60 due to:
(i) the limited number of suppliers of Cobalt-60; (ii) the restrictions on
transporting radioactive materials; and (iii) the time-consuming "re-sourcing"
of Cobalt-60 periodically required due to its decaying nature. EtO sterilization
is accomplished by exposing products to ethylene oxide gas in a lengthy
three-step procedure which uses special packaging to allow gas to penetrate to a
product. The product processing time for EtO sterilization generally ranges from
7 to 14 days, with turnaround time being slightly longer. The length of this
procedure, as well as safety and environmental concerns and regulatory
restrictions related to the use of ethylene oxide gas, has led to a decrease in
EtO sterilization over the past 10 years.
Electron beam sterilization has speed and safety advantages, and its
operating costs are significantly lower than the costs of Gamma and EtO
sterilization. Like Gamma sterilization, Titan Scan's electron beam
sterilization process disrupts the DNA structure of microorganisms on or within
the product rendering them sterile. The fundamental difference between the two
processes is that Gamma sterilization uses Cobalt-60 while electron beam
sterilization uses electrons from a commercial electrical source. Titan Scan
believes its SureBeam(R) system offers a reliable, environmentally acceptable
and efficient alternative to both Gamma sterilization and EtO sterilization. The
primary advantages of the SureBeam(R) system include a significantly shorter
turnaround time and reduced inventory carrying costs, reduced degradation of
product, enhanced safety, lack of supply problems and turnkey system
capabilities.
The Company believes that its turnkey SureBeam(R) system is the only
existing technology that offers the economic benefits of allowing sterilization
to be directly incorporated into a manufacturer's production process. To date,
turnkey SureBeam(R) systems have been purchased by Guidant Corporation, Baxter
Corporation in the Dominican Republic and Rochialle Corporation in Wales. In
addition to its turnkey systems, Titan Scan offers contract sterilization
services at its facilities in San Diego and Denver.
Titan Scan also provides electron beam linear accelerators to the non-DoD
government and scientific communities both domestically and internationally.
Potential Markets. Although contaminated food is one of the most widespread
health problems in the world, lack of regulatory approval and consumer
acceptance historically have limited the development of the market for food
pasteurization. The Company believes the absence of a market for food
pasteurization historically has been due in part to the lack of Food and Drug
Administration ("FDA") approval for the pasteurization of most foods, including
red meat. On December 3, 1997, however, the FDA approved irradiation of red
meat. The FDA also found that irradiation of meat, at its recommended doses,
affects neither the food's taste nor its nutritional value in any detectable
way. In February 1999, the U.S. Department of Agriculture ("USDA") announced
that it would soon allow the nation's meatpackers and food processors to
sterilize raw meat and several other food products to eliminate bacteria with
beams of radiation. Despite the FDA's approval and the USDA's announcement,
however, the development of this potential market is still dependent on broad
consumer acceptance of pasteurized foods, which may not occur. Although Titan
Scan, until recently, has focused its efforts in the area of medical device
products, it believes it is well positioned to take advantage of the food
pasteurization market if it develops. Titan Scan is actively pursuing contracts
to test and ultimately commercialize its food pasteurization services. In
addition, Titan Scan believes that its SureBeam(R) technology is readily
adaptable to the sterilization of pharmaceutical products.
Communications Systems Segment
The Communications Systems segment ("Communications Systems") operates
primarily in two markets: (1) secure defense communications and (2) satellite
communications in the private sector to support rural telephony in developing
countries. Communications Systems develops and produces advanced satellite
ground terminals, satellite voice/data modems, networking systems and other
products for government and commercial customers worldwide. Communications
Systems' products incorporate DAMA technology, which is used to provide
bandwidth-efficient, cost-effective communications and addresses the need to
increase the efficiency of satellites in response to the significant growth in
demand for satellite communications.
Secure Defense Products. The U.S. military has sought to increase its
satellite communications capacity to meet increasing user demands by improving
the efficiency of its existing constellation of military satellites, in which it
has a significant investment, as well as by enabling its communications hardware
to use commercial satellites. Despite declining defense spending, the government
is increasing its investment in communications products which are seen as "force
multipliers," making military assets more effective in a conflict. Additionally,
the government is increasingly using open systems that incorporate commercial
off-the-shelf products to minimize the impact of the shrinking defense budget.
Communications Systems' defense business growth is being driven by the Joint
Chiefs of Staff decision to standardize DAMA-based satellite communications and
initiate a major upgrade program which requires that all military radios be
capable of using DAMA technology. Communications Systems offers a complete range
of solutions that satisfy the Joint Chiefs of Staff mandate, including add-on
modules which can be incorporated into existing military communications products
and stand-alone products which operate with existing military products, and new
systems incorporating DAMA technology. Communications Systems' solutions also
have the design flexibility to incorporate off-the-shelf products.
Communications Systems markets its defense products directly to all
branches of the U.S. military, its allies and international companies that
supply such allies, and also works with strategic partners such as Motorola
Corporation to incorporate its technologies into their products. The Company
expects that the upgrade of all military satellite communications to
DAMA-compatible technology will take a number of years to complete and that it
will be a major source of revenue for Communications Systems over the next three
years.
Rural Telephony. Telephone service for remote areas of many developing
countries has not been practical for a number of economic and technical reasons,
and consequently, nearly 50% of the world's population has never made a
telephone call. However, the development of low-cost ground terminals,
availability of satellite capacity covering rural areas and advancements in
voice transmission technologies have made satellite communications a practical
solution for rural telephony. Recently, governments in developing countries have
shown an increased interest in providing rural telephone services for both
economic and political reasons. In addition, consumers and businesses in these
areas are in need of affordable telephone services.
Communications Systems' commercial products use existing geosynchronous
satellites to provide low-cost voice, facsimile and data services to rural
areas. These products connect directly to the national public switched telephone
network of the host country, making it possible to provide low-cost telephone
services to vast under-served areas. Communications Systems develops and markets
its rural telephony products through strategic alliances, which it currently has
with AfroNetwork, Benin, Sakon Corporation and PT. Pasifik Satelit Nusantara
("PSN"), for sales of products in developing countries in Africa, Latin America
and Asia. Similarly, Communications Systems is also part of a consortium led by
Alcatel Telespace, pursuant to which the companies pursue symbiotic successes in
new markets.
Communications Systems is leveraging its experience in rural telephony to
selectively pursue private networking opportunities in developing countries. For
example, in Thailand, Communications Systems is providing elements of a private
voice, data and facsimile communications network for use by The Bank for
Agriculture and Agricultural Cooperatives.
Emerging Technologies and Businesses Segment
The Emerging Technologies and Businesses segment consists of embedded
real-time software and services, video imaging and graphics, and certain new
technologies and early-stage businesses, including businesses in which the
Company owns only a minority interest. The Emerging Technologies and Businesses
segment pursues commercial applications for technologies originally developed by
the Company's other segments in government-sponsored research and development
programs. This segment employs the Company's rich technology portfolio, superior
research and development capabilities and stream of government funded projects
to create solutions to technology-related problems which the Company can sell to
multiple commercial markets.
Government Contracts
A substantial portion of the Company's revenues are dependent upon
continued funding of United States and allied government agencies, as well as
continued funding of the programs targeted by the Company's businesses. For the
years ended December 31, 1996, 1997 and 1998, United States government business
represented approximately 81%, 82% and 80%, respectively, of the Company's
revenues. United States defense budgets and the budgets of other government
agencies have been declining in real terms since the mid-1980's, and may
continue to do so in the future. However, U.S. government spending on
information technology has increased as a percent of the total U.S. defense
budget and in real dollars in each of the past three years, and it is expected
to continue to do so according to industry sources. Any significant reductions
in the funding of United States government agencies or in the funding areas
targeted by the Company's businesses could materially and adversely affect the
Company's business, results of operations and financial condition.
The Company's direct contracts with the United States government, and its
subcontracts with prime contractors who have direct contracts with the United
States government, are subject to termination for the convenience of the
government, as well as termination, reduction or modification in the event of
budgetary constraints or any change in the government's requirements. When the
Company subcontracts with prime contractors, such subcontracts are also subject
to the ability of the prime contractor to perform its obligations under its
prime contract. The Company often has little or no control over the resources
allocated by the prime contractor to the prime contract, and any failure by the
prime contractor to perform its obligations under the prime contract could
result in the Company's loss of its subcontract. In addition, the Company's
contract-related costs and fees, including allocated indirect costs, are subject
to audits and adjustments by negotiation between the Company and the United
States government. As part of the audit process, the government audit agency
verifies that all charges made by a contractor against a contract are legitimate
and appropriate. Audits may result in recalculation of contract revenues and
non-reimbursement of some contract costs and fees. Any audits of the Company's
contract-related costs and fees could result in material adjustments to the
Company's revenues. In addition, United States government contracts are
conditioned upon the continuing availability of congressional appropriations.
Congress usually appropriates funds on a fiscal year basis even though contract
performance may take several years. Consequently, at the outset of a major
program, the contract is usually incrementally funded and additional funds are
normally committed to the contract by the procuring agency as Congress makes
appropriations for future fiscal years. Any failure of such agencies to continue
to fund such contracts could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company's business with the U.S. government and prime contractors is
generally performed under cost reimbursement, fixed price or time and materials
contracts. Cost reimbursement contracts for the government provide for
reimbursement of costs plus the payment of a fee. Under fixed price contracts,
the Company agrees to perform certain work for a fixed price. Under time and
materials contracts, the Company is reimbursed for labor hours at negotiated
hourly billing rates and is reimbursed for travel and other direct expenses at
actual costs plus applied general and administrative expense.
The following table gives the percentage of revenues realized by the
Company from the three primary types of government contracts during the periods
indicated.
Year Ended December 31,
--------------------------------
Contract Type 1996 1997 1998
------------- ------ ------ ------
Cost Reimbursement................ 50.5% 51.6% 49.8%
Fixed Price....................... 31.8 32.8 32.0
Time and Materials................ 17.7 15.6 18.2
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
Raw Materials
The Company operates both fabrication and assembly facilities and also
purchases certain components and assemblies from other suppliers. No one
supplier accounts for a significant portion of total purchases.
Patents, Trademarks and Trade Secrets
The Company's policy is to apply for patents and other appropriate
statutory protection when it develops new or improved technology. The Company
presently holds numerous United States and international patents, as well as a
number of trademarks and copyrights. However, it does not rely solely on such
statutory protection to protect its technology and intellectual property. In
addition to seeking patent protection for its inventions, the Company relies on
the laws of unfair competition and trade secrets to protect its unpatented
proprietary rights. The Company attempts to protect its trade secrets and other
unpatented proprietary information through agreements with customers, vendors,
employees and consultants. In addition, various names used by the Company for
its products and services have been registered with the United States Patent and
Trademark Office.
Backlog
Contracts undertaken by the Company may extend beyond one year.
Accordingly, portions are carried forward from one year to the next as part of
backlog. Because many factors affect the scheduling of projects, no assurance
can be given as to when revenue will be realized on projects included in the
Company's backlog. Although backlog represents only business which is considered
to be firm, there can be no assurance that cancellations or scope adjustments
will not occur. The majority of backlog represents contracts under the terms of
which cancellation by the customer would entitle the Company to all or a portion
of its costs incurred and potential fees.
Many of the Company's contracts with the United States government are
funded by the procuring agency from year to year, primarily based on its fiscal
requirements. This results in two different categories of United States
government backlog: funded and unfunded backlog. "Funded backlog" consists of
the aggregate contract revenues remaining to be earned by the Company at a given
time, but only to the extent such amounts have been appropriated by Congress and
allocated to the contract by the procuring government agency. "Unfunded backlog"
consists of (i) the aggregate contract revenues expected to be earned as the
Company's customers incrementally allot funding to existing contracts, whether
the Company is acting as a prime contractor or subcontractor, and (ii) the
aggregate contract revenues to be funded on contracts which have been newly
awarded to the Company. "Backlog" is the total of the government and commercial
funded and unfunded backlog.
The Company's backlog consisted of the following approximate amounts as of
December 31 of the following years:
Backlog 1997 1998
------------- -------------
U.S. Government funded backlog............ $ 126,720,000 $ 106,635,000
U.S. Government unfunded backlog.......... 356,052,000 466,149,000
Commercial backlog........................ 48,367,000 47,227,000
------------- -------------
Total backlog............................. $ 531,139,000 $ 620,011,000
============= =============
In addition to the backlog described above, at December 31, 1998, the
Company had remaining priced options of over $240 million from the Navy for
full-scale production of its Mini-DAMA satellite communications terminal and
certain systems engineering and program management services. The Company expects
that a substantial number of these options will be exercised in the future,
although there is no assurance that any options will be exercised.
Management believes that year-to-year comparisons of backlog are difficult
and not necessarily indicative of future revenues. The Company's backlog is
typically subject to large variations from quarter to quarter as existing
contracts are renewed or new contracts are awarded. Additionally, all United
States government contracts included in backlog, whether or not funded, may be
terminated at the convenience of the United States government.
The Company expects to realize approximately 31% of its December 31, 1998
backlog by the end of 1999.
Competition
Information Technologies. TTIS is one of many companies involved in
providing information systems solutions for a variety of programs for agencies
of the U.S. government and prime contractors for these agencies. Most activities
in which TTIS engages are very competitive and require highly skilled and
experienced technical personnel. Many of TTIS' competitors have significantly
greater financial and personnel resources than TTIS. Competitors in this
industry include Anteon Corp., Autometrics, BTG, Inc., Booz-Allen Hamilton Inc.,
CACI International, Inc., Comptek Research, Inc., Computer Sciences Corporation,
Contraves, Dunn Computer Corporation, Dynamics Research Corporation, General
Dynamics Corporation, GRC International, Government Technology Services, Inc.,
Intergraph Corporation, Lockheed Martin Corporation, Metric, Morpho, Nichols
Research Corporation, Raytheon Company, Science Applications International
Corporation, Steven Myers & Associates, Inc., and TRW. TTIS believes that the
primary competitive factors for its information systems services include
technical skills, experience in the industry and customer relationships.
Software Systems. The Information Technology ("IT") services industry is
highly competitive. Titan Software Systems competes against a large number of
multinational, national, regional and local firms, including system integrators,
custom software developers and service groups of software vendors. Many of Titan
Software Systems' competitors have substantially greater financial, technical
and marketing resources and greater name recognition than Titan Software
Systems. In addition, many of Titan Software Systems' clients have internal IT
resources and may elect to do work in-house instead of using Titan Software
Systems' services. Titan Software Systems believes that the primary competitive
factors for its IT services include technical skills, knowledge of specific
industry operations for which software is integrated or developed, customer
relationships and quality and cost of service.
Medical Sterilization and Food Pasteurization. The market for sterilization
services is intensely competitive and is characterized by significant price
competition. Titan Scan's market is fragmented as a result of geographical
limitations on the transportation of products for sterilization, multiple
technologies and the mix of in-house and contract sterilization facilities.
Although Titan Scan believes that it is the only provider of relatively small,
low-cost, turnkey systems for in-house manufacturers, Titan Scan currently faces
competition from several providers of contract Gamma sterilization services,
several providers of contract E-Beam sterilization services and a significantly
larger number of providers of contract EtO sterilization services. Certain of
Titan Scan's competitors and potential competitors have substantially greater
financial, marketing, distribution, technical and other resources than Titan
Scan, or offer multiple sterilization technologies or operate multiple
sterilization facilities at geographically advantageous sites, which may enable
them to address a broader range of the sterilization requirements of individual
customers.
Communications Systems. The industries and markets in which Communications
Systems competes are highly competitive, and the Company expects that
competition will increase in such markets. Communications Systems encounters
intense competition from numerous companies, including large and emerging
domestic and international companies, many of which have far greater financial,
engineering, technological, marketing, sales and distribution and customer
service resources than Communications Systems. Some of Communications Systems'
competitors in the secure defense communications market include GEC (UK),
Raytheon Corporation, Rockwell International and ViaSat, Inc. Some of
Communications Systems' commercial competitors include Gilat Satellite Networks
Ltd., Hughes Network Systems, Scientific Atlanta Inc., STM Wireless Inc. and
ViaSat, Inc. Furthermore, the satellite communications industry itself competes
with other technologies such as terrestrial wireless, copper wire and fiber
optic communications systems.
Emerging Technologies and Businesses. Because it is attempting to
commercialize a number of diverse technologies and products, Emerging
Technologies effectively competes in many areas. Other companies are engaged in
significant research and development activities in these areas, either on their
own or in collaboration with others. Some of these companies have greater
financial and personnel resources, and more experience in these specific areas
than the Company. The Company anticipates that Emerging Technologies will face
increased competition in the future as new companies enter these areas and
additional and potentially more sophisticated technologies become available.
Research and Development
The Company maintains a staff of engineers, other scientific professionals
and support personnel engaged in development of new applications of technology
and improvement of existing products. These programs' costs are expensed as
incurred. Total expenditures for research and development were $9.8 million,
$12.8 million and $10.0 million in 1996, 1997 and 1998, respectively. These
expenditures included Company-funded research and development of $5.0 million,
$7.5 million and $5.6 million, and customer-sponsored research and development
of $4.8 million, $5.3 million and $4.4 million in 1996, 1997 and 1998,
respectively. The majority of the Company's customer-sponsored research and
development activity is funded under contracts with the United States
government.
Employees
As of December 31, 1998, the Company employed approximately 2,200
employees, predominantly located in the United States.
Government and Environmental Regulations
The Company must comply with and is affected by various government
regulations. These regulations affect how the Company and its customers can do
business and, in some instances, impose added costs to the Company's 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 material fines and penalties or affect how the
Company conducts its business in the future.
In addition, the Company is subject to environmental and safety laws and
regulations and laws governing use and storage of hazardous materials. The
Company cannot completely eliminate the risk of accidental contamination or
injury from these materials, and, in the event of such an accident, could be
held liable for any damages that result. From time to time, the Company is
notified of minor violations of government and environmental regulations. The
Company attempts to promptly correct these violations without any material
impact on its operations. Also, in the quarter ended September 30, 1997, DBA
recorded a $3.0 million charge in recognition of certain environmental matters
including soil contamination and potential asbestos and lead-based paint
contamination at its Kissimmee, Florida facility. This charge represents an
initial estimate, which could change significantly as further studies are
performed. The Company may be required to incur significant additional costs to
comply with environmental laws and regulations in the future. Any future
violation of, and the cost of compliance with, these laws and regulations could
have a material adverse effect on the Company's business, financial condition
and operations.
