<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
REGISTRATION NO. 333-41695
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
LINKABIT WIRELESS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3663 33-0591074
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
3033 SCIENCE PARK ROAD
SAN DIEGO, CA 92121
(619) 552-9500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
FREDERICK L. JUDGE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LINKABIT WIRELESS, INC.,
3033 SCIENCE PARK ROAD
SAN DIEGO, CA 92121
(619) 552-9500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
M. WAINWRIGHT FISHBURN, JR., ESQ. JOHN A. DENNISTON, ESQ.
ERIC J. LOUMEAU, ESQ. DAVID G. ODRICH, ESQ.
Cooley Godward LLP Brobeck, Phleger & Harrison LLP
4365 Executive Drive, Suite 1100 550 West C Street, Suite 1300
San Diego, CA 92121 San Diego, CA 92101
(619) 550-6000 (619) 234-1966
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS Subject to Completion, Dated April 24, 1998
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2,700,000
[LINKABIT WIRELESS, INC. LOGO]
Class A Common Stock
- ------------------------------------------------------------
All of the shares of Class A Common Stock, par value $0.001 per share ("Class A
Common Stock"), offered hereby (the "Offering") are being sold by Linkabit
Wireless, Inc. ("Linkabit Wireless" or the "Company"). The Company has two
classes of authorized Common Stock, Class A Common Stock and Class B Common
Stock, par value $0.001 per share ("Class B Common Stock" and, together with
Class A Common Stock, the "Common Stock"). Holders of Class A Common Stock
generally have identical rights to holders of Class B Common Stock, except that
holders of Class A Common Stock are entitled to one vote per share while holders
of Class B Common Stock are entitled to ten votes per share on all matters
submitted to a vote of stockholders. Holders of Class A Common Stock are
generally entitled to vote with the holders of Class B Common Stock as one class
on all matters as to which the holders of Class B Common Stock are entitled to
vote. See "Description of Capital Stock."
The Company is a wholly-owned subsidiary of The Titan Corporation ("Titan").
Upon completion of the Offering, Titan will own 100% of the Company's
outstanding Class B Common Stock, which will represent approximately 74.3% of
the outstanding Common Stock of the Company (approximately 71.5% if the
Underwriters' over-allotment option is exercised in full) and approximately
96.7% of the combined voting power of the Company's outstanding Common Stock
(approximately 96.2% if the Underwriters' over-allotment option is exercised in
full), and will continue to control the Company. See "Relationship with Titan
and Certain Transactions."
Prior to the Offering, there has been no public market for the Class A Common
Stock of the Company. It is currently estimated that the initial public offering
price of the Class A Common Stock will be between $8.00 and $10.00 per share.
See "Underwriting" for the factors to be considered in determining the initial
public offering price. Application has been made for quotation of the Class A
Common Stock on the Nasdaq National Market under the symbol "LBIT."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF CLASS A
COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
Price to Underwriting Discounts Proceeds to
Public and Commissions (1) Company (2)
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Per Class A Common Share $ $ $
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Total (3) $ $ $
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</TABLE>
(1) THE COMPANY AND TITAN HAVE AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST
CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES OF THE OFFERING PAYABLE BY THE COMPANY ESTIMATED
AT $900,000.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
405,000 ADDITIONAL SHARES OF CLASS A COMMON STOCK ON THE SAME TERMS PER
SHARE SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED
IN FULL, THE TOTAL PRICE TO PUBLIC WILL BE $ , TOTAL UNDERWRITING
DISCOUNTS AND COMMISSIONS WILL BE $ AND THE TOTAL PROCEEDS TO THE
COMPANY WILL BE $ . SEE "UNDERWRITING."
The Class A Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that the delivery of the certificates
therefor will be made at the offices of SBC Warburg Dillon Read Inc., New York,
New York, on or about , 1998. The Underwriters include:
SBC WARBURG DILLON READ INC.
NEEDHAM & COMPANY, INC.
C.E. UNTERBERG, TOWBIN
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT COVERING TRANSACTIONS IN THE
CLASS A COMMON STOCK AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
DAMALink-TM- and Xpress Connection-TM- are trademarks of the Company. All other
trademarks, service marks, and tradenames referred to in this Prospectus are the
property of their owners.
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2
<PAGE>
PROSPECTUS SUMMARY
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THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE INDICATES,
(I) ALL REFERENCES TO THE "COMPANY" OR "LINKABIT WIRELESS" INCLUDE LINKABIT
WIRELESS, INC. AND ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS, AND (II)
ALL INFORMATION CONTAINED IN THIS PROSPECTUS (A) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION AND (B) GIVES EFFECT TO A 0.39 TO 1 REVERSE
SPLIT OF THE COMMON STOCK. SEE "UNDERWRITING."
THE COMPANY
Linkabit Wireless specializes in the development and production of advanced
satellite ground terminals, satellite voice/data modems, networking systems and
other products used to provide bandwidth efficient communications for government
and commercial customers. The Company's market driven product development
efforts have resulted in products which are particularly well suited for two
significant market opportunities, secure defense communications and rural
telephony.
Linkabit Wireless has developed substantial expertise in Demand Assigned
Multiple Access ("DAMA") technology and critical engineering disciplines such as
satellite ground system design, RF and digital engineering, digital and
communications signal processing software, network management and modem
technology. The Company has benefited from substantial and continued investment
in its technology and products. Since 1986, the U.S. government, third parties
and the Company have collectively invested over $250 million in the Company's
research and development programs. A significant portion of this investment has
been focused in the area of DAMA technology which enables more cost-effective
and efficient use of satellite transmission capacity and allows each ground
terminal in a satellite network to communicate with any other terminal in the
network. The government business has benefited from the Company's investment in
the design and production of commercial products which can satisfy the
government's demand for more commercial off-the-shelf ("COTS") products.
Similarly, the Company's commercial products leverage the advanced technologies
and broad technical competencies developed from the substantial investment in
its government business.
SECURE DEFENSE COMMUNICATIONS 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 COTS products to minimize the impact of the shrinking defense
budget.
To improve the capacity utilization of its ultra high frequency ("UHF")
satellites, the Joint Chiefs of Staff have mandated that all UHF satellite
communications users have terminals capable of DAMA operations (the "JCS
mandate"). DAMA can increase satellite capacity by a factor of as much as eight
by dynamically allocating channels among all users.
Linkabit Wireless is well-positioned to capitalize on both the JCS mandate and
the trend towards procurement of COTS products. The Company is a leader in the
development and production of UHF satellite terminals that incorporate DAMA
technology. The Company offers a complete range of solutions that satisfy the
JCS mandate, including add-on modules which can be incorporated into existing
military communications products and standalone products which operate with
existing military products, and new systems incorporating DAMA technology. The
Company's solutions also have the design flexibility to incorporate COTS
products. The Company markets 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 ("Motorola") to incorporate its
technologies into their products.
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, developing countries, particularly
Africa, Latin America and Asia, have shown an increased interest in providing
rural telephone services for both economic and political reasons. For example,
the Indonesian government has mandated that 20% of all new telephone lines be
installed in rural areas. In addition, consumers and businesses in these areas
are in need of affordable telephone services.
3
<PAGE>
The Company's leading commercial product, Xpress Connection, uses existing
geosynchronous satellites to provide low-cost voice, facsimile and data services
using satellites to connect villages to a national Public Switched Telephone
Network ("PSTN"), making it possible to provide low-cost telephone service to
vast unserved areas. Xpress Connection is well-suited to the Company's target
markets because it: (i) is easy to operate; (ii) can be quickly installed in
rugged terrain without special test instruments or tools; (iii) operates
reliably in extreme heat, rain and humidity conditions with no requirement for
periodic maintenance, calibrations or manual adjustments; (iv) requires limited
human intervention as the network is unmanned with the exception of the central
control site; and (v) can operate at low power on a wide range of locally
available power sources, including solar energy.
The Company develops and markets its rural telephony products through strategic
alliances. In September 1995, the Company received an approximately $10 million
contract from PT. Pasifik Satelit Nusantara ("PSN") to develop the Xpress
Connection system for use in a rural telephony network in Indonesia. In December
1997, the Company received a follow-on order from PSN for 10,000 additional
terminals at a contract value of approximately $27 million. This contract also
contains a priced option to purchase up to 10,000 additional terminals, which
may be exercised at any time during the contract term. The Company and PSN are
marketing Xpress Connection to other countries covered by PSN's satellites. In
addition, the Company is working with Alcatel Telespace ("Alcatel") to market
Xpress Connection to other developing regions, including Africa and Latin
America.
The Company believes there is substantial unmet demand for rural telephone
service, especially in developing countries. The Company's strategy is to
capitalize on its proven experience with Xpress Connection, which serves as an
overlay to a national PSTN. In Indonesia, this system is fully developed, tested
and operational with approximately 2,000 terminals installed to date, which the
Company believes is the largest functional rural telephony system in the world.
The Company's strategy is to extend this proven system in developing countries
throughout the world, with initial focus on Africa, Latin America and Asia.
The Company was selected to participate in a consortium led by Alcatel, which is
designing and developing a satellite-based alternative to conventional telephone
systems. The consortium's Multi-Media Asia ("M(2)A") product will provide
feature-rich telephone, facsimile, and high speed Internet access to homes and
businesses in suburban and rural areas initially throughout Indonesia and
potentially to other developing countries throughout the world. The Company will
develop key portions of the ground terminals, primarily RF circuits, software
and Application Specific Integrated Circuit ("ASIC") chip sets incorporating
technology derived from the Company's Xpress Connection.
The Company is leveraging its experience in rural telephony to selectively
pursue private networking opportunities in developing countries. In Thailand,
the Company is providing elements of a private voice, data and facsimile
communications network for use by The Bank for Agriculture and Agricultural
Cooperatives ("BAAC").
GROWTH STRATEGY. The Company's goal is to become a preeminent solutions
provider to emerging satellite-based communications markets in developing
countries, international commercial sectors and the U.S. and allied defense
markets. To achieve this goal, the Company intends to: (i) pursue the global
rural telephony market with its Xpress Connection, M(2)A and private network
products; (ii) expand its government business, particularly in secure
communications for defense agencies; (iii) remain on the leading edge of
technology; (iv) leverage these technologies and capabilities into other
markets; and (v) expand its strategic alliances with existing and new partners.
--------------------------
The Company was incorporated in Delaware in 1993. Prior to the incorporation of
the Company, the Company's operations were conducted within a business division
of Titan. The Company's principal executive offices are located at 3033 Science
Park Road, San Diego, California, 92121. Its telephone number is (619) 552-9500
and its fax number is (619) 552-9651.
RISK FACTORS
An investment in the Class A Common Stock offered hereby involves a high degree
of risk. See "Risk Factors," beginning on page 7.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock Offered............................ 2,700,000 shares
Common Stock Outstanding after the Offering
Class A Common Stock.................................. 2,700,000 shares
Class B Common Stock.................................. 7,800,000 shares
---------------
Total(1)............................................ 10,500,000 shares
Voting Rights........................................... Holders of Class A Common Stock vote together as a class
with, and generally have identical rights (including
as to dividends) to, those of holders of Class B
Common Stock, except that holders of Class A Common
Stock are entitled to one vote per share and holders
of Class B Common Stock are entitled to ten votes per
share. See "Description of Capital Stock--Common
Stock--Voting Rights."
Use of Proceeds......................................... Working capital, general corporate purposes and
potential acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol.................. LBIT
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
- -----------------------------------
Revenues........................... $ 25,246 $ 26,464 $ 25,506 $ 27,850 $ 48,980
Gross profit....................... (3,193) 9,480 10,016 9,195 17,072
Selling, general and administrative
expense.......................... 7,287 4,841 6,298 7,230 7,690
Research and development
expense(2)....................... 1,288 3,063 5,416 7,544 10,117
Operating income (loss) before
interest and income taxes........ (11,768) 1,576 (1,698) (5,579) (735)
Parent company interest charge..... 1,050 799 578 1,171 1,820
Income (loss) before income
taxes............................ (12,818) 777 (2,276) (6,750) (2,555)
Net income (loss).................. (7,568) 513 (1,730) (4,455) (5,445)
Net income (loss) per share - basic
and diluted...................... $ (0.97) $ 0.07 $ (0.22) $ (0.57) $ (0.70)
Weighted average common shares used
in computing income (loss) per
share(3)......................... 7,800 7,800 7,800 7,800 7,800
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(4)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
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Cash and cash equivalents............................................................................. $ 717 $ 22,416
Working capital....................................................................................... 16,753 38,452
Total assets.......................................................................................... 29,019 50,718
Long-term debt, including current portion............................................................. -- --
Stockholders' equity.................................................................................. 18,267 39,966
</TABLE>
- ------------------------------
(1) Excludes: (i) approximately 865,000 shares of Common Stock issuable upon
exercise of outstanding stock options as of December 31, 1997, at a weighted
average exercise price of $3.68 per share and (ii) approximately 1,183,000
shares of Class A Common Stock reserved for future issuance under the
Company's Stock Option Plans, Employee Stock Purchase Plan and Non-Employee
Directors' Stock Option Plan. See "Capitalization" and "Management,"
"Description of Capital Stock" and Notes 8, 9 and 10 of Notes to Financial
Statements. To the extent that outstanding options are exercised in the
future, there may be further dilution to stockholders.
(2) Excludes development costs incurred as part of low rate initial production
contracts charged to cost of revenues under the percentage of completion
method.
(3) See Note 1 to Financial Statements for a description of the computation of
net income (loss) per share.
(4) Adjusted to give effect to the receipt of the net proceeds from the sale of
2,700,000 shares of Class A Common Stock offered by the Company hereby (at
an assumed initial public offering price of $9.00 per share, after deduction
of underwriting discounts and commissions and estimated expenses payable by
the Company in connection with the Offering).
5
<PAGE>
RELATIONSHIP WITH TITAN
The Company is currently a wholly-owned subsidiary of Titan. In September 1997,
Titan's and the Company's Board of Directors approved a reorganization of
certain of their respective divisions (the "Reorganization"), pursuant to which
the Company (i) became the successor to the business formerly operated as the
Linkabit division of Titan and (ii) transferred all of the assets and
liabilities of its Client/ Server and discontinued Broadband Communications and
Gamma Satcom divisions to Titan. In connection with the Reorganization, Titan
contributed $22.1 million to the capital of the Company through the retirement
of the Company's intercompany indebtedness. Upon completion of the Offering,
Titan will own 100% of the Company's outstanding Class B Common Stock, which
will represent approximately 74.3% of the outstanding Common Stock of the
Company (approximately 71.5% if the Underwriters' over-allotment option is
exercised in full) and approximately 96.7% of the combined voting power of the
Company's outstanding Common Stock (approximately 96.2% if the Underwriters'
over-allotment option is exercised in full). As long as Titan beneficially owns
a majority of the combined voting power, it will have the ability to elect all
of the members of the Board of Directors of the Company (the "Board of
Directors") and thereby ultimately be able to control the management and affairs
of the Company. See "Risk Factors-- Relationship with Titan," "--Potential
Conflicts of Interest" and "Relationship with Titan and Certain Transactions."
Upon completion of the Offering, Titan will continue to provide certain
administrative services to the Company in a manner generally consistent with
past practices. The Company and Titan have entered into a number of intercompany
agreements (the "Affiliate Agreements") with respect to such services and other
matters, including a tax allocation agreement, a corporate services agreement
and a facilities agreement. See "Risk Factors--Affiliates Agreements Not Subject
to Arm's-Length Negotiations; Reliance on Titan for Certain Corporate Services,"
"--Control of Tax Matters; Tax and ERISA Liability" and "Relationship With Titan
and Certain Transactions."
6
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
PROSPECTIVE INVESTORS IN THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER
INFORMATION CONTAINED IN THE PROSPECTUS BEFORE PURCHASING ANY OF THE CLASS A
COMMON STOCK OFFERED HEREBY.
RECENT LOSSES. The Company reported net losses of $1.7 million, $4.5 million
and $5.4 million for the years ended December 31, 1995, 1996 and 1997,
respectively. These losses were due primarily to substantial planned investment
in research and development of the Company's products. There can be no assurance
that the Company will achieve profitability in the future or that profitability,
if achieved, will continue. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ABSENCE OF COMBINED OPERATING HISTORY. Prior to the Reorganization, the
Company's operations were conducted separately within a business division of
Titan and as a wholly-owned subsidiary of Titan. The financial data and
Financial Statements and Notes thereto contained in this Prospectus assume the
Reorganization was consummated, and the Affiliate Agreements were effective,
upon Titan's acquisition of the Linkabit division in 1990, and reflect the
allocation of certain costs between the Company and Titan in accordance with
methodologies selected by Titan generally pursuant to cost accounting standards.
Accordingly, the financial information included herein may not necessarily
reflect what the results of operations, financial position and cash flows would
have been had all of the Company's operations been conducted within a separate
entity during the periods presented. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview" and "Relationship
with Titan and Certain Transactions--Corporate Services Agreement."
FLUCTUATIONS IN RESULTS OF OPERATIONS. The Company has experienced and expects
to continue to experience significant fluctuations in quarterly and annual
revenues, gross margins and operating results, and there can be no assurance
that the Company will be profitable in any particular period. Such fluctuations
may result in volatility in the price of the Company's Class A Common Stock.
Demand for the Company's products, particularly its commercial products, can
vary significantly from quarter to quarter due to revisions in budgets or
schedules for customer projects requiring the Company's products, changes in
demand for customers' products which incorporate or utilize the Company's
products and other factors beyond the Company's control. Furthermore,
announcements by the Company or its competitors of new products and technologies
could cause customers to defer or cancel purchases of the Company's products,
which could materially adversely affect the Company's business, financial
condition and results of operations or result in fluctuations in the Company's
results of operations from period to period. In addition, the procurement
process for most of the Company's current and potential customers is complex and
lengthy, generally ranging from 6 to 36 months from the time of the initial
customer contact, depending on the customer and the type of contract, and the
timing and amount of revenues is difficult to reliably predict. A single
customer's order scheduled for delivery in a quarter can represent a significant
portion of the Company's potential revenues for such quarter. During the year
ended December 31, 1997, approximately 28% and 37% of the Company's revenues
were derived from contracts with its largest customers, PSN and the U.S. Navy,
respectively. Any disruption with respect to either of these customers could
have a material adverse effect on the Company in any period where such a
disruption occurs. As a result, the Company's operating results for particular
periods have in the past been and may be materially adversely affected by a
delay, rescheduling or cancellation of even one purchase order. In addition, the
Company recognizes a majority of its revenues under the percentage of completion
method which requires the Company to estimate the costs that will be incurred
over the life of a specific contract. Actual results may differ significantly
from estimates, primarily as a result of changes in the amount of estimated
labor needed to complete a development task. In such event, the Company may be
required to adjust revenues in subsequent periods to account for revisions of
prior period estimates. The Company has experienced in the past such significant
differences with respect to certain firm fixed-price development contracts.
Further, purchase orders and production contracts are often received and
accepted substantially in advance of
- --------------------------------------------------------------------------------
7
<PAGE>
delivery, and the failure to operate within budgeted contract costs could
materially adversely affect the gross margins for such orders, and as a result,
the Company's results of operations. Average selling prices for the Company's
products may also fluctuate from period to period due to a number of factors,
including product mix, competition, customer demand for products and unit
volumes. A large portion of the Company's expenses are fixed and difficult to
reduce in a timely manner should revenues not meet the Company's expectations,
thus magnifying the adverse effect of any revenue shortfall. Additional factors
that may cause the Company's revenues, gross margins and results of operations
to vary significantly from period to period include mix of products sold; stage
of completion of contracts; costs; price discounts; market acceptance and the
timing of availability of new products by the Company or its customers; usage of
different distribution and sales channels; warranty and customer support
expenses; customization of products; and general economic and political
conditions. There can be no assurance that the Company will realize positive
operating results in the future, and even if so realized, there can be no
assurance as to the level of such operating results.
In addition, the Company's results of operations are influenced by competitive
factors, including the pricing and availability of, and demand for, competitive
products. All of the above factors are difficult for the Company to forecast,
and these and other factors could materially adversely affect the Company's
business, financial condition and results of operations or result in
fluctuations in the Company's results of operations from period to period. As a
result, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE ON GOVERNMENT CONTRACTS. The Company's government customers include
the U.S. Navy, Army and Air Force and other U.S. and allied government agencies.
The Company's secure defense communications business is dependent to a large
extent upon continued funding of these agencies. 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. Further significant
reductions in defense expenditures could adversely affect the Company's results
of operations and financial condition. For the years ended December 31, 1995,
1996 and 1997, U.S. government business represented approximately 85%, 90% and
59% of the Company's revenues, respectively.
The Company's contracts with the U.S. government and its subcontracts with
government prime contractors are subject to termination for the convenience of
the government, and termination, reduction or modification in the event of
change in the government's requirements or budgetary constraints. When the
Company participates as a subcontractor, such contracts are also subject to the
failure or inability of the prime contractor to perform its prime contract. 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 U.S. government. In addition to the right to terminate, U.S.
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 appropriations are made by Congress for future fiscal
years. See "Business--Government Contracts and Regulations."
In connection with the Reorganization, among other things, Titan agreed to
transfer to the Company all of its contracts with various branches of the U.S.
military, companies that supply U.S. allies and other entities which, prior to
the Reorganization, were performed on behalf of Titan by its Linkabit division
(collectively, the "Linkabit Division Contracts"). Titan further agreed to use
its reasonable best efforts to obtain all third party consents and contract
novations (collectively, the "Novations") required to complete the transfer of
the Linkabit Division Contracts to the Company. Revenues and expenses recorded
and incurred in connection with these contracts are reflected in the financial
data and Financial Statements and Notes thereto contained in this Prospectus.