Risk Factors
Dependence on Government Contracts. We earn a substantial portion of our
revenues from government contracts. During 1996, 1997 and 1998, our revenues
from U.S. government business represented approximately 81%, 82%, and 80%,
respectively, of our total revenues. This percentage may rise in the future.
Although we bid for and are awarded long-term government contracts and
subcontracts, the government only funds these contracts on an annual basis. The
government may cancel these contracts at any time without penalty or may change
its requirements or its contract budget. The U.S. Congress may decline to
appropriate funds needed to complete the contracts awarded to us or the prime
contractor. On our subcontracts, we generally do not control the prime
contractor's allocation of resources. We also depend upon the prime contractor
to perform its obligations on the primary government contract. Any cancellations
or modifications of our significant contracts or subcontracts could hurt our
financial performance in the short or long-term. Continuing declines in U.S.
defense and other federal agency budgets also may hurt our ongoing prospects.
Our 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 our contract costs and fees. Generally,
we resolve audit issues by negotiation without material adjustments. However, in
the future, we could have a material adjustment to revenue as a result of an
audit, including an audit of one of the companies we have recently acquired.
Prior to being acquired by Titan, some of the recently acquired companies did
not impose internal controls as rigorous as those we impose on the government
contracts we perform. As part of the integration process, Titan will take steps
to apply its policies throughout the acquired companies.
Finally, some of our contracts are fixed price contracts. Under these
contracts, we bear the risk of any cost overruns and our profits are adversely
affected if our costs exceed the assumptions we used in bidding for the
contract.
Attraction and Retention of Key Personnel. We need to maintain our
workforce of highly qualified technical and management personnel, including our
engineers, computer programmers and personnel with security clearances required
for classified work. In addition, our future success will depend in part on our
ability to identify, recruit and retain additional qualified personnel,
including individuals with security clearances required for classified work. Our
employees generally have many other job opportunities and there is intense
competition for their services in the areas of our activities. Consequently, we
strive to maintain an entrepreneurial work environment and provide financial
incentives to attract and retain our key personnel. We cannot guarantee that we
will be able to continue to attract and retain personnel with the advanced
technical and security clearance qualifications necessary for the development of
our business. The loss of any key personnel could negatively affect our
financial performance.
Competition. Our businesses are highly competitive. We believe we must
continue to expand our defense information technology business so that we can
remain price competitive and compete for larger contracts. For that reason, we
are continuing to look for acquisition candidates. Our commercial businesses
compete against other technologies as well as against companies with similar
products. In order to remain competitive, we must invest to keep our products
technically advanced and compete on price and on value added to our customers.
Our ability to compete may be adversely affected by limits on our capital
resources and our ability to invest in maintaining and growing our market share.
Any adverse financial developments could make us a less effective competitor.
Many of our competitors are larger, better financed and better known companies
who may compete more effectively than we are able to compete.
Risks Associated with Acquisition Strategy. Since January 1, 1998, we
acquired five defense information technology companies as part of our
consolidation strategy for our defense business. All but one of these
transactions was structured as a stock for stock pooling of interests
transaction. The acquisition and integration of new companies involves risk.
While we believe that each of our recent acquisitions may improve our overall
financial performance and enable us to compete more effectively for defense
contracts, the integration of these businesses may be costly in the short run.
We may need to divert more management resources to integration than we planned.
This diversion may adversely affect our ability to pursue other more profitable
activities. In addition, we may not eliminate as many redundant costs as we
anticipated in selecting our acquisition candidates. One or more of our
acquisition candidates also may have liabilities or adverse operating issues
that we failed to discover through our diligence prior to the acquisition.
Consequently, our recent acquisitions may not improve our financial performance
in the short or long-term as we expect them to do.
We intend to continue to look for complementary businesses or technologies
to acquire so that we can expand our core businesses. However, we may not find
any more attractive candidates or may find that the acquisition terms are not
favorable to us. In addition, we may compete with other companies for these
acquisition candidates. Instability in the U.S. securities markets and
volatility in our stock price may make acquisitions with stock more expensive.
We also may not adequately assess the risks inherent in a particular acquisition
candidate or correctly assess the candidate's potential contribution to our
financial performance. Accordingly, our acquisition strategy may not improve our
overall financial performance and could weaken it.
Fluctuations in Results of Operations. Our quarterly and annual financial
performance has historically fluctuated and may continue to fluctuate
significantly in the future. Our revenues are affected by factors such as the
unpredictability of sales and contract awards due to the long procurement
process for most of our products and services, defense and intelligence budgets,
competition and general economic conditions. Our product mix and unit volume,
our ability to keep expenses within budgets, our distribution channels and our
pricing affect our gross margins. These factors and other risks discussed in
this section may adversely affect our financial performance within a period.
Consequently, we do not believe that comparison of our financial performance
from period to period is necessarily meaningful or predictive of our likely
future performance.
Ability to Commercialize New Technologies. In 1991, we adopted a strategy
of seeking to develop commercial businesses using technology developed in our
defense businesses. Most of our commercial businesses are in an early stage of
development. These technology-based businesses are subject to risks inherent in
early stage startup companies. We must ensure that these businesses have
adequate capital to fund their growth. At the inception of this strategy, we
used cash generated through our defense business to fund the substantial startup
and expansion costs. This practice cost us short-term profitability in prior
years. We have since modified our financing strategy and are seeking funding
from external sources through minority spin-offs or through sales of majority
interests in earlier stage technologies that require substantial business
development. However, external funding may not be available and we may be unable
or chose not to fund these businesses through our operations. Lack of adequate
capital could cause one or more of these businesses to fail or cause us to sell
a business.
These businesses are also subject to a high degree of competition and a
risk of technical obsolescence if we fail to respond to rapid technological
changes. Each of these businesses face market and operating risks that are
unique to the particular business, and require significant management time and
resources. We have a limited history of commercializing new technologies and
ultimately may not succeed in creating new commercial businesses that positively
contribute to our profitability.
Reliance on Strategic Relationships. Since the primary markets for our
commercial communications products are in more rural developing countries, we
have formed strategic arrangements with local partners to develop and expand
this business. We have strategic arrangements with AfroNetwork, Benin, Sakon
Corporation ("Sakon") and PT. Pasifik Satelit Nusantara ("PSN") for sales of
commercial communications products in developing countries in Africa, Latin
America and Asia. Similarly, we are part of a consortium led by Alcatel
Telespace, pursuant to which the companies pursue symbiotic successes in new
markets. In addition, our electronic beam sterilization products are marketed
primarily through a joint venture with Varian Associates, Inc., and several of
our defense communications and information technologies products are marketed
through strategic relationships with Motorola, Inc. and Harris Corporation. We
will need to continue these relationships and develop additional strategic
relationships to support our operations and continued growth. We cannot
guarantee that we can maintain these strategic alliances or develop new
strategic alliances to expand our marketing networks for our commercial
communications products. Without these alliances and stable economic conditions
in our target markets, our development of robust commercial markets for our
communication products may be delayed or may not occur.
Risk of International Operations. We sell our commercial communications
products primarily in foreign countries with large rural areas. Although we
generally sell our commercial communications products in U.S. dollars, currency
devaluations and adverse market conditions in Indonesia and other Asian
countries have negatively affected demand for our commercial communications
products and, consequently, our revenues for this segment. Our commercial
communications products generally require substantial capital investments, and
our potential customers have not had the capital resources to make these
investments. We have assisted our established marketing partner in Indonesia by
extending some trade credit that has subsequently been extended with
installments due over an additional two years. Because of market conditions in
Indonesia and other factors, there is a risk that our customer there may not be
able to pay this debt in accordance with the extended terms. Further, we do not
have the capital resources or risk tolerance to finance the purchase of our
commercial communications products. As a result, revenues in this group may
decline until economic conditions in the Pacific Rim region begin to improve.
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 us and difficulties in managing overseas employees and
contractors. Any one of these factors or other international business risks
could adversely affect our financial performance.
Customer Concentration. A significant percentage of our products and
services are predominantly 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, our various U.S. Navy customers exercise independent purchasing
decisions. However, because of such concentration, we are potentially vulnerable
to adverse changes in our revenues and overall financial performance if a
significant number of our U.S. Navy contracts and subcontracts are
simultaneously delayed or canceled for budgetary or other reasons.
Market Acceptance of Food Pasteurization. Our Medical Sterilization and
Food Pasteurization segment is attempting to develop food pasteurization as a
new market for its E-Beam sterilization process. Because food pasteurization or
irradiation has yet to gain consumer acceptance, we do not know whether a viable
new market will develop or grow. Unless meat producers and large-scale sellers
such as chain restaurants decide to pasteurize or purchase pasteurized meat,
this market is unlikely to develop. If the market does develop, our technology
will compete against other technologies now used to sterilize medical
instruments and our business may not win a substantial share of this market.
Compliance with Government and Environmental Regulations. Like most
businesses, our defense and commercial businesses must comply with or are
affected by various government regulations. These regulations affect how our
customers and we can do business and, in some instances, impose added costs to
our 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 material fines and
penalties or affect how we do business in the future.
In addition, we are subject to environmental and safety laws and
regulations and laws governing use and storage of hazardous materials. We cannot
completely eliminate the risk of accidental contamination or injury from these
materials, and, in the event of such an accident, we could be held liable for
any damages that result. From time to time, we are notified of minor violations
of government and environmental regulations. We attempt to promptly correct
these violations without any material impact on our operations. Also, in the
quarter ended September 30, 1997, DBA recorded a $3.0 million charge in
recognition of certain environmental matters including soil contamination and
potential asbestos and lead-based paint contamination at its Kissimmee, Florida
facility. This charge represents an initial estimate, which could change
significantly as further studies are performed. We may be required to incur
significant additional costs to comply with environmental laws and regulations
in the future. Any future violation of and the cost of compliance with these
laws and regulations could have a material adverse effect on our business,
financial condition and operations.
Dependence upon Suppliers; Sole and Limited Sources of Supply. Our internal
manufacturing capacity is limited so we use contract manufacturers. While we use
care in selecting our manufacturers, this arrangement gives us less control over
the quality and price of products or components than if we manufactured them
ourselves. In some cases, we obtain products from a sole supplier or a limited
group of suppliers. Consequently, we risk disruptions in our supply of key
products and components if our suppliers fail or are unable to perform because
of strikes, natural disasters, financial condition or other factors. Any
material supply disruptions could adversely affect our revenues and our ongoing
product cost structure.
Limited Intellectual Property Protection; Dependence on Proprietary
Technology. As a policy, we seek to protect our proprietary technology and
inventions through patents, copyrights, trade secret law and other legal
protections. While our patent portfolio is valuable, our financial success
ultimately depends upon our ability to deliver products and services that meet
customer needs, not on intellectual property laws. We may, however, incur
significant expense in both protecting our intellectual property and in
defending or assessing claims with respect to intellectual property owned by
others. Any patent or other infringement litigation by or against us could have
an adverse effect on our financial performance. We also could be forced to
modify or abandon one or more planned or current products based upon our
assessment of intellectual property risks or actual or threatened claims by
other companies.
Impact of the Year 2000 Issue. We have implemented a Year 2000 compliance
program to address our current hardware and software products and development
tools and all of our major computing information systems networks, desktop
systems and infrastructure. In addition, we are contacting business associates
such as our third party vendors, business partners, contractors and service
providers to assess their level of readiness. Finally, we have formed a Year
2000 steering committee to monitor implementation of our overall program and the
plans of each of our business units. Each of our business units has formed
steering committees to develop and implement compliance plans.
We are in the process of assessing whether all of our business unit
products and services are Year 2000 compliant. We do not expect our current
products or services to have material Year 2000 issues. In some cases, our
government customers have contracted with us to modify our older products to be
Year 2000 compliant. Our products are not sold under extended warranties so we
do not expect that we will have to spend any material amounts to make any of our
prior products Year 2000 compliant. However, we are in the process of assessing
all of our products, including the products of our recently acquired businesses,
and we cannot be certain that Year 2000 issues will not arise.
As part of our program, we intend to review the internally developed and
third party software that we use for accounting, manufacturing processes and
other business functions. Because of our history of acquisitions, we have a
number of business units that use different systems; some of which we know are
not Year 2000 compliant. Based upon our assessment, we may elect to move
business units to other Year 2000 compliant systems that we currently use as
part of an overall plan to consolidate the number of different systems being
used. We estimate the cost of moving business units to new systems will range
from $3 million to $5 million. Some of our business units may use internal
resources to convert legacy application systems to be Year 2000 compliant.
Finally, many of our government contracts related business units use an
accounting package that is not currently Year 2000 compliant. Our supplier of
this package has released a Year 2000 compliant version that we are currently
installing. We expect to incur substantially all of our Year 2000 related costs
during fiscal year 1999. These costs could have a material adverse effect on our
financial position, results of operations or cash flows. If we cannot timely
correct all Year 2000 problems, these problems also may cause material adverse
effects on our financial position, results of operations or cash flows.
Some of our customers, in particular the U.S. government, utilize complex
billing and accounting systems to determine when and what amounts will be paid
to us under our various contracts. In addition, several of our major strategic
partners rely on complex software systems to coordinate and control their
day-to-day operations. These complex systems may not be Year 2000 compliant.
Although these customers and strategic partners have advised us that they expect
to resolve any Year 2000 issues prior to December 31, 1999, we cannot guarantee
that our billing procedures and cycles, or our joint sales and marketing
efforts, will not be interrupted. If these customers' or business partners' Year
2000 issues are not resolved on time, or at all, our financial position, results
of operations or cash flows could be materially and adversely affected.
We plan on developing contingency plans in the event that our internal
systems or our third party business associates' systems are not timely
corrected.
Item 2. Properties
The Company's operations occupy approximately 900,000 square feet of space
located throughout the United States. The large majority of the space is office
space. Substantially all of the Company's facilities are leased. For lease
commitment information, reference is made to Note 8 to the accompanying
financial statements.
It is management's policy to maintain the Company's facilities and
equipment in good condition and at a high level of efficiency. Existing
facilities are considered to be generally suitable and adequate for the
Company's present needs. The Company owns substantially all of the machinery and
equipment employed by it in its business.
The locations of the principal operating facilities of the Company and its
consolidated subsidiaries are as follows:
[Download Table]
Information Technologies Software Systems
------------------------ ----------------
Anniston, Alabama Dublin, California
Huntsville, Alabama San Diego, California
Chatsworth, California Colorado Springs, Colorado
Englewood, California Washington, D.C.
National City, California Heathrow, Florida
Port Hueneme, California Tampa, Florida
Sacramento, California Dallas, Texas
San Diego, California Reston, Virginia
San Leandro, California
Santa Clara, California Medical Sterilization and Food Pasteurization
---------------------------------------------
Vallejo, California Dublin, California
Aurora, Colorado San Diego, California
Denver, Colorado Denver, Colorado
Gales Ferry, Connecticut
Niantic, Connecticut Communications Systems
----------------------
Melbourne, Florida San Diego, California
Warner Robins, Georgia
Hanover, Maryland Emerging Technologies and Businesses
------------------------------------
Indian Head, Maryland Phoenix, Arizona
Largo, Maryland Tempe, Arizona
Lexington Park, Maryland Dublin, California
Billerica, Massachusetts San Diego, California
Westborough, Massachusetts Pensacola, Florida
Princeton, New Jersey Westford, Massachusetts
Akron, Ohio Alexandria, Virginia
Middleton, Rhode Island Dumfries, Virginia
Westerly, Rhode Island Richmond, Virginia
Newport News, Virginia Virginia Beach, Virginia
Norfolk, Virginia United Kingdom
Fairfax, Virginia
King George, Virginia
Reston, Virginia
Virginia Beach, Virginia
Item 3. Legal Proceedings
In the ordinary course of business, defense contractors are subject to many
levels of audit and investigation by various government agencies. Further, the
Company and its subsidiaries are subject to claims and from time to time are
named as defendants in legal proceedings. The Company may also assert claims
from time to time. In the opinion of management, the amount of ultimate
liability or recovery with respect to these actions will not materially affect
the financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
At a special meeting of stockholders held on October 21, 1998, the
stockholders approved a proposal to amend the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of the Company's
Common Stock from 45,000,000 to 100,000,000. Stockholders voted as follows:
Affirmative Votes.............. 15,215,716
Negative Votes................. 3,702,258
Abstaining..................... 78,474
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
The Company's common stock and cumulative convertible preferred stock are
traded on the New York Stock Exchange ("NYSE"). As of March 2, 1999, there were
approximately 3,844 holders of record of the Company's common stock and 654
holders of record of the Company's preferred stock, excluding beneficial owners
of shares held in the names of brokers or other nominees. The closing prices for
the common and preferred stock on the NYSE as of March 2, 1999, were $5.63 and
$11.44, respectively. The quarterly market price ranges for the Company's common
and preferred stock on the NYSE in 1998 and 1997 were as follows:
Common Stock 1998 1997
------------------- -------------------
Fiscal Quarter High Low High Low
------------------ ------ ------ ------ ------
First $ 6.81 $ 5.75 $ 3.75 $ 2.88
Second 8.13 5.81 4.38 2.88
Third 6.56 3.94 7.31 4.44
Fourth 5.94 4.50 8.19 5.34
Cumulative
Convertible
Preferred Stock 1998 1997
------------------- -------------------
Fiscal Quarter High Low High Low
------------------ ------ ------ ------ ------
First $ 13.38 $ 11.81 $ 11.75 $ 10.57
Second 14.38 13.19 12.50 10.13
Third 14.00 11.00 13.25 12.38
Fourth 11.94 11.25 13.69 12.38
No dividends were paid on the Company's common stock in 1998 or 1997.
Regular quarterly dividends of $.25 per share were paid on the cumulative
convertible preferred stock in both years.
Item 6. Selected Financial Data* (in thousands of dollars, except per share
data)
[Enlarge/Download Table]
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
Operating Results:
Revenues .................................................................. $ 303,428 $ 275,923 $ 245,976 $ 244,882 $ 230,611
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle .............................................................. 7,213 (1,382) 5,342 2,053 10,203
Income (loss) from continuing operations before cumulative effect of change
in accounting principle per common share:
Basic ............................................................... .18 (.07) .14 .04 .31
Diluted ............................................................. .18 (.07) .14 .04 .31
Financial Position:
Cash, cash equivalents and investments .................................... 11,079 15,882 15,607 14,477 9,447
Total assets .............................................................. 192,567 183,703 193,288 163,060 150,424
Line of credit, long-term ................................................. 39,632 -- -- -- --
Other long-term debt ...................................................... 30,659 37,565 40,521 6,874 4,196
Redeemable preferred stock ................................................ -- 3,000 3,000 -- --
Stockholders' equity ...................................................... 50,711 65,447 82,279 71,691 78,296
Preferred dividends ....................................................... 778 875 803 695 695
*Previously reported amounts have been restated to reflect the
acquisitions, accounted for as poolings of interests, of Delfin, VisiCom,
Horizons and DBA in 1998, and the discontinuance of the Company's access control
systems business in 1998.
Item 7. Management's Discussion And Analysis Of Results Of Operations And
Financial Condition
(The following discussion should be read in conjunction with the
consolidated financial statements and related notes. Dollar amounts are
expressed in thousands.)
Company Overview
The Company is a leading provider of state-of-the-art communications and
information solutions to the U.S. military and allied government agencies. The
Company's systems, products and services enable its customers to generate,
process, transmit, store and distribute information in a secure, cost-effective
and timely manner. The Company operates its business primarily through
subsidiaries that are focused on targeted markets and/or technologies.
A substantial portion of the Company's revenues is dependent upon continued
funding of U.S. and allied government agencies as well as continued funding of
the programs targeted by the Company's businesses. For the years ended December
31, 1998, 1997, and 1996, U.S. government business represented approximately
80%, 82%, and 81% of the Company's revenues, respectively. U.S. defense budgets
have generally been declining in real terms since the mid-1980's. However, U.S.
government spending for professional and technical services such as engineering,
information technology, training, research and development and operating and
maintenance support has increased in real dollars in each of the past three
years, and industry sources expect it to continue to do so. Any significant
reductions in the funding of United States government agencies or in the funding
areas targeted by the Company's businesses could materially and adversely affect
the Company's business, results of operations and financial condition.
Throughout 1998, the Company closely followed its well-defined strategy of
growing its defense information technology business through the Company's active
participation in the industry roll up of third-tier defense intelligence
companies. In addition, these acquisitions provided expansion of the Information
Technologies segment's existing Navy customer base to include significant Army
and Air Force business. The Company completed five acquisitions during 1998: DBA
Systems ("DBA") on February 27, Validity Corporation ("Validity") on March 31,
Horizons Technology ("Horizons") on June 30, VisiCom Laboratories ("VisiCom") on
August 24, and Delfin Systems ("Delfin") on October 23. All mergers with the
exception of Validity were stock-for-stock transactions accounted for as
poolings of interests transactions. All acquisitions with the exception of
VisiCom were integrated into the Company's Information Technologies segment. The
operating results of VisiCom have been included in the Emerging Technologies and
Businesses segment.
Through acquisitions and internal growth, record revenues and operating
profits were achieved by the Company's Information Technologies segment in 1998.
This segment provides information systems solutions primarily to government
customers with large data management, information manipulation, information
fusion, knowledge-based systems, and communications requirements. This segment
also supports high priority government programs by providing system integration,
information systems engineering services, development of systems and specialized
products, as well as systems research, development and prototyping. Other
services include research and development under government funded contracts for
the Department of Defense (DoD) and other customers.
During 1998, operating entities in the Information Technologies segment
were awarded five contracts with an aggregate potential value exceeding $180
million. These contracts provide for communications systems integration,
engineering and technical support services for the U.S. government over a
five-year period. A substantial portion of the contracts booked in this segment
was awarded to the entities that were acquired during 1998. The Company intends
to further support this segment's growth through continued active participation
in the on-going defense industry consolidation, taking advantage of synergistic
acquisition opportunities.
The Company's Software Systems segment ("Titan Software Systems") continued
to diversify its customer base and achieve internal revenue growth as well as
significantly improving operating performance in 1998. In addition, in early
January 1999, the Company's wholly-owned subsidiary, Titan Software Systems
Corporation, acquired Transnational Partners II, LLC, a software services
company which provides infrastructure and Enterprise Resource Planning (ERP)
solutions for major corporations. Management believes that this acquisition
brings added business, profits and critical mass to Titan Software Systems, all
of which are critical factors in implementing the Company's stated strategy of a
future spin-out or spin-off.
Titan Software Systems is primarily a systems integrator that provides a
broad range of end-to-end information technology services and solutions to
customers such as the State of Wyoming, the Federal Aviation Administration, MCI
Worldcom, Sempra Energy and other non-defense government and commercial entities
with large and complex system integration and data management requirements.
Titan Software Systems provides integration and package software implementation
services, integration of third party enterprise resource planning (ERP) software
solutions, business process re-engineering, data warehousing and database
administration, client/server application development, Year 2000 solutions,
Internet and intranet infrastructure design and development, and electronic
commerce solutions.
The Company's Medical Sterilization and Food Pasteurization segment
achieved record revenues and operating profits during 1998. This segment
currently provides medical product sterilization services at two Titan
facilities and manufactures and sells turnkey electron beam sterilization and
food pasteurization systems to customers for use in their own facilities.
The 1998 operating results include the near-completion of two SureBeam(R)
sterilization systems during 1998, the first for Rochaille Corporation in Wales
and the second for Baxter Corporation in the Dominican Republic. During 1998,
the Company signed agreements to provide medical product sterilization services
at its Denver facility, with aggregate values of approximately $6 million. Both
the San Diego and Denver facilities achieved record utilization levels during
1998.
In addition, in February 1999, the U.S. Department of Agriculture (USDA)
announced that it would soon allow the nation's meatpackers and food processors
to sterilize raw meat and several other food products with beams of radiation to
eliminate bacteria. The Company has received significant inquiries in response
to this recent USDA announcement. The Company believes that its SureBeam(R)
product is superior to other similar systems to eliminate these food-borne
bacteria.
The Company's Communications Systems segment, ("Linkabit Wireless"),
develops and produces advanced satellite ground terminals, satellite voice/data
modems, networking systems and other products used to provide
bandwidth-efficient communications for commercial and government customers. Its
market-driven product development efforts have resulted in products which are
particularly well suited for rural telephony and secure defense communications.
During 1998, the defense communications systems business of Linkabit
Wireless was awarded a $13.8 million contract as well as two additional
production options with an aggregate value of $4.5 million for Mini-DAMA
satellite communications terminals. This business also experienced internal
revenue and operating profit growth in 1998.
In October 1998, the Company acquired a 50% ownership position in an
African based telecommunications company, AfroNetwork, Benin, which is building
a satellite-based telephone system in Benin, Africa. The Company also entered
into a strategic relationship with Sakon Corporation, an international telephone
service provider and communications company which provides telephone and
internet services. Through a newly formed company, Sakon LLC, Titan and Sakon
Corporation will provide carrier, direct dial rural telephony and enhanced
communications services, including international fax, conference calling, voice
over IP, virtual communication centers and virtual-private network services to
the developing countries of Africa, Latin America, the Middle East and Southeast
Asia.
The Company's Emerging Technologies and Businesses segment experienced
internal revenue growth as well as significantly improved operating margins
during 1998. This segment consists primarily of image processing and circuit
boards, as well as certain new technologies and early-stage businesses,
including businesses in which the Company owns only a minority interest.
Emerging Technologies and Businesses pursues commercial applications for
technologies originally developed by the Company's other segments in
government-sponsored research and development programs. Emerging Technologies
and Businesses employs the Company's rich technology portfolio, superior
research and development capabilities and stream of government funded projects
to create solutions to technology-related problems which the Company can sell to
multiple commercial markets.
Operating Results
The table below sets forth the Company's operating results and the
percentage of total revenues for certain operations data for each of the three
years in the period ended December 31, 1998:
[Enlarge/Download Table]
1998 % 1997 % 1996 %
--------- ----- --------- ----- --------- -----
Revenues ............................... $ 303,428 100.0 $ 275,923 100.0 $ 245,976 100.0
Cost of revenues ....................... 232,041 76.5 216,553 78.5 192,657 78.4
Selling, general and administrative .... 37,553 12.4 36,731 13.3 36,226 14.7
Research and development ............... 5,590 1.8 7,466 2.7 5,023 2.0
Special acquisition related charges and 9,891 3.3 6,600 2.4 -- --
other
Operating profit ....................... 18,353 6.0 8,573 3.1 12,070 4.9
Interest expense, net .................. 6,985 2.3 5,771 2.1 4,125 1.7
Income tax provision ................... 4,155 1.4 4,184 1.5 2,603 1.1
Cumulative effect of change in
accounting principle, net ........... (19,474) (6.4) -- -- -- --
Loss from discontinued operations, net . (7,444) (2.4) (17,930) (6.5) (6,326) (2.6)
Net income (loss)....................... (19,705) (6.5) (19,312) (7.0) (984) (0.4)
Results of Operations
As noted above, the Company's consolidated revenues were $303,428, $275,923
and $245,976 in 1998, 1997 and 1996, respectively. Increased revenues were
reported in the Information Technologies, Software Systems, Medical
Sterilization and Food Pasteurization and Emerging Technologies and Businesses
segments in 1998. Revenue growth in 1998 was primarily attributable to the
impact of the acquisitions noted previously in the Information Technologies and
Emerging Technologies and Businesses segments, work performed on new business in
the Software Systems segment, and the near-completion of two SureBeam(R) systems
in the Medical Sterilization and Food Pasteurization segment.
The Company's consolidated operating profits have been significantly
impacted by a number of factors in each of the three years shown above. The 1998
operating results include a charge of $9,891 primarily related to the direct
transaction costs incurred on the Delfin, VisiCom, Horizons and DBA mergers, and
to a lesser degree certain costs incurred to integrate these businesses into
Titan, as well as certain integration costs incurred in other business segments.
The 1997 operating results include a charge of $9,846 related primarily to
provisions taken to reflect certain asset impairments and an estimated
environmental liability pertaining to a DBA manufacturing facility which is held
for sale. The 1996 operating performance reflects the Company's continuing
investment in and funding of its commercial ventures.
Selling, general and administrative ("SG&A") expenses were $37,553, $36,731
and $36,226 in 1998, 1997 and 1996, respectively. As a percentage of revenues,
SG&A expenses have decreased from 14.7% in 1996 to 13.3% in 1997 and to 12.4% in
1998. The reductions in 1997 and 1998 reflect the impact of cost reduction
measures as well as economies of scale and efficiencies that have been achieved.
In addition, the Company has eliminated many duplicate functions and costs as
part of its process of integrating certain of its acquired businesses. In early
1997, the Company implemented a re-engineering process of its administrative
functions. This re-engineering focused on the elimination of redundancies,
resulting in increased efficiencies and reduced infrastructures, and ultimately
resulted in reduced costs. This re-engineering process continued throughout
1998, and the Company intends to continue this process through 1999 as the
acquired entities are integrated into the Company.
Research and development ("R&D") expenses were $5,590, $7,466 and $5,023 in
1998, 1997 and 1996, respectively. The reduced level of R&D expenditures in 1998
primarily reflects the completion of certain development and certification
efforts in the defense communications business within Communications Systems
which were substantially completed in 1997. The Company anticipates that the
1999 levels of R&D spending will increase in absolute dollars primarily in the
defense communications business and the Emerging Technologies and Businesses
segment.
Net interest expense has increased over the three-year period ended
December 31, 1998, primarily as a direct result of the increased level of the
Company's borrowings, primarily to fund the growth in the various segments. In
1998 and 1997, the principal component of interest expense is related to the
convertible subordinated debentures issued by the Company in November 1996. The
debentures are redeemable by the Company on or after November 2, 1999. In 1996,
the principal component of interest expense is related to the Company's
borrowings under its bank lines of credit. Borrowings from the Company's primary
bank lines of credit, excluding the working capital lines from the acquired
companies, averaged $28,889, $10,803 and $12,315 at weighted average interest
rates of 7.7%, 8.1% and 8.2% during 1998, 1997 and 1996, respectively. Also
included in interest expense is interest on the Company's deferred compensation
and retiree medical obligations. Interest expense related to these items was
$890, $767 and $801 for 1998, 1997, and 1996, respectively.
Income taxes reflect effective rates of 37%, 149% and 33% in 1998, 1997 and
1996, respectively. The difference between the actual provision and the
effective rate (based on the United States statutory tax rate) in 1998 and 1996
was due primarily to state income taxes. The increased rate in 1997 was due
primarily to significant non-deductible expenses which were recorded for
financial reporting purposes, as well as the inability to offset losses of
certain acquired entities with income of other entities. The Company expects its
effective income tax rate to remain stable in the foreseeable future at an
approximate rate of 30% to 34%.
In the third quarter of 1998, the Company adopted Statement of Position
98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities". This resulted
in a $19,474 one-time, non-cash charge accounted for as a cumulative effect of a
change in accounting principle. The charge primarily represents previously
capitalized start-up costs incurred in the Company's discontinued broadband
communications business and deferred pre-contract costs as well as non-recurring
engineering costs previously carried in inventory in the Company's
Communications Systems segment.
In late 1998, the Company made a decision to divest and/or wind down its
access control systems business. Revenues and operating income (losses) for this
business were $3,122 and $(3,026) in 1998, $4,136 and $492 in 1997, and $1,808
and $483 in 1996, respectively. The 1998 loss includes a charge of $1,500 for
the estimated costs to be incurred in future periods in connection with the
winding down of this business. Early in 1997, the Company announced its decision
to divest its broadband communications business. Revenues and operating losses
for the broadband communications business were $-0- and $4,172 in 1998, $551 and
$343 in 1997, and $2,238 and $3,642 in 1996, respectively. During 1998, the
Company received cash payments of $4,400 for licensing of the broadband
technology and as settlement of certain contingencies related to the broadband
patents. In the third quarter ended September 30, 1998, the remaining net assets
of this business were written off as a charge to loss from discontinued
operations of $4,638. Additionally, approximately $7,200 in previously
capitalized broadband communications start-up costs were written off as part of
the cumulative effect of the change in accounting principle discussed above.
In addition to the discontinued operations of the access control systems
business and the broadband business, the loss from discontinued operations
reflects operations discontinued by certain of the companies acquired by Titan
in 1998. The decisions to dispose of or otherwise wind down these operations
were made by the separate Boards of Directors of the respective acquired
companies prior to entering into any discussions with Titan regarding the
potential acquisitions of these entities by Titan. Revenues and losses for these
discontinued operations were $10,899 and $-0- for 1998, $7,999 and $17,907 for
1997, and $9,367 and $2,998 for 1996, respectively. Aggregate charges for
estimated costs to be incurred in future periods in connection with the winding
down of these operations amounted to approximately $6,800, substantially all of
which was recorded by the acquired companies in the last quarter of 1997.
Operating losses of approximately $5.8 million were charged against this accrual
during 1998. Additionaly, a pre-tax charge of $1,300 was taken in the third
quarter of 1998 based on management's most recent review of estimated future
wind-down costs.
Information Technologies
Revenues in this segment were $190,467, $165,739 and $154,054 in 1998, 1997
and 1996, respectively. The increase in 1998 primarily relates to $22,969 of
revenue generated from Validity, which was purchased in March 1998, and to a
lesser degree, revenues related to a claim with the U.S. Government for work
performed in a prior year. The increased revenue in 1997 was primarily related
to a full-year's revenues generated from Eldyne and Unidyne, which were acquired
in May 1996.
Segment operating income increased to $16,291 in 1998, compared to $5,457
in 1997 and $14,861 in 1996. The 1998 operating income includes a charge of
$5,772 related to special acquisition and integration related charges
principally comprised of direct transaction and integration costs incurred by
the Company in conjunction with the mergers of DBA, Horizons and Delfin. The
1997 operating income includes charges of $9,846 related to the write-down of
property held for sale, an estimated environmental liability and certain other
asset write-downs recorded in connection with the acquisition of DBA. Excluding
the impact of these charges, segment operating income increased from $14,861 in
1996, to $15,303 in 1997, and to $22,063 in 1998, primarily from the increased
revenues discussed above, as well as from certain cost reduction efforts taken
during 1997 and 1998.
Software Systems
Revenues in this segment increased to $21,470 in 1998, compared to $17,374
in 1997 and $18,505 in 1996. One federal agency accounted for approximately
$11,200 of this revenue in 1998, $8,900 in 1997, and $6,800 in 1996, and one
telecommunications customer accounted for approximately $3,700 of this segment's
revenue in 1998, $4,500 in 1997, and $8,300 in 1996. Reduced revenues from the
latter customer in 1998 were offset by revenues from several new and existing
customers, as well as increased revenues from the aforementioned federal agency.
Segment operating income improved to $5,137 in 1998, compared to $4,580 in
1997, and an operating loss of $137 in 1996. The 1998 increase in operating
performance reflects the impact of the increased revenues discussed above. The
1997 results reflect the impact of cost reductions achieved, offset somewhat by
additional costs associated with a negotiated conclusion of certain contracts.
The 1996 operating loss was due primarily to reduced sales from the previously
mentioned telecommunications customer, the timing of corresponding decreases in
SG&A, and additional costs associated with the aforementioned contract
conclusion.
Medical Sterilization and Food Pasteurization
Revenues in this segment were $10,000 in 1998, $5,983 in 1997 and $2,818 in
1996. The increase in 1998 is a result of revenue recognized, using the
percentage-of-completion method of accounting, for two turnkey sterilization
systems which were ordered by customers in late 1997 and substantially completed
in 1998. Increased processing of medical products at the Company's two medical
sterilization facilities also contributed to this revenue growth. Revenues in
1997 were also favorably impacted by increased processing of medical products as
well as the sale of the Company's turnkey sterilization systems to Guidant
Corporation and Baxter Healthcare.
Segment operating performance improved to operating income of $1,365 in
1998, compared to $189 in 1997, and an operating loss of $1,080 in 1996.
Operating margins were directly impacted by the growth in revenues discussed
previously.
Communications Systems
Revenues in this segment were $42,468 in 1998, $48,980 in 1997, and $27,850
in 1996. The decline in 1998 revenues was due primarily to the decreased
shipments made on the Company's contract with PSN for Xpress Connection(TM)
units for a rural telephony system in Indonesia, offset partially by increased
revenues generated on the Company's Mini-DAMA contract. The revenue increase in
1997 primarily reflected the fulfillment of the Company's initial contract for
Xpress Connection units, increased market acceptance for certain of the
Company's modem and networking products, and an increase in deliveries of
Mini-DAMA, LSM-1000 and the LST-5D products.