Although Titan has agreed that, in the event Titan fails to obtain any of the
Novations, it will compensate the Company for the value of any asset on the
Company's balance
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sheet as of September 30, 1997, specifically arising from the contract for which
the Novation was not obtained, there can be no assurance that Titan will
ultimately succeed in procuring all of the Novations or that such Novations will
be procured prior to the completion of the Offering. Failure by Titan to procure
one or more Novations could have an adverse effect on the Company's business,
financial conditions and results of operations.
DEVELOPMENT OF RURAL TELEPHONY MARKET. One of the Company's principal
strategies is to provide products used in rural telephony systems in developing
countries. Such a system is being developed in Indonesia with the Company's
products. There can be no assurance that a substantial market for rural
telephony services in other developing countries will ever develop, or if such a
market does develop that fixed-site satellite equipment will capture a
significant portion of that market. The development of a market for rural
telephony services in such a country will depend upon a variety of factors
including, without limitation, whether the country has sufficient resources to
support such a market and whether the rural telephony services are offered at a
reasonable cost to the end users of such services. The Company's ability to
penetrate the rural telephony market in developing countries will be adversely
affected to the extent other competing elements of the communications
infrastructure, such as telephone lines, other satellite-delivered solutions and
fiber optic cable and television cable, are installed in the developing
countries. The Company's ability to penetrate the rural telephony market will
also be dependent upon (i) its ability to tailor its equipment for use by the
regional and local service providers to develop and implement and market such
systems, (ii) such service providers' ability to market and sell the use of such
systems and (iii) the Company's ability to timely enter markets in developing
countries. The development and implementation of such rural telephony systems
will be dependent upon, among other things, the continued development of
necessary technologies, continued financial and other support from governmental
agencies, the implementation of cost-effective systems, market acceptance for
such systems and approval by appropriate regulatory agencies. Even if the
Company successfully introduces such products and the regional and local service
providers successfully develop and implement such systems, there can be no
assurance that the Company will generate enough revenues to cover the Company's
expenditures in the development and marketing of such products. Also, because
infrastructure contracts in individual countries are likely to be awarded to
single or a limited group of service providers, the Company expects that a
significant portion of its revenues will be derived from one or a limited number
of customers (the identity of whom may vary from year to year) in regions
targeted by the Company.
OTHER EMERGING MARKETS IN WIRELESS COMMUNICATIONS. Another of the Company's
principal strategies is to leverage its technologies and capabilities into other
markets, including the private networking and M(2)A markets. A number of these
markets have only recently begun to develop. Because these markets are
relatively new, it is difficult to predict the rate at which these markets will
grow, if at all. If the markets for the Company's products in the commercial
wireless communications area fail to grow, or grow more slowly than anticipated,
the Company's business, financial condition and results of operations could be
materially adversely affected. Conversely, to the extent that growth in these
markets results in capacity limitations in the wireless communications area, the
Company's business, financial condition and results of operations could also be
materially adversely affected.
INTERNATIONAL OPERATIONS; RISKS OF DOING BUSINESS IN DEVELOPING
COUNTRIES. Substantially all of the Company's commercial sales to date have
been to customers located in the Pacific Rim, principally to PSN. The Company
believes that sales of its products to PSN and other foreign customers may
become more significant and that its revenue mix could be predominately with
foreign customers in the future. The Company's contracts have all been U.S.
dollar-denominated to date. As a result, a decline in the value of certain
foreign currencies relative to the U.S. dollar could make certain of the
Company's products less price-competitive. This risk is particularly sensitive,
given the recent currency devaluations in Indonesia, Malaysia, Taiwan, Thailand
and the Philippines, countries in which the Company currently sells or intends
to sell its commercial products. The Company believes that its global
competitors generally denominate their contracts in U.S. dollars and, thus, are
faced with similar risks. Accordingly, the Company does not
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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. In addition, certain of
the Company's customers in these foreign countries have encountered or may in
the future encounter financial difficulties resulting from such foreign currency
fluctuations or other economic, social or political instabilities which could
restrict their ability to fufill their contractual obligations to the Company.
Furthermore, a precipitous decline in such foreign currency values or
significant economic, social or political changes in these foreign countries
could result in certain of the Company's customers and local subcontractors and
partners refusing or becoming unable 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 or
an economic, social or political change in any such country will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Additional risks inherent in the Company's international business activities
include various and changing regulatory requirements, costs and risks of relying
upon local subcontractors for the installation of its satellite communications
products, 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 collections.
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. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's business, financial condition and results of operations.
RELIANCE ON STRATEGIC RELATIONSHIPS. The Company is dependent on certain
strategic partners for the development and expansion of its rural telephony and
secure defense communications businesses. Except for specific purchase
contracts, such relationships are generally not governed by any contractual
obligations. Accordingly neither the Company nor such strategic partners are
obligated to maintain such strategic relationships. There can be no assurance
that the Company will be able to maintain or develop strategic relationships,
that its strategic partners will continue to assist the Company by developing
and expanding its business or that such strategic partners in the future will
not actually compete with or enter into alliances with companies that compete
with the Company. Because the Company intends to provide its rural telephony
products almost entirely in developing markets where the Company has little or
no market experience, the Company will also be dependent on local partners in
such markets to provide marketing expertise and knowledge of the local
regulatory environment in order to facilitate the acquisition of necessary
licenses and access to existing customers. The Company has established such
alliances with PSN and Alcatel in Indonesia. The Company's failure to maintain
such alliances or form additional alliances with local partners in other
markets, or the preemption or disruption of such alliances by the actions of the
Company's competitors or otherwise, would adversely affect the Company's ability
to penetrate and compete successfully in such emerging markets. There can be no
assurance that the Company will be able to compete successfully in the future in
such markets or that competition will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Customers and Strategic Alliances" and "--Competition."
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RISK OF CUSTOMER/CONTRACT CONCENTRATION. The Company typically relies upon a
small number of customers for a large portion of its revenues. For example,
approximately 37% of the Company's revenue in fiscal 1997 was derived from one
contract with the U.S. Navy and approximately 28% was derived from the Company's
contracts with PSN. At December 31, 1997, $10.3 million and $21.8 million, or
approximately 21% and 47%, of the Company's funded backlog was attributable to
such contracts with the U.S. Navy and PSN, respectively. The Company expects
that in the near term a significant portion of its revenues will continue to be
derived from one or a limited number of customers (the identity of whom may vary
from year to year) as the Company seeks to expand its business and its customer
base. The reduction, delay or cancellation of orders from one or more of such
significant customers or contracts would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"--International Operations; Risks of Doing Business in Developing Countries."
CONTRACT PROFIT EXPOSURE; DEVELOPMENT CONTRACTS. During the year ended December
31, 1997, over 90% of the Company's revenue was derived from fixed-price
contracts. Profitability of such contracts is subject to inherent uncertainties
as to the cost of performance. Cost overruns may be incurred as a result of
unforeseen obstacles, including unexpected problems encountered in engineering,
design and testing. Since the Company's business may at certain times be
concentrated in a limited number of large contracts, a significant cost overrun
on any one contract could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company assumes
greater financial risk on fixed-price contracts than on either
time-and-materials or cost-reimbursement contracts. Failure to anticipate
technical problems, estimate costs accurately or control costs during
performance of a fixed-price contract may reduce the Company's profit or cause a
loss. Although management believes that it adequately estimates costs for
fixed-price contracts, no assurance can be given that such estimates are
adequate or that losses on fixed-price contracts will not occur in the future.
In addition, the Company is often a party to governmental and commercial
contracts which involve development of various products, pursuant to which the
Company must agree to meet strict performance covenants and project milestones.
Under the terms of such contracts, the failure by the Company to meet such
performance covenants and milestones permit the other party to terminate the
contract and, under certain circumstances, recover liquidated damages or other
penalties from the Company. The Company is currently a party to a number of such
contracts with customers including, but not limited to, PSN, United
Communication Industry Public Company Limited and the U.S. government. Although
the Company believes that it has complied with all material performance
covenants and milestones, the Company is not currently and in the past has not
been in full compliance with every outstanding performance covenant and project
milestone. Although in such situations in the past the other party has not
elected to terminate such contracts and generally has not sought liquidated
damages from the Company, there can be no assurance that this will not occur in
the future with respect to current or future contracts and that such termination
or damages would not have a material adverse effect on the Company.
RAPID INDUSTRY CHANGE; TECHNOLOGICAL OBSOLESCENCE. The Company's success in
penetrating new markets depends in part upon the success of new product
introductions by the Company, which will be dependent upon several factors,
including timely completion and introduction of new product designs, achievement
of competitive product costs, establishment of close working relationships with
major customers for the design of satellite communications systems incorporating
the Company's products and market acceptance. The satellite communications
industry, particularly the rural telephony and secure defense communications
markets, is characterized by rapid and continuous technological change. Future
technological advances in the satellite communications industry may result in
the availability of new products that could compete with the satellite
communications products provided by the Company or render the Company's products
obsolete. There can be no assurance that the Company will be successful in
developing and introducing new products that meet changing customer needs or
respond to technological changes or evolving industry standards in a timely
manner, if at all, or that products or technologies developed by others will not
render the Company's products noncompetitive. The Company may experience delays
from time to time in completing the development and introduction of new
products. There can be no assurance that errors will not be found in the
Company's products after commencement of deliveries, which could result in the
loss of or delay in market acceptance. Furthermore, for the fiscal year ended
December 31,
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1997, the Company's two largest contracts (by revenues) were contracts related
to the Company's UHF DAMA technology, which together generated approximately 42%
of the Company's total revenues for such period. Any failure by the Company to
respond to changing market conditions, technological developments, evolving
industry standards or changing customer requirements, or the development of
competing technology or products that render the Company's products
noncompetitive or obsolete could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION. The industries and markets in which the Company competes are
highly competitive, and the Company expects that competition will increase in
such markets. The Company encounters intense competition in most of its business
areas from numerous other companies, including large and emerging domestic and
international companies. Some of the Company's competitors in the secure defense
communications market include GEC (UK), Raytheon Corporation, Rockwell
International and ViaSat, Inc. Some of the Company's commercial competitors
include Gilat Satellite Networks Ltd., Hughes Network Systems, Scientific
Atlanta Inc., STM Wireless Inc. and ViaSat, Inc. A number of the Company's
competitors have far greater financial, engineering, technological, marketing,
sales and distribution and customer service resources than the Company. As a
result, such competitors may be able to develop and expand their products more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products and services than can the Company. In addition, current and potential
competitors in markets in which the Company competes have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products and services to address the needs of the
Company's current and prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced profit margins and loss of market share, any of which would
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company's ability to compete in its markets depends
to a large extent on its ability to provide technologically advanced products
and services with shorter lead times at lower prices than its competitors. There
can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures will not
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company also is dependent on the continued
success and development of the satellite communications industry in general,
which itself competes with other technologies such as terrestrial wireless,
copper wire and fiber optic communications systems. Any failure of the satellite
communications industry to continue to develop, or any technological development
which significantly improves the capacity, cost or efficiency of competing
systems relative to satellite systems, could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business-- Competition."
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY. The Company's
internal manufacturing capacity is limited. Therefore, the Company utilizes
contract manufacturers to produce its products and expects to rely increasingly
on such manufacturers in the future. The Company also relies on outside vendors
to manufacture certain components and subassemblies, including printed circuit
boards. Certain components, subassemblies and services necessary for the
manufacture of the Company's products are obtained from a sole supplier or a
limited group of suppliers in connection with specific contracts and the Company
does not otherwise carry significant inventories or have long-term or exclusive
supply contracts with its vendors. The Company's reliance on contract
manufacturers and on sole suppliers or a limited group of suppliers involves
several risks, including a potential inability to obtain an adequate supply of
required components, and reduced control over the price, delivery, reliability
and quality of finished products. The Company has from time to time experienced
delays in receiving products from certain of its vendors due to quality control
or manufacturing problems, shortages of materials or components or product
design difficulties. There can be no assurance that similar problems will not
recur or that
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replacement products will be available when needed at commercially reasonable
rates, or at all. If the Company were to change certain of its vendors, the
Company would be required to perform additional testing procedures upon the
components supplied by such new vendors, which could prevent or delay product
shipments. Additionally, prices could increase significantly in connection with
changes of vendors. Any inability to obtain timely deliveries of components and
subassemblies of acceptable quality or any other circumstance that would require
the Company to seek alternative sources of supply, or to manufacture its
finished products or such components and subassemblies internally, could delay
or prevent the Company from timely delivery of its systems or raise issues
regarding quality, which could damage relationships with current or prospective
customers and have a material adverse effect on the Company's business,
financial condition and results of operations.
LIMITED INTELLECTUAL PROPERTY PROTECTION; DEPENDENCE ON PROPRIETARY
TECHNOLOGY. The Company's ability to compete may depend, in part, on its
ability to obtain and enforce intellectual property protection for its
technology in the United States and internationally. The Company relies heavily
on the technological and creative skills of its personnel, new product
developments, software programs and designs, frequent product enhancements,
reliable product support and proprietary technological expertise in maintaining
its competitive position, but does not have significant patent protection for
all of its products. The Company relies on a combination of trade secrets,
copyrights, patents, trademarks, service marks and contractual rights to protect
its intellectual property. There can be no assurance that the steps taken by the
Company to protect its intellectual property will be adequate to deter
misappropriation of the Company's technology or to prevent others from
independently developing or acquiring substantially equivalent technologies or
otherwise gaining access to or disclosing the Company's proprietary and
confidential technologies or that the Company can ultimately enforce all of its
rights to its proprietary technologies. Further, the laws of certain foreign
countries in which the Company's products are or may be sold may not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States. Any failure of the Company to obtain protection for its
proprietary technologies or inability of the Company to enforce any protection
it obtains for such technologies could have a material adverse effect on the
Company's business, financial condition and results of operations.
Litigation may be necessary to enforce the Company's intellectual property
rights, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or misappropriation. Such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company's products do
not infringe the intellectual property rights of others or that one or more
parties will not make claims that the Company's products infringe upon their
proprietary rights or other rights of third parties. Such claims might include
infringement, invalidity, right to use or ownership claims by third parties or
claims for indemnification resulting from infringement claims. If any claims or
actions are asserted against the Company, the Company may seek to obtain a
license under a third party's intellectual property rights. There can be no
assurance, however, that a license will be available under reasonable terms or
at all. In addition, should the Company decide to litigate such claims, such
litigation could be extremely expensive and time consuming and could materially
adversely affect the Company's business, financial condition and results of
operations, regardless of the outcome of the litigation. There can be no
assurance that the Company's intellectual property rights would withstand the
claims brought by others in such litigation. If the Company's products are found
to infringe upon the rights of third parties, the Company may be prohibited from
making and selling the infringing products, ordered to pay monetary damages for
past infringment and forced to incur substantial costs to develop alternative
products. There can be no assurance that the Company would be able to develop
such alternative products or that if such alternative products were developed,
they would perform as required or be accepted in the applicable markets. See
"Business--Patents, Trademarks and Trade Secrets."
RELATIONSHIP WITH TITAN. Titan currently owns all of the outstanding capital
stock of the Company. Upon completion of the Offering, Titan will own 100% of
the Company's outstanding Class B Common Stock,
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representing approximately 96.7% of the combined voting power of all classes of
voting stock of the Company (approximately 96.2% if the Underwriters'
over-allotment option is exercised in full). As long as Titan beneficially owns
a majority of the combined voting power, it will have the ability to elect all
of the members of the Board of Directors and thereby ultimately to control the
management and affairs of the Company, including any determinations with respect
to acquisitions, dispositions, borrowings, issuances of Common Stock or other
securities of the Company or the declaration and payment of any dividends on the
Common Stock. In addition, Titan will be able to determine the outcome of any
matter submitted to a vote of the Company's stockholders for approval and to
cause or prevent a change in control of the Company.
Titan could decide to sell or otherwise dispose of all or a portion of its Class
B Common Stock (or, upon conversion of the Class B Common Stock, the resulting
Class A Common Stock) at some future date, and there can be no assurance that,
in any transfer by Titan of a controlling interest in the Company, any holders
of Class A Common Stock will be allowed to participate in such transaction or
will realize any premium with respect to their shares of Class A Common Stock.
Sales or distribution by Titan of substantial amounts of Class B Common Stock
(or Class A Common Stock) in the public market or to its stockholders could
adversely affect prevailing market prices for the Class A Common Stock. See
"Relationship with Titan and Certain Transactions."
The Company has financed its operations and growth through advances from Titan
and does not currently have its own lines of credit or other external financing
facilities. Although the Company presently does not anticipate a need for such
outside financing facilities, the Company believes that, if and when such need
arises, the Company will, subject to certain limitations and restrictions set
forth in Titan's loan agreements, have access to lines of credit or financing
facilities available to Titan.
POTENTIAL CONFLICTS OF INTEREST; CERTAIN CHARTER PROVISIONS; POTENTIAL
LIMITATION OF LIABILITY. Conflicts of interest may arise between the Company
and Titan in a number of areas relating to their past and ongoing relationships,
including the nature and quality of services rendered by the Company to Titan
and its affiliates or by Titan and its affiliates to the Company, potential
competitive business activities, issuances of Common Stock, potential shared
marketing functions, tax consolidation issues, employee benefit matters,
indemnity agreements, sales or distributions by Titan of all or any portion of
its ownership interest in the Company or Titan's ability to control the
management and affairs of the Company. Persons serving as directors, officers
and employees of both the Company and Titan may have conflicting duties to each.
Currently, Gene W. Ray, Frederick L. Judge, Ronald B. Gorda and Eric M. DeMarco,
the Company's Chairman of the Board, President, Chief Operating Officer and
Chief Financial Officer, respectively, also serve as President and Chief
Executive Officer, Senior Vice President, Senior Vice President and Chief
Financial Officer, respectively, of Titan. In addition, J. S. Webb, a director
of the Company, is also a member of Titan's Board of Directors. Ownership
interests of directors or officers of the Company in the common stock of Titan
could also create or appear to create potential conflicts of interest when
directors and officers are faced with decisions that could have different
implications for the Company and Titan. In addition, for financial reporting
purposes, the Company's financial results will be included in Titan's
consolidated financial statements. The members of the Board of Directors of the
Company and executive officers of the Company who are affiliated with Titan will
consider not only the short-term and long-term impact of financial and operating
decisions on the Company, but also the impact of such decisions on Titan's
consolidated financial results. In some instances, the impact of such decisions
could be disadvantageous to the Company while advantageous to Titan. There can
be no assurance that Titan and the Company will be able to resolve any potential
conflict or that, if resolved, the Company would not receive more favorable
resolution if it were dealing with an unaffiliated party. See "Description of
Capital Stock-- Certain Certificate of Incorporation and Bylaw Provisions."
The Company's Certificate of Incorporation includes provisions relating to
competition by Titan with the Company, allocations of corporate opportunities,
transactions with interested parties and intercompany agreements and provisions
limiting the liability of certain persons. See "Description of Capital Stock--
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Certain Certificate of Incorporation and Bylaw Provisions." The enforceability
under Delaware corporate law of such provisions, which may eliminate certain
rights that might have been available to stockholders under Delaware law had
such provisions not been included, has not been established and thus counsel to
the Company is not able to render an opinion regarding the enforceability of
such provisions. The Company's Certificate of Incorporation provides that any
person purchasing or acquiring an interest in shares of capital stock of the
Company, including the Underwriters, shall be deemed to have consented to the
provisions in the Certificate of Incorporation relating to competition by Titan
with the Company, conflicts of interest, corporate opportunities and
intercompany agreements, and such consent may restrict such person's ability to
challenge transactions carried out in compliance with such provisions. The
Company intends to disclose the existence of such provisions in its Annual
Reports on Form 10-K as well as in certain other filings with the Securities and
Exchange Commission (the "Commission"). The corporate charter of Titan does not
include comparable provisions and, as a result, persons who are directors and/or
officers of the Company and who are also directors and/or officers of Titan may
choose to take action in reliance on such provisions rather than act in a manner
that might be favorable to the Company but adverse to Titan. See "Description of
Capital Stock--Certain Certificate of Incorporation and Bylaw Provisions."
Under the Company's Certificate of Incorporation, the personal monetary
liability of the directors of the Company for breach of their fiduciary duty of
care, including actions involving gross negligence, is eliminated to the fullest
extent permitted under Delaware law. See "Description of Capital Stock--Certain
Certificate of Incorporation and Bylaw Provisions."
CONTROL OF TAX MATTERS; TAX AND ERISA LIABILITY. By virtue of its controlling
ownership and the terms of a tax allocation agreement (the "Tax Allocation
Agreement") to be entered into between the Company and Titan, which shall apply
for taxable periods during which Titan and the Company file, for federal
purposes, a consolidated income tax return or, for state and local purposes, a
consolidated, combined or unitary tax return, Titan will effectively control all
of the Company's tax decisions. Under the Tax Allocation Agreement, Titan will
have sole authority to respond to and conduct all tax proceedings (including tax
audits) relating to the Company, to file federal, state and local returns on
behalf of the Company and to calculate the amount of the Company's liability to
Titan under the Tax Allocation Agreement. Further, pursuant to the terms of the
Tax Allocation Agreement, the Company's ability to fully utilize its existing
tax losses and tax losses it incurs in the future will be subject to Titan's
ability to generate sufficient consolidated income to utilize such losses. Titan
may choose to contest, compromise or settle any adjustment or deficiency
proposed by the relevant taxing authority in a manner that may be beneficial to
Titan and detrimental to the Company. See "Relationship with Titan and Certain
Transactions."