Segment operating loss was $1,418 in 1998, compared to operating income of
$1,074 in 1997 and an operating loss of $4,187 in 1996. The 1998 operating
results include special charges of $2,841 including pre-operating and start-up
costs of $572 related to the AfroNetwork, Benin operation, $1,383 related to
employee termination and retention costs related to the reorganization of this
business, as well as approximately $900 related to costs incurred to file a
registration statement with the Securities and Exchange Commission ("SEC"),
which was ultimately withdrawn. Excluding the impact of these charges, operating
income, as adjusted, was $1,423, compared to operating income of $1,074 in 1997,
and an operating loss of $4,187 in 1996. Although revenues declined in 1998,
operating income, as adjusted, increased slightly due to a reduction in the
level of R&D spending. Operating performance improved in 1997 from 1996 due
primarily to the increased revenue volume.
Emerging Technologies and Businesses
Revenues in this segment were $39,023 in 1998, compared to $37,847 in 1997
and $42,749 in 1996. The increase in 1998 was due primarily to increased revenue
volume experienced in several of VisiCom's product lines, offset partially by
the wind-down of the Company's environmental consulting business during the
first quarter of 1998, and due to the near completion of certain of the
Company's contracts to build linear electron accelerators. The decline in 1997
revenues was due primarily to contract completion in this same accelerator
business.
Segment operating income was $3,455 in 1998, compared to $81 in 1997, and
$3,156 in 1996. The 1998 operating results include special charges of $1,003 of
transaction costs incurred in connection with the VisiCom merger. Excluding
these charges, operating income was $4,458 in 1998, compared to $81 in 1997 and
$3,156 in 1996. The increased operating margin in 1998 was due primarily to
favorable product mix as well as to the increase in revenue volume. Reduced
profits in 1997 were primarily impacted by reduced revenue volume.
Liquidity and Capital Resources
On July 29, 1998, the Company entered into a credit agreement with a bank
syndicate under which it may borrow up to $80 million. The new credit facility
includes a five year $55 million working capital line of credit and a $25
million component dedicated for acquisitions which converts any outstanding
balances after one year into a term loan, to be repaid in increasing quarterly
amounts over four years. The Company has the option to borrow at the bank base
rate or at LIBOR, plus applicable margins based on the ratio of total debt to
EBITDA (earnings before interest, taxes, depreciation and amortization). The
agreement contains, among other financial covenants, provisions which set
maximum debt to EBITDA limits and which require the Company to maintain
stipulated levels of EBITDA, tangible net worth, a minimum quick ratio, and
minimum coverage of fixed charges, as defined. Initial proceeds of $36.1 million
were used to pay off and replace the then outstanding line of credit balances
with the Company's and Horizons' banks and for working capital purposes. Also,
as part of the terms of the Company's merger with VisiCom, the Company retired
VisiCom's bank line of credit of $5 million in August 1998. At December 31,
1998, the outstanding balances on the working capital line and the acquisition
line were $35 million and $5 million, respectively. Cash and cash equivalents
were $11,079 at December 31, 1998.
During 1998, the Company's continuing operations used $132 in cash and
discontinued operations used $1,814 in cash. Financing activities generated
$12,714, substantially all of which was utilized to purchase Validity for $11.7
million in cash, net of cash acquired.
Income from the Company's continuing operations was $7,213. Working capital
changes included significant cash uses from increases in accounts receivables of
$12,427, primarily related to increases in the defense information technologies
businesses, and to a lesser degree, due to increases in commercial software
receivables. Other uses of cash included increases in inventories of $2,290, and
the funding requirements of certain accrued costs of $3,933. Additionally, after
the receipt of payment for the licensing of the broadband technology, $1,814 of
cash was used by discontinued operations.
The Company has a receivable of approximately $7,800 from its Indonesian
customer, PSN. The Company has negotiated a payment plan agreement with PSN for
settlement of all amounts due from PSN. The payment plan agreement provides for
an immediate payment by PSN of $1,000, which was received by the Company in the
fourth quarter of 1998, with the remaining balance to be paid in equal
installments of $3,907 on September 30, 1999 and September 30, 2000. All
outstanding balances will accrue interest at 10% per annum. At any time prior to
the payment of all the obligations in full, the Company may elect to convert all
or a portion of the principal and interest due into common stock of PSN, based
on its then current market value. In addition, if at any time after the
execution of this agreement, PSN sells any of its interest in its wholly-owned
subsidiary, subject to another third party obligation, PSN is required by the
agreement to immediately pay to the Company the lesser of the $3,907 or the
total amount of the outstanding balance owed to the Company. In the event that
PSN obtains financing from additional sources, the payment terms of its
obligation to the Company will be renegotiated at that time.
Funding for the advancement of the Company's strategic goals, including
acquisitions and continued investment in targeted commercial businesses and
start-up ventures, is expected to continue throughout 1999. The Company plans to
finance these requirements from a combination of sources, which include cash
generation from the Company's core businesses, the Company's expanded bank line
of credit as described above and other available cash sources. One of the
Company's primary strategies is the funding of growth in specific subsidiaries
through spin-out transactions. If the Company is unable to implement this
strategy, whether in whole or in part, then the Company may need to complete
additional equity or debt financings to fund potential acquisitions of new
businesses and technologies. Any additional equity or convertible debt
financings could, however, result in substantial dilution to the Company's
stockholders. Management is continually monitoring and reevaluating its level of
investment in all of its operations and the financing sources available to
achieve the Company's goals in each business area. Management believes that the
combination of cash on hand, amounts available on its credit facility and cash
flow expected to be generated from its operations will be sufficient to fund
planned investments and working capital requirements through fiscal 1999.
Forward Looking Information: Certain Cautionary Statements
Certain statements contained in this Management's Discussion and Analysis
of Results of Operations and Financial Condition that are not related to
historical results are forward looking statements. Actual results may differ
materially from those stated or implied in the forward looking statements.
Further, certain forward looking statements are based upon assumptions of future
events which may not prove to be accurate.
Dependence on Government Contracts. A substantial portion of the Company's
revenues are dependent upon continued funding of U.S. and allied government
agencies as well as continued funding of the programs targeted by the Company's
businesses. U.S. defense budgets and the budgets of other government agencies
have been declining in real terms since the mid-1980's, and may continue to do
so in the future. Any significant reductions in the funding of U.S. government
agencies or in the funding areas targeted by the Company's businesses could
materially and adversely affect the Company's business, results of operations
and financial condition.
Ability to Commercialize New Technologies. Since 1991, the Company has
sought to leverage the technologies developed as part of its defense business
into new business opportunities. Accordingly, many of the Company's existing
businesses, such as medical product sterilization and food pasteurization, and
new businesses the Company is continuing to develop are at an early stage. As
such, the Company is subject to all the risks inherent in the operation of a
start-up venture, including the need to secure the funding required to operate
and expand these businesses, to develop and maintain marketing, sales and
support capabilities, to secure appropriate third-party manufacturing
arrangements, to respond to the rapid technological advances inherent in the
markets for these new technologies and, ultimately, to design and manufacture
products or provide services acceptable to buyers in its target markets. Certain
of the Company's new products, including products for which the Company has
contracts for delivery, are still in the testing stage. There can be no
assurance that such tests will be completed satisfactorily or that the Company
will be able to satisfy all of the requirements for delivery of and payment for
these products. In addition, many of the opportunities in the communications and
sterilization businesses involve projects with lengthy sales cycles. The
Company's efforts to address these risks have required, and may continue to
require, significant expenditures and dedicated management time and other
resources. There can be no assurance that the Company will be successful in
addressing these risks or in commercializing these new technologies.
Risks of International Operations. Several of the Company's businesses,
particularly the Communications Systems segment, conduct substantial business in
foreign countries. The Company generally denominates its foreign contracts in
U.S. dollars, and the Company believes that its global competitors follow
similar business practices. Accordingly, the Company does not believe that
foreign currency fluctuations will have a material adverse impact on its ability
to compete with these competitors in these markets. Foreign currency
fluctuations could, however, make the Company's products less affordable and
thus reduce the demand for such products. Furthermore, a precipitous decline in
such foreign currency values could result in certain of the Company's customers
and local subcontractors and partners refusing to perform their obligations
under contracts with the Company, the cancellation of projects from which the
Company expects to receive significant revenues, defaulting on accounts
receivable, and the loss of any investments by the Company to build
infrastructure or develop business in these countries. Accordingly, there can be
no assurance that a decline in the value of any one foreign currency relative to
the U.S. dollar will not have a material adverse effect on the Company's
business, financial condition and results of operations. The currency
devaluations and adverse market conditions in Indonesia and other Asian
countries have negatively affected the demand for the Company's commercial
communications products and, consequently, the revenues in the Communications
Systems segment.
Additional risks inherent in the Company's international business
activities include various and changing regulatory requirements, costs and risks
of relying upon local subcontractors, increased sales and marketing and research
and development expenses, export restrictions and availability of export
licenses, tariffs and other trade barriers, political and economic instability,
difficulties in staffing and managing foreign operations, longer payment cycles,
seasonal reduction in business activities, potentially adverse tax laws, complex
foreign laws and treaties and the potential for difficulty in accounts
receivable collection. Any of these factors could have a material adverse effect
on the Company's business, financial condition and results of operations.
Certain of the Company's customer purchase agreements are governed by foreign
laws, which may differ significantly from U.S. laws. Therefore, the Company may
be limited in its ability to enforce its rights under such agreements and to
collect amounts owing to the Company should any customer refuse to pay such
amounts. In addition, the Company is subject to the Foreign Corrupt Practices
Act (the "FCPA") which may place the Company at a competitive disadvantage to
foreign companies which are not subject to the FCPA.
Year 2000 Readiness Disclosure
The Company has implemented a Year 2000 compliance program to address its
current hardware and software products and development tools and all of its
major computing information systems networks, desktop systems and
infrastructure. In addition, the Company is contacting business associates such
as its third party vendors, business partners, contractors and service providers
to assess their level of readiness. Finally, the Company has formed a Year 2000
steering committee to monitor implementation of its overall program and the
plans of each of its business units. Each of the Company's business units has
formed steering committees to develop and implement compliance plans.
The Company is in the process of assessing whether its business unit
products and services are Year 2000 compliant. The Company does not expect its
current products or services to have material Year 2000 issues. In some cases,
the Company's government customers have contracted with the Company to modify
the Company's older products so that they are Year 2000 compliant. The Company's
products are not generally sold under extended warranties, so the Company does
not expect that it will have to spend any material amounts to make any of its
prior products Year 2000 compliant. However, the Company is in the process of
assessing its products, including the products of its recently acquired
businesses, and it cannot predict whether any Year 2000 issues will arise.
As part of its Year 2000 compliance program, the Company intends to review
the internally developed and third party software that it uses for accounting,
manufacturing processes and other business functions. Because of its history of
acquisitions, the Company has a number of business units that use different
systems; some of which it knows are not Year 2000 compliant at this time. Based
upon the Company's assessment, it may elect to move business units to other Year
2000 compliant systems that the Company currently uses as part of an overall
plan to consolidate the number of different systems being used. It is estimated
that the cost of moving business units to new systems will range from $3 million
to $5 million. Some of the Company's business units may use internal resources
to convert legacy application systems to be Year 2000 compliant. The Company
does not separately track the costs incurred of its own employees on the Year
2000 project. Finally, many of the Company's government contracts related
business units use an accounting package that is not currently Year 2000
compliant. The supplier of this package has released a Year 2000 compliant
version that the Company is currently installing. If the Company cannot timely
correct all Year 2000 problems, these problems may cause material adverse
effects on the Company's financial position, results of operations or cash
flows.
Some of the Company's customers, in particular the U.S. government, utilize
complex billing and accounting systems to determine when and what amounts will
be paid to the Company under its various contracts. In addition, several of the
Company's major strategic partners rely on complex software systems to
coordinate and control their day-to-day operations. These complex systems may
not be Year 2000 compliant. Although these customers and strategic partners have
advised the Company that they expect to resolve any Year 2000 issues prior to
December 31, 1999, the Company cannot guarantee that its billing procedures and
cycles, or its joint sales and marketing efforts, will not be interrupted. If
these customers' or business partners' Year 2000 issues are not resolved on
time, or at all, the Company's financial position, results of operations or cash
flows could be materially and adversely affected. The Company plans on
developing contingency plans in the event that its internal systems or third
party business associates' systems are not timely corrected.
[THIS SPACE LEFT INTENTIONALLY BLANK]
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Financial Statement Schedules
Page
Report of Independent Public Accountants......................................
Financial Statements:
Consolidated Statements of Operations....................................
Consolidated Balance Sheets..............................................
Consolidated Statements of Cash Flows....................................
Consolidated Statements of Stockholders' Equity..........................
Notes to Consolidated Financial Statements...............................
Supporting Financial Schedule Covered by the Foregoing Report of
Independent Public Accountants:
Schedule II - Valuation and Qualifying
Accounts.............................................................
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Titan Corporation:
We have audited the accompanying consolidated balance sheets of The
Titan Corporation (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present
fairly, in all material respects, the financial position of The Titan
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and financial statement schedules is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Diego, California
February 15, 1999
[Enlarge/Download Table]
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Years Ended December 31,
----------------------------------
1998 1997 1996
--------- --------- --------
Revenues ........................................................ $ 303,428 $ 275,923 $ 245,976
--------- --------- ---------
Costs and expenses:
Cost of revenues ............................................. 232,041 216,553 192,657
Selling, general and administrative expense .................. 37,553 36,731 36,226
Research and development expense ............................. 5,590 7,466 5,023
Special acquisition related charges and other ................ 9,891 6,600 --
--------- --------- ---------
Total costs and expenses ..................................... 285,075 267,350 233,906
--------- --------- ---------
Operating profit ................................................ 18,353 8,573 12,070
Interest expense ................................................ (7,377) (6,643) (4,764)
Interest income ................................................. 392 872 639
--------- --------- ---------
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle .......... 11,368 2,802 7,945
Income tax provision ............................................ 4,155 4,184 2,603
--------- --------- ---------
Income (loss) from continuing operations before cumulative effect
of change in accounting principle ............................ 7,213 (1,382) 5,342
Cumulative effect of change in accounting principle, net of taxes (19,474) -- --
Loss from discontinued operations, net of taxes ................. (7,444) (17,930) (6,326)
--------- --------- ---------
Net loss ........................................................ (19,705) (19,312) (984)
Dividend requirements on preferred stock ........................ (778) (875) (803)
--------- --------- ---------
Net loss applicable to common stock ............................. $ (20,483) $ (20,187) $ (1,787)
========= ========= =========
Basic earnings (loss) per share:
Income (loss) from continuing operations ..................... $ .18 $ (.07) $ .14
Cumulative effect of change in accounting principle .......... (.56) -- --
Loss from discontinued operations ............................ (.21) (.54) (.20)
--------- --------- ---------
Net loss ..................................................... $ (.59) $ (.61) $ (.06)
========= ========= =========
Weighted average shares ....................................... 34,895 33,094 32,068
========= ========= =========
Diluted earnings (loss) per share:
Income (loss) from continuing operations ..................... $ .18 $ (.07) $ .14
Cumulative effect of change in accounting principle .......... (.54) -- --
Loss from discontinued operations ............................ (.21) (.54) (.20)
--------- --------- ---------
Net loss ..................................................... $ (.57) $ (.61) $ (.06)
========= ========= =========
Weighted average shares ...................................... 36,177 33,094 32,445
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
[Enlarge/Download Table]
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and per share amounts)
As of December 31,
----------------------
1998 1997
--------- ---------
Assets
Current Assets:
Cash and cash equivalents .................................................. $ 11,079 $ 11,383
Investments ................................................................ -- 4,499
Accounts receivable-net .................................................. 88,068 72,653
Inventories ................................................................ 8,646 18,826
Net assets of discontinued operations ...................................... -- 3,930
Prepaid expenses and other ................................................. 2,176 2,743
Deferred income taxes ...................................................... 10,978 8,298
--------- ---------
Total current assets .................................................... 120,947 122,332
Property and equipment-net ................................................... 25,702 27,666
Goodwill-net of accumulated amortization of $7,620 and $6,078 ................ 38,694 21,274
Other assets-net ............................................................. 6,579 8,756
Net assets of discontinued operations ........................................ 645 3,675
--------- ---------
Total assets ................................................................. $ 192,567 $ 183,703
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Lines of credit ............................................................ $ 368 $ 23,130
Accounts payable ........................................................... 21,335 16,086
Acquisition debt ........................................................... 3,000 --
Current portion of long-term debt .......................................... 1,581 1,505
Accrued compensation and benefits .......................................... 12,682 14,300
Other accrued liabilities .................................................. 11,659 10,522
Net liabilities of discontinued operations ................................. 5,872 --
--------- ---------
Total current liabilities ............................................... 56,497 65,543
--------- ---------
Line of credit ............................................................... 39,632 --
--------- ---------
Long-term debt ............................................................... 30,659 37,565
--------- ---------
Other non-current liabilities ................................................ 15,068 12,148
--------- ---------
Commitments and contingencies
Series B cumulative convertible redeemable preferred stock, $3,000 liquidation
preference, 6% cumulative annual dividend, -0- and 500,000 shares issued and
outstanding ................................................................ -- 3,000
--------- ---------
Stockholders' Equity:
Preferred stock: $1 par value, authorized 2,500,000 shares:
Cumulative convertible, $13,897 liquidation preference:
694,872 shares issued and outstanding ................................. 695 695
Series A junior participating, authorized 250,000 shares:
None issued ........................................................... -- --
Common stock: $.01 par value, authorized 100,000,000 shares, issued and
outstanding: 36,650,460 and 34,776,764 shares ........................... 367 348
Capital in excess of par value ............................................... 75,157 69,332
Retained earnings (deficit) .................................................. (22,929) (2,337)
Treasury stock (962,530 and 971,894 shares), at cost ......................... (2,579) (2,591)
--------- ---------
Total stockholders' equity ................................................. 50,711 65,447
--------- ---------
Total liabilities and stockholders' equity ................................... $ 192,567 $ 183,703
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
[Enlarge/Download Table]
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
For the Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Cash Flows from Operating Activities:
Income (loss) from continuing operations ............................... $ 7,213 $ (1,382) $ 5,342
Adjustments to reconcile income (loss) from continuing operations to net
cash provided by (used for) continuing operations:
Depreciation and amortization .................................... 7,126 9,213 8,044
Deferred income taxes and other .................................. (498) 1,926 (1,655)
Write-off of assets, investments and environmental accrual ....... -- 9,846 --
Poolings of interests ............................................ (109) 695 --
Change in operating assets and liabilities, net of effects from
businesses sold and acquired:
Accounts receivable ........................................ (12,427) (4,102) 7,989
Inventories ................................................ (2,290) (1,047) (6,069)
Prepaid expenses and other assets .......................... 1,081 (879) 594
Accounts payable ........................................... 3,705 874 (3,467)
Income taxes payable ....................................... -- -- (653)
Accrued compensation and benefits .......................... (2,298) 1,531 (1,587)
Restructuring activities ................................... -- (815) (4,099)
Other liabilities .......................................... (1,635) (6,165) (684)
-------- -------- --------
Net cash provided by (used for) continuing operations .................. (132) 9,695 3,755
-------- -------- --------
Loss from discontinued operations ...................................... (7,444) (17,930) (6,326)
Changes in net assets and liabilities of discontinued operations ....... 5,630 7,426 (2,639)
-------- -------- --------
Net cash used for discontinued operations .............................. (1,814) (10,504) (8,965)
-------- -------- --------
Net cash used for operating activities ................................. (1,946) (809) (5,210)
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures ................................................... (4,038) (6,647) (6,638)
Proceeds, net of transaction costs, from sale of businesses ............ -- 200 2,492
Payment for purchase of businesses, net of cash acquired ............... (11,679) -- (2,679)
Proceeds from sale of investments ...................................... 4,499 19,199 5,000
Purchase of investments ................................................ -- (15,410) (9,888)
Other .................................................................. 146 235 (283)
-------- -------- --------
Net cash used for investing activities ................................. (11,072) (2,423) (11,996)
-------- -------- --------
Cash Flows from Financing Activities:
Additions to debt ...................................................... 16,870 12,671 37,762
Retirements of debt .................................................... (1,447) (3,137) (21,909)
Redemption of Series B Preferred Stock ................................. (3,000) -- --
Deferred debt issuance costs ........................................... -- -- (2,035)
Proceeds from stock issuances .......................................... 1,214 708 433
Purchase of stock from benefit plan .................................... -- (471) --
Dividends paid ......................................................... (778) (875) (803)
Other .................................................................. (145) -- --
-------- -------- --------
Net cash provided by financing activities .............................. 12,714 8,896 13,448
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ................... (304) 5,664 (3,758)
Cash and cash equivalents at beginning of year ......................... 11,383 5,719 9,477
-------- -------- --------
Cash and cash equivalents at end of year ............................... $ 11,079 $ 11,383 $ 5,719
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
[Enlarge/Download Table]
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except per share data)
Cumulative Capital in
Convertible Excess of Retained
Preferred Common Par Earnings/ Treasury
Stock Stock Value (Deficit) Stock Total
--------- --------- -------- -------- --------- --------
Balances at December 31, 1995 ........... $ 695 $ 317 $ 54,933 $ 19,270 $ (3,524) $ 71,691
Stock issued for acquisition ......... -- 18 10,659 -- -- 10,677
Other stock issued ................... -- 1 161 -- -- 162
Exercise of stock options and other .. -- 3 349 (16) (62) 274
Shares contributed to employee benefit
plans ............................. -- -- 827 (261) 626 1,192
Income tax benefit from employee stock
transactions ...................... -- -- 70 -- -- 70
Dividends on preferred stock -
Cumulative Convertible, $1.00 per
share ............................. -- -- -- (695) -- (695)
Series B, 6% annual ............... -- -- -- (108) -- (108)
Net loss ............................. -- -- -- (984) -- (984)
--------- --------- -------- -------- --------- --------
Balances at December 31, 1996 ........... 695 339 66,999 17,206 (2,960) 82,279
Conversion of subordinated debt ...... -- 5 1,597 -- -- 1,602
Exercise of stock options and other .. -- 2 726 (51) 37 714
Stock issued for acquisition ......... -- 2 503 -- -- 505
Shares contributed to employee benefit
plans ............................. -- -- 12 -- 332 344
Shares purchased from benefit plan ... -- -- (545) -- -- (545)
Income tax benefit from employee stock
transactions ...................... -- -- 40 -- -- 40
Pooling of interests ................. -- -- -- 695 -- 695
Dividends on preferred stock -
Cumulative Convertible, $1.00 per
share ............................. -- -- -- (695) -- (695)
Series B, 6% annual ............... -- -- -- (180) -- (180)
Net loss ............................. -- -- -- (19,312) -- (19,312)
--------- --------- -------- -------- --------- --------
Balances at December 31, 1997 ........... 695 348 69,332 (2,337) (2,591) 65,447
Conversion of subordinated debt ...... -- 15 5,368 -- -- 5,383
Stock repurchase ..................... -- (1) (752) -- -- (753)
Exercise of stock options and other .. -- 4 848 -- 12 864
Conversion of warrants ............... -- 1 349 -- -- 350
Poolings of interests ................ -- -- -- (109) -- (109)
Shares contributed to employee benefit
plans ............................. -- -- (100) -- -- (100)
Income tax benefit from employee stock
transactions ...................... -- -- 112 -- -- 112
Dividends on preferred stock -
Cumulative Convertible, $1.00 per
share ............................. -- -- -- (695) -- (695)
Series B, 6% annual ............... -- -- -- (83) -- (83)
Net loss ............................. -- -- -- (19,705) -- (19,705)
--------- --------- -------- -------- --------- --------
Balances at December 31, 1998 ........... $ 695 $ 367 $ 75,157 $(22,929) $ (2,579) $ 50,711
========= ========= ======== ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements.