For as long as Titan desires to include the Company in its consolidated group
for federal income tax purposes, which requires that Titan own at least 80% of
the total voting power of the Company and stock with a value equal to at least
80% of the total value of the Company, the Company may be constrained in its
ability to raise equity capital or to issue Common Stock in connection with
acquisitions. Upon completion of the Offering, Titan will own 100% of the
Company's outstanding Class B Common Stock, representing approximately 96.7% of
the combined voting power of all classes of voting stock of the Company
(approximately 96.2% if the Underwriters' over-allotment option is exercised in
full). Each member of a consolidated group for federal income tax purposes is
jointly and severally liable for the federal income tax liability of each other
member of the consolidated group. In addition, under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and federal income tax law,
each member of the controlled group is jointly and severally liable for funding
and termination liabilities of tax qualified defined benefit retirement plans as
well as certain plan taxes. Accordingly, during the period in which the Company
is included in Titan's consolidated or controlled group, the Company could be
liable if such liability or tax is incurred, and not discharged, by any other
member of Titan's consolidated or controlled group.
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PRESERVATION OF ABILITY TO COMPLETE TAX-FREE SPIN-OFF. Titan must beneficially
own at least 80% of the total voting power and 80% of each class of nonvoting
capital stock of the Company in order to be able to effect a tax-free spin-off
of the Company under the Internal Revenue Code of 1986, as amended (the "Code").
It is anticipated that upon completion of the Offering, Titan will continue to
own at least 80% of the total voting power of the Company. Because Titan may
seek to maintain its beneficial ownership percentage of the Company for tax
planning purposes or otherwise and may not desire to acquire additional shares
of Common Stock in connection with a future issuance of shares by the Company,
the Company may be constrained in its ability to raise equity capital in the
future or to issue Common Stock or other equity securities in connection with
acquisitions. See "Relationship with Titan and Certain Transactions."
AFFILIATE AGREEMENTS NOT SUBJECT TO ARM'S-LENGTH NEGOTIATIONS; RELIANCE ON TITAN
FOR CERTAIN
CORPORATE SERVICES. Prior to the Reorganization, the Company was not operated
independently of Titan. Prior to the completion of the Offering, Titan and the
Company will enter into the Affiliate Agreements, including, among others, an
agreement pursuant to which Titan will provide various corporate services to the
Company that may be material to the conduct of the Company's business (the
"Corporate Services Agreement"). These services include certain routine and
ordinary corporate services, including financial, insurance, accounting,
employee benefits, payroll, tax and legal services as described in the Corporate
Services Agreement. The Company's Statement of Operations includes revenues and
costs directly attributable to the Company, as well as certain allocations from
Titan of indirect costs associated with such services and shared systems. As of
December 31, 1997, the Company had incurred a $32.8 million intercompany debt to
Titan. As part of the Reorganization, Titan contributed $29.8 million of such
amount to the capital of the Company. The Company's future statements of
operations will include revenues and costs directly attributable to the
Company's operations as well as allocations from Titan for indirect costs of
shared services and systems. Titan's cost of its human resources department is
allocated to Titan and its subsidiaries (the "Titan Group") based upon the
member's average percentage of total Titan Group headcount as of the end of the
last fiscal year and as of the final day of each calendar quarter in the current
fiscal year ("measuring dates"). Other corporate services are allocated based
upon the average of three percentages: (i) the percentage of the Company's
payroll to the total payroll of the Titan Group, (ii) the percentage of the
Company's operating revenue to the total operating revenue of the Titan Group,
and (iii) the percentage of the average net book value of the sum of the
Company's tangible capital assets plus inventories to the total average net book
value of the tangible capital assets plus inventory of the Titan Group as of the
measuring dates. These allocations may be adjusted by Titan based upon its
assessment of the relative uses of these services by members of the Titan Group.
Titan's method of allocating its costs is based upon government cost accounting
standards and is consistent with Titan's past practices for allocating costs to
its subsidiaries. This fee will be included in the operating results of the
Company. With respect to matters covered by the Corporate Services Agreement,
the relationship between Titan and the Company is intended to continue in a
manner generally consistent with past practices. The Company believes that the
charges under the Corporate Services Agreement are reasonable. The initial term
of this agreement will be one year. Thereafter, the Corporate Services Agreement
will be automatically renewed for successive one-year terms unless the Company
elects not to renew the agreement upon at least 45 days prior notice to Titan.
In addition, a withdrawal by or removal of the Company from the Titan Charter
will automatically terminate the Corporate Services Agreement. In the event that
the Corporate Services Agreement is terminated, there can be no assurance that
the Company would be able to secure alternative sources for such services or
that such services could be obtained for costs comparable to costs to be charged
by Titan. Because the Company is currently a wholly-owned subsidiary of Titan,
none of the Affiliate Agreements will result from arm's-length negotiations.
These agreements may include terms and conditions that may be more or less
favorable to the Company than terms contained in similar agreements negotiated
with third parties. See "Relationship with Titan and Certain Transactions."
GOVERNMENT REGULATIONS. The Company's products are incorporated into
communications systems that are subject to various government regulations.
Regulatory changes, including changes in the allocation of
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16
<PAGE>
available frequency spectrum and in the military standards and specifications
which define the current satellite networking environment, could significantly
impact the Company's operations by restricting development efforts by the
Company's strategic partners or customers, making current products obsolete or
increasing the opportunity for additional competition. In addition, in certain
circumstances the Company' local partners must obtain various approvals,
licenses and permits prior to the installation of the Company's products.
Although the Company believes that it or its strategic partners or customers
will be able to obtain the requisite local approvals, licenses and permits from
the countries in which the Company intends to provide its products, the
regulatory schemes in each country are different and thus there may be instances
of noncompliance of which the Company is not aware. Further, certain countries
in which the Company intends to operate have telecommunications laws and
regulations that do not currently contemplate technical advances in
communications technology such as multi-function transmissions via satellite.
There can be no assurance that regulatory bodies will not promulgate new
regulations that could have a material adverse effect on the Company's business,
financial condition and results of operations. Changes in, or the failure by the
Company or its strategic partners or customers to comply with, applicable
domestic and international regulations could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the increasing demand for satellite communications has exerted
pressure on regulatory bodies worldwide to adopt new standards for such products
and services, generally following extensive investigation of and deliberation
over competing technologies. The delays inherent in this governmental approval
process have caused and may continue to cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company's
customers, which in turn may have a material adverse effect on the sale of
products by the Company to such customers.
The sale of the Company's products outside the United States is subject to
compliance with the regulations of the United States Export Administration
Regulations. The absence of comparable restrictions on competitors in other
countries may adversely affect the Company's ability to compete in foreign
markets. See "Business--Government Contracts and Regulations."
RELIANCE ON KEY PERSONNEL. The Company's success depends in large part upon its
ability to attract, retain and motivate highly qualified technical and
management personnel, including without limitation, telecommunications engineers
and management personnel with security clearances required for the Company's
classified work. In addition, the Company is highly dependent on the principal
members of its management team, particularly Frederick L. Judge and Ronald B.
Gorda. The loss of the services of any of these individuals or any group of
individuals could have a material adverse effect on the Company's business,
financial condition and results of operations. Most of the Company's technical
and management personnel are not subject to employment or noncompetition
agreements. Competition for such personnel from other companies, academic
institutions, government entities and other organizations is intense. There can
be no assurance that the Company will be successful in hiring, retaining or
motivating such personnel.
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; TRADING OF TITAN
COMMON STOCK. Prior to the Offering, there has been no public market for the
Class A Common Stock, and there can be no assurance that a viable public market
for the Class A Common Stock will develop or be sustained after the Offering.
The Company believes that factors such as announcements of developments related
to the Company's business, announcements of technological innovations, new
products or product enhancements by the Company or its competitors, developments
in the Company's relationships with its customers, partners, distributors and
suppliers, changes in analysts' estimates, regulatory developments, fluctuations
in results of operations and general conditions in the Company's market or the
markets served by the Company's customers or the economy could cause the price
of the Class A Common Stock to fluctuate, perhaps substantially. In addition, in
recent years the stock market in general, and the market price of the stock of
technology companies in particular have been subject to significant
fluctuations, which have often been unrelated to the operating performance of
affected companies. Such fluctuations could adversely affect the market price of
the Class A Common Stock. Furthermore, the market price of the Class A Common
Stock
- --------------------------------------------------------------------------------
17
<PAGE>
may be significantly affected by trading in the shares of Titan common stock on
the New York Stock Exchange since Linkabit Wireless currently constitutes a
substantial portion of the consolidated total assets of Titan and contributes a
substantial portion of the consolidated net income of Titan. There can be no
assurance that the market price of the Class A Common Stock will not experience
significant fluctuations in the future, including fluctuations that are
unrelated to the Company's performance.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS. Certain provisions of the
Company's Certificate of Incorporation and Bylaws could discourage potential
acquisition proposals, could delay or prevent a change in control of the Company
and could make removal of management more difficult. Such provisions could
diminish the opportunities for a stockholder to participate in tender offers,
including tender offers that are priced above the then current market value of
the Class A Common Stock. The provisions also may inhibit increases in the
market price of the Class A Common Stock that could result from takeover
attempts. Additionally, the Board of Directors of the Company, without further
stockholder approval, may issue up to 10,000,000 shares of Preferred Stock, in
one or more series, with such terms as the Board of Directors may determine,
including rights such as voting, dividend and conversion rights which could
adversely affect the voting power and other rights of the holders of Common
Stock. Preferred Stock may be issued quickly with terms which delay or prevent
the change in control of the Company or make removal of management more
difficult. Also, the issuance of Preferred Stock may have the effect of
decreasing the market price of the Class A Common Stock. Other than as set forth
under "Description of Capital Stock," the Company does not currently intend to
adopt any anti-takeover provisions.
DILUTION. The initial public offering price is expected to be substantially
higher than the net tangible book value per share of the Class A Common Stock.
Investors purchasing shares of Class A Common Stock in the Offering will
therefore incur immediate and substantial net tangible book value dilution. To
the extent that stock options (currently outstanding or subsequently granted) to
purchase Class A Common Stock are exercised, there will be further dilution. See
"Dilution."
BROAD DISCRETION IN APPLICATION OF NET PROCEEDS. The net proceeds to the
Company from the sale of the shares of Class A Common Stock offered hereby are
estimated to be approximately $21.7 million ($25.1 million if the Underwriters'
over-allotment option is exercised in full). The anticipated net proceeds to the
Company from the Offering have not been designated for specific uses other than
generally for potential acquisitions, working capital and general corporate
purposes. Accordingly, the Company's management and Board of Directors will
retain broad discretion with respect to the application of such proceeds. See
"Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Class A Common
Stock in the public market or the prospect of such sales could materially and
adversely affect the market price of the Class A Common Stock.
Upon completion of the Offering, the Company will have 2,700,000 shares of Class
A Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option). In addition, as of December 31, 1997, the Company had
granted stock options to certain employees and directors for the purchase of an
aggregate of approximately 865,000 shares of Common Stock. The 2,700,000 shares
of Class A Common Stock being sold hereby will be freely tradable (other than by
an "affiliate" of the Company as such term is defined in Rule 144 of the
Securities Act) without restriction or registration under the Securities Act.
All remaining shares were issued and sold by the Company in a private
transactions ("Restricted Shares") and are eligible for public sale if
registered under the Securities Act or sold in accordance with Rule 701
thereunder.
Titan, which will own 7,800,000 shares of Class B Common Stock upon completion
of the Offering, and certain restricted persons have agreed they will not sell
any shares of Common Stock owned by them without the prior written consent of
SBC Warburg Dillon Read Inc. for a period of 180 days from the effective date of
the Registration Statement of which this Prospectus is a part (the "Lockup
Period"). See
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18
<PAGE>
"Underwriting." Following the expiration of the Lockup Period, Titan and such
restricted persons may sell such shares only pursuant to the requirements of
Rule 144 or pursuant to an effective registration statement under the Securities
Act. Furthermore, the shares held by Titan and such restricted persons are
"restricted securities" within the meaning of Rule 144. Following the expiration
of the Lockup Period, 3,900,000 of the shares of Class B Common Stock held by
Titan will be eligible for sale in the public market subject to compliance with
Rule 144. The remaining 3,900,000 shares of Class B Common Stock held by Titan
will be eligible for sale in compliance with Rule 144 in September 1998.
Subject to certain limitations on the aggregate offering price of a transaction
and other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from the Company by its employees, directors,
officers, consultants or advisers prior to the closing of the Offering, pursuant
to written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to stock options granted by
the Company before the Offering, along with the shares acquired upon exercise of
such options. Securities issued in reliance on Rule 701 are deemed to be
Restricted Shares and, beginning 90 days after the date of this Prospectus
(unless subject to the contractual restrictions described above), may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements. See "Management--Stock Option Plans,"
"--Employee Stock Purchase Plan," "--Non-Employee Directors' Stock Option Plan,"
"Shares Eligible For Future Sale" and "Underwriting."
INVESTMENT COMPANY ACT CONSIDERATIONS. The regulatory scope of the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which was
enacted principally for the purpose of regulating vehicles for pooled
investments in securities, extends generally to companies engaged primarily in
the business of investing, reinvesting, owning, holding or trading in
securities. The Investment Company Act may, however, also be deemed to be
applicable to a company which does not intend to be characterized as an
investment company but which, nevertheless, engages in activities which may be
deemed to be within the definitional scope of certain provisions of the
Investment Company Act. The Company believes that its actions will not subject
the Company to regulation under the Investment Company Act. Nevertheless, there
can be no assurance that the Company will not be deemed to be an investment
company. In the event the Company is deemed to be an investment company, the
Company may become subject to certain restrictions relating to the Company's
activities, including, but not limited to, restrictions on the nature of its
investments and the issuance of securities. In addition, the Investment Company
Act imposes certain requirements on companies deemed to be within its regulatory
scope, including registration as an investment company, adoption of a specific
form of corporate structure and compliance with certain burdensome reporting,
record-keeping, voting, proxy, disclosure and other rules and regulations. The
characterization of the Company as an investment company may, under certain
circumstances, have a material adverse effect on the Company.
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS. Completion of the Offering
will result in substantial benefits to the Company's existing stockholders and
optionholders, including the creation of a liquid trading market and the
ability, subject to restrictions under applicable securities laws and market
stand-off agreements among such security holders, the underwriters and the
Company, to sell shares in a public market. Upon the completion of the Offering
(at an assumed initial public offering price of $9.00 per share), assuming no
exercise of the Underwriters' over-allotment option, the aggregate market value
of Common Stock held by existing stockholders, without regard to possible
regulatory or contractual restrictions on transfer, will be approximately $70
million, representing a substantial unrealized gain to existing stockholders.
See "--No Prior Market; Possible Volatility of Stock Price" and "--Shares
Eligible for Future Sale."
IMPACT OF THE YEAR 2000 ISSUE. The Year 2000 issue is a problem created by the
fact that most computer software programs have been written using two digits
rather than four to represent a specific year. Any of
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19
<PAGE>
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculation causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. Based on a recent
assessment, the Company has determined that it will be required to modify or
replace certain portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999. The Company presently believes
that with modifications to existing software and conversions to new software,
the Year 2000 issue can be mitigated, primarily by utilizing the Company's
internal resources to reprogram, replace and test the software for Year 2000
modifications. However, if such modifications and conversions are not made, or
are not completed on a timely basis, the Year 2000 issue could have a material
adverse impact on the operations of the Company. There also can be no assurance
that the systems of other companies on which the Company's systems rely will be
timely converted or that any such failure to convert by another company would
not have an adverse effect on the Company's systems. The Company has not yet
fully assessed the nature, extent and timing of the year 2000 project,
therefore, the total cost of the project cannot be reasonably estimated at this
time. The Company, however, is committed to completion of the project no later
than mid 1999.
FORWARD-LOOKING STATEMENTS
This Prospectus includes statements of a forward-looking nature. All statements,
other than statements of historical facts, included in this Prospectus which
address activities, events or developments which the Company expects or
anticipates will or may occur in the future, including such things as the
attainment of product development goals or the receipt of product orders or the
entering into of strategic relationships and other similar matters, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions and expected future developments as
well as other factors it believes are appropriate in the circumstances. However,
whether actual results and developments will conform with the Company's
expectations and predictions is subject to a number of risks and uncertainties
which could cause actual results to differ materially from the Company's
expectations, including the risk factors discussed in this Prospectus, including
the matters set forth in this section, and other factors, many of which are
beyond the control of the Company. Consequently, all of the forward-looking
statements made in this Prospectus are qualified by these cautionary statements
and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequences to or effects on the Company or
its business or operations. The Company assumes no obligation to update publicly
any such forward-looking statements, whether as a result of new information,
future events or otherwise.
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<PAGE>
USE OF PROCEEDS
- --------------------------------------------------------------------------------
The net proceeds to the Company from the sale of shares of Class A Common Stock
offered by the Company hereby are estimated to be $21.7 million ($25.1 million
if the Underwriters' over-allotment option is exercised in full), based on an
assumed public offering price of $9.00 per share, and after deduction of the
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
The Company intends to use the net proceeds from the Offering principally for
potential acquisitions and for working capital and general corporate purposes.
The amounts actually expended by the Company for such purposes will vary
significantly depending on a number of factors, including future revenue growth,
if any, the amount of cash, if any, generated by the Company's operations and
the consideration paid by the Company for acquisitions, if any. The Company's
management will retain broad discretion in the allocation of the net proceeds of
the Offering. As set forth above, the Company may use a portion of the net
proceeds to fund acquisitions of complementary technologies, products or
businesses, although the Company has no current agreements or commitments for
any such acquisition. Pending such uses, the Company intends to invest the net
proceeds of the Offering in short-term, interest bearing, investment-grade
securities.
DIVIDEND POLICY
- --------------------------------------------------------------------------------
The Company has never declared or paid any cash dividends on its Common Stock.
The Company currently intends to retain any future earnings for funding growth
and, therefore, does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. Although neither the Company's nor Titan's
various bank and loan agreements specifically prohibit the Company from
declaring or paying dividends, some of the financial covenants and ratio
requirements in Titan's credit or other agreements could, in certain limited
circumstances, effectively restrict the declaration or payment of cash dividends
by the Company.
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21
<PAGE>
CAPITALIZATION
- --------------------------------------------------------------------------------
The following table sets forth at December 31, 1997 (i) the actual
capitalization of the Company and (ii) the capitalization as adjusted to reflect
the receipt of the estimated net proceeds, based on an assumed initial public
offering price of $9.00 per share, from the sale of 2,700,000 shares of Class A
Common Stock being offered by the Company hereby and after deduction of the
underwriting discounts and commissions and estimated offering expenses payable
by the Company. This table should be read in conjunction with the Financial
Statements of the Company and related Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(in thousands)
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized, actual and as
adjusted; no shares issued or outstanding, actual and as adjusted.................. $ -- $ --
Class A Common Stock, $.001 par value, 30,000,000 shares authorized; none issued and
outstanding, actual; 2,700,000 shares issued and outstanding, as adjusted(1)....... -- 3
Class B Common Stock, $.001 par value; 7,800,000 shares authorized, issued and
outstanding, actual and as adjusted(1)............................................. 8 8
Additional paid-in capital........................................................... 29,760 51,456
Parent company investment............................................................ -- --
Retained deficit..................................................................... (11,501) (11,501)
--------- -----------
Total stockholders' equity......................................................... 18,267 39,966
--------- -----------
Total capitalization............................................................. $ 18,267 $ 39,966
--------- -----------
--------- -----------
</TABLE>
- --------------------------
(1) Excludes: (i) approximately 865,000 shares of Common Stock issuable upon
exercise of outstanding stock options as of December 31, 1997, at a weighted
average exercise price of $3.68 per share and (ii) approximately 1,183,000
shares of Class A Common Stock reserved for future issuance under the
Company's Stock Option Plans, Employee Stock Purchase Plan and Non-Employee
Directors' Stock Option Plan. See "Management," "Description of Capital
Stock" and Notes 8, 9 and 10 of Notes to Financial Statements. To the extent
that outstanding options are exercised in the future, there may be further
dilution to stockholders.
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<PAGE>
DILUTION
- --------------------------------------------------------------------------------
As of December 31, 1997, the Company had a net tangible book value of $17.2
million, or $2.21 per share of Common Stock. Net tangible book value per share
is determined by dividing the net tangible book value (tangible assets less
liabilities) of the Company by the 7,800,000 shares of Common Stock outstanding
at such date. Net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of Class A Common
Stock in the Offering, and the net tangible book value per share of Common Stock
immediately after the completion of the Offering. Without taking into account
any changes in net tangible book value after December 31, 1997 other than to
give effect to the sale by the Company of the 2,700,000 shares of Class A Common
Stock offered hereby (based upon an assumed offering price of $9.00 per share),
and the receipt by the Company of the estimated net proceeds therefrom, the pro
forma net tangible book value of the Company as of December 31, 1997 would have
been $3.71 per share. This represents an immediate increase in the pro forma net
tangible book value of $1.50 per share to existing investors, and an immediate
dilution in net tangible book value of $5.29 per share to new investors
purchasing shares of Class A Common Stock in the Offering.
The following table presents this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share................................. $ 9.00
Net tangible book value per share as of December 31, 1997........... $ 2.21
Increase per share attributable to the Offering..................... 1.50
---------
Pro forma net tangible book value per share after the Offering.......... 3.71
---------
Dilution per share to new investors..................................... $ 5.29
---------
---------
</TABLE>
The following table summarizes on a pro forma basis, as of December 31, 1997,
the differences between the existing stockholders and the purchasers of shares
in the Offering (at an assumed price of $9.00 per share) with respect to the
number of shares purchased from the Company, the total consideration paid and
the average price per share paid.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 7,800,000 74.3% $18,267,000 42.9% $ 2.34
New investors...................... 2,700,000 25.7 24,300,000 57.1 $ 9.00
---------- ------- ----------- -------
Total.......................... 10,500,000 100.0% $42,567,000 100.0%
---------- ------- ----------- -------
---------- ------- ----------- -------
</TABLE>
The preceding tables exclude: (i) approximately 865,000 shares of Common Stock
issuable upon exercise of outstanding stock options as of December 31, 1997, at
a weighted average exercise price of $3.68 per share and (ii) approximately
1,183,000 shares of Class A Common Stock reserved for future issuance under the
Company's Stock Option Plans, Employee Stock Purchase Plan and Non-Employee
Directors' Stock Option Plan. See "Capitalization" and "Management,"
"Description of Capital Stock" and Notes 8, 9 and 10 of Notes to Financial
Statements. To the extent that outstanding options are exercised in the future,
there may be further dilution to stockholders.
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23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following selected consolidated financial data as of December 31, 1996 and
1997 and for the years ended December 31, 1995, 1996 and 1997 have been derived
from and should be read in conjunction with the Company's audited financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
selected consolidated financial data as of December 31, 1993 and 1994 and for
the years ended December 31, 1993 and 1994 have been derived from financial
statements not included herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 25,246 $ 26,464 $ 25,506 $ 27,850 $ 48,980
Gross profit............................ (3,193) 9,480 10,016 9,195 17,072
Selling, general and administrative
expense............................... 7,287 4,841 6,298 7,230 7,690
Research and development expense........ 1,288 3,063 5,416 7,544 10,117
Operating income (loss) before interest
and income taxes...................... (11,768) 1,576 (1,698) (5,579) (735)
Parent company interest charge.......... 1,050 799 578 1,171 1,820
Income (loss) before income taxes....... (12,818) 777 (2,276) (6,750) (2,555)
Net income (loss)....................... (7,568) 513 (1,730) (4,455) (5,445)
Net income (loss) per share............. $ (0.97) $ 0.07 $ (0.22) $ (0.57) $ (0.70)
Weighted average common shares and
common share equivalents used in
computing income (loss) per share..... 7,800 7,800 7,800 7,800 7,800
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, 1997
------------------------------------------ --------------------------
1993 1994 1995 1996 ACTUAL AS ADJUSTED(1)
--------- --------- --------- --------- --------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ -- $ -- $ -- $ -- $ 717 $ 22,416
Working capital......................... 15,266 2,198 7,228 11,044 16,753 38,452
Total assets............................ 24,244 9,988 14,438 23,153 29,019 50,718
Long-term debt, including current
portion............................... -- -- -- -- -- --
Stockholders' equity.................... 18,005 4,538 10,072 15,601 18,267 39,966
</TABLE>
- --------------------------
(1) Adjusted to give effect to the receipt of the net proceeds from the sale of
2,700,000 shares of Class A Common Stock offered by the Company hereby (at
an assumed initial public offering price of $9.00 per share, after deduction
of underwriting discounts and commissions and estimated expenses payable by
the Company in connection with the Offering).
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24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
SECURITIES ACT. DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE
FOUND THROUGHOUT THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN THE MATERIALS
SET FORTH UNDER "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ACTUAL EVENTS OR
RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING WITHOUT LIMITATION THE
RISKS SET FORTH UNDER "RISK FACTORS" AND THE MATTERS SET FORTH IN THIS
PROSPECTUS GENERALLY.
OVERVIEW
Linkabit Wireless specializes in the development and production of advanced
satellite ground terminals, satellite voice/data modems, networking systems and
other products used to provide bandwidth efficient communications for government
and commercial customers. The Company also provides research, development and
engineering services for customers under contractual arrangements. These types
of services, as a percent of the Company's total revenues, declined in 1997, and
are expected to continue to decline as a percent of total revenues in the
future, as production and deliveries of Xpress Connection, Mini-DAMA and other
products increase. The Company utilizes contract manufacturers to produce a
significant portion of its products. These turn-key vendors currently are
located domestically and are an integral component of the Company's ability to
meet the demand for its products in a cost-effective manner. The Company expects
its turn-key vendors to play an increasing role in the future as more and more
of the Company's products are manufactured by third parties. However, all
quality assurance, test assembly and customer qualification are performed by the
Company's highly trained manufacturing and test personnel.
Historically, the Company's revenues have been derived from contracts with the
agencies of the U.S. government, principally the Department of Defense ("DOD").
U.S. government revenues amounted to $21.7 million, $25.2 million and $28.8
million, or 85%, 90% and 59% of total revenues, for the years ended December 31,
1995, 1996, and 1997, respectively. Beginning in 1995, the Company began to
realize the benefit of its strategy of leveraging the technology developed in
its defense business to produce commercial products and generate commercial
sales. Commercial revenues have totaled $3.8 million, $2.6 million and $20.2
million for the years ended December 31, 1995, 1996 and 1997, respectively.
Aggregate Company revenues increased from $25.5 million for the year ended
December 31, 1995 to $27.8 million for the year ended December 31, 1996 and to
$49.0 million for the year ended December 31, 1997. The Company has achieved
this growth exclusively through internally generated business.
Substantially all of the Company's commercial sales to date have been to
customers located in the Pacific Rim, principally to PSN. The Company has a
strategic relationship with PSN, whereby the Company and PSN work jointly to
market each others' products and services throughout Asia. The Company believes
that sales of its products to PSN and other foreign customers may become more
significant and that its revenue mix could be predominately with foreign
customers in the future. The Company's contracts have all been U.S.
dollar-denominated to date. As a result, a decline in the value of certain
foreign currencies relative to the U.S. dollar could make certain of the
Company's products less price-competitive. This risk is particularly sensitive,
given the recent currency devaluations in Indonesia, Malaysia, Taiwan, Thailand
and the Philippines, countries in which the Company currently sells or intends
to sell its commercial products. The Company believes that its global
competitors generally denominate their contracts in U.S. dollars and, thus, are
faced with similar risks. 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. In addition, certain of the Company's customers in
these foreign countries have encountered or may encounter in the future
financial difficulties resulting from such
- --------------------------------------------------------------------------------
25
<PAGE>
foreign currency fluctuations or other economic, social or political
instabilities which could restrict their ability to fulfill their contractual
obligations to the Company. Furthermore, a precipitous decline in such foreign
currency values or significant economic, social or political changes in these
foreign countries could result in certain of the Company's customers and local
subcontractors and partners refusing or becoming unable 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. The Company intends to
mitigate the effect on the Company resulting from the devaluation of any one or
more foreign currencies by establishing a customer base in several different
regions of the world. However, there can be no assurance that the Company will
successfully establish a geographically diverse customer base, or that a decline
in the value of any one foreign currency relative to the U.S. dollar or an
economic, social or political change in any such country will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company attempts to mitigate credit risk relative to sales to foreign
customers through its policy of requiring payment primarily in the form of
stand-by letters of credit, advance deposits or wire transfers prior to
shipment.
The Company's commercial products and services currently are sold and provided
through fixed-price contracts. The Company's government products and services
are sold and provided primarily through three types of contracts: fixed-price,
time-and-materials and cost-reimbursement. The Company derived approximately
77%, 88% and 90% of government contract revenues from fixed-price contracts for
the years ended December 31, 1995, 1996 and 1997, respectively. These contracts
require the Company to provide products and services under a contract at a
predetermined price. The Company derived approximately 11%, 2% and 6% of its
government revenues for the years ended December 31, 1995, 1996 and 1997,
respectively, from time-and-materials contracts. These contracts provide for the
reimbursement of labor hours expended at an established hourly rate negotiated
in the contract, plus the cost of materials utilized in providing such products
or services. The remaining 12%, 10% and 4% of the Company's government revenues
for the years ended December 31, 1995, 1996 and 1997, respectively, were derived
from cost-reimbursement contracts. These contracts provide for the reimbursement
of all actual costs incurred in performing the contracts to the extent that such
costs are within the contract ceiling and allowable under the terms of the
contracts, plus fee or profit. See "Risk Factors--Contract Profit Exposure;
Development Contracts."
The Company's gross profit margins historically have varied as a result of the
nature and mix of contracts in progress. For example, gross profit margins on
production-type contracts typically exceed margins on development contracts.
As of December 31, 1997, the Company had a total backlog of $133.1 million, of
which approximately 30% is expected to be delivered by December 31, 1998. The
Company's backlog consisted of the following approximate amounts as of December
31, 1997:
<TABLE>
<CAPTION>
BACKLOG
- ----------------------------------------------------------------------------
<S> <C>
U.S. Government backlog..................................................... $ 77.5
Commercial backlog.......................................................... 55.6
---------
$ 133.1
---------
---------
</TABLE>
The backlog above includes unfunded U.S. government and commercial priced
contract options of approximately $61 million and $25 million, respectively.
Although the Company expects that a substantial number of these options will be
exercised in the future, there can be no assurance that any such options will be
exercised. See "Business--Backlog."
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26
<PAGE>
Selling, general and administrative ("SG&A") expenses consist primarily of
personnel costs and expenses for business development, marketing, sales, general
management, contract administration and finance. The Company's SG&A expenses
have increased as its revenues have increased. However, SG&A expenses as a
percent of revenues have decreased as economies of scale and efficiencies have
been achieved. The Company intends to significantly increase its sales and
marketing efforts, particularly in the latter part of 1998.
Historically, the Company has made significant investments in independent
research and development ("R&D"). The Company maintains a staff of engineers,
other scientific professionals and support personnel engaged in development of
new applications of technology and improvements of existing products. R&D
expenses consist primarily of salaries and other personnel-related expenses,
supplies and prototype materials related to research and development programs.
R&D expenditures for each of the last several years were incurred primarily in
connection with the development of Xpress Connection, satellite telephony and
other satellite DAMA products. A significant portion of 1996 and 1997 R&D
expenses relate to the LST-5D, LSM-1000, Mini-DAMA and Xpress Connection
development efforts, the majority of which were completed as of December 31,
1997. R&D costs are expensed as they are incurred.
Total expenditures for research and development, including customer funded
development, were $8.5 million, $9.8 million and $11.0 million for the years
ended December 31, 1995, 1996 and 1997, respectively. The majority of the
Company's customer funded development activity has historically been funded
under contracts with the U.S. government. This funding is accounted for as
revenue and the related development expenditures are expensed as costs of
revenue. Customer funded development was $3.1 million, $2.3 million, and $0.9
million for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company expects that total research and development expenditures will
increase in 1998. However, due to the planned increases in customer funded
development in early 1998, the Company expects that its independent R&D expenses
will decrease in fiscal 1998 compared to 1997.
The Company and Titan have entered into a Corporate Services Agreement, pursuant
to which Titan's corporate staff and shared services organization will provide
certain administrative services, including accounting, tax, legal, risk
management, employee benefit administration, centralized cash management and
certain other services to the Company for a fee. To date, such allocations have
been generally based on the proportionate labor costs, revenues and carrying
value of net tangible assets of the Company to the rest of Titan and have been
included in the Company's results of operations. See "Relationship with Titan
and Certain Transactions."
The Company and Titan have also entered into a Tax Allocation Agreement, under
which the Company will be included in Titan's consolidated federal and state
income tax returns, as long as Titan owns at least 80% of the total voting power
of the Company and stock with a value equal to at least 80% of the total value
of the Company. The impact of the Company being party to such a tax allocation
agreement is not expected to materially impact the Company's income tax
liability relative to what it would be if it were an independent taxpayer. The
Company has recently established a wholly-owned foreign subsidiary, Linkabit
Wireless Limited, to potentially facilitate its ongoing global business
endeavors, as well as its world-wide tax-planning strategy.
- --------------------------------------------------------------------------------
27
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
operations data for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues..................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................. 60.7 67.0 65.1
----- ----- -----
Gross profit................................................. 39.3 33.0 34.9
Operating expenses:
Selling, general and administrative........................ 24.7 25.9 15.7
Research and development................................... 21.2 27.1 20.7
----- ----- -----
Operating profit (loss)...................................... (6.6) (20.0) (1.5)
Parent company interest charge............................... 2.3 4.2 3.7
Income (loss) before income taxes............................ (8.9) (24.2) (5.2)
Income tax provision (benefit)............................... (2.1) (8.2) 5.9
----- ----- -----
Net income (loss)............................................ (6.8)% (16.0)% (11.1)%
----- ----- -----
----- ----- -----
</TABLE>
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
REVENUES. The Company's revenues increased 75.8% from $27.9 million for the
year ended December 31, 1996 to $48.9 million for the year ended December 31,
1997. This increase is due primarily to the fulfillment of the Company's initial
order for Xpress Connection units with PSN, and, to a lesser extent, to an
increase in deliveries of Mini-DAMA, LST-5D and LSM-1000 UHF Satcom products.
Specifically, Xpress Connection and Mini-DAMA related revenues increased 633.8%
and 27.5%, respectively, for the year ended December 31, 1997, compared to the
year ended December 31, 1996. Revenues increased 9.2% from $25.5 million in 1995
to $27.8 million in 1996. This increase reflects the growth in defense related
production and development contracts, primarily associated with the Company's
Mini-DAMA product and the Company's LST-5D and LSM-1000 UHF Satcom products.
Revenues from production orders increased from $9.5 million (37.2% of revenues)
in 1995 to $14.7 million (52.7% of revenues) in 1996.
GROSS PROFIT. The Company's gross profit margins have varied in the past due to
the stage of completion and changing mix of its contracts, which have included
development, initial production and full-scale production contracts. The
increase in gross profit margins in 1997 was primarily a result of an increase
in full scale production type contracts, which generally carry higher gross
profit margins. Gross profit margin, excluding a $1.4 million one time credit
recorded in 1995 related to the resolution of a dispute regarding amounts owed
to the Company for work completed prior to termination of a contract, decreased
from 35.7% (pro forma) for the year ended December 31, 1995 to 33.0% for the
year ended December 31, 1996. This change was due to a number of factors
including product mix, stage of completion of certain contracts and decreased
revenues from certain of the Company's commercial products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased from $7.2
million for the year ended December 31, 1996 to $7.7 million for the year ended
December 31, 1997. During this same period, SG&A expenses as a percent of
revenues decreased from 25.9% to 15.7%, substantially as a result of a 75.9%
increase in revenue, with only a 6.4% increase in SG&A expenses. SG&A expenses
increased from $6.3 million in 1995 to $7.2 million in 1996. SG&A expenses
increased during 1997 and 1996, primarily as a result of the addition of sales,
marketing and customer service personnel required to support the Company's
revenue growth. SG&A expenses as a percent of revenues increased from 24.7% to
25.9% from 1995 to 1996.
RESEARCH AND DEVELOPMENT. R&D expenses increased from $7.5 million for the year
ended December 31, 1996 to $10.1 million in the year ended December 31, 1997.
This increase resulted primarily from higher
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28
<PAGE>
R&D expenditures related to the Company's Xpress Connection product and certain
certification costs related to the Company's LSM-1000 and LST-5D UHF Satcom
products. During this period, R&D expenses as a percent of revenues decreased
from 27.1% to 20.7%, due primarily to the higher rate of growth in revenue
during the period. R&D expenses increased from $5.4 million in 1995 to $7.5
million in 1996. This increase primarily reflects increased labor and related
costs associated with the ongoing development of the Company's Mini-DAMA, Xpress
Connection and other products during the period. During the same periods, R&D
expenses as a percent of revenues increased from 21.2% to 27.1%.
PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision for the year
ended December 31, 1997 approximated an effective rate of 113%, compared to
(34%) for the year ended December 31, 1996, resulting primarily from the income
tax incurred on the sale of certain intellectual property of the Company to its
wholly-owned subsidiary, Linkabit Wireless, Ltd. This provision was somewhat
offset by Titan's ability to more fully utilize losses generated by Linkabit
Wireless. The income tax (benefit) in 1996 approximated an effective rate of
(34%), compared to (24%) in 1995. The lower 1995 income tax (benefit) was
limited to (24%) due to Titan's inability to fully utilize certain of the
Company's net operating loss carry forwards at that time.
QUARTERLY RESULTS
The following table sets forth certain financial information for each of the
Company's last eight quarters. The information for each of these quarters is
unaudited but includes all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
this information when read in conjunction with the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus. The results of operations
for any quarter and any quarter-to-quarter trends are not necessarily indicative
of results to be expected for any future periods (all amounts in thousands).
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------
1996 1997
-------------------------------------------- -------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31
--------- -------- --------- --------- --------- -------- --------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 6,160 $ 6,110 $6,680 $ 8,900 $11,025 $12,501 $11,093 $14,361
Gross profit.................. 1,902 1,947 2,231 3,115 3,599 4,228 3,978 5,267
Selling, general and
administrative.............. 1,839 1,707 1,664 2,020 1,960 1,950 1,773 2,007
Research and development...... 1,811 2,101 1,498 2,134 1,929 3,263 2,938 1,987
--------- -------- --------- --------- --------- -------- --------- --------
Operating income (loss) before
interest and income taxes... (1,748) (1,861) (931) (1,039) (290) (985) (733) 1,273
Parent company interest
charge...................... 196 315 243 417 396 454 402 568
--------- -------- --------- --------- --------- -------- --------- --------
Income (loss) before income
taxes....................... (1,944) (2,175) (1,174) (1,456) (686) (1,439) (1,135) 705
Net loss...................... $(1,283) $(1,436) $ (775) $ (961) $ (439) $ (921) $ (727) $(3,358)
--------- -------- --------- --------- --------- -------- --------- --------
--------- -------- --------- --------- --------- -------- --------- --------
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
The following table sets forth the above unaudited quarterly financial
information as a percentage of total revenues.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------
1996 1997
-------------------------------------------- --------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31
--------- -------- --------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit....................... 30.9 31.9 33.4 35.0 32.6 33.8 35.9 36.7
Selling, general and
administrative................... 29.9 27.9 24.9 22.7 17.7 15.6 16.0 14.0
Research and development........... 29.4 34.4 22.4 24.0 17.5 26.1 26.5 13.9
--------- -------- --------- --------- --------- -------- --------- ---------
Operating income (loss) before
interest and income taxes........ (28.4) (30.4) (13.9) (11.7) (2.6) (7.9) (6.6) 8.8
Parent company interest charge..... 3.2 5.1 3.6 4.7 3.6 3.6 3.6 4.0
--------- -------- --------- --------- --------- -------- --------- ---------
Income (loss) before income
taxes............................ (31.6) (35.5) (17.5) (16.4) (6.2) (11.5) (10.2) 4.8
Net loss........................... (20.8)% (23.5)% (11.6)% (10.8)% (4.0)% (7.4)% (6.5)% (23.4)%
--------- -------- --------- --------- --------- -------- --------- ---------
--------- -------- --------- --------- --------- -------- --------- ---------
</TABLE>
The Company has experienced and expects to continue to experience significant
fluctuations in quarterly and annual revenues, gross margins and operating
results, and there can be no assurance that the Company will be profitable in
any particular period. Demand for the Company's products, particularly its
commercial products, can vary significantly from quarter to quarter due to
revisions in budgets or schedules for customer projects requiring the Company's
products, changes in demand for customers' products which incorporate or utilize
the Company's products and other factors beyond the Company's control.
Furthermore, announcements by the Company or its competitors of new products and
technologies could cause customers to defer or cancel purchases of the Company's
products, which could materially adversely affect the Company's business,
financial condition and results of operations or result in fluctuations in the
Company's results of operations from period to period. In addition, the
procurement process for most of the Company's current and potential customers is
complex and lengthy, generally ranging from 6 to 36 months from the time of the
initial customer contact, depending on the customer and the type of contract,
and the timing and amount of revenues is difficult to reliably predict. A single
customer's order scheduled for delivery in a quarter can represent a significant
portion of the Company's potential revenues for such quarter. During the year
ended December 31, 1997, approximately 28% and 37% of the Company's revenues
were derived from contracts with its largest customers, PSN and the U.S. Navy,
respectively. Any disruption with respect to either of these customers could
have a material adverse effect on the Company in any period where such a
disruption occurs. As a result, the Company's operating results for particular
periods have in the past been and may be adversely affected by a delay,
rescheduling or cancellation of even one purchase order. In addition, the
Company recognizes a majority of its revenues under the percentage of completion
method which requires the Company to estimate the costs that will be incurred
over the life of a specific contract. Actual results may differ from those
estimates. In such event, the Company may be required to adjust revenues in
subsequent periods to account for revisions of prior period estimates. Further,
purchase orders and production contracts are often received and accepted
substantially in advance of delivery, and the failure to operate within budgeted
contract costs could materially adversely affect the gross margins for such
orders, and as a result, the Company's results of operations. Average selling
prices for the Company's products may also fluctuate from period to period due
to a number of factors, including product mix, competition, customer demand for
products and unit volumes. A large portion of the Company's expenses are fixed
and would be difficult to reduce in a timely manner should revenues not meet the
Company's expectations, thus magnifying the adverse effect of any revenue
shortfall. Additional factors that may cause the Company's revenues, gross
margins and results of operations to vary significantly from period to period
include mix of products sold; stage of completion of contracts; costs; price
discounts; market acceptance and the timing of availability of new products by
the Company or its customers; usage of different distribution and sales
channels; warranty and customer support expenses; customization of products; and
general economic and political conditions. There can be
- --------------------------------------------------------------------------------
30
<PAGE>
no assurance that the Company will realize positive operating results in the
future, and even if so realized, there can be no assurance as to the level of
such operating results.