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Note 1. Summary of Significant Accounting Policies
Nature of Operations. The Titan Corporation (the "Company" or
"Titan") provides information technology and electronic systems and
services to government and commercial customers. The Company groups
its businesses into four core business segments --Information
Technologies, Software Systems, Medical Sterilization and Food
Pasteurization, and Communications Systems -- and a fifth business
segment, Emerging Technologies and Businesses. The Company provides
engineering, technical, management and consulting services in the
areas of national security, software systems, communication systems,
information systems, threat simulation/training systems, electronic
control systems, advanced research and development, and medical
products sterilization and food pasteurization. The Company also
develops, designs, manufactures and markets satellite communications
subsystems, digital imaging products, electro-optical systems, and
pulsed power products including linear accelerators.
The Company is involved in a number of start-up ventures, most
notably the commercial satellite communications business in Titan's
Communications Systems segment. The Company believes that the primary
source of revenues for this business will be international customers
in developing countries, primarily within Asia, Africa and South
America.
Principles of Consolidation. The consolidated financial
statements include the accounts of Titan and its subsidiaries. All
significant intercompany transactions and balances have been
eliminated. The accompanying consolidated financial statements have
been restated to reflect four acquisitions in 1998 that have been
accounted for as poolings of interests (see Note 2). From time to
time, the Company makes investments in joint ventures which primarily
involve international locations and operations. Management evaluates
its investment in each joint venture on an individual basis for
purposes of determining whether or not consolidation is appropriate.
Investments in such ventures are generally consolidated in instances
where the Company retains control through decision-making ability and
a greater than 50% ownership interest. In the absence of such factors,
the Company generally accounts for these investments under the equity
method.
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition. A majority of the Company's revenue, both
government and commercial, is derived from products manufactured and
services performed under cost-reimbursement, time-and-materials, and
fixed-price contracts wherein revenues are generally recognized as
services are performed, using the percentage-of-completion method,
which includes revenues recognized as units are delivered. Total
estimated costs are based on management's assessment of costs to
complete the project based upon evaluation of the level of work
achieved and costs expended to date. Estimated contract losses are
fully charged to operations when identified.
Cash Equivalents. All highly liquid investments purchased with an
original maturity of three months or less are classified as cash
equivalents.
Investments. The Company does not invest in securities as its
primary business and does not maintain a trading account.
Occasionally, however, the Company purchases financial instruments
with maturities greater than three months from the date of
acquisition, principally investment grade commercial paper and U.S.
Treasury obligations. Such securities are classified as "available for
sale" as required by Statement of Financial Accounting Standards No.
115 ("SFAS 115") "Accounting for Certain Investments in Debt and
Equity Securities." As of December 31, 1998, the Company has no such
investments. As of December 31, 1997, all such investment securities
owned by the Company matured in one year or less and were carried at
their current market value, which approximated their cost, as required
by SFAS 115.
Unbilled Accounts Receivable. Unbilled accounts receivable
include work-in-process which will be billed in accordance with
contract terms and delivery schedules, as well as amounts billable
upon final execution of contracts, contract completion, milestones or
completion of rate negotiations. Generally, unbilled accounts
receivable are expected to be collected within one year. Payments to
the Company for performance on certain U.S. Government contracts are
subject to audit by the Defense Contract Audit Agency. Revenues have
been recorded at amounts expected to be realized upon final
settlement.
Concentration of Credit Risk. As the Company expands its business
into international markets and developing countries, certain accounts
receivable may be exposed to credit risk due to political and economic
instability in these areas. To mitigate credit risk in foreign
countries, the Company generally denominates its foreign contracts in
U.S. dollars and requires payment primarily in the form of stand-by
letters of credit, advance deposits, or wire transfers, prior to
shipment.
Inventories. Inventories include the cost of material, labor and
overhead, and are stated at the lower of cost, determined on the
first-in, first-out (FIFO) and weighted average methods, or market.
The Company periodically evaluates its on-hand stock and makes
appropriate disposition of any stock deemed excess or obsolete.
Property and Equipment. Property and equipment are stated at
cost. Depreciation is provided using the straight-line method, with
estimated useful lives of 25 to 40 years for buildings, 2 to 40 years
for leasehold improvements and 3 to 10 years for machinery and
equipment and furniture and fixtures. Certain machinery and equipment
in the Company's medical sterilization business is depreciated based
on units of production.
Goodwill. The excess of the cost over the fair value of net
assets of purchased businesses ("goodwill") is amortized on a
straight-line basis over varying lives ranging from 5 to 30 years. The
Company periodically re-evaluates the original assumptions and
rationale utilized in the establishment of the carrying value and
estimated lives of its goodwill. The criteria used for these
evaluations include management's estimate of the asset's continuing
ability to generate positive income from operations and positive cash
flow in future periods as well as the strategic significance of the
intangible asset to the Company's business objectives.
Impairment of Long-Lived Assets. Periodically, the Company
reviews for possible impairment its long-lived assets and certain
identifiable intangibles to be held and used. Whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable, asset values are adjusted accordingly.
Stock-Based Compensation. The Company has elected to adopt the
disclosure only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, the Company will continue to account for its stock
based compensation plans under the provisions of APB No. 25.
Income Taxes. The Company accounts for income taxes under
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"), which requires the use of the liability
method of accounting for deferred income taxes. Under this method,
deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end. If
it is more likely than not that some portion or all of a deferred tax
asset will not be realized, a valuation allowance is recognized.
Per Share Information. The Company computes earnings per share
based on the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128").
The following data summarize information relating to the per
share computations for continuing operations before the cumulative
effect of a change in accounting principle:
[Enlarge/Download Table]
For the Year Ended December 31, 1998
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Income from continuing operations ......................................... $ 7,213
Less preferred stock dividends ............................................ (778)
-----------
Basic EPS:
Income from continuing operations available to common stockholders .... 6,435 34,895 $ .18
Effect of dilutive securities: Stock options .............................. -- 1,282 (.00)
----------- ----------- --------
Diluted EPS:
Income from continuing operations available to common stockholders plus
assumed conversions ................................................ $ 6,435 36,177 $ .18
=========== =========== ========
[Enlarge/Download Table]
For the Year Ended December 31, 1997
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Loss from continuing operations............................................ $(1,382)
Less preferred stock dividends............................................. (875)
-----------
Basic EPS:
Loss from continuing operations available to common stockholders......... $(2,257) 33,094 $ (.07)
=========== =========== ========
Diluted EPS:............................................................... Same as basic
[Enlarge/Download Table]
For the Year Ended December 31, 1996
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
Income from continuing operations.......................................... $5,342
Less preferred stock dividends............................................. (803)
-----------
Basic EPS:
Income from continuing operations available to common stockholders....... 4,539 32,068 $ .14
Effect of dilutive securities: Stock options............................... -- 377 (.00)
----------- ----------- --------
Diluted EPS:
Income from continuing operations available to common stockholders plus
assumed conversions.................................................... $4,539 32,445 $ .14
=========== =========== ========
In 1998, options to purchase approximately 742,000 shares of
common stock were not included in the computation of diluted EPS,
because the options' exercise price was greater than the average
market price of the common shares. In 1998, 1997 and 1996, 463,268
shares of common stock that could result from the conversion of
cumulative convertible preferred stock, as well as common shares that
could result from the conversion of the Company's convertible
subordinated debentures and Series B cumulative convertible redeemable
preferred stock, were not included in the computation of diluted EPS,
as the effect would have been anti-dilutive on the results of
continuing operations.
Comprehensive Income. Effective January 1, 1998, the Company
adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). This statement
establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. The objective of the statement is to report a measure of
all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with
owners. The adoption of the accounting and disclosure provisions of
SFAS 130 has had no impact on the Company's financial statements, as
comprehensive income is the same as net income for all periods
presented.
Business Segments. In December 1997, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131").
This statement establishes standards for reporting and disclosure of
operating segments on a basis consistent with that of the management
structure. As a result of adopting SFAS 131, in 1997, the Company
restated its segments for all periods presented.
New Accounting Standards. In 1998, the Company adopted Statement
of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" ("SFAS 132"). This
statement revises and standardizes employers' disclosures about
pension and other postretirement benefit plans, but it does not change
the measurement or recognition of those plans. This statement further
requires restatement of disclosure provisions for earlier periods
provided for comparative purposes. The adoption of SFAS 132 has had no
material impact on the Company's financial statements or related
disclosures thereto.
In 1998, the Company adopted the provisions of AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). This statement
provides guidance on accounting for the costs of computer software
developed or obtained for internal use and identifies characteristics
of internal-use software as well as assists in determining when
computer software is for internal use. The adoption had no material
impact on the Company's financial statements or related disclosure
thereto.
In 1998, the Company adopted the provisions of AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP
98-5"). This Statement provides guidance on the financial reporting of
start-up and organization costs and requires that such costs of
start-up activities be expensed as incurred. The Company adopted SOP
98-5 in the third quarter ended September 30, 1998, recording a
one-time, non-cash charge of $19,474. The charge primarily represents
previously capitalized start-up costs incurred in the Company's
discontinued broadband communications business and deferred
pre-contract costs as well as non-recurring engineering costs
previously carried in inventory in accordance with SOP 81-1 in the
Company's Communications Systems segment. The adoption of SOP 98-5 by
the Company was recorded effective January 1, 1998 as a cumulative
effect of change in accounting principle in the Statement of
Operations for the year ended December 31, 1998.
Note 2. Mergers and Acquisitions
On October 23, 1998, the Company consummated a merger with Delfin
Systems ("Delfin") in a stock-for-stock transaction. Delfin provides
systems engineering and program management services, signal
intelligence systems, and program integration and high-end software.
Titan issued approximately 3,628,000 shares of Titan common stock in
exchange for all the outstanding shares of Delfin common stock and
assumed Delfin stock options representing approximately 823,000 shares
of Titan common stock, based on an exchange ratio of approximately .50
shares of Titan common stock for each share of Delfin common stock.
The merger constituted a tax-free reorganization and has been
accounted for as a pooling of interests.
On August 24, 1998, the Company consummated a merger with VisiCom
Laboratories, Inc., ("VisiCom") in a stock-for-stock transaction.
VisiCom specializes in information technology solutions. Titan issued
approximately 4,172,000 shares of common stock in exchange for all the
outstanding shares of VisiCom and assumed VisiCom's stock options
representing approximately 593,000 shares of Titan common stock, based
on an exchange ratio of approximately .45 shares of Titan common stock
for each share of VisiCom's common stock. The merger constituted a
tax-free reorganization and has been accounted for as a pooling of
interests.
On June 30, 1998 the Company consummated a merger with Horizons
Technology, Inc., ("Horizons") in a stock-for-stock transaction.
Horizons is a provider of systems engineering and program management
services, computer systems integration and high-end software. Titan
issued approximately 3,200,000 shares of common stock in exchange for
all the outstanding shares of Horizons stock based on exchange ratios
of approximately .37 and .82 shares of Titan common stock for each
share of Horizons' common stock and Horizons' preferred stock,
respectively. The merger constituted a tax-free reorganization and has
been accounted for as a pooling of interests.
On February 27, 1998, the Company consummated a merger with DBA
Systems, Inc. ("DBA"), in a stock-for-stock transaction. DBA is a
developer and manufacturer of digital imaging products,
electro-optical systems and threat simulation/training systems whose
products and systems are primarily used by the defense and
intelligence communities. Titan issued approximately 6,100,000 shares
of common stock in exchange for all the outstanding shares of DBA
stock and assumed options representing approximately 441,000 shares of
Titan common stock based on an exchange ratio of approximately 1.37
shares of Titan's common stock for each share of DBA stock. The merger
constituted a tax-free reorganization and has been accounted for as a
pooling of interests.
Delfin, Horizons and DBA have been integrated into Titan's
Information Technologies segment. VisiCom is included in the Emerging
Technologies and Businesses segment.
Effective January 1, 1998, Delfin's September 30, VisiCom's March
31, Horizons' January 31 and DBA's June 30 fiscal year-ends have been
changed to coincide with Titan's year-end. Accordingly, the
accompanying financial statements presented herein have been restated
to include the combined results of operations, financial positions and
cash flows of Delfin, VisiCom, Horizons and DBA as if the mergers had
occurred at the beginning of the periods presented.
The combining periods of Titan, Delfin, VisiCom, Horizons and DBA
are as follows:
Fiscal Years 1997 and 1996
----------------------------------------------
Titan Fiscal years ended December 1997 and 1996
Delfin Fiscal years ended September 1997 and 1996
VisiCom Fiscal years ended March 1998 and 1997
Horizons Fiscal years ended January 1998 and 1997
DBA Twelve months ended December 1997 and June 1996
Fiscal Year 1997 Quarterly Periods
----------------------------------------------------------
Q1 97 Q2 97 Q3 97 Q4 97
------------ ----------- ----------- -----------
Titan March 97 June 97 Sept. 97 Dec. 97
Delfin Dec. 96 March 97 June 97 Sept. 97
VisiCom June 97 Sept. 97 Dec. 97 March 98
Horizons April 97 July 97 Oct. 97 Jan. 98
DBA March 97 June 97 Sept. 97 Dec. 97
For the six months ended December 31, 1996, revenues of $11,724
and net income of $695 were reported by DBA. Such amounts are not
reflected in the accompanying statements of operations as DBA's fiscal
year ended June 30, 1997 was conformed to Titan's fiscal year ended
December 31, 1997. DBA's six-month 1996 net income of $695 is
reflected as a pooling adjustment in the accompanying Statement of
Stockholders' Equity for the year ended December 31, 1996. Other
adjustments to conform Delfin's, VisiCom's and Horizons' fiscal
year-ends were not significant and resulted in a net pooling
adjustment of $(109) in 1998, which is reflected in the accompanying
Statement of Stockholders' Equity for the year ended December 31,
1998.