In addition, the Company's results of operations are influenced by competitive
factors, including the pricing and availability of, and demand for, its
products. All of the above factors are difficult for the Company to forecast,
and these and other factors could materially adversely affect the Company's
business, financial condition and results of operations or result in
fluctuations in the Company's results of operations from period to period. As a
result, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through advances from
Titan. The Company has experienced significant growth since 1995. To achieve and
support this growth, the Company has expended significant amounts of cash for
R&D activities, ramping up of its sales, marketing and customer service
activities, as well as for working capital requirements. Cash used for
operations for the years ended December 31, 1995, 1996 and 1997 was $6.2
million, $8.2 million and $8.9 million, respectively. As of December 31, 1997,
Titan contributed $29.8 million of its parent company investment to the
Company's capital. The Company's $3.0 million note payable to parent company as
of December 31, 1997 represents the cumulative future benefit of net operating
losses funded by Titan in prior years. This amount is expected to be repaid to
Titan based upon future cash generated from operations by the Company.
Management believes that future cash needs will continue to be significant to
fund the anticipated growth of the Company. The actual capital requirements of
the Company will depend upon many factors, including, but not limited to, the
Company's research and development efforts, and the nature and timing of
commercial orders. The Company believes that the net proceeds from the Class A
Common Stock offered hereby, along with the net cash generated from operating
activities, will be adequate to meet the Company's working capital and capital
expenditure requirements over the next 12 months. Management of the Company
intends to invest the Company's cash in excess of operating needs and capital
requirements in short-term, interest bearing, investment-grade securities. See
also "Use of Proceeds." Although the Company presently does not have or
anticipate a need for outside financing facilities, the Company believes that,
if and when such need arises, the Company will, subject to certain limitations
and restrictions set forth in Titan's loan agreements, have access to lines of
credit or financing facilities available to Titan.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is a problem created by the fact that most computer software
programs have been written using two digits rather than four to represent a
specific year. Any of the Company's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. Based on a recent assessment, the Company has determined that it
will be required to modify or replace certain portions of its software so that
its computer systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 issue can be mitigated, primarily by
utilizing the Company's internal resources to reprogram, replace and test the
software for Year 2000 modifications. However, if such modifications and
conversions are not made, or are not completed on a timely basis, the Year 2000
issue could have a material adverse impact on the operations of the Company.
There also can be no assurance that the systems of other companies on which the
Company's systems rely will be timely converted or that any such failure to
convert by another company would not have an adverse effect on the Company's
systems. The Company has not yet fully assessed the nature, extent and timing of
the year 2000 project, therefore, the total cost of the project cannot be
reasonably estimated at this time. The Company, however, is committed to
completion of the project no later than mid 1999.
- --------------------------------------------------------------------------------
31
<PAGE>
BUSINESS
- --------------------------------------------------------------------------------
OVERVIEW
Linkabit Wireless specializes in the development and production of advanced
satellite ground terminals, satellite voice/data modems, networking systems and
other products used to provide bandwidth efficient communications for government
and commercial customers. The Company's market driven product development
efforts have resulted in products which are particularly well suited for two
significant market opportunities, secure defense communications and rural
telephony.
Linkabit Wireless has developed substantial expertise in DAMA technology and
critical engineering disciplines such as satellite ground system design, RF and
digital engineering, digital and communications signal processing software,
network management and modem technology. The Company has benefited from
substantial and continued investment in its technology and products. The
government business has benefited from the Company's investment in the design
and production of commercial products which can satisfy the government's demand
for more COTS products. Similarly, the Company's commercial products leverage
the advanced technologies and broad technical competencies developed from the
substantial investment in its government business.
INDUSTRY BACKGROUND
Satellite technology, because of its unique capabilities and features, is
becoming increasingly important for commercial and defense communications.
Currently, there are approximately 530 satellites in earth's orbit and an
additional 1,800 satellites are expected to be launched over the next ten years.
The U.S. government launched the first telecommunications satellite in 1958
primarily to demonstrate signal communications by an orbiting relay. The
commercial satellite industry soon followed with the launch of the initial
active telecommunications satellite in July 1962, which carried the first live
television broadcast between the United States and Europe. Commercial satellite
applications quickly expanded with transcontinental voice communication and
television broadcasts. More recently, research and development efforts targeted
at both military and commercial markets have led to a number of significant
improvements and enhancements in satellite communications technology, resulting
in more cost-effective and technologically efficient products for varying
communications applications. As a result of military budget constraints, the
government has emphasized the procurement of cost-effective, open-architecture
systems that can incorporate less expensive COTS components. In this context,
commercial research and development efforts have resulted in the creation of
products and technology platforms that can easily be adapted to defense-oriented
applications. Existing available commercial satellite capacity, coupled with the
recent development of relatively low cost ground terminals, have made satellite
communication solutions a reality for both the secure defense communications and
rural telephony markets.
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32
<PAGE>
SECURE DEFENSE COMMUNICATIONS
The U.S. military has for a number of years been reliant on satellite technology
for its secure communications needs. Today, in order to respond effectively to
hostile situations worldwide, and to compensate for reductions in defense
personnel and weapons platforms, U.S. and allied governments are increasingly
employing systems that act as "force multipliers." This strategy includes the
utilization of communications solutions that are specifically tailored to the
needs of military and intelligence agencies and which provide secure and
reliable transmission and receipt of voice and data in demanding environments.
The military's increasing reliance on satellite communications, though, has
placed considerable demands on existing capacity. The increasing requirements of
modern defense systems and improvements in technology have resulted in
substantially higher volumes of information communicated over military satellite
channels and greater use of capacity intensive applications such as image
compression and transmission.
The U.S. government initially selected UHF for its secure communications
transmissions primarily because it enabled the use of small, portable,
omni-directional antennas with relatively low power requirements, thus
supporting dynamic platforms such as naval vessels and aircraft and supporting
use in manportable applications. UHF satellite systems that were originally used
for the transmission of low speed message traffic to relatively few users are
now being utilized to transmit voice and high speed encrypted data to thousands
of users. Increases in the number of UHF satellite channels have not kept pace
with the increased demand resulting from the greater number of users and the
additional capacity utilized by these new technologies. However, the U.S.
government remains committed to the use of UHF as the primary frequency band to
support secure communications, despite the availability of other alternatives.
The government has a substantial investment in UHF technology, including both an
installed satellite infrastructure and base of support equipment on the ground
that cannot be readily replaced. For example, the Navy's investment in UHF
ground terminals exceeds $3.0 billion. The magnitude of this installed base has
focused the military's efforts on improving the capacity of its UHF satellite
network and using open-architecture systems that incorporate low-cost, COTS
components.
Additional system capacity can be made available, and more users accommodated,
through a more efficient use of available frequencies. The JCS mandate is, in
large part, due to the recognition of the significant efficiency benefits
offered by DAMA technology, including DAMA's ability to prioritize system access
to specific users or specific transmissions. The government expects DAMA to
increase capacity for UHF tactical users by a factor of as much as eight,
depending on the application and traffic usage, compared to dedicated non-DAMA
links. To satisfy the government's mandate, virtually all U.S. forces and U.S.
allies are either upgrading existing products or procuring new UHF DAMA
satellite terminals.
In addition, despite its commitment to UHF, the U.S. government recognizes the
need to expand defense communications capabilities beyond the traditional
military frequency spectrum. Even with more efficient use of the UHF spectrum
resulting from the utilization of DAMA-based equipment, the UHF spectrum will
likely continue to be saturated during times of conflict. Accordingly, defense
communications technology has matured to the point where it will be necessary to
accommodate multiple radio frequency bands in a single communications terminal.
It is therefore anticipated that defense communications products will be
required to provide bandwidth access from HF (~100 kHz) through L and S-bands
(~2.0 GHz) in a single radio. Similarly, while DAMA is initially being applied
to the UHF satellite frequency band, other frequency bands such as Super High
Frequency (SHF), Extremely High Frequency (EHF) and commercial C, K(u) and K(a)
bands are being targeted for implementation of DAMA technology.
Until recently, the U.S. government generally commissioned new products to be
designed and developed under development contracts which required the products
to meet very rigorous military specifications. In order to reduce costs, the
U.S. government has now shifted to a non-development procurement approach,
pursuant to which it attempts to utilize COTS components where feasible and
encourages companies to perform their own research and development programs to
have products readily available for purchase. As a result, defense spending that
was traditionally allocated for research and development contracts is now
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33
<PAGE>
allocated for the procurement of commercially available products. To maintain
its stated objective of "information superiority," the U.S. government will need
to continue to fund the design and development of new products that are on the
leading edge of technology and meet very rigorous specifications.
In light of the demand for low cost satellite network capacity, the secure
defense communications market presents significant opportunities for companies
that are able to offer cost effective solutions which enable compliance with the
JCS mandate and that can provide COTS solutions for other satellite
communications applications, including products that allow secure communications
transmissions through both defense and commercial satellite networks.
Significant opportunities are also present for those companies that have
sufficient resources available to design and develop state-of-the-art products
that satisfy demanding operational requirements.
RURAL TELEPHONY
Vast regions of the world remain without adequate telecommunications
infrastructure. According to industry sources, 50% of the world's population has
never made a telephone call. In 1995, there were approximately 3.22, 9.43 and
1.71 subscriber lines in service per 100 inhabitants in Southeast Asia, Latin
America and Africa, respectively, compared to 62.71 in the United States. In
these developing regions, non-urban areas now account for 67.0%, 26.3% and 66.2%
of the population in Southeast Asia, Latin America and Africa, respectively.
Although many countries in these regions are developing urban wired telephony
systems, economic considerations in these countries have made the provision of
wired telephone service to rural areas cost prohibitive. A confluence of several
factors, including advancements in voice transmission technologies, development
of low cost ground terminals and the existence of available commercial satellite
capacity, has made the provision of telephone service (including voice, fax and
data services) possible in these rural areas.
The substantial economic benefits of telecommunications infrastructure have been
well documented. The World Bank estimates that each dollar spent on
telecommunications infrastructure in developing regions of the world results in
approximately 35 dollars of Gross Domestic Product, and that sustainable
economic growth in such regions requires approximately 50 subscriber lines in
service per 100 inhabitants. In light of these economic considerations, as well
as for political reasons, governments in developing countries, particularly in
Africa, Latin America and Asia, have recently shown an increased interest in
providing rural telephone services. In Indonesia, for example, the government is
requiring that a minimum of 20% of all new telephone lines installed be in rural
areas. Also, the movement of rural populations towards urban-based activities
and employment has served to geographically disperse families in developing
countries, necessitating the development of communications capabilities between
cities and rural areas. Even in countries with a relatively well-developed PSTN,
telephone coverage is sparse just beyond the outer boundaries of the cities and
large population centers. People living in these urban-fringe areas, who are
more likely to have some knowledge about telephone capabilities than their rural
counterparts, are in need of quality in-home telephone service. Furthermore,
economic development of rural areas has increased the need for an adequate
telephony infrastructure. Companies with manufacturing, processing and
distribution interests in these areas need adequate telephony capabilities to
operate with greater efficiency.
Today, there are principally three transmission alternatives available for
providing rural telephone service: wired, terrestrial wireless and satellite
networks. Of these three alternatives, satellite networks are uniquely suited to
provide a rapidly available solution for the rural telephony market. Satellite
networks, unlike wired networks, do not require the installation of significant
infrastructure over long distances and difficult terrain. Wired networks are
generally cost prohibitive for use in rural areas and can take a number of years
to complete. Terrestrial wireless systems, in particular microwave radio
networks, are subject to line-of-sight limitations, require a large number of
microwave towers (one approximately every 20 to 50 kilometers), compete with
other users for radio frequency spectrum and also require substantial time and
expense to install. Satellite networks, on the other hand, have substantial
available capacity and provide
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broad geographic coverage. In fact, most areas with large rural populations are
within the footprint of one or more commercial satellites in orbit today. At any
location within the footprint of these satellite networks, ubiquitous telephone
service can be established simply by installing small, low-cost ground terminals
with links to the country's PSTN. Moreover, such satellite networks have
relatively lower infrastructure costs compared to wired and terrestrial wireless
networks, are not constrained by topographical or climatic characteristics and
can be rapidly and economically deployed, upgraded and reconfigured.
The three principal types of satellite communications networks are (i) direct
broadcast, which provide a direct transmission link from high-power satellites
to customers over a wide geographic area, (ii) mobile, which enable voice and
data communications through small portable terminals, including hand-held
phones, and (iii) fixed-site, which provide television, voice, facsimile and
data communications between fixed ground terminals. Direct broadcast satellite
networks are best suited for one-way, continuous transmissions such as
direct-to-home television, music and data and, for this reason, are not
optimized for use in the rural telephony market. Mobile satellite networks, in
order to operate with hand-held mobile phones, utilize specially designed
satellites which operate at high power and at lower frequencies where less
bandwidth is available than with fixed-site satellite systems. As a result,
mobile satellite systems generally are more expensive and are not as well suited
for rural telephony applications in developing countries as fixed-site satellite
networks. Fixed-site satellite telephony systems are therefore increasingly
being utilized by developing countries which seek to provide a practical, cost
effective means to quickly extend the PSTN and provide basic telephone service
to rural areas.
Several characteristics of rural telephony networks are of particular importance
to countries committed to establishing an extensive rural telephony network.
First and foremost, a rural telephony system must be cost-effective. Second, a
rural telephony system must be capable of connecting many thousands of ground
terminals with the national PSTN. Third, individual terminals must be easy to
transport and simple to install. Fourth, ground terminals must be easy to use,
low maintenance, highly reliable, capable of operating unattended for lengthy
periods and, in some instances, able to withstand extreme heat, rain and
humidity conditions. Fifth, terminals must be able to operate on a wide range of
locally available power sources. Finally, a rural telephony system must be
scaleable to meet the increasing demands of certain locations.
THE COMPANY'S SOLUTION
Linkabit Wireless specializes in the development and production of advanced
satellite ground terminals, satellite voice/data modems, networking systems and
other products used to provide bandwidth efficient communications for government
and commercial customers. The Company believes its expertise positions it to
respond to the demands of the secure defense communications industry and the
requirements of the emerging rural telephony market.
SECURE DEFENSE COMMUNICATIONS
Linkabit Wireless is a leading provider of UHF DAMA-based defense products for
the U.S. military and its allies. The Company's DAMA solutions allow defense
customers to select the manner in which they will comply with the JCS mandate.
The Company has developed several COTS products that are designed to enhance the
sub-system functionality of DAMA systems, and has engineered a solution to meet
the growing need to expand military communications capabilities to commercial
satellite networks. In addition to its defense products, the Company's
experienced research and development team is available to design and develop
state-of-the-art products that meet very rigorous military specifications. The
Company's secure defense communications solution consists of the following:
COMPLETE SUITE OF UHF DAMA PRODUCTS. The Company offers a three tiered,
turn-key, fully functional solution to the JCS mandate. Defense customers can
select the product best suited to their individual needs, including complete
DAMA terminals, stand-alone DAMA modem products and board level DAMA
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modems for incorporation into an existing communication terminal. The Company's
DAMA products combine the attractive characteristics of low cost, low power and
reduced weight and size, and provide for high reliability through reduced
component count. Each of the Company's DAMA products has been developed with an
open-architecture format that allows future upgrades and enhancements to be
provided as communications needs evolve.
COTS PRODUCTS. The Company has developed several board level products that are
designed to enhance the sub-system functionality of communications systems. One
such COTS product is the Company's communication security module, which encrypts
data transmission and can be integrated into an existing communications
terminal.
TRI-BAND PRODUCTS. The Company has developed a portable terminal system that
allows existing communications equipment to transmit over commercial C, X and
Ku-band satellites, thereby providing the military with the flexibility of
communicating through either defense or commercial networks.
RESEARCH AND DEVELOPMENT CAPABILITIES. The Company has an experienced team of
engineers and technicians with expertise in critical engineering disciplines
such as satellite ground system design, RF and digital engineering, digital and
communications signal processing software, network management and modem
technology. This team of engineers is available to design and develop
state-of-the-art products that meet demanding military specification
requirements.
RURAL TELEPHONY
The Company specializes in the development and production of advanced fixed-site
satellite terminals and associated voice/data processing modems for
implementation in rural and urban-fringe areas. Linkabit Wireless has designed a
network of fixed-site satellite terminals which satisfies the requirements of
countries committed to establishing an extensive rural telephony network. To
date, such a network has been developed in Indonesia utilizing the Company's
products. These terminals provide telephone, facsimile and data communications
services to rural areas not previously served by the national PSTN. This
telephony solution combines the following characteristics:
LOW COST TERMINAL. Leveraging recent advancements in voice transmission
technologies, the Company has developed a relatively low cost terminal that
operates in a fixed-site satellite network.
LOW OPERATING COSTS. The Company's rural telephony products utilize its
defense-derived DAMALink network management software system, which allows for
multiple simultaneous users to efficiently access the same satellite channel,
resulting in "space segment" cost savings and improved operational flexibility.
In addition, a complete national network is controlled and managed from a
central location via a PC-based network management system, resulting in
increased operating efficiencies. With the exception of the central control
site, the system is unmanned. Early experience in Indonesia has demonstrated
that the Company's rural telephony products can provide affordable telephone
service to rural inhabitants.
CONNECTION TO PSTN. The Company's rural telephony system is one of the first
revenue generating systems to provide a direct connection to the PSTN. This
system makes it possible for telephone calls to be placed from remote terminals
in rural areas to any phone within the country through the national PSTN and any
phone in the world through the international PSTN.
PORTABLE AND EASY TO INSTALL. Portability and ease of installation are of
particular importance in rugged terrains that are characteristic of many rural
areas. The electronic components of the Company's ground terminals weigh less
than 20 pounds and are used with small portable "dish" antennas, facilitating
transportation to remote sites. Installation, testing and inauguration of the
antenna and the Company's ground terminal can be completed in about four hours
by two trained technicians using nothing more than hand tools.
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RUGGED AND RELIABLE. Terminals designated for installation in rural areas are
designed to withstand extreme heat, rain and humidity conditions with little or
no maintenance required. Operational status of individual terminals can be
monitored from the network control center, and any required reconfiguration or
upgrades can be accomplished by sending new software via satellite links to
individual terminals during down-times.
VARIETY OF POWER SOURCES. The Company's ground terminals are capable of
operating on a wide range of locally available power sources. For example, the
Company's Xpress Connection is capable of operating on solar power.
SCALEABLE AND ADAPTABLE. The Company's rural telephony systems are scaleable to
provide as many channels as are required to meet a specific location's
communications needs. In addition, the core technologies and designs of the
Company's rural telephony terminals can be adapted for private commercial
networks.
STRATEGY
The Company's goal is to become a preeminent solutions provider to emerging
communications markets in developing countries, international commercial sectors
and in the U.S. and allied defense markets. The Company's strategy to achieve
this goal includes the following primary components:
PURSUE GLOBAL RURAL TELEPHONY MARKET. The Company believes there is substantial
unmet demand for rural telephone service, especially in developing countries.
The Company's strategy is to capitalize on its proven experience with Xpress
Connection, a satellite based telephony system which serves as an overlay to a
national PSTN. In Indonesia, this system is fully developed, tested and
operational with approximately 2,000 terminals installed to date, which the
Company believes is the largest functional rural telephony system in the world.
The Company's strategy is to extend this proven system in developing countries
throughout the world, with initial focus on Africa, Latin America and Asia.
EXPAND DEFENSE AND GOVERNMENT BUSINESS. In light of the JCS mandate, as well as
the U.S. government's shift toward a COTS procurement approach, the Company
intends to continue to utilize its DAMA and other technologies to develop
standardized satellite communications products available for purchase by
government customers. Consistent with the U.S. government's stated objective of
"information superiority," the Company also intends to continue designing and
developing next generation technologies and products under development contracts
with the U.S. government.
REMAIN ON LEADING EDGE OF TECHNOLOGY. The Company's satellite communications
capabilities have been refined over several years, driven in large part by over
$250 million in government and third party funding and internal research and
development since 1986. The Company intends to continue the development of its
technologies and capabilities by maintaining close ties with satellite based
telecommunications service providers which allow the Company to identify and
understand the current needs of the market, anticipate future trends and develop
technologies and products that are designed to address those needs and trends.
LEVERAGE TECHNOLOGY AND CAPABILITIES INTO OTHER MARKETS. The Company intends to
leverage technologies and capabilities it has developed in connection with its
rural telephony products to penetrate other targeted commercial markets,
including the private networking market, where it can provide comprehensive
solutions that use a combination of the Company's technologies, including its
multi-port and voice and modem products. The Company also intends to adapt
products and technology platforms originally created for commercial uses to
defense-oriented COTS applications. Similarly, the Company intends to continue
to adapt, where feasible, products and technologies originally developed for
defense applications to commercial uses. The Company targets commercial and
defense markets that it believes will offer high growth potential and where it
believes its technology will have competitive advantages. Examples of such
commercial markets targeted by the Company include the multi-channel rural
telephony and suburban multi-media markets, for which the Company's CCM 4000 and
M(2)A products, respectively, are designed.
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The Company's work on the externally funded M(2)A development contract will
provide technology enhancements to the next generation of the Xpress Connection
product. The Company believes these enhancements will help reduce the size,
weight and cost of the next generation of Xpress Connection. The Company expects
that the knowledge and experience gained from the M(2)A program will also be
applied in developing other new, affordable products for future rural telephony
applications.