The separate and combined results of Titan, Delfin, VisiCom,
Horizons and DBA in prior years are as follows:
For the Year Ended December 31, 1997
------------------------------------------
Income
(Loss)
from
Continuing Net Income
Revenues Operations (Loss)
---------- ------------ ------------
Titan............. $167,050 $ 5,188 $ 5,165
Delfin............ 26,534 (127) (127)
VisiCom........... 31,360 (1,352) (13,397)
Horizons.......... 26,281 1,640 (4,222)
DBA............... 24,698 (6,731) (6,731)
---------- ------------ ------------
$275,923 $ (1,382) $ (19,312)
========== ============ ============
For the Year Ended December 31, 1996
------------------------------------------
Income
(Loss)
from
Continuing Net Income
Revenues Operations (Loss)
---------- ------------ ------------
Titan............. $133,676 $ (50) $ (3,378)
Delfin............ 29,629 (92) (92)
VisiCom........... 32,650 1,389 381
Horizons.......... 29,551 2,934 944
DBA............... 20,470 1,161 1,161
---------- ------------ ------------
$245,976 $ 5,342 $ (984)
========== ============ ============
DBA's loss from continuing operations and net loss for the year
ended December 31, 1997 include recognition of a special charge of
$9,846 for the write-down of certain assets to net realizable value
and accrual for certain liabilities as described in Notes 8 and 14.
Net income (loss) reflects the discontinued operations of the
broadband communications business, the access control systems business
and certain operations discontinued by companies prior to their
acquisition by Titan. Refer to Note 3 for further discussion.
On March 31, 1998, the Company acquired all of the outstanding
common stock of Validity Corporation ("Validity") for $12 million in
cash, and notes payable to the shareholders of Validity totaling $3
million, subject to post-closing adjustments, if any, due and payable
March 31, 1999, and bearing interest at the prime rate. The
transaction has been accounted for as a purchase; accordingly,
Validity's results of operations have been consolidated with the
Company's results of operations beginning April 1, 1998. The excess of
the purchase price over the estimated fair value of net assets
acquired is being amortized on a straight line basis over 30 years,
and amounted to approximately $18.6 million as of December 31, 1998.
During the year ended December 31, 1998, the Company recorded
special acquisition related and other charges of $9,891, which
includes approximately $5,500 of direct transaction costs (consisting
primarily of investment banking and other professional fees), $3,800
of integration expenses and $600 of pre-operating and start-up costs
of the AfroNetwork, Benin operation. Approximately $4,600 of the
direct transaction costs were incurred in connection with the Delfin,
VisiCom, Horizons and DBA mergers. The remaining $900 in transaction
fees were related to costs incurred to file a withdrawn registration
statement of Linkabit Wireless.
The integration costs included approximately $3,500 for
severance, outplacement and retention costs incurred in the
Information Technologies and Communications Systems segments. Included
in these amounts were termination benefits associated with employment
agreements, as well as retention amounts associated with employee
retention agreements. The integration costs also include $330 related
to the closure and elimination of leased facilities, primarily
duplicate field offices.
Accruals for unpaid special charges of $1,090 and $250 remain in
other current and non-current liabilities, respectively, at December
31, 1998. Unpaid amounts at year-end are primarily termination,
retention and other integration costs which will be paid by December
31, 1999.
On May 24, 1996, the Company completed the acquisition of three
privately-held affiliated businesses--Eldyne, Inc. ("Eldyne"), Unidyne
Corporation ("Unidyne") and Diversified Control Systems, LLC ("DCS").
The overall transaction consideration, excluding associated
transaction costs and expenses, consisted of $1 million cash,
1,779,498 shares of Titan common stock with an assigned value of $6.00
per share, the issuance of 500,000 shares of a new class of cumulative
convertible redeemable preferred stock (see Note 9), assumption of
indebtedness and a promissory note for $1 million issued to the
principal stockholder of the acquired companies. The $1 million note
was due and paid on March 15, 1997, and earned interest of 10% per
annum. Titan also entered into an agreement with the principal
stockholder, providing for annual payments of $.3 million, payable
monthly, for 6 years beginning May 24, 1996. The net present value of
this agreement ($1.5 million) was recorded as additional purchase
price at the acquisition date. This obligation was settled in full on
January 2, 1997. Estimated other direct costs of the acquisition were
approximately $3 million. The acquisition has been accounted for as a
purchase, and, accordingly, Titan's consolidated financial statements
include the operating results of the three acquired companies since
May 24, 1996. The excess of the purchase price over the estimated fair
value of net assets acquired of $16.9 million at December 31, 1998 is
being amortized using a straight-line method over 30 years.
Note 3. Discontinued Operations
In December 1998, the Company's Board of Directors adopted a plan
to wind down the Company's access control systems business. The
results of this business have been accounted for as a discontinued
operation. Revenues for the access control business were $3,122,
$4,136 and $1,808 and operating profit (loss) was $(3,026), $492 and
$483 for the years ended December 31, 1998, 1997 and 1996,
respectively. The 1998 loss includes a charge of $1,500 for the
estimated costs to be incurred in future periods in connection with
the winding down of this business.
In 1997, the Company's Board of Directors adopted a plan to
divest the Company's broadband communications business. The results of
the broadband communications business have been accounted for as a
discontinued operation in accordance with Accounting Principles Board
Opinion No. 30, which among other provisions, anticipates that the
plan of disposal will be carried out within one year. During 1998, the
Company received cash payments of $4,400 for licensing of the
broadband technology and as settlement of certain contingencies
related to the broadband patents. As a result of a periodic review by
management of the likelihood of receiving further proceeds from the
sale of the broadband technology, which would enable the Company to
realize the remaining net assets of the broadband business, a decision
was reached by management in the third quarter of 1998 to write off
such remaining net assets. The write-off resulted in a pre-tax charge
to loss from discontinued operations of $4,638. Additionally,
approximately $7,200 in previously capitalized start-up costs were
written off as part of the cumulative effect of the change in
accounting principle (see Note 1). Revenues for the broadband
communications business were $-0-, $551 and $2,238 for the years ended
December 31, 1998, 1997 and 1996, respectively. Titan deferred losses
from the discontinued operation of $9,271 in 1997, which primarily
represented amortization and wind-down costs of the business.
In addition to the discontinued operations of the access control
systems business and the broadband business as discussed above, the
accompanying consolidated financial statements reflect operations
discontinued by certain of the companies acquired by Titan in 1998.
The decisions to dispose of or otherwise wind down these operations
were made by the separate Boards of Directors of the respective
acquired companies prior to entering into any discussions with Titan
regarding the potential acquisitions of these entities by Titan. All
periods presented reflect these specific operations as discontinued
operations. Revenue for these discontinued operations aggregated
$10,899, $7,999 and $9,367 for the years ended December 31, 1998, 1997
and 1996, respectively, and losses attributable to these discontinued
operations aggregated $-0-, $17,907 and $2,998 for the same respective
periods. Aggregate charges for estimated costs to be incurred in
future periods in connection with the winding down of these operations
amounted to approximately $6,800, substantially all of which was
recorded by the acquired companies in the last quarter of 1997.
Operating losses of approximately $5.8 million were charged against
this accrual during 1998. Additionally, a pre-tax charge of $1,300 was
taken in the third quarter of 1998 based on management's most recent
review of estimated future wind-down costs.
Net liabilities of discontinued operations at December 31, 1998
consist primarily of accrued liabilities of approximately $12,700, net
of current assets (primarily accounts receivable and inventory) of
approximately $6,200. The liabilities consist of accruals for contract
losses, estimated wind-down costs and costs related to the closure and
elimination of leased facilities. Long-term net assets of discontinued
operations are primarily fixed assets.
Note 4. Other Financial Data
Following are details concerning certain balance sheet accounts:
[Download Table]
1998 1997
-------- --------
Accounts Receivable:
U.S. Government--billed .................. $ 44,021 $ 33,031
U.S. Government--unbilled ................ 30,710 23,648
Trade .................................... 13,586 16,692
Less allowance for doubtful accounts ..... (249) (718)
-------- --------
$ 88,068 $ 72,653
======== ========
Inventories:
Materials ................................. $ 3,871 $ 4,343
Work-in-process ........................... 1,788 12,421
Finished goods ............................ 2,987 2,062
-------- --------
$ 8,646 $ 18,826
======== ========
Property and Equipment:
Machinery and equipment ................... $ 45,299 $ 51,238
Furniture and fixtures .................... 8,320 6,726
Land, buildings and leasehold improvements 13,902 14,960
Construction in progress .................. 358 406
-------- --------
67,879 73,330
Less accumulated depreciation and amortization (42,177) (45,664)
-------- --------
$ 25,702 $ 27,666
======== ========
Note 5. Segment Information
In the fourth quarter of 1997, the Company realigned certain
operations within its existing segments and added a fifth segment to
better position these operations for strategic transactions pursuant
to the Company's corporate strategy. This realignment conforms with
the provisions of Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information".
All prior year segment data were restated to conform to the 1997
presentation.
The Information Technologies segment provides information systems
solutions primarily to government customers with large data
management, information manipulation, information fusion,
knowledge-based systems and communications requirements, and
manufactures digital imaging products, electro-optical systems and
threat simulation/training systems primarily used by the defense and
intelligence communities. This segment also supports high priority
government programs by providing systems integration, information
systems engineering services, development of systems and specialized
products, as well as systems research, development and prototyping.
Other services provided include research and development under
government funded contracts for the Department of Defense (DoD) and
other customers.
The Software Systems segment is a systems integrator that
provides systems integration services and solutions for commercial and
non-defense clients with distributed computing environments.
The Medical Sterilization and Food Pasteurization segment
provides medical product sterilization services at two Titan
facilities and manufactures and sells turnkey electron beam
sterilization and food pasteurization systems to customers for use in
their own facilities.
The Communications Systems segment is made up of the Company's
wholly-owned subsidiary, Linkabit Wireless, Inc., ("Linkabit
Wireless"), which develops and produces advanced satellite
communications products and systems for government and commercial
customers.
The Emerging Technologies and Businesses segment includes several
businesses which apply the Company's proprietary knowledge and core
competencies to industrial and commercial opportunities.
Substantially all of the Company's operations are located in the
United States. Export revenues amounted to approximately $18,893,
$21,365 and $10,693 in 1998, 1997 and 1996, respectively, primarily to
countries in the Far East and Western Europe. All international sales
are denominated in U.S. dollars.
The following tables summarize industry segment data for 1998,
1997 and 1996.
[Download Table]
1998 1997 1996
-------- -------- --------
Revenues:
Information Technologies ........... $190,467 $165,739 $154,054
Software Systems ................... 21,470 17,374 18,505
Medical Sterilization and Food
Pasteurization ................... 10,000 5,983 2,818
Communications Systems ............. 42,468 48,980 27,850
Emerging Technologies and Businesses 39,023 37,847 42,749
-------- -------- --------
$303,428 $275,923 $245,976
======== ======== ========
Sales to the United States Government, including both defense and
non-defense agencies, and sales as a subcontractor as well as direct
sales, aggregated approximately $242,560 in 1998, $225,016 in 1997,
and $199,901 in 1996. Inter-segment sales were not significant in any
year.
[Download Table]
1998 1997 1996
-------- -------- --------
Operating Profit (Loss):
Information Technologies .................... $ 16,291 $ 5,457 $ 14,861
Software Systems ............................ 5,137 4,580 (137)
Medical Sterilization and Food Pasteurization 1,365 189 (1,080)
Communications Systems ...................... (1,418) 1,074 (4,187)
Emerging Technologies and Businesses ........ 3,455 81 3,156
Corporate ................................... (6,477) (2,808) (543)
-------- -------- --------
$ 18,353 $ 8,573 $ 12,070
======== ======== ========
Corporate includes corporate general and administrative expenses,
certain corporate restructuring charges, and gains or losses from the
sale of businesses. Corporate general and administrative expenses are
generally recoverable from contract revenues by allocation to
operations.
[Download Table]
1998 1997 1996
-------- -------- --------
Identifiable Assets:
Information Technologies .................... $103,034 $ 85,449 $ 96,665
Software Systems ............................ 14,959 8,114 6,139
Medical Sterilization and Food Pasteurization 11,362 11,854 10,222
Communications Systems ...................... 22,406 29,019 18,774
Emerging Technologies and Businesses ........ 14,239 15,573 18,349
Discontinued operations, net ................ 645 7,605 15,031
General corporate assets .................... 25,922 26,089 28,108
-------- -------- --------
$192,567 $183,703 $193,288
======== ======== ========
General corporate assets are principally cash, prepaid expenses,
property and equipment, deferred income taxes and other assets.
[Download Table]
1998 1997 1996
------ ------ ------
Depreciation and Amortization of Property and
Equipment, Goodwill, and Other Assets:
Information Technologies ................ $3,291 $4,101 $3,751
Software Systems ........................ 475 617 1,152
Medical Sterilization and Food .......... 617 499 510
Pasteurization
Communications Systems .................. 1,191 1,292 820
Emerging Technologies and Businesses .... 952 1,722 1,398
Corporate ............................... 600 982 413
------ ------ ------
$7,126 $9,213 $8,044
====== ====== ======
Capital Expenditures:
Information Technologies .................... $1,648 $1,972 $2,175
Software Systems ............................ 325 453 261
Medical Sterilization and Food Pasteurization 210 429 1,024
Communications Systems ...................... 1,180 1,438 1,831
Emerging Technologies and Businesses ........ 317 2,236 1,120
Corporate ................................... 358 119 227
------ ------ ------
$4,038 $6,647 $6,638
====== ====== ======
Note 6. Income Taxes
The components of the income tax provision from continuing
operations are as follows:
1998 1997 1996
------ ------ ------
Current:
Federal......... $ 782 $2,046 $2,131
State........... 278 374 377
------ ------ ------
1,060 2,420 2,508
Deferred......... 3,095 1,764 95
------ ------ ------
$4,155 $4,184 $2,603
====== ====== ======
Following is a reconciliation of the income tax provision from
continuing operations expected (based on the United States federal
income tax rate applicable in each year) to the actual tax provision
on income:
[Download Table]
1998 1997 1996
------- ------- -------
Expected Federal tax provision on continuing ........ $ 3,865 $ 953 $ 2,701
operations
State income taxes, net of Federal income tax benefit 341 92 (18)
Research credit ..................................... -- (324) --
Goodwill amortization ............................... 218 351 88
Keyman life insurance ............................... 24 24 36
Acquisition special charges and other ............... (293) 3,088 (204)
------- ------- -------
Actual tax provision on continuing operations ....... $ 4,155 $ 4,184 $ 2,603
======= ======= =======
The deferred tax asset as of December 31, 1998 and 1997, results
from the following temporary differences:
[Download Table]
1998 1997
-------- --------
Loss carryforward .................. $ 7,746 $ 7,798
Employee benefits .................. 4,275 4,923
Loss from discontinued operations .. -- (3,338)
Tax credit carryforwards ........... 2,096 2,546
Inventory and contract loss reserves 10,199 8,919
Depreciation ....................... (1,378) (1,400)
Deferred tax on foreign profit ..... -- 1,123
Other .............................. (306) (759)
-------- --------
22,632 19,812
Valuation allowance ................ (11,200) (11,200)
-------- --------
Net deferred tax asset ............. $ 11,432 $ 8,612
======== ========
Realization of certain components of the net deferred tax asset
is dependent upon the Company generating sufficient taxable income
prior to expiration of loss and credit carryforwards. Although
realization is not assured, management believes it is more likely than
not that the net deferred tax asset will be realized. The amount of
the net deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during
the carryforward period are changed. Also, under Federal tax law,
certain potential changes in ownership of the Company which may not be
within the Company's control may limit annual future utilization of
these carryforwards. Deferred income taxes of $454 and $314 are
included in Other Assets at December 31, 1998 and 1997, respectively.
Cash paid for income taxes was $1,343 and $1,195 in 1998 and
1997, respectively. Net tax refunds in 1996 were $277.
Note 7. Debt
On July 29, 1998, the Company entered into a credit agreement
with a bank syndicate under which it may borrow up to $80 million,
replacing its existing line of credit agreement. The credit facility
includes a five year $55 million working capital line of credit and a
$25 million component dedicated for acquisitions which converts any
outstanding balances after one year into a term loan, to be repaid in
increasing quarterly amounts over four years. The Company has the
option to borrow at the bank base rate or at LIBOR, plus applicable
margins based on the ratio of total debt to EBITDA (earnings before
interest, taxes, depreciation and amortization). The agreement
contains, among other financial covenants, provisions which set
maximum debt to EBITDA limits and which require the Company to
maintain stipulated levels of EBITDA, tangible net worth, a minimum
quick ratio, and minimum coverage of fixed charges, as defined.
Initial proceeds of $36.1 million were used to pay off and replace the
then outstanding line of credit balances with the Company's, Horizons'
and VisiCom's banks and for working capital purposes. At December 31,
1998, the outstanding balances on the working capital line and the
acquisition line were $35 million and $5 million (of which $368 is
current), respectively. The borrowings were subject to a weighted
average interest rate of 7.09%, and commitments under letters of
credit reducing availability under the working capital line were $950.
In November 1996, Titan issued $34,500 of 8.25% convertible
subordinated debentures due 2003. At December 31, 1998, $27,515 remain
outstanding. The debentures are convertible into common stock of the
Company at a conversion price of $3.50 per share, subject to
adjustment upon the occurrence of certain events. The debentures are
redeemable, on or after November 2, 1999, initially at 104.125% of
principal amount and at decreasing prices thereafter to 100% of
principal amount through maturity, in each case together with accrued
interest. The debentures also may be repaid at the option of the
holder upon a change in control, as defined in the indenture governing
the debentures, at 100% of principal amount plus accrued interest. The
net proceeds from the issuance of these securities were used to repay
borrowings under the Company's bank lines of credit and for working
capital and general corporate purposes.