EXPAND STRATEGIC ALLIANCES. The Company utilizes strategic alliances to enter
the broadest possible markets as quickly as possible. The Company continually
evaluates potential additional strategic alliances that can provide financial,
technological and/or marketing resources for the Company's products.
Specifically, with respect to the rural telephony market, the Company intends to
continue to seek partnerships with regional and local telephone service
providers which can assure satellite access, obtain operating permits and play a
key role in the installation and operation of a rural satellite telephone
network. One example of such a partnership is the Company's alliance with PSN,
pursuant to which the Company tailored its Xpress Connection system to meet
PSN's specifications for installation in Indonesia. The Company believes that,
as it did with Xpress Connection, PSN will take an active role in the
commercialization of the M(2)A system in other selected developing countries.
The Company also intends to continue to evaluate selected externally funded
research and development projects where technologies may be generated that could
create additional value for Linkabit Wireless.
CORE TECHNOLOGIES AND CAPABILITIES
Linkabit Wireless has developed substantial expertise in DAMA technology and
critical engineering disciplines such as satellite ground system design, RF and
digital engineering, digital and communications signal processing software,
network management and modem technology. Management believes that the technology
developed by the Company over the past two decades has lead to what today
represents a significant segment of the global Very Small Aperture Terminal
(VSAT) market. The Company's breadth of capability allows it to provide complete
turn-key solutions for the satellite communications market. Linkabit Wireless'
legacy of innovative technology development and comprehensive team of engineers,
scientists and technicians enable the Company to remain at the forefront of
satellite communications technology.
The Company intends to selectively develop products through market driven
research and development efforts for specific perceived market needs and focus
on market opportunities that can utilize a number of the Company's core
technologies and capabilities. Additionally, the Company attempts to select
research and development projects that will result in the development of
products that have the potential to be adapted to both commercial and defense
applications.
DAMA TECHNOLOGY
For satellite communications to be cost effective, valuable satellite capacity
must be shared among multiple users. Early systems used dedicated channels where
each user terminal had access to only its dedicated satellite channels. The
essence of DAMA is the replacement of a fixed system of dedicated channel
assignments with a much more flexible, centrally managed system that dynamically
assigns communication channels to users on an as needed basis. DAMA system users
"request" assignment of these channels when they initiate a call, and a central
network control computer automatically assigns one or more users to a channel
depending on the user's priority, bandwidth requirements and channel
availability. Any unused capacity is available to be shared by other users. When
a user no longer requires communications access, the control system dynamically
returns the channels to the central pool for use by other users as needed. DAMA
increases system efficiency up to eight-fold over existing non-DAMA systems
through the dynamic allocation of valuable satellite capacity. The result of
this improved channel efficiency is lower costs to both customers and the system
operator.
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SATELLITE GROUND SYSTEM DESIGN
The Company's system design efforts for both military and commercial satellite
networks begin with a thorough understanding of the requirements of the intended
application. Linkabit Wireless' systems engineers develop the requirements
definition based on defined customer needs and allocate the requirements to
detailed design disciplines such as analog, digital, software and mechanical
designs. The Company's full range of design expertise supports terminal designs
which start by processing the user's data, voice, or images and continuing
through to the modem and radio functions where the signal is finally interfaced
to the antenna for transmission and reception.
To support its design efforts, the Company's electrical design engineers use
computer aided design ("CAD") tools to simulate electrical designs prior to
layout of printed circuit boards in their CAD center. The engineers also utilize
the VHSIC Hardware Description Language ("VHDL") for simulation, synthesis and
layout of circuitry to be implemented in field programmable gate arrays
("FPGAs") or ASICs.
MODEM TECHNOLOGY AND RF ENGINEERING
Linkabit Wireless' products include both modem and radio components that support
data rates from 75 bytes per second to 20 mega bytes per second ("Mbps"). The
Company's modems utilize the latest high speed digital signal processors
combined with FPGAs and ASICs to implement the many complex functions required
of wireless terminals. The modem functions include modulation/demodulation,
forward error correction and acquisition and tracking techniques that are
required to provide reliable communications over satellite and line-of-sight
links. The Company's radio design team performs computer simulation of its
designs prior to development of the requisite hardware for incorporation into
wireless terminals.
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PRODUCTS
SECURE DEFENSE COMMUNICATIONS PRODUCTS
The Company is a leading provider of DAMA-based defense products for the United
States and its allies. In order to respond effectively to ongoing and emerging
hostile situations worldwide and to compensate for reductions in defense
personnel and weapons platforms, U.S. and allied governments are increasingly
employing systems that act as "force multipliers." As a result, defense- and
government-oriented customers are continuing to spend significant amounts on the
procurement and utilization of advanced communications products and systems. The
Company's defense- and government-related products include the following:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
<S> <C>
Mini-DAMA UHF Dual channel DAMA terminal that is designed to provide
Satcom Terminal secure multi- mode communications and is intended for use in
space constrained platforms such as aircraft, submarines and
small ships. The Mini-DAMA system's open architecture
incorporates COTS components and provides for growth
options.
LST-5D UHF Modem designed to upgrade existing Motorola LST-5D
DAMA Modem manportable communications radios to provide embedded DAMA
capability.
LSM-1000 UHF UHF satellite modem, with full DAMA capability and
Satcom Modem open-system architecture, which has the flexibility to
interface with existing satellite communications radios and
operate in a variety of modes.
LST-8000 Portable Tri-Band Portable satellite ground terminal designed to enable secure
Satcom Terminal communications transmissions through defense or commercial
satellites utilizing C, X or Ku band satellite frequencies.
DAMA Modem Module Two miniaturized, full duplex DAMA modems embedded on a
single module to be installed into existing communications
terminals to provide DAMA capability. Provides
point-to-point, line-of-sight, simultaneous data or voice
communications at a variety of data rates.
</TABLE>
- MINI-DAMA UHF SATCOM TERMINAL. The Mini-DAMA terminal is a full UHF
satellite communications terminal that is designed to provide dual
channel, multi-mode communications for up to 16 simultaneous users. The
Mini-DAMA terminal condenses the communications capabilities formerly
housed in two six-foot high racks into a single 25-inch high terminal. The
Mini-DAMA terminal provides a weight savings of over 500 pounds and a
power savings of approximately 60% to 70% over prior systems. The
terminal's small size and reduced power requirements permit aircraft,
submarines and small ships for the first time to enter critical UHF
satellite communications command and control networks and transmit secure
voice and data communications. The Company's Mini-DAMA terminal employs a
modular, open systems architecture that allows it to incorporate cards for
multiple UHF channels while leaving space for embedded encryption devices
and other growth options.
Initial work on the Mini-DAMA terminal was performed under a development
contract from the U.S. Navy. The Company also funded internal research and
development work to transition the terminal design into an open systems
architecture incorporating commercial components. This internal research
and development work led to the Company's receipt in January 1995 of a
$12.0 million initial production contract for Mini-DAMA terminals from the
U.S. Navy's Space and Naval Warfare Systems Command ("SPAWAR"). In April
1996, SPAWAR exercised an $8.3 million production option for additional
Mini-DAMA terminals. Through September 1997, the Company has received
additional orders from SPAWAR and an independent defense systems
contractor
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which aggregated $18.6 million. The Company's production contract with
SPAWAR also includes $56.0 million of remaining priced options which may
be exercised through September 1999. Allied governments have also
expressed significant interest in the Mini-DAMA terminal due to the need
to coordinate secure satellite communications with U.S. Armed Forces. The
Company has already received initial orders from customers in the United
Kingdom, Norway, Germany and Australia.
- LST-5D UHF DAMA MODEM. One of the satellite communications devices used by
the U.S. military today is the LST-5D radio, a lightweight, compact,
manportable UHF Satcom radio produced by Motorola. Currently, over 5,000
LST-5D units are in service with various U.S. military organizations. As a
result of the JCS mandate, these LST-5D radios must be upgraded to have
DAMA capability or be replaced. The Company, under a strategic alliance
with Motorola, has developed a UHF modem that will add DAMA capability to
the LST-5D radio. The Company has delivered approximately 540 LST-5D UHF
DAMA modems to Motorola and has orders for an additional 660 modems.
- LSM-1000 UHF SATCOM MODEM. The Company's LSM-1000, which enables U.S.
military users to select from a variety of operational modes, is a UHF
satellite modem with full DAMA capability designed for use with an
existing satellite communications radio. The LSM-1000's open-architecture
system allows for the addition of encryption, global positioning systems,
video compression and other capabilities. The Company has contracts for
initial deliveries of over 75 LSM-1000 modems.
- LST-8000 PORTABLE TRI-BAND SATCOM TERMINAL. The Company's LST-8000 is a
portable satellite ground terminal that is designed to allow the U.S.
military to communicate through either defense or commercial satellites.
The LST-8000 operates at data rates up to 9.4 Mbps and is capable of
communications over C, X and Ku-band satellite frequencies. To facilitate
rapid deployment to areas of conflict, the LST-8000 disassembles into six
transit cases for vehicular, helicopter or aircraft transport worldwide.
In 1996, the Company received an initial $2.6 million contract from the
U.S. Army for the production of LST-8000 terminals.
- DAMA MODEM MODULE. The Company's DAMA Modem Module (DMM) consists of two
independent, full-duplex DAMA modems which provide point-to-point,
line-of-sight, simultaneous data or voice communications at a variety of
data rates. Each modem may be configured to support waveforms that are
utilized in a number of U.S. military applications. Several existing
military radios can utilize this plug-in module to provide
interoperability with other military DAMA capable modems. The Company has
contracted to deliver these modems to two major U.S. government prime
contractors to be embedded within their products.
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COMMERCIAL PRODUCTS
The Company develops and sells bandwidth efficient, turn-key systems and
products which address the demand for rural telephone service. The Company has
combined expertise gained under government sponsored development projects and
its own internal development efforts to become a leader in a technology which
enables low-cost, efficient satellite communications. The Company's commercial
satellite products include:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
<S> <C>
Xpress Connection Network of fixed-site satellite ground terminals designed to
provide basic telephony services to rural areas of
developing countries. Interoperable with the national PSTN.
CCM 4000 Modem product designed to allow a single ground terminal to
provide service for up to four simultaneous users. Utilized
in Xpress Connection networks and in private telephone and
data networks. Cost-effective alternative to installing
additional terminals where demand warrants.
MRVC Voice digitizing, compression and multiplexing product sold
to defense and commercial markets.
Multi-Media Asia (M(2)A) Key portions of ground terminals, primarily software and
Products ASIC chip sets, to be used in a satellite-based
(in development) communication system designed to provide quality
multi-function telecommunications services to individual
homes and businesses in areas not adequately served by the
PSTN.
</TABLE>
- XPRESS CONNECTION. The backbone of the Company's commercial products is
its Xpress Connection system, which was developed to address the need for
telecommunications infrastructure in developing countries by providing a
cost-effective means to link remote locations into the national PSTN. The
Xpress Connection system permits telephone calls to be made to and from a
ground terminal to any telephone in the country (including other Xpress
Connection terminals) or abroad. It is cost-effective because all calls
are controlled by a centralized DAMA-based network management system,
which provides efficient use of satellite capacity, short call set-up
times (approximately four seconds), billing information and complete
network control for the system operator, including the ability to remotely
monitor the operational status of individual terminals. Calls from remote
terminals enter the PSTN through one of a number of "gateway" terminals
strategically located near population centers to minimize the access
charges which must typically be paid for use of the PSTN. With the
exception of the central control site, the network is unmanned. A typical
national system might employ from five to thirty gateway terminals,
depending on the distribution pattern of calls to and from population
centers.
Individual ground terminals, which are typically installed at a central
point in a village, are comprised of a 1.2 meter parabolic antenna,
electronics enclosure and other non-moving parts that are mounted
outdoors. The indoor unit is a small enclosure, which is typically mounted
on a wall and connected by a cable to the outdoor electronics enclosure.
The indoor unit is connected to a telephone and in some systems to a
printer (both supplied by the system operator), and incorporates a display
which provides billing information to the system operator. The printer, if
used, provides a printed record of the call which lists the number called,
the duration of call and connect charges incurred. The indoor unit also
provides a connection for facsimile or data services, each of which can be
supported by the system at 4.8 kilo bytes per second ("Kbps"). Xpress
Connection ground terminals have been designed for ease of transport and
installation. Total installation can be completed in less than four hours
by two trained technicians. Xpress Connection ground terminals are
designed to operate reliably in extreme heat, rain and humidity conditions
with little or no
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periodic maintenance, manual adjustments or calibrations required.
Consuming only 30 watts of power, they can operate on a wide range of
locally available power sources, including generator and solar power
units.
- CCM 4000. The Company has designed its CCM 4000 modem product to be a
cost-effective alternative to installing additional Xpress Connection
terminals in areas where demand for rural telephone service exceeds the
capacity of a single Xpress Connection terminal. The CCM 4000 utilizes a
DAMA control channel similar to those installed in Xpress Connection's
centralized network management system to allow a single ground terminal to
simultaneously access multiple communications channels. The CCM 4000
provides voice, facsimile or data service for up to four simultaneous
users. The CCM 4000 is fully compatible with existing Xpress Connection
system architecture, and is expected to be installed in gateway terminals
as well as remote locations. In addition, though designed initially for
use with Xpress Connection networks, the CCM 4000, which combines DAMA and
multi-channel modem functions in one compact unit, provides a cost
effective building block for private satellite network applications and
allows voice, facsimile or data transmissions at up to 32 Kbps per
channel. In Thailand, the Company is installing the CCM 4000 in a private
network application developed for the BAAC.
- MRVC AND CHANNEL CONTROL MODEM. The Company's Multiple Rate Voice Card
("MRVC"), which was originally designed for defense applications, is sold
for defense as well as commercial private network applications. The MRVC
digitizes voice signals and performs voice compression, multiplexing and
echo cancellation functions necessary for satellite communications.
Linkabit Wireless has sold over 3,000 MRVCs for use in commercial,
government and defense applications. In satellite applications which
require reception of intermittent or burst transmissions, such as in DAMA
operations, the Company offers channel control modems. These modems reduce
call set-up times and the required amount of control bandwidth for call
processing.
- MULTI-MEDIA ASIA (M(2)A) PRODUCTS. The Company is part of a consortium led
by Alcatel that was selected to implement a large scale, satellite-based
communication system (the M(2)A system) designed to provide
telecommunications services to individual homes and businesses in suburban
and rural areas throughout Indonesia and other surrounding Asian countries
which, because of the time and cost of extending wireline service into
these vast areas, are underserved or are not served at all. The Company
has been engaged by Alcatel on a subcontract basis to design and develop
key portions of the ground terminals, to be used with the M(2)A system.
Once designed, the M(2)A terminals will be manufactured by Thompson Multi
Media ("Thompson"). This state-of-the-art system will be designed to
ultimately use dedicated, high powered satellites. Initially this product
will utilize existing capacity on the Palapa C1 satellite. Pursuant to the
terms of its proposed agreement with Alcatel, the Company will retain
ownership of certain technology and products developed by the Company for
use with the M(2)A system. The Company anticipates that some of the
technology developed for use with the M(2)A system may be used to upgrade
the Company's Xpress Connection terminals in the future.
The M(2)A system will provide a direct connection to the national PSTN and
will utilize core technologies originally developed for use with the
Xpress Connection system. The M(2)A system will be designed to provide
feature-rich telephone, facsimile and high speed Internet access to homes
and businesses in suburban and rural areas. The system is designed to be
price and quality competitive with conventional wireline services. It is
anticipated that an add-on feature will be developed that will enable
digital television reception. The ground terminals to be used with the
M(2)A system will be designed for easy installation at private residences
and business facilities throughout the M(2)A satellite service area. Each
ground terminal is expected to be comprised of an indoor unit and an
outdoor unit which are connected by a cable. The indoor unit will be a
consumer electronics unit, with a phone, buttons and switches for
operation and control and provisions for
- --------------------------------------------------------------------------------
43
<PAGE>
connectivity to the outdoor unit, a facsimile machine, a computer and a
power connection. The outdoor unit will consist of an elliptically shaped
antenna assembly and mounting brackets, with electronics and feed assembly
attached to it. The ground terminals to be used with the M(2)A system
represent an important technological and price breakthrough for satellite
ground equipment used in fixed-site satellite applications. To be price
competitive with wireline services, the terminals will be designed to be
full featured at a price of less than $1,000. Comparably featured
terminals today sell in a range of four to more than ten times this price.
CUSTOMERS AND STRATEGIC ALLIANCES
A key element of the Company's strategy is to expand its strategic customer
alliances, through which many of the Company's commercial and defense products
are sold. The Company selects its strategic alliances based on many factors,
including technical capability, geographic location and market presence. Key
strategic customer relationships of which the Company are a part include:
SECURE DEFENSE COMMUNICATIONS PRODUCTS
MOTOROLA CORPORATION; LST-5D UHF DAMA MODEM. Motorola produces the LST-5D
radio, a lightweight, compact UHF Satcom terminal used by the U.S. military
today. To satisfy the JCS mandate, these LST-5D radios must be upgraded to
incorporate DAMA capability or be replaced. The Company has entered into a
strategic alliance with Motorola to develop an internally funded UHF modem that
is specifically designed to add DAMA capability to existing and new LST-5D
radios. The Company has delivered approximately 540 LST-5D UHF DAMA modems to
Motorola and has orders for an additional 660 modems.
OTHER SECURE DEFENSE COMMUNICATIONS PRODUCTS AND CUSTOMERS. Customers for the
Company's other secure defense communications products include U.S. and allied
government agencies and defense contractors. For example, the Company's
Mini-DAMA terminal is sold both to the U.S. Navy and to independent defense
contractors and LST-8000 terminals are sold directly to the U.S. Army. Sales to
the U.S. government, including sales as a subcontractor as well as direct sales,
aggregated $21.7 million, $25.2 million and $30.1 million in 1995, 1996 and
1997, respectively. These amounts represented 85%, 90% and 61% of total revenues
in 1995, 1996 and 1997, respectively.
RURAL TELEPHONY PRODUCTS
PSN; XPRESS CONNECTION. With respect to the rural telephony market, the Company
intends to seek partnerships with regional and local telephone service providers
who can assure satellite access, obtain operating permits and play a key role in
the installation and operation of a rural telephone satellite network. One
example of such a partnership is the Company's alliance with PSN, a satellite
telecommunications service provider licensed to provide public calling office
(i.e., payphone) services throughout Indonesia. PSN owns communications capacity
(i.e., transponders) on two fixed-site satellites, Palapa C1 and C2, that
provide satellite coverage throughout Southeast Asia. In September 1995, the
Company received an approximately $10 million contract from PSN to provide the
Xpress Connection system for use in a rural telephony system being developed in
Indonesia. The agreement provides for the Company to develop and test the
system, deliver gateway terminals, network control and management systems, and
2,000 Xpress Connection terminals to PSN. In September 1996, the contract was
amended to add Tedco Group Limited, a Singapore company ("Tedco"), as a party.
Under the contract, PSN purchases Xpress Connection infrastructure components
and Tedco purchases individual ground terminals from the Company. Tedco leases
ground terminals to PSN, which then installs and tests the terminals in
designated locations throughout Indonesia. The contract includes an option for
PSN and Tedco to purchase additional terminals and other equipment. Under this
contract, PSN and Tedco have the exclusive right to market and sell Xpress
Connection in Indonesia. PSN and Tedco also have co-exclusive rights to work
with Linkabit Wireless to market and sell Xpress Connection in other countries
within the Asian Palapa C1 and C2 satellites' coverage area, which encompasses
virtually all of Southeast Asia and portions of China and
- --------------------------------------------------------------------------------
44
<PAGE>
India. In December 1997, the Company received a follow-on order from PSN for
10,000 additional Xpress Connection terminals at a contract value of
approximately $27 million. This contract also contains a priced option to
purchase up to 10,000 additional terminals, which may be exercised at any time
during the contract term. To date, all of the Company's sales of Xpress
Connection have been made through the Company's strategic relationship with PSN.
The Company intends to establish similar relationships in other developing areas
targeted for implementation of Xpress Connection.
ALCATEL; M(2)A SYSTEM. The Company is part of a consortium led by Alcatel that
has been selected to develop and implement the M(2)A system for use in suburban
and rural areas throughout Indonesia and other surrounding Asian countries. The
Company has been engaged by Alcatel on a subcontract basis to design and develop
key portions of the ground terminals, primarily RF circuits, software and ASIC
chip sets to be used with the M(2)A system. Once designed, the M(2)A terminals
will be manufactured by Thompson. In developing the M(2)A system, the Company
expects to draw upon the knowledge and experience gained from the implementation
of Xpress Connection in Indonesia.
SALES AND MARKETING
Linkabit Wireless sells its commercial satellite communication products
primarily through its strategic partners, with support provided as necessary by
the Company's sales and marketing personnel. The Company also engages in direct
sales of its products in certain geographic areas. The Company sells its defense
products in direct sales agreements with both U.S. and allied government
agencies and other major customers. The Company's direct sales efforts are
targeted principally toward large accounts and the establishment of strategic
alliances in new markets.
The Company's direct sales and marketing staff is supported by management
personnel and systems and applications engineers. Direct sales activities are
focused on expanding the Company's international sales by identifying emerging
markets and working with current strategic partners to establish new customer
accounts. Additionally, the Company directly targets certain major accounts that
may provide entry into new markets or lead to subsequent distribution
agreements. Such major accounts include telecommunications agencies and major
corporations in international markets. The Company has a customer service and
support group, which primarily supports distributors and end-users and is
responsible for after-sales support and installation supervision. In most
instances, customers or third party companies install and maintain Company
supplied products, installation and maintenance.