At December 31, 1998 and 1997, Titan had $3,328 and $4,319,
respectively, outstanding under two promissory notes, secured by
certain machinery and equipment, at interest rates of 8.5% and 7.42%,
respectively. At December 31, 1998, $1,101 is due within one year. At
December 31, 1998 and 1997, the Company also had outstanding a
mortgage note collateralized by real estate with a balance of $747 and
$1,196, respectively, at an interest rate of LIBOR plus 2.5%, of which
$112 is due within one year. Long-term debt at entities acquired by
the Company in 1998 was $650 ($368 short-term) at December 31, 1998.
Cash paid for interest, primarily on these borrowings, was
$6,491, $6,254 and $3,847 in 1998, 1997, and 1996, respectively. At
December 31, 1998 the Company was in compliance with all financial
covenants under its various debt agreements.
Note 8. Commitments and Contingencies
The Company leases certain buildings and equipment under
non-cancelable operating lease agreements. These leases generally
require the Company to pay all executory costs such as taxes,
insurance and maintenance related to the leased assets. Certain of the
leases contain provisions for periodic rate accelerations to reflect
cost-of-living increases. Rental expense under these leases was
$10,130 in 1998, $9,457 in 1997 and $11,928 in 1996. The Company has
entered into a long-term lease agreement for facilities which are
owned by an entity in which Titan has a minority ownership interest.
Rental expense in 1998, 1997 and 1996 includes $921, $904 and $884,
respectively, paid under this agreement.
Future minimum lease payments under noncancelable operating
leases at December 31, 1998, are as follows:
1999....................................... $ 8,311
2000....................................... 6,649
2001....................................... 5,310
2002....................................... 4,567
2003....................................... 3,613
Thereafter................................. 9,343
-------
Total minimum lease payments............ $37,793
=======
In 1997, DBA recorded a $3.0 million charge in recognition of
certain environmental matters at its Kissimmee facility including, but
not limited to, soil contamination and potential asbestos and
lead-based paint contamination. These matters became known to DBA as a
result of an environmental study performed as part of Titan's due
diligence process related to the merger with DBA. The accrual has been
recorded in accordance with SFAS No. 5 and SOP 96-1 and represents an
initial estimate which could change significantly as further studies
are performed. In the accompanying balance sheet, approximately $.2
million is included in other current liabilities and the remaining
$2.8 million is included in other non-current liabilities based on the
estimated timing of continued assessments and remediation work to be
performed. This property is currently on the market and the Company
has received several indications of interest (see Note 14). The
Company has commenced its pre-cleanup activities, which are being
coordinated with the sale of the property.
On April 19, 1995 Titan was served in a lawsuit entitled Donald
P. Shaw v. Titan Corporation (the "Lawsuit"). The Lawsuit was pending
in the United States District Court for the Eastern District of
Virginia, Alexandria Division, and sought compensatory damages in an
aggregate amount of $3,000 and punitive damages in the amount of
$1,050 on account of alleged wrongful termination and intentional
infliction of emotional distress. The Lawsuit resulted in a verdict
for the plaintiff awarding $65 in compensatory damages and $350 in
punitive damages which was affirmed on appeal in February 1998.
In the ordinary course of business, defense contractors are
subject to many levels of audit and investigation by various
government agencies. Further, the Company and its subsidiaries are
subject to claims and from time to time are named as defendants in
legal proceedings. The Company may also assert claims from time to
time. In the opinion of management, the amount of ultimate liability
or recovery with respect to these actions will not materially affect
the financial position or results of operations of the Company.
Note 9. Series B Cumulative Convertible Redeemable Preferred Stock
The Company's Series B Preferred Stock had a par value of $1.00,
accrued dividends at a rate of 6% per annum payable quarterly in
arrears cumulatively, had a liquidation preference of $6.00 per share
plus accrued and unpaid dividends (the "Series B Liquidation
Preference") and entitled the holder thereof to one vote per
outstanding share, voting together as a class with the holders of
shares of outstanding Common Stock (and any other series or classes
entitled to vote therewith) on all matters submitted for a shareholder
vote. The Series B Preferred Stock was redeemable at the Series B
Liquidation Preference (i) at the holder's option, after May 24, 1998
until May 24, 2001, and (ii) at the Company's option, after May 24,
2001 until May 24, 2006. The Company redeemed all of the outstanding
shares of Series B Preferred Stock in 1998.
Note 10. Cumulative Convertible Preferred Stock
Each share of $1.00 cumulative convertible preferred stock is
entitled to 1/3 vote, annual dividends of $1 per share and is
convertible at any time into 2/3 share of the Company's common stock.
Common stock of 463,248 shares has been reserved for this purpose.
Upon liquidation, the $1.00 cumulative convertible preferred
stockholders are entitled to receive $20 per share, plus cumulative
dividends in arrears, before any distribution is made to the common
stockholders.
Note 11. Common Stock
At December 31, 1998, approximately 47,974,672 common shares were
reserved for future issuance for conversion of convertible
subordinated debentures, preferred stock, and all stock incentive
plans.
On August 17, 1995, the Board of Directors adopted a Shareholder
Rights Agreement and subsequently distributed one preferred stock
purchase right ("Right") for each outstanding share of the Company's
common stock. Each Right entitles the registered holder to purchase
from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $1.00 per share (the
"Preferred Shares") at a price of $42.00 per one one-hundredth of a
Preferred Share, subject to adjustment. The Rights become exercisable
if a person or group acquires, in a transaction not approved by the
Company's Board of Directors ("Board"), 15% or more of the Company's
common stock or announces a tender offer for 15% or more of the stock.
If a person or group acquires 15% or more of the Company's common
stock, each Right (other than Rights held by the acquiring person or
group which become void) will entitle the holder to receive upon
exercise a number of shares of the Company's common stock having a
market value of twice the Right's exercise price. If the Company is
acquired in a transaction not approved by the Board, each Right may be
exercised for common shares of the acquiring company having a market
value of twice the Right's exercise price. Titan may redeem the Rights
at $.01 per Right, subject to certain conditions. The Rights expire on
August 17, 2005.
Note 12. Stock-Based Compensation Plans
The Company provides stock-based compensation to officers,
directors and key employees through various fixed stock option plans
and to all non-executive employees through an employee stock purchase
plan. The Company has adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the fixed stock option or stock purchase plans. Had
compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS 123, the
Company's results of operations would have been reduced to the pro
forma amounts indicated below:
[Download Table]
1998 1997 1996
-------- -------- --------
Net loss As reported...... $(19,705) $(19,312) $ (984)
Pro forma........ (20,827) (21,019) (1,654)
Net loss per share, basic As reported...... (.59) (.61) (.06)
Pro forma........ (.62) (.66) (.08)
Net loss per share, diluted As reported...... (.57) (.61) (.06)
Pro forma........ (.60) (.66) (.08)
The Company currently has options available for grant under the
Stock Option Plans of 1990, 1994 and 1997, The 1989 Directors' Stock
Option Plan and The 1996 Directors' Stock Option and Equity
Participation Plan (the "1996 Directors' Plan"). Options authorized
for grant under the employee plans and under the directors' plans are
3,000,000 and 185,000, respectively. Under the 1996 Directors' Plan, a
director may elect to receive stock in lieu of fees, such stock to
have a fair market value equal to the fees. Under all plans, the
exercise price of each option equals the market price of the Company's
stock on the date of grant. Under the employee plans, an option's
maximum term is ten years. Under the directors' plans, options expire
90 days after the option holder ceases to be a director. Employee
options may be granted throughout the year; directors' options are
granted annually during the first two or three years as a director.
All options vest in 25% increments beginning one year after the grant
date. Stock options assumed by the Company as a result of the mergers
discussed in Note 2 generally retain the terms under which they were
granted.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model using the following
weighted-average assumptions: zero dividend yield and an expected life
of 5 years in all years; expected volatility of 71% in 1998, 70% in
1997 and 87% in 1996; and a risk free interest rate of 4.74% in 1998,
5.72% in 1997 and 6.57% in 1996.
A summary of the status of the Company's fixed stock option plans
as of December 31, 1998, 1997 and 1996, and changes during the years
ending on those dates is presented below:
[Enlarge/Download Table]
1998 1997 1996
-------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
------- -------- ------- -------- ------- -------
Outstanding at beginning of year.. 3,697 $ 3.66 3,155 $ 3.37 3,148 $ 3.22
Granted .......................... 808 4.30 1,175 3.77 1,202 3.45
Exercised ........................ (258) 2.70 (207) 2.75 (241) 2.13
Cancelled ........................ (589) 4.31 (426) 3.10 (954) 2.71
------- ------- -------
Outstanding at end of year ....... 3,658 3.77 3,697 3.66 3,155 3.37
======= ======= =======
Options exercisable at year-end... 1,898 1,994 1,814
Weighted-average fair value of
options granted during the year.. $ 5.46 $ 3.42 $ 2.47
The following table summarizes information about fixed stock
options outstanding at December 31, 1998:
[Download Table]
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/98 Life Price at 12/31/98 Price
------------ ----------- ------------ ---------- ----------- ----------
$ 0.05-3.94 1,852,964 6.06 years $ 2.19 1,283,420 $ 2.25
4.00-5.88 1,418,805 8.39 years 4.79 445,636 4.60
6.06-9.50 386,232 7.81 years 7.57 168,732 8.34
--------- ---------
3,658,001 7.15 years 1,897,788
========= =========
Under the 1995 Employee Stock Purchase Plan, the Company is
authorized to issue up to 500,000 shares of common stock to its
full-time employees. Elected officers of the Company are not eligible
to participate. Under the terms of the plan, employees may elect to
have between 1 and 10 percent of their regular earnings, as defined in
the plan, withheld to purchase the Company's common stock. The
purchase price of the stock is 85 percent of the lower of its market
price at the beginning or at the end of each subscription period. A
subscription period is six months, beginning January 1 and July 1 of
each year. Approximately 13%, 11% and 11% of eligible employees
participated in the Plan and purchased 92,089, 110,461 and 89,865
shares of the Company's common stock in 1998, 1997 and 1996,
respectively. The weighted-average fair value of the purchase rights
granted in 1998, 1997 and 1996 was $1.61, $1.06 and $1.71,
respectively.
Four of the Company's wholly-owned subsidiaries have stock option
plans for the granting of subsidiary common stock, which is not
publicly traded. The exercise price of all options granted under these
plans equals the fair value of the subsidiary stock at the date of
grant as determined by the subsidiaries' board of directors. If all
options available for grant in these plans were exercised, the
Company's ownership in each of the subsidiaries would be diluted by no
greater than 20% to 30%.
Note 13. Benefit Plans
The Company has various defined contribution benefit plans
covering certain employees. The Company's contributions to these plans
were $3,326, $2,914 and $3,040 in 1998, 1997 and 1996, respectively.
Titan's and Horizons' combined discretionary contributions to their
Employee Stock Ownership Plans were $295, $372 and $120 in 1998, 1997
and 1996, respectively. Discretionary contributions to a profit
sharing plan covering certain employees were $150, $175 and $150 in
1998, 1997 and 1996, respectively. During 1997 and 1996, the Company
utilized treasury stock of $344 and $1,192, respectively, for benefit
plan contributions.
The Company has a non-qualified executive deferred compensation
plan for certain officers and key employees. The Company's expense for
this plan was $824, $821 and $901 in 1998, 1997 and 1996,
respectively. Interest expense for the years ended December 31, 1998,
1997 and 1996 includes $650, $527 and $561, respectively, related to
the plan. Included in other non-current liabilities is $4,311 and
$3,954 related to this plan at December 31, 1998 and 1997,
respectively. The Company also has performance bonus plans for certain
of its employees. Related expense amounted to approximately $3,316,
$2,125 and $1,709 in 1998, 1997 and 1996, respectively.
The Company has previously provided for postretirement benefit
obligations of operations discontinued in prior years. The Company has
no postretirement benefit obligations for any of its continuing
operations nor for its recently discontinued businesses.
Note 14. DBA Asset Impairments
The Company has a 141,000 square foot manufacturing facility
located in Kissimmee, Florida which was acquired in the merger with
DBA. The property has been held for sale since June 1996. As a result
of several factors, including offers received by third parties,
management concluded that there had been an impairment in the carrying
value of the asset. A charge of $2.0 million was recorded in the
Company's financial statements for the year ended December 31, 1997
which reflects management's estimate of the impairment, including
estimated disposal costs. Titan management has a program of ongoing
maintenance (and environmental remediation - see Note 8) and is
actively marketing the property for sale through various channels.
Management regularly reviews this asset for further impairment, and
believes that the recorded book value at December 31, 1998 reflects an
amount which is not less than net realizable value.
In September 1997, DBA invested $1.6 million in a start-up
venture. To date, this start-up venture has not yet generated any
significant business and has generated no significant revenue. In
light of these circumstances, Titan management believed that there was
an impairment in the value of the investment as recorded by DBA. An
adjustment to write down the investment by $1.6 million was recorded
in the results of operations for the year ended December 31, 1997.
Note 15. Subsequent Event
In January 1999, the Company's wholly-owned subsidiary, Titan
Software Systems Corporation, acquired Transnational Partners II, LLP
("TNP"), a software services company which provides infrastructure and
enterprise resources planning solutions for major corporations, for
$9.8 million in a transaction that will be accounted for as a
purchase. The purchase price consisted of $7 million cash, a $2.8
million note due January 2000 (bearing interest at 7%), subject to
certain post-closing adjustments, and a preferred stock representing a
minority interest in Titan Software Systems Corporation, which
comprises the Company's Software Systems segment.
Note 16. Quarterly Financial Data (Unaudited) (in thousands,
except per share data)
[Enlarge/Download Table]
First Second Third Fourth Total
1998 Quarter Quarter Quarter Quarter Year
---- ---------- ---------- ---------- ---------- -----------
Revenues ............................ $ 64,630 $ 75,413 $ 78,635 $ 84,750 $ 303,428
Gross profit ........................ 15,163 17,071 17,628 21,525 71,387
Income from continuing operations
before cumulative effect of change
in accounting principle .......... 954 2,973 1,948 1,338 7,213
Net income (loss) ................... (18,349) 3,184 (4,051) (489) (19,705)
Basic earnings per share:
Income from continuing operations .02 .08 .05 .03 .18
Net income (loss) ................ (.55) .09 (.11) (.02) (.59)
Diluted earnings per share:
Income from continuing operations .02 .07 .05 .03 .18
Net income (loss) ................ (.53) .08 (.09) (.02) (.57)
[Enlarge/Download Table]
First Second Third Fourth Total
1997 Quarter Quarter Quarter Quarter Year
---- ---------- ---------- ---------- ---------- -----------
Revenues ......................... $ 67,827 $ 70,255 $ 66,931 $ 70,910 $ 275,923
Gross profit ..................... 14,808 17,102 14,776 12,684 59,370
Income (loss) from continuing
operations .................... 2,253 2,301 (4,366) (1,570) (1,382)
Net income (loss) ................ 1,172 1,619 (15,765) (6,338) (19,312)
Basic earnings (loss) per share:
Income (loss) from continuing
operations ................. .06 .06 (.14) (.05) (.07)
Net income (loss) ............. .03 .04 (.48) (.20) (.61)
Diluted earnings (loss) per share:
Income (loss) from continuing
operations ................. .06 .06 (.14) (.05) (.07)
Net income (loss) ............. .03 .04 (.48) (.20) (.61)
The above financial information for each quarter reflects all
normal and recurring adjustments.
Previously reported amounts have been restated to reflect the
acquisitions, accounted for as poolings of interests, of Horizons,
VisiCom and Delfin in the second, third and fourth quarters of 1998,
respectively, the discontinuance of the Company's access control
systems business in the fourth quarter of 1998, and to reflect the
cumulative effect of a change in accounting principle as effective in
the first quarter of 1998.
Net results for the first quarter of 1998 reflect a charge of
$19,474 for the cumulative effect of a change in accounting principle
(see Note 1). Income (loss) from continuing operations and net income
(loss) include special charges of $1,460, $3,093 and $5,338 in the
first, third and fourth quarters of 1998, respectively, and asset and
investment write-downs and environmental accrual of $5,000 and $4,846
in the third and fourth quarters of 1997, respectively (see Notes 2
and 14).
PART III
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
Item 10. Directors and Executive Officers of the Company
The information required by Item 10 with respect to the directors and
the executive officers of the Company is incorporated herein by this reference
to such information on pages 3 - 7 and 15 of the Company's definitive proxy
statement for the 1999 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by this
reference to such information on pages 4 - 5 and 8 - 13 of the Company's
definitive proxy statement for the 1999 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated herein by this
reference to such information on page 2 of the Company's definitive proxy
statement for the 1999 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
No information is required by Item 13.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1 and 2. Financial Statements being filed as part of this report are
listed in the index in Item 8, on page 24.
(b) No reports on Form 8-K were filed by the Company during the fourth
quarter of 1998.
(c) Exhibits
3.1 Registrant's Certificate of Amendment of Restated Certificate
of Incorporation dated as of October 21, 1998, which was
Exhibit No. 3.1 to Registrant's Quarterly Report on Form 10-Q
dated November 16, 1998, is incorporated herein by this
reference. Registrant's Restated Certificate of Incorporation
dated as of November 6, 1986, which was Exhibit No. 3.1 to
Registrant's 1987 Annual Report on Form 10-K is incorporated
herein by this reference. Registrant's Certificate of Amendment
of Restated Certificate of Incorporation dated as of June 30,
1987, which was Exhibit 3.2 to Registrant's 1987 Annual Report
on Form 10-K is incorporated herein by this reference.
3.2 Registrant's By-laws, as amended, which was Exhibit 6(a)(3) to
Registrant's Quarterly Report on Form 10-Q dated November 13,
1995, is incorporated herein by this reference.
4.1 Rights Amendment, dated as of August 21, 1995, between The
Titan Corporation and American Stock Transfer and Trust
Company, which was Exhibit 1 to Registrant's Form 8-A dated
September 5, 1995, is incorporated herein by this reference.
4.2 Form of Indenture relating to the Registrant's 8 1/4%
Convertible Subordinated Debentures due November 1, 2003, which
was Exhibit 4.1 to Amendment No. 1 to Registrant's Registration
Statement on Form S-3 (No. 333-10965) is incorporated herein by
this reference.