GOVERNMENT CONTRACTS AND REGULATIONS
The Company's contracts with the U.S. government and its subcontracts with
government prime contractors are subject to termination for the convenience of
the government, and termination, reduction or modification in the event of
change in the government's requirements or budgetary constraints. When the
Company participates as a subcontractor, such contracts are also subject to the
failure or inability of the prime contractor to perform its prime contract. 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 U.S. government. In addition to the right to terminate, U.S.
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 appropriations are made by Congress for future fiscal
years.
The Company's products are incorporated into communications systems that are
subject to various government regulations. Regulatory changes, including changes
in the allocation of available frequency spectrum and in the military standards
and specifications which define the current satellite networking environment,
could significantly impact the Company's operations by restricting development
efforts by
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45
<PAGE>
the Company's customers, making current products obsolete or increasing the
opportunity for additional competition. In addition, in certain circumstances
the Company's local partners must obtain various approvals, licenses and permits
prior to the installation of the Company's products. Although the Company
believes that it or its local partners will be able to obtain the requisite
approvals, licenses and permits from the countries in which the Company intends
to provide its products, the regulatory schemes in each country are different
and thus there may be instances of noncompliance of which the Company is not
aware. Further, certain countries in which the Company intends to operate have
telecommunications laws and regulations that do not currently contemplate
technical advances in communications technology such as multi-function
transmissions via satellite. There can be no assurance that regulatory bodies
will not promulgate new regulations that could have a material adverse effect on
the Company's business, financial condition and results of operations. Changes
in, or the failure by the Company to comply with, applicable domestic and
international regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
increasing demand for satellite communications has exerted pressure on
regulatory bodies worldwide to adopt new standards for such products and
services, generally following extensive investigation of and deliberation over
competing technologies. The delays inherent in this governmental approval
process have caused and may continue to cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company's
customers, which in turn may have a material adverse effect on the sale of
products by the Company to such customers.
The sale of the Company's products outside the United States is subject to
compliance with the regulations of the United States Export Administration
Regulations. The absence of comparable restrictions on competitors in other
countries may adversely affect the Company's competitive position.
The Company believes that it operates its business in material compliance with
applicable government regulations. The Company is not aware of any pending
legislation which if enacted could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
The industries and markets in which the Company competes are highly competitive,
and the Company expects that competition will increase in such markets. The
Company encounters intense competition in most of its business areas from
numerous other companies, including large and emerging domestic and
international companies. Some of the Company's competitors in the secure defense
communications market include GEC (UK), Raytheon Corporation, Rockwell
International and ViaSat, Inc. Some of the Company's commercial competitors
include Gilat Satellite Networks Ltd., Hughes Network Systems, Scientific
Atlanta Inc., STM Wireless Inc. and ViaSat, Inc. A number of the Company's
competitors have far greater financial, engineering, technological, marketing,
sales and distribution and customer service resources than the Company. As a
result, such competitors may be able to develop and expand their products more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products and services than can the Company. In addition, current and potential
competitors in markets in which the Company competes have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products and services to address the needs of the
Company's current and prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced profit margins and loss of market share, any of which would
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company's ability to compete in its markets depends
to a large extent on its ability to provide technologically advanced products
and services with shorter lead times at lower prices than its competitors. There
can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures will not
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46
<PAGE>
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company also is dependent on the continued
success and development of the satellite communications industry in general,
which itself competes with other technologies such as terrestrial wireless,
copper wire and fiber optic communications systems. Any failure of the satellite
communications industry to continue to develop, or any technological development
which significantly improves the capacity, cost or efficiency of competing
systems relative to satellite systems, could have a material adverse effect on
the Company's business, financial condition and results of operations.
PATENTS, TRADEMARKS AND TRADE SECRETS
The Company's ability to compete may depend, in part, on its ability to obtain
and enforce intellectual property protection for its technology in the United
States and internationally. The Company relies heavily on the technological and
creative skills of its personnel, new product developments, software programs
and designs, frequent product enhancements, reliable product support and
proprietary technological expertise in maintaining its competitive position, but
does not have significant patent protection for all of its products. The Company
relies on a combination of trade secrets, copyrights, patents, trademarks,
service marks and contractual rights to protect its intellectual property. There
can be no assurance that the steps taken by the Company to protect its
intellectual property will be adequate to deter misappropriation of the
Company's technology or to prevent others from independently developing or
acquiring substantially equivalent technologies or otherwise gaining access to
or disclosing the Company's proprietary and confidential technologies or that
the Company can ultimately enforce all of its rights to its proprietary
technologies. Further, the laws of certain foreign countries in which the
Company's products are or may be sold may not protect the Company's intellectual
property rights to the same extent as do the laws of the United States. Any
failure of the Company to obtain protection for its proprietary technologies or
inability of the Company to enforce any protection it obtains for such
technologies could have a material adverse effect on the Company's business,
financial condition and results of operations.
Litigation may be necessary to enforce the Company's intellectual property
rights, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or misappropriation. Such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company's products do
not infringe the intellectual property rights of others or that one or more
parties will not make claims that the Company's products infringe upon their
proprietary rights or other rights of third parties. Such claims might include
infringement, invalidity, right to use or ownership claims by third parties or
claims for indemnification resulting from infringement claims. If any claims or
actions are asserted against the Company, the Company may seek to obtain a
license under a third party's intellectual property rights. There can be no
assurance, however, that a license will be available under reasonable terms or
at all. In addition, should the Company decide to litigate such claims, such
litigation could be extremely expensive and time consuming and could materially
adversely affect the Company's business, financial condition and results of
operations, regardless of the outcome of the litigation. There can be no
assurance that the Company's intellectual property rights would withstand the
claims brought by others in such litigation. If the Company's products are found
to infringe upon the rights of third parties, the Company may be prohibited from
making and selling the infringing products, ordered to pay monetary damages for
past infringement and forced to incur substantial costs to develop alternative
products. There can be no assurance that the Company would be able to develop
such alternative products or that if such alternative products were developed,
they would perform as required or be accepted in the applicable markets.
BACKLOG
Contracts undertaken by the Company may extend beyond one year, and accordingly,
portions are carried forward from one year to the next as part of backlog.
Because many factors affect the scheduling of
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<PAGE>
projects, no assurance can be given as to when revenue will be recognized 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 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. The Company's total
backlog at December 31, 1997, was approximately $133.1 million, of which
approximately 30% is expected to be delivered by December 31, 1998.
Many of the Company's contracts with the U.S. government are funded by the
procuring agency from year to year, primarily based on its fiscal requirements.
This results in two different categories of U.S. 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 which are 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 which remain to be funded on contracts which have been newly
awarded to the Company. "Backlog" is the total of the Company's funded and
unfunded backlog.
The Company's backlog consisted of the following approximate amounts as of
December 31, 1997:
<TABLE>
<CAPTION>
BACKLOG
- ----------------------------------------------------------------------------
<S> <C>
U.S. Government backlog..................................................... $ 77.5
Commercial backlog.......................................................... 55.6
---------
$ 133.1
---------
---------
</TABLE>
The backlog above includes unfunded U.S. government and commercial priced
contract options of approximately $61 million and $25 million, respectively. The
Company expects that a substantial number of these options will be exercised in
the future, although there can be no assurance that any such options will be
exercised.
Management believes that backlog is 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 U.S. government contracts included in backlog,
whether or not funded, may be terminated at the convenience of the U.S.
government.
MANUFACTURING
The Company primarily utilizes contract manufacturers in the manufacture of its
products. The Company oversees or conducts extensive testing and quality control
procedures for all products before they are delivered to customers. The Company
also relies on outside vendors to manufacture certain components and
subassemblies used in the production of the Company's products. Certain
components, subassemblies and services necessary for the manufacture of the
Company's products are obtained from sole suppliers or a limited group of
suppliers. The Company intends to reserve its limited internal manufacturing
capacity for new products and products manufactured in accordance with a
customer's specifications or expected delivery schedule, as necessary.
Therefore, the Company's internal manufacturing capability for standard products
has been, and is expected to continue to be, very limited, and the Company
intends to rely on contract manufacturers for large scale manufacturing. There
can be no assurance that the Company's internal manufacturing capacity and that
of its contract manufacturers and suppliers will be sufficient to fulfill the
Company's orders in a timely manner. Failure to manufacture and deliver products
and meet customer demands on a timely and cost effective basis could damage
relationships with customers and have a material adverse effect on the Company's
business, financial condition and operating results.
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<PAGE>
EMPLOYEES
As of December 31, 1997, the Company had a total of 195 full-time employees.
None of the Company's employees is represented by a labor union or covered by a
collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
FACILITIES
The Company's principal executive offices are located at 3033 Science Park Road,
San Diego, California 92121, in an approximately 46,569 square foot facility
occupied pursuant to the Facilities Agreement. The Company believes that its
existing facilities will be adequate for its current and projected needs and
that additional facilities will be available in the future as needed on
commercially reasonable terms.
LEGAL PROCEEDINGS
Linkabit Wireless is not a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
- --------------------------------------------------------------------------------
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ----------------- ------------------------------------------
<S> <C> <C>
Gene W. Ray 59 Chairman of the Board
Frederick L. Judge 63 President, Chief Executive Officer and
Director
Ronald B. Gorda 42 Chief Operating Officer and Director
Eric M. DeMarco 34 Chief Financial Officer
Thomas G. Pownall 76 Director
J. S. Webb 78 Director
</TABLE>
- ------------------
GENE W. RAY has been the Chairman of the Board of the Company since November
1993. He was a co-founder of Titan Systems, Inc. ("Titan Systems"), the parent
of which merged into Titan in 1985. He served as a director, Chief Executive
Officer and President of Titan Systems from its inception in 1981 until such
merger. He has been President and Chief Executive Officer of Titan since such
merger. He is also a director of Wave Systems Corporation.
FREDERICK L. JUDGE has been President and Chief Executive Officer of the Company
since September 1997 and a director since February 1994. He has also been Senior
Vice President of Titan since February 1994. From January 1991 to January 1994,
Mr. Judge was Senior Vice President and Chief Operating Officer of Hughes
Communications, Inc., a unit of GM Hughes Electronics Corp. From January 1988 to
January 1991, he served as Senior Vice President of Hughes Communications, Inc.
It is expected that Mr. Judge will devote substantially all of his business time
to the performance of his duties as an officer of the Company.
RONALD B. GORDA has been Chief Operating Officer of the Company since September
1997 and a director since January 1998. He has also been Senior Vice President
of Titan since February 1995 and was President of Titan's Linkabit division from
June 1993 to September 1997. From May 1994 to February 1995 he was a Vice
President at Titan. From August 1991 to June 1993 he served as Senior Vice
President of the Satcom Systems business unit of Titan's Linkabit division. It
is expected that Mr. Gorda will devote substantially all of his business time to
the performance of his duties as an officer of the Company.
ERIC M. DEMARCO has been Chief Financial Officer of the Company since November
1997. Mr. DeMarco has also been Senior Vice President and Chief Financial
Officer of Titan since January 1997. From June 1986 to January 1997 he was
employed with Arthur Andersen LLP, most recently in the capacity of Senior
Manager. It is anticipated that Mr. DeMarco will devote approximately 30% of his
time to the performance of his duties as an officer of the Company.
THOMAS G. POWNALL has been a director of the Company since January 1998 and has
served as a director of Titan since 1992. He was employed by Martin Marietta
Corporation, a diversified manufacturing and services company, from 1963 to 1988
where he held a number of executive management positions, including director
from September 1971 to April 1992, Chief Executive Officer from April 1982 to
December 1987 and Chairman of the Board of Directors from January 1983 to April
1988.
J. S. WEBB has been a director of the Company since November 1993 and has served
as a director of Titan since 1984, more recently as Chairman of the Board. He
also served as Vice Chairman of the Board of TRW, Inc., a diversified
manufacturing company, from June 1978 until December 1981 and President of
TRW-Fujitsu Company, a joint venture formed to market Fujitsu's computer
projects in the United States, from May 1980 until his retirement in December
1981. Mr. Webb is also a director of EIP Microwave, Inc., Platronics, Inc.,
Visigenic Software, Inc. and Micro Focus Group PLC.
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50
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has no committees. Upon completion of the
Offering, the Board of Directors will seek to appoint to the Board of Directors
at least two individuals who are not affiliated with the Company or Titan (the
"Independent Directors"). Concurrent with such appointments, the Board of
Directors expects to create Audit and Compensation Committees, the members of
which will be the Independent Directors.
DIRECTOR COMPENSATION
The Company's directors do not currently receive any cash compensation for
services on the Board of Directors or any committee thereof, but directors may
be reimbursed for certain expenses in connection with attendance at Board and
committee meetings. All directors are eligible to participate in the Company's
1997 Stock Option Plan. Non-employee directors receive automatic grants of
options under the Company's Non-Employee Directors' Stock Option Plan as
described below. See "--Stock Option Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Frederick L. Judge, the Company's Chief Executive Officer, is a member of the
Company's Board of Directors. During the fiscal year ended December 31, 1996,
Mr. Judge participated in deliberations of the Company's Board of Directors
concerning executive compensation.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year indicated, summary
information concerning compensation awarded to, earned by or paid to the
Company's Chief Executive Officer and each of the Company's two other executive
officers for services rendered in all capacities to the Company and Titan (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)SALARY(1) ($) BONUS (2) OPTION/SARS (#) ($) (3)
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Frederick L. Judge ........................ 1997 204,326 90,000 -- 19,181
Chief Executive Officer
Ronald B. Gorda ........................... 1997 196,490 92,000 60,000 38,845
Chief Operating Officer
Eric M. DeMarco ........................... 1997 144,830 100,000 100,000 20,423
Chief Financial Officer
</TABLE>
(1) Amounts shown include cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers.
(2) Amounts shown include cash bonus compensation earned by executive officers
for each fiscal year whether received in the fiscal year in which it was
earned or in the subsequent fiscal year.
(3) Amounts shown consist of (i) Titan's matching contribution to its 401(k)
Retirement Plan; (ii) Titan's matching contribution to its Supplemental
Retirement Plan for Key Executives; (iii) Titan's contribution to its
Employee Stock Ownership Plan and (iv) interest earned in Titan's
Supplemental Retirement Plan for Key Executives that exceeded 120% of the
applicable federal long-term rate with compounding (as prescribed under
Section 1274(d) of the Code). Amounts shown for fiscal year 1997 for each
Named Executive Officer consist of the following amounts of each of the
foregoing elements of compensation: Mr. Judge: (i) $7,500; (ii) $0; (iii)
$0; and (iv) $11,681; Mr. Gorda: (i) $7,500; (ii) $18,502; (iii) $152; and
(iv) $12,691; and Mr. DeMarco: (i) $3,526; (ii) $15,000; (iii) $0; and (iv)
$1,897.
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51
<PAGE>
STOCK OPTION GRANTS
The following table sets forth, for the fiscal year ended December 31, 1997,
certain information regarding options to acquire shares of the Company's Common
Stock granted to each of the Named Executive Officers.
LINKABIT WIRELESS OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
NUMBER OF REALIZABLE VALUE AT
SECURITIES % OF ASSUMED ANNUAL
UNDERLYING TOTAL OPTIONS RATES OF STOCK PRICE
OPTIONS GRANTED TO EXERCISE APPRECIATION
GRANTED EMPLOYEES IN PRICE EXPIRATION FOR OPTION TERM (5)
NAME (#)(1) 1997(2) ($/SH)(3) DATE(4) 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Frederick L. Judge............. -- -- -- -- -- --
Ronald B. Gorda................ 117,000 26.6 5.12 9/29/07 1,116,186 2,132,170
Eric M. DeMarco................ 39,000 8.8 5.12 9/29/07 372,062 710,723
</TABLE>
(1) Options granted in 1997 are exercisable starting 12 months after grant date,
with 25% of the options becoming exercisable at that time and with an
additional 25% of the options becoming exercisable on each successive
anniversary date, with full vesting occurring on the fourth anniversary
date.
(2) Based on options to purchase an aggregate of 429,140 shares of Common Stock
granted to employees, officers and directors of the Company in 1997,
including the Named Executive Officers.
(3) Represents the fair market value of the underlying Common Stock as
determined by the Board of Directors on the date of grant.
(4) The options have a term of 10 years, subject to earlier termination in
certain events related to termination of employment.
(5) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and an assumed initial public offering price
of $9.00. It is calculated assuming that the stock price on the date of
grant appreciates at the indicated annual rate, compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price. These amounts
represent certain assumed rates of appreciation only, in accordance with the
rules of the Commission, and do not reflect the Company's estimate or
projection of future stock price performance. Actual gains, if any, are
dependent on the actual future performance of the Company's Common Stock.
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52
<PAGE>
The following table sets forth, for the fiscal year ended December 31, 1997,
certain information regarding options to acquire shares of Titan common stock
granted to the Company's Named Executive Officers. No Titan stock appreciation
rights were granted during the Company's 1997 fiscal year.
TITAN OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL
SECURITIES % OF RATES OF STOCK PRICE
UNDERLYING TOTAL OPTIONS EXERCISE
OPTIONS GRANTED TO OR BASE APPRECIATION
GRANTED EMPLOYEES IN PRICE EXPIRATION FOR OPTION TERM (5)
NAME (#)(1) 1997(2) ($/SH)(3) DATE(4) 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Frederick L. Judge................ -- -- -- -- -- --
Ronald B. Gorda................... 60,000 10.36% 5.625 7/16/07 212,252 537,888
Eric M. DeMarco................... 50,000 8.6% 3.625 1/16/07 114,188 288,188
</TABLE>
(1) Options granted in 1997 are exercisable starting 12 months after grant date,
with 25% of the options becoming exercisable at that time and with an
additional 25% of the options becoming exercisable on each successive
anniversary date, with full vesting occurring on the fourth anniversary
date.
(2) Based on options to purchase an aggregate of 579,000 shares of Titan common
stock granted to employees, officers and directors of Titan and its
subsidiaries in 1997, including the Named Executive Officers.
(3) The exercise price on the date of grant was equal to not less than of the
fair market value on the date of grant. The exercise price may be paid in
cash, check, by delivery of already-owned shares of Titan common stock
subject to certain conditions, or pursuant to a cashless exercise procedure
under which the optionee provides irrevocable instructions to a brokerage
firm to sell the purchased shares and to remit to Titan, out of the sale
proceeds, an amount equal to the aggregate exercise price plus all
applicable withholding taxes.
(4) The options have a term of 10 years, subject to earlier termination in
certain events related to termination of employment.
(5) Based on a base price per share equal to the exercise price. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Securities
and Exchange Commission and do not represent Titan's or the Company's
estimate or projection of the future Titan common stock price. There can be
no assurance that any of the values reflected in the table will be achieved.
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<PAGE>
The following table summarizes the value realized on the exercise of options to
acquire Common Stock during the fiscal year ended December 31, 1997 by each of
the Named Executive Officers. No options to acquire shares of Common Stock were
exercised during the Company's 1997 fiscal year. The following table also
presents the number and value of unexercised options to acquire Common Stock as
of December 31, 1997 for the Company's Named Executive Officers. All options are
exercisable into shares of Class A Common Stock.
AGGREGATED LINKABIT WIRELESS FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
1997 DECEMBER 31, 1997
(#) ($)(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
Frederick L. Judge(2).......................... 146,250/48,750 1,054,462/351,488
Ronald B. Gorda................................ 0/117,000 0/453,960
Eric M. DeMarco................................ 0/39,000 0/151,320
</TABLE>
(1) Based on an assumed initial public offering price of $9.00, less the
exercise price of such options.
(2) Represents an option granted on May 10, 1994 to purchase 195,000 shares of
Common Stock at an exercise price of $1.79 per share.
The following table summarizes the value realized on the exercise of options to
acquire Titan common stock during the fiscal year ended December 31, 1997. The
following table also presents the number and value of unexercised options to
acquire Titan common stock as of December 31, 1997 for the Company's Named
Executive Officers.
AGGREGATED TITAN FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
1997 DECEMBER 31, 1997
(#) ($)(2)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Frederick L. Judge................................ 37,500/12,500 128,925 42,975
Ronald B. Gorda................................... 95,000/130,000 233,948 223,653
Eric M. DeMarco................................... 0/100,000 0 218,800
</TABLE>
(1) Calculated by multiplying the difference between the fair market value of
Titan's common stock underlying the option as of the date of exercise and
the exercise price of the option by the number of shares of Titan common
stock acquired on exercise of the option.
(2) Based on the fair market value of Titan's common stock as of such date, less
the exercise price of such option.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
The Company and Frederick L. Judge entered into an employment arrangement with
Titan pursuant to a letter agreement dated as of August 1, 1996. The agreement
has a term of 18 months and provides for the payment of an initial annual base
salary of $234,000. Mr. Judge's employment may not be terminated by the Company
other than for cause (as defined in said agreement). Eric M. DeMarco entered
into an employment arrangement with Titan pursuant to a letter agreement dated
as of December 14, 1996. The
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54
<PAGE>
agreement has a term of 24 months and provides for the payment of an initial
base salary of $150,000. If Mr. DeMarco's employment is terminated for any
reason other than cause, Titan will pay a severance amount equal to one year's
base salary.
Certain members of corporate management of the Company are eligible to receive
annual cash bonuses based on a percentage of their respective base salaries if
certain performance targets established by management and approved by the Board
of Directors are met. The bonuses paid to the executive officers for services
rendered in 1997 are included in the Summary Compensation Table.