4.3 Letter Agreement dated February 4, 1998 between the Company and
DBA Systems, Inc. ("DBA") regarding certain registration rights
granted in connection with the acquisition of DBA which was
Exhibit 10.38 to Registration Statement on Form S-4 (no.
333-45719) is incorporated herein by this reference.
10.1 Stock Option Plan of 1983, as amended though January 1, 1987,
which was Exhibit 10.2 to Registrant's 1987 Annual Report on
Form 10-K is incorporated herein by this reference.
10.2 Stock Option Plan of 1986, as amended through January 1, 1987,
which was Exhibit 10.3 to Registrant's 1987 Annual Report on
Form 10-K is incorporated herein by this reference.
10.3 Stock Option Plan of 1990, which was filed in the 1990
definitive proxy statement and was Exhibit 10.11 to
Registrant's 1989 Annual Report on 10-K is incorporated herein
by this reference.
10.4 Stock Option Plan of 1994, which was filed in the 1994
definitive proxy statement and was Exhibit 10.17 to
Registrant's 1993 Annual Report on Form 10-K is incorporated
herein by this reference.
10.5 1989 Directors' Stock Option Plan which was filed in the 1990
definitive statement and was Exhibit 10.12 to Registrant's 1989
Annual Report on Form 10-K is incorporated herein by this
reference.
10.6 1992 Directors' Stock Option Plan which was filed in the 1993
definitive proxy statement and was Exhibit 10.14 to
Registrant's 1992 Annual Report on Form 10-K is incorporated
herein by this reference.
10.7 1996 Directors' Stock Option and Equity Participation Plan
which was filed in the 1996 definitive proxy statement and was
Exhibit 10.7 to Registrant's 1995 Annual Report on Form 10-K is
incorporated herein by this reference.
10.8 Supplemental Retirement Plan for Key Executives which was filed
in the 1990 definitive proxy statement and was Exhibit 10.13 to
Registrant's 1989 Annual Report on Form 10-K is incorporated
herein by this reference.
10.9 1995 Employee Stock Purchase Plan, which was Exhibit 4 to
Registrant's Form S-8 dated December 18, 1995, is incorporated
herein by this reference.
10.10 Lease Agreement dated as of July 9, 1991, by and between Torrey
Pines Limited Partnership, a California limited partnership, as
landlord, and Registrant, as tenant, which was Exhibit 10.1 to
Registrant's Form 8-K dated July 11, 1991 is incorporated
herein by this reference.
10.11 Agreement and Plan of Reorganization of Eldyne, Inc. dated as
of April 19, 1996, by and among Eldyne, Inc., Jack Witt, ELD
Acquisition Sub, Inc. and Registrant, which was Exhibit 2.1 to
Registrant's Form 8-K dated May 24, 1996, is incorporated
herein by this reference.
10.12 Agreement and Plan of Reorganization of Unidyne Corporation
dated as of April 19, 1996, by and among Unidyne Corporation,
Jack Witt, UNI Acquisition Sub, Inc. and Registrant, which was
Exhibit 2.2 to Registrant's Form 8-K dated May 24, 1996, is
incorporated herein by this reference.
10.13 Executive Severance Plan entered into by the Company with Gene
W. Ray, Eric M. DeMarco, Ronald B. Gorda, Mellon C. Baird,
Herbert L. Bradley, Clifton L. Cooke, and Ira Frazer, which was
Exhibit 6(a)(10) to Registrant's Quarterly Report on Form 10-Q
dated November 13, 1995, is incorporated herein by this
reference.
10.14 Loan and Security Agreement, dated December 29, 1995, by and
between Registrant and Capital Associates International, Inc.,
which was Exhibit 10.17 to Registrant's 1995 Annual Report on
Form 10-K, is incorporated by this reference.
10.15 Rider dated August 13, 1996, to Loan and Security Agreement
dated December 29, 1995 by and between Registrant and Capital
Associates International, Inc. which was Exhibit 10.28 to
Registrant's 1996 Annual Report on Form 10-K, is incorporated
herein by this reference.
10.16 Loan and Security Agreement dated January 31, 1996, by and
between Registrant and Sanwa General Equipment Leasing, a
division of Sanwa Business Credit Corporation, which was
Exhibit 10.18 to Registrant's 1995 Annual Report on Form 10-K,
is incorporated herein by this reference.
10.17 Credit Agreement, dated as of July 29, 1998, among the Company,
Various financial institutions from time to time parties
thereto (the "Lenders"), the Bank of Nova Scotia, as
administrative agent for the Lenders, and Imperial Bank as
documentation agent, which was Exhibit 10 to the Company's
Quarterly Report on Form 10-Q dated August 14, 1998, is
incorporated herein by this reference.
10.18 Agreement and Plan of Merger and Reorganization dated January
6, 1998 among The Titan Corporation, Titan Acquisition Sub,
Inc. and DBA Systems, Inc. which was filed as Exhibit 2.1 to
the Company's Registration Statement on Form S-4 (No.
333-45719), is incorporated herein by this reference.
10.19 Agreement and Plan of Merger and Reorganization dated February
26, 1998, among The Titan Corporation, Sunrise Acquisition Sub,
Inc., Horizons Technology, Inc. ("Horizons") and certain
stockholders of Horizons, which was filed as Appendix A to the
Company's Registration Statement on Form S-4 (No. 333-47633) is
incorporated herein by this reference.
10.20 Agreement and Plan of Reorganization dated as of June 30, 1998
by and among The Titan Corporation, Delsys Merger Corp., and
Delfin Systems, which was filed as Exhibit 2.1 to the Company's
Registration Statement on Form S-4 (No. 333-60127) is
incorporated herein by this reference.
21 Subsidiaries of Registrant as of December 31, 1998.
23 Consent of Arthur Andersen LLP, Independent Public
Accountants.
27.1 Financial Data Schedule for the year ended December 31, 1998.
27.2 Restated Financial Data Schedule for the years ended December
31, 1997 and 1996, and for the three month, six month and nine
month periods ended March 31, 1998, June 30, 1998 and September
30, 1998, respectively.
27.3 Restated Financial Data Schedule for the three month, six month
and nine month periods ended March 31, 1997, June 30, 1997, and
September 30, 1997, respectively.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE TITAN CORPORATION
By: /s/ Gene W. Ray
--------------------------------
Gene W. Ray, President and Chief
Executive Officer
March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
[Download Table]
Signature Title Date
----------------------- -------------------------------------- --------------
/s/ Gene W. Ray President, Chief Executive Officer and March 31, 1999
----------------------- Director
Gene W. Ray
/s/ Eric M. DeMarco Executive Vice President and Chief March 31, 1999
----------------------- Financial Officer
Eric M. DeMarco (Principal Financial Officer)
/s/ Deanna Hom Petersen Vice President, Corporate Controller March 31, 1999
----------------------- (Principal Accounting Officer)
Deanna Hom Petersen
/s/ Charles R. Allen Director March 31, 1999
-----------------------
Charles R. Allen
/s/ Joseph F. Caligiuri Director March 31, 1999
-----------------------
Joseph F. Caligiuri
/s/ Daniel J. Fink Director March 31, 1999
-----------------------
Daniel J. Fink
/s/ Robert I. Hanisee Director March 31, 1999
-----------------------
Robert I. Hanisee
Director
-----------------------
Robert E. La Blanc
/s/ Thomas G. Pownall Director March 31, 1999
-----------------------
Thomas G. Pownall
/s/ James Roth Director March 31, 1999
-----------------------
James Roth
[Enlarge/Download Table]
THE TITAN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1998, 1997, 1996
(in thousands of dollars)
Balance at Additions
beginning of (charges to Balance at
year expense) Deductions end of year
------------ ----------- ---------- -----------
1998:
Allowance for doubtful accounts.. $718 $ -- $469(a) $249
1997:
Allowance for doubtful accounts.. 481 297 60 718
1996:
Allowance for doubtful accounts.. 454 106 79 481
(a) Includes $267 reclassed to unbilled accounts receivable.
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
3.1 Registrant's Certificate of Amendment of Restated Certificate
of Incorporation dated as of October 21, 1998, which was
Exhibit No. 3.1 to Registrant's Quarterly Report on Form 10-Q
dated November 16, 1998, is incorporated herein by this
reference. Registrant's Restated Certificate of Incorporation
dated as of November 6, 1986, which was Exhibit No. 3.1 to
Registrant's 1987 Annual Report on Form 10-K is incorporated
herein by this reference. Registrant's Certificate of
Amendment of Restated Certificate of Incorporation dated as
of June 30, 1987, which was Exhibit 3.2 to Registrant's 1987
Annual Report on Form 10-K is incorporated herein by this
reference.
3.2 Registrant's By-laws, as amended, which was Exhibit 6(a)(3)
to Registrant's Quarterly Report on Form 10-Q dated November
13, 1995, is incorporated herein by this reference.
4.1 Rights Amendment, dated as of August 21, 1995, between The
Titan Corporation and American Stock Transfer and Trust
Company, which was Exhibit 1 to Registrant's Form 8-A dated
September 5, 1995, is incorporated herein by this reference.
4.2 Form of Indenture relating to the Registrant's 8 1/4%
Convertible Subordinated Debentures due November 1, 2003,
which was Exhibit 4.1 to Amendment No. 1 to Registrant's
Registration Statement on Form S-3 (No. 333-10965) is
incorporated herein by this reference.
4.3 Letter Agreement dated February 4, 1998 between the Company
and DBA Systems, Inc. ("DBA") regarding certain registration
rights granted in connection with the acquisition of DBA
which was Exhibit 10.38 to Registration Statement on Form S-4
(no. 333-45719) is incorporated herein by this reference.
10.1 Stock Option Plan of 1983, as amended though January 1, 1987,
which was Exhibit 10.2 to Registrant's 1987 Annual Report on
Form 10-K is incorporated herein by this reference.
10.2 Stock Option Plan of 1986, as amended through January 1,
1987, which was Exhibit 10.3 to Registrant's 1987 Annual
Report on Form 10-K is incorporated herein by this reference.
10.3 Stock Option Plan of 1990, which was filed in the 1990
definitive proxy statement and was Exhibit 10.11 to
Registrant's 1989 Annual Report on 10-K is incorporated
herein by this reference.
10.4 Stock Option Plan of 1994, which was filed in the 1994
definitive proxy statement and was Exhibit 10.17 to
Registrant's 1993 Annual Report on Form 10-K is incorporated
herein by this reference.
10.5 1989 Directors' Stock Option Plan which was filed in the 1990
definitive statement and was Exhibit 10.12 to Registrant's
1989 Annual Report on Form 10-K is incorporated herein by
this reference.
10.6 1992 Directors' Stock Option Plan which was filed in the 1993
definitive proxy statement and was Exhibit 10.14 to
Registrant's 1992 Annual Report on Form 10-K is incorporated
herein by this reference.
10.7 1996 Directors' Stock Option and Equity Participation Plan
which was filed in the 1996 definitive proxy statement and
was Exhibit 10.7 to Registrant's 1995 Annual Report on Form
10-K is incorporated herein by this reference.
10.8 Supplemental Retirement Plan for Key Executives which was
filed in the 1990 definitive proxy statement and was Exhibit
10.13 to Registrant's 1989 Annual Report on Form 10-K is
incorporated herein by this reference.
10.9 1995 Employee Stock Purchase Plan, which was Exhibit 4 to
Registrant's Form S-8 dated December 18, 1995, is
incorporated herein by this reference.
10.10 Lease Agreement dated as of July 9, 1991, by and between
Torrey Pines Limited Partnership, a California limited
partnership, as landlord, and Registrant, as tenant, which
was Exhibit 10.1 to Registrant's Form 8-K dated July 11, 1991
is incorporated herein by this reference.
10.11 Agreement and Plan of Reorganization of Eldyne, Inc. dated as
of April 19, 1996, by and among Eldyne, Inc., Jack Witt, ELD
Acquisition Sub, Inc. and Registrant, which was Exhibit 2.1
to Registrant's Form 8-K dated May 24, 1996, is incorporated
herein by this reference.
10.12 Agreement and Plan of Reorganization of Unidyne Corporation
dated as of April 19, 1996, by and among Unidyne Corporation,
Jack Witt, UNI Acquisition Sub, Inc. and Registrant, which
was Exhibit 2.2 to Registrant's Form 8-K dated May 24, 1996,
is incorporated herein by this reference.
10.13 Executive Severance Plan entered into by the Company with
Gene W. Ray, Eric M. DeMarco, Ronald B. Gorda, Mellon C.
Baird, Herbert L. Bradley, Clifton L. Cooke, and Ira Frazer,
which was Exhibit 6(a)(10) to Registrant's Quarterly Report
on Form 10-Q dated November 13, 1995, is incorporated herein
by this reference.
10.14 Loan and Security Agreement, dated December 29, 1995, by and
between Registrant and Capital Associates International,
Inc., which was Exhibit 10.17 to Registrant's 1995 Annual
Report on Form 10-K, is incorporated by this reference.
10.15 Rider dated August 13, 1996, to Loan and Security Agreement
dated December 29, 1995 by and between Registrant and Capital
Associates International, Inc. which was Exhibit 10.28 to
Registrant's 1996 Annual Report on Form 10-K, is incorporated
herein by this reference.
10.16 Loan and Security Agreement dated January 31, 1996, by and
between Registrant and Sanwa General Equipment Leasing, a
division of Sanwa Business Credit Corporation, which was
Exhibit 10.18 to Registrant's 1995 Annual Report on Form
10-K, is incorporated herein by this reference.
10.17 Credit Agreement, dated as of July 29, 1998, among the
Company, Various financial institutions from time to time
parties thereto (the "Lenders"), the Bank of Nova Scotia, as
administrative agent for the Lenders, and Imperial Bank as
documentation agent, which was Exhibit 10 to the Company's
Quarterly Report on Form 10-Q dated August 14, 1998, is
incorporated herein by this reference.
10.18 Agreement and Plan of Merger and Reorganization dated January
6, 1998 among The Titan Corporation, Titan Acquisition Sub,
Inc. and DBA Systems, Inc. which was filed as Exhibit 2.1 to
the Company's Registration Statement on Form S-4 (No.
333-45719), is incorporated herein by this reference.
10.19 Agreement and Plan of Merger and Reorganization dated
February 26, 1998, among The Titan Corporation, Sunrise
Acquisition Sub, Inc., Horizons Technology, Inc. ("Horizons")
and certain stockholders of Horizons, which was filed as
Appendix A to the Company's Registration Statement on Form
S-4 (No. 333-47633) is incorporated herein by this reference.
10.20 Agreement and Plan of Reorganization dated as of June 30,
1998 by and among The Titan Corporation, Delsys Merger Corp.,
and Delfin Systems, which was filed as Exhibit 2.1 to the
Company's Registration Statement on Form S-4 (No. 333-60127)
is incorporated herein by this reference.
21 Subsidiaries of Registrant as of December 31, 1998.
23 Consent of Arthur Andersen LLP, Independent Public
Accountants.
27.1 Financial Data Schedule for the year ended December 31, 1998.
27.2 Restated Financial Data Schedule for the years ended December
31, 1997 and 1996, and for the three month, six month and
nine month periods ended March 31, 1998, June 30, 1998 and
September 30, 1998, respectively.
27.3 Restated Financial Data Schedule for the three month, six
month and nine month periods ended March 31, 1997, June 30,
1997, and September 30, 1997, respectively.
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10-K405’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 5/24/06 | | 44 |
| | 8/17/05 | | 45 |
| | 11/1/03 | | 49 | | 53 |
| | 5/24/01 | | 44 |
| | 9/30/00 | | 20 | | | | | 10-Q |
| | 12/31/99 | | 13 | | 36 | | | 10-K/A, 10-K405, 11-K, 5, 5/A |
| | 11/2/99 | | 18 | | 42 | | | 8-K, S-8 |
| | 9/30/99 | | 20 | | | | | 10-Q, 4 |
| | 5/18/99 | | 1 | | | | | DEF 14A |
| | 4/1/99 | | | | | | | DEF 14A |
| Filed on: | | 3/31/99 | | 35 | | 52 | | | 10-Q, 4 |
| | 3/22/99 | | 1 |
| | 3/2/99 | | 15 |
| | 2/15/99 | | 24 |
| For Period End: | | 12/31/98 | | 1 | | 55 |
| | 11/16/98 | | 49 | | 53 | | | 10-Q, S-8 |
| | 10/23/98 | | 32 | | | | | 8-K |
| | 10/21/98 | | 14 | | 53 | | | DEFS14A, PRES14A |
| | 9/30/98 | | 18 | | 55 | | | 10-Q |
| | 8/24/98 | | 33 |
| | 8/14/98 | | 51 | | 54 | | | 10-Q |
| | 7/29/98 | | 20 | | 54 | | | S-4 |
| | 6/30/98 | | 33 | | 55 | | | 10-Q, 8-K, 8-K/A |
| | 5/24/98 | | 44 |
| | 4/1/98 | | 35 |
| | 3/31/98 | | 35 | | 55 | | | 10-Q, 10-Q/A |
| | 2/27/98 | | 33 |
| | 2/26/98 | | 51 | | 55 | | | 10-K405, 8-K, 8-K/A |
| | 2/4/98 | | 49 | | 53 |
| | 1/6/98 | | 51 | | 55 |
| | 1/1/98 | | 11 | | 34 |
| | 12/31/97 | | 7 | | 55 | | | 10-K/A, 10-K405 |
| | 12/3/97 | | 5 |
| | 9/30/97 | | 10 | | 55 | | | 10-Q |
| | 6/30/97 | | 34 | | 55 | | | 10-Q, 11-K |
| | 3/31/97 | | 51 | | 55 | | | 10-K, 10-Q |
| | 3/15/97 | | 36 |
| | 1/2/97 | | 36 |
| | 12/31/96 | | 7 | | 55 | | | 10-K, 10-K405/A |
| | 8/13/96 | | 50 | | 54 |
| | 5/24/96 | | 36 | | 54 | | | 8-K |
| | 4/19/96 | | 50 | | 54 |
| | 1/31/96 | | 51 | | 54 |
| | 12/31/95 | | 28 | | | | | 10-K |
| | 12/29/95 | | 50 | | 54 |
| | 12/18/95 | | 50 | | 54 | | | S-8 |
| | 11/13/95 | | 49 | | 54 | | | 10-Q |
| | 9/5/95 | | 49 | | 53 |
| | 8/21/95 | | 49 | | 53 |
| | 8/17/95 | | 45 |
| | 4/19/95 | | 43 |
| List all Filings |
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