Titan has entered into change-in-control agreements (collectively, the "Change
in Control Agreements") with its senior executives, including Mr. Judge, Mr.
Gorda and Mr. DeMarco (each hereinafter referred to as the "Executive"). The
terms of the agreements provide that, in the event of a Change in Control (as
defined in the Change of Control Agreements of Titan), and the termination of
the Executive's employment at any time during the two-year period thereafter by
Titan other than for cause (as defined in the Change in Control Agreements) or
by the Executive for good reason (as defined in the Change in Control
Agreements), the Executive will be paid a lump sum amount equal to two times his
base salary (or one time the Executive's annualized base salary if he has been
employed by Titan or a subsidiary thereof for less than 12 months) plus maximum
annual bonus. Additionally, the Executive will receive a prorated bonus for the
year of termination and continuation of medical and dental benefits covering the
Executive and his dependents for two years following the termination. The
payments are limited to ensure deductibility for tax purposes under Section 280G
of the Code.
Under the Change in Control Agreements, change in control is deemed to have
occurred in the event of (i) the acquisition by any person (as defined in the
Change in Control Agreements), together with its affiliates, of beneficial
ownership of capital stock of Titan possessing 25% or more of the combined
voting power of Titan's outstanding capital stock, (ii) within any two year
period, the majority of the members of the Board of Directors of Titan were to
be comprised of individuals other than those who were members at the beginning
of such period, unless the new members elected during such period were approved
by two-thirds of the members of the Board of Directors of Titan still in office
who were members of the Board of Directors of Titan at the beginning of such
two-year period, (iii) all or substantially all of Titan's assets are sold as an
entirety to any person or related group of persons, or (iv) Titan is merged with
or into another corporation or another corporation is merged into Titan with the
effect that immediately after such transaction, the stockholders of Titan
immediately prior to such transaction hold less than a majority interest of the
total voting power entitled to vote in the election of directors, managers or
trustees of the entity surviving such transaction.
STOCK OPTION PLANS
In September, 1997, the Company adopted its 1997 Stock Option Plan, as amended
(the "1997 Plan"), under which 780,000 shares of Class A Common Stock are
reserved for issuance pursuant to the exercise of options granted to employees,
directors and consultants under the 1997 Plan. The 1997 Plan was adopted by the
Board of Directors to replace the Company's 1994 Stock Option Plan, as amended
(the "1994 Plan"); provided, however, that options outstanding under the 1994
Plan and any predecessor plans will remain exercisable according to their terms.
The 1997 Plan will terminate in September 2007, unless sooner terminated by the
Board of Directors. As of December 31, 1997, under the 1994 Plan there were
outstanding options to purchase a total of 439,725 shares of the Company's
Common Stock.
The 1997 Plan permits the granting of options intended to qualify as incentive
stock options ("Incentive Stock Options") within the meaning of Section 422 of
the Code, to employees (including officers and employee directors), and options
that do not so qualify ("Nonstatutory Stock Options," and, together with
Incentive Options, the "Options") to employees (including officers and employee
directors) and consultants (including non-employee directors). No person is
eligible to be granted Options covering more than 195,000 shares of Class A
Common Stock in any 12 month period.
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55
<PAGE>
The 1997 Plan is administered by the Board of Directors or a committee appointed
by the Board of Directors. Subject to the limitations set forth in the 1997
Plan, the Board of Directors has the authority to select the persons to whom
grants are to be made, to designate the number of shares to be covered by each
Option, to determine whether an Option is to be an Incentive Stock Option or a
Nonstatutory Stock Option, to establish vesting schedules, to specify the Option
exercise price and the type of consideration to be paid to the Company upon
exercise and, subject to certain restrictions, to specify other terms of
Options.
The maximum term of Options granted under the 1997 Plan is ten years. The
aggregate fair market value, determined at the time of grant, of the shares of
Class A Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by an optionee during any calendar year (under
all such plans of the Company and its affiliates) may not exceed $100,000.
Options granted under the 1997 Plan generally are non-transferable and expire
three months after the termination of an optionee's service to the Company. In
general, if an optionee is permanently disabled or dies during his or her
service to the Company, such person's Option may be exercised up to 12 months
following such disability or death.
The exercise price of Options granted under the 1997 Plan is determined by the
Board of Directors in accordance with the guidelines set forth in the 1997 Plan.
The exercise price of an Incentive Stock Option cannot be less than 100% of the
fair market value of the Class A Common Stock on the date of the grant. The
exercise price of a Nonstatutory Stock Option cannot be less than 85% of the
fair market value of the Class A Common Stock on the date of grant. Options
granted under the 1997 Plan vest at the rate specified in the option agreement.
The exercise price of Incentive Stock Options granted to any person who at the
time of grant owns stock representing more than 10% of the total combined voting
power of all classes of the Company's capital stock must be at least 110% of the
fair market value of such stock on the date of grant and the term of such
Incentive Stock Options cannot exceed five years.
Upon certain changes in control of the Company, the 1997 Plan provides that all
outstanding Options either be assumed or substituted by the surviving entity. In
the event the surviving entity determines not to assume or substitute such
Options, with respect to persons then performing services as employees,
directors or consultants, the time during which such Options may be exercised
will be accelerated and such Options terminated if not exercised prior to such
change in control.
As of December 31, 1997, the Company had granted Incentive Stock Options to
purchase an aggregate of 429,140 shares of Common Stock. As of December 31,
1997, 350,860 shares of Common Stock remained available for future grants under
the 1997 Plan.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In December 1997, the Company adopted its Non-Employee Directors' Stock Option
Plan (the "Directors' Plan") to provide for the automatic grant of options to
purchase shares of Class A Common Stock to non-employee directors of the Company
(each being a "Non-Employee Director"). The Directors' Plan is administered by
the Board of Directors, unless the Board of Directors delegates administration
to a committee of disinterested directors.
The maximum number of shares of Class A Common Stock that may be issued pursuant
to options granted under the Directors' Plan is 97,500. Pursuant to the terms of
the Directors' Plan: (i) each person who upon the effective date of the Offering
is a Non-Employee Director automatically will be granted a one-time option to
purchase 5,000 shares of Class A Common Stock; (ii) each person who after the
effective date of the Offering for the first time becomes a Non-Employee
Director automatically will be granted, upon the date of his or her initial
appointment or election to be a Non-Employee Director, a one-time option to
purchase 5,000 shares of Class A Common Stock; and (iii) on the date of each
annual meeting of the stockholders of the Company after the effective date of
the Offering, each person who is elected at such annual meeting to serve as a
Non-Employee Director (other than a person who receives a grant in
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56
<PAGE>
accordance with (ii) above on or during the six-month period preceding such
date) automatically will be granted an option to purchase 5,000 shares of Class
A Common Stock.
No options granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. Options granted under the
Directors' Plan vest annually over a four-year period. The exercise price of
options under the Directors' Plan will equal 100% of the fair market value of
the Class A Common Stock on the date of grant. Options granted under the
Directors' Plan are generally non-transferable. Unless otherwise terminated by
the Board of Directors, the Directors' Plan automatically terminates on the
tenth anniversary of the date of the Offering. As of the date hereof, no options
have been granted under the Directors' Plan.
EMPLOYEE STOCK PURCHASE PLAN
In December 1997, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 390,000 shares of Class A Common
Stock. The Purchase Plan is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Code. Under the Purchase Plan, the
Board of Directors may authorize participation by eligible employees, including
officers, in periodic offerings following the commencement of the Purchase Plan.
The initial offering under the Purchase Plan will commence on the date of this
Prospectus and terminate on January 31, 2000.
Unless otherwise determined by the Board of Directors, employees are eligible to
participate in the Purchase Plan only if they are employed by the Company or an
affiliate of the Company (as defined in the Purchase Plan) designated by the
Board of Directors for at least 20 hours per week and are customarily employed
by the Company or an affiliate of the Company (as defined in the Purchase Plan)
designated by the Board of Directors for at least five months per calendar year.
Employees who participate in an offering may have up to 15% of their earnings
withheld pursuant to the Purchase Plan. The amount withheld is then used to
purchase shares of the Class A Common Stock on specified dates determined by the
Board of Directors. The price of Class A Common Stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the
Class A Common Stock at the commencement date of each offering period or the
relevant purchase date. Employees may end their participation in any offering at
any time during the applicable offering period, and participation ends
automatically upon termination of employment with the Company or an affiliate of
the Company (as defined in the Purchase Plan), as the case may be.
In the event of a merger, reorganization, consolidation or liquidation involving
the Company, the Board of Directors has discretion to provide that each right to
purchase Class A Common Stock will be assumed or an equivalent right substituted
by the successor corporation, or the Board of Directors may shorten this
offering period and provide for all sums collected by payroll deductions to be
applied to purchase stock immediately prior to such merger or other transaction.
The Board of Directors has the authority to amend or terminate the Purchase
Plan, provided, however, that no such action may adversely affect any
outstanding rights to purchase Class A Common Stock.
401(k) PLAN
In May 1984, Titan adopted an employee retirement savings plan (as amended and
restated on January 1, 1997, the "401(k) Plan") covering the employees of Titan
and its affiliates, including the Company. Pursuant to the 401(k) Plan, eligible
employees over the age of 21 may elect to reduce their current compensation by
up to the lesser of 10% of their annual compensation or the statutorily
prescribed annual limit ($9,500 in 1997) and have the amount of such reduction
contributed to the 401(k) Plan. After the completion of the lesser of six months
of participation in the 401(k) Plan or 12 months of service with Titan or an
affiliate including the Company, the 401(k) Plan provides for matching
contributions by Titan in an amount equal to 100% of the lesser of the maximum
amount of deferrals that may be made for the 401(k) Plan year or 5% of such
participant's compensation. In addition, eligible employees may make roll-over
contributions to the 401(k) Plan from any tax-qualified retirement plan. The
401(k) Plan also allows for
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57
<PAGE>
Titan to make additional discretionary contributions as determined by a
committee of the Board of Directors of Titan. The 401(k) Plan administrator, at
the discretion of each participant, invests the assets of the 401(k) Plan in
designated investment options. Titan's matching and discretionary contributions
become 25% vested after three years of service, with an additional 25% becoming
vested for each year of service thereafter. The 401(k) Plan is intended to
qualify under Section 401 of the Code, so that both employee and Titan
contributions to the 401(k) Plan, and income earned on the 401(k) Plan
contributions, are not taxable until withdrawn, and that contributions by Titan
will be deductible by Titan when made.
SUPPLEMENTAL RETIREMENT PLAN FOR EXECUTIVES
Titan adopted a Supplemental Retirement Plan For Executives on September 1, 1990
(as amended on January 1, 1994) (as amended, the "Retirement Plan"). The
Retirement Plan allows certain key employees ("Participants" or individually,
"Participant") to annually defer a percentage of their annual salary to a
retirement account with Titan contributing to each Participant's account an
amount equal to the Participant's annual deferral. Each year, the Participants
may defer no less than $2,000 per year and no more than the maximum percentage
of annual salary permitted by the Compensation Committee of the Board of
Directors of Titan. Each Participant's retirement account accrues interest at a
rate equal to the treasury rate (as defined in the Retirement Plan) plus three
percent. If a Participant retires from employment with Titan or its subsidiaries
(including the Company) on or after the attainment of age sixty-two or six years
of Retirement Plan participation, whichever is later, Titan will pay the
Participant an amount per month based on the Participant's account balance. If a
Participant dies before retirement and the Retirement Plan is in effect at the
time, Titan will pay a survivor's benefit to a designated beneficiary. The
amount of the survivor benefit will be equal to the account balance at the time
of death. Said amount shall be paid in a lump sum or, if the account balance
exceeds $25,000, over a period of 60 months. If a Participant dies after normal
retirement, and after retirement benefits have commenced, the designated
beneficiary will receive any unpaid installments due the Participant. If a
Participant becomes disabled before the attainment of age sixty-two, the
Participant's retirement account balance will become fully vested with benefits
to be paid when he or she reaches the retirement age. Upon any change in control
(as defined in the Retirement Plan), the retirement account balance of each
Participant shall become fully vested and, at the Participant's discretion,
shall be due and payable in a lump-sum.
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Bylaws provide that the Company will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company is also
empowered under its Bylaws to purchase insurance on behalf of any person it is
required or permitted to indemnify.
In addition, the Company's Certificate of Incorporation provides that directors
of the Company will not be personally liable to the Company or its stockholders
for monetary damages for any breach of fiduciary duty as a director, except for
liability (i) for any breach of the directors' duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
(the "Delaware Law") or (iv) for any transaction from which the director derives
any improper personal benefit. The Certificate of Incorporation also provides
that if the Delaware Law is amended after the approval by the Company's
stockholders of the Certificate of Incorporation to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of the Company's directors shall be eliminated or limited to the
fullest extent permitted by the Delaware Law. The provision also does not affect
a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
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<PAGE>
RELATIONSHIP WITH TITAN AND CERTAIN TRANSACTIONS
- --------------------------------------------------------------------------------
Titan has adopted a strategy of selling a minority interest in subsidiary
companies to outside investors as an important tool in its future development.
As part of this strategy, Titan has created the Company as a privately held
subsidiary, and has created several other privately held wholly-owned
subsidiaries. From time to time, Titan and its subsidiaries will create other
wholly-owned subsidiaries as part of its spin-out strategy. (The Company and the
other Titan subsidiaries are hereinafter referred to as the "Titan
Subsidiaries.")
THE TITAN CORPORATE CHARTER
Titan and the Titan Subsidiaries, including the Company, recognize that the
benefits and support that derive from their affiliation are essential elements
of their individual performance. Accordingly, Titan and each of the Titan
Subsidiaries have adopted the Titan Corporate Charter (the "Charter") to define
the relationships and delineate the nature of such cooperation among themselves.
The purpose of the Charter is to ensure that (1) all of the companies and their
stockholders are treated consistently and fairly, (2) the scope and nature of
the cooperation among the companies, and each company's responsibilities, are
adequately defined, (3) each company has access to the combined resources and
financial, managerial and technological strengths of the others, and (4) Titan
and the Titan Subsidiaries, in the aggregate, are able to obtain the most
favorable terms from outside parties.
To achieve these ends, the Charter identifies the general principles to be
followed by the companies, addresses the role and responsibilities of the
management of each company, provides for the sharing of group resources by the
companies and provides for centralized administrative, banking and credit
services to be performed by Titan. The services provided by Titan include
collecting and managing cash generated by members, coordinating the access of
Titan and the Titan Subsidiaries (the "Titan Group") to external financing
sources, ensuring compliance with external financial covenants and internal
financial policies, assisting in the formulation of long-range planning and
providing other banking and credit services. Pursuant to the Charter, Titan may
also provide guarantees of debt obligations of the Titan Subsidiaries or may
obtain external financing at the parent level for the benefit of the Titan
Subsidiaries. In certain instances, the Titan Subsidiaries may provide credit
support to, or on behalf of, the consolidated entity or may obtain financing
directly from external financing sources. Under the Charter, Titan is
responsible for determining that the Titan Group remains in compliance with all
covenants imposed by external financing sources, including covenants related to
borrowings of Titan or other members of the Titan Group, and for apportioning
such constraints within the Titan Group. In addition, Titan is also responsible
for ensuring that members comply with internal policies and procedures. The cost
of the services provided by Titan to the Titan Subsidiaries is covered under
corporate services agreements between Titan and each of the Titan Subsidiaries.
The Charter presently provides that it shall continue in effect so long as Titan
and at least one Titan Subsidiary participates. The Charter may be amended at
any time by agreement of the participants. Any Titan Subsidiary, including the
Company, can withdraw from participation in the Charter upon 30 days' prior
notice. In addition, Titan may terminate a subsidiary's participation in the
Charter in the event the subsidiary ceases to be controlled by Titan or ceases
to comply with the Charter or the policies and procedures applicable to the
Titan Group. A withdrawal from the Charter automatically terminates the
corporate services agreement in effect between the withdrawing company and
Titan. The withdrawal from participation does not terminate outstanding
commitments to third parties made by the withdrawing company, or by Titan or
other members of the Titan Group, prior to the withdrawal. However, a
withdrawing company is required to continue to comply with all policies and
procedures applicable to the Titan Group and to provide certain administrative
functions mandated by Titan so long as the withdrawing company is controlled by
or affiliated with Titan.
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<PAGE>
GENERAL
Pursuant to the Reorganization, the Company (i) became the successor to the
business formerly operated as the Linkabit division of Titan and (ii)
transferred all of the assets and liabilities of its Client/Server and
discontinued Broadband Communications and Gamma Satcom divisions to Titan. In
connection with the Reorganization, Titan contributed $22.1 million to the
capital of the Company through the retirement of the Company's intercompany
indebtedness.
Titan currently owns all of the outstanding capital stock of the Company. Upon
completion of the Offering, Titan will own 100% of the Company's outstanding
Class B Common Stock, representing approximately 96.7% of the combined voting
power of all classes of voting stock of the Company (approximately 96.2% if the
Underwriters' over-allotment options are exercised in full). As long as Titan
beneficially owns a majority of the combined voting power, it will have the
ability to elect all of the members of the Board of Directors and thereby
ultimately to control the management and affairs of the Company, including any
determinations with respect to acquisitions, dispositions, borrowings, issuances
of Common Stock or other securities of the Company or the declaration and
payment of any dividends on the Common Stock. In addition, Titan will be able to
determine the outcome of any matter submitted to a vote of the Company's
stockholders for approval and to cause or prevent a change in control of the
Company.
Conflicts of interest may arise between the Company and Titan in a number of
areas relating to their past and ongoing relationships, including the nature and
quality of services rendered by the Company to Titan and its affiliates or by
Titan and its affiliates to the Company, potential competitive business
activities, shared marketing functions, tax and employee benefit matters,
indemnity agreements, sales or distributions by Titan of all or any portion of
its ownership interest in the Company or Titan's ability to control the
management and affairs of the Company. Persons serving as directors, officers
and employees of both the Company and Titan may have conflicting duties to each.
There can be no assurance that Titan and the Company will be able to resolve any
potential conflict or that, if resolved, the Company would not receive more
favorable resolution if it were dealing with an unaffiliated party. In addition,
certain of the Affiliate Agreements contain specific procedures for resolving
disputes between the Company and Titan with respect to the subject matter of
those agreements. There can be no assurance that more favorable results to the
Company would not be obtained under different procedures.
Titan could decide to sell or otherwise dispose of all or a portion of its Class
B Common Stock (or, upon conversion of the Class B Common Stock, the resulting
Class A Common Stock) at some future date, and there can be no assurance that,
in any transfer by Titan of a controlling interest in the Company, any holders
of Class A Common Stock will be allowed to participate in such transaction or
will realize any premium with respect to their shares of Class A Common Stock.
Titan has advised the Company that its current intent is to continue to hold all
of its outstanding shares of Class B Common Stock. Further, pursuant to the
Underwriting Agreement to be executed among the Company, Titan and the
Underwriters (the "Underwriting Agreement"), Titan has agreed, subject to
certain exceptions, not to sell or otherwise dispose of any shares of Common
Stock (or any security convertible into or exchangeable or exercisable for
Common Stock) owned by it for a period of 180 days following the date of this
Prospectus without the prior written consent of SBC Warburg Dillon Read, Inc.
However, after such 180 day period, there can be no assurance concerning the
period of time during which time Titan will maintain its ownership of Class B
Common Stock.
Titan must beneficially own at least 80% of the total voting power and 80% of
each class of nonvoting capital stock of the Company in order to be able to
effect a tax-free spin-off of the Company under the Code. It is anticipated that
upon completion of the Offering, Titan will continue to own at least 80% of the
total voting power of the Company. Because Titan may seek to maintain its
beneficial ownership percentage of the Company for tax planning purposes or
otherwise and may not desire to acquire additional shares of Common Stock in
connection with a future issuance of shares by the Company, the
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<PAGE>
Company may be constrained in its ability to raise equity capital in the future
or to issue Common Stock or other equity securities in connection with
acquisitions.
The Company's Certificate of Incorporation contains provisions relating to
competition by Titan with the Company, potential conflicts of interest that may
arise between the Company and Titan, the allocation of business opportunities
that may be suitable for either Titan or the Company and the approval of
transactions between the Company and Titan. The Company's Certificate of
Incorporation also limits the liability of its directors for monetary damages
arising from a breach of their fiduciary duty as directors, except to the extent
otherwise required by the Delaware Law. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Bylaws provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has also entered into indemnification agreements with its
officers and directors containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms.
CONTRACTUAL ARRANGEMENTS
The Company's relationship with Titan will also be governed by the following
agreements to be entered into prior to completion of the Offering: the Corporate
Services Agreement, the Tax Allocation Agreement and the Facilities Agreement,
the material terms of which are summarized below. Because the Company is a
wholly-owned subsidiary of Titan, none of these arrangements will result from
arm's length negotiations and, therefore, the prices charged to the Company for
services provided thereunder may be higher or lower than prices that may be
charged by third parties.
The descriptions of agreements set forth below are intended to be summaries and,
while material terms of the agreements are set forth herein, the descriptions
are qualified by reference to the relevant agreements filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
The Company believes that the transactions contemplated by the following
agreements are in its best interests. It is the Company's current policy that
all transactions by the Company with its officers, directors, five percent
stockholders and their affiliates will be entered into (or amended) only if such
transactions are approved by a majority of the Independent Directors, are on
terms no less favorable to the Company than could be obtained from unaffiliated
parties and are reasonably expected to benefit the Company.
CORPORATE SERVICES AGREEMENT
Titan has provided to the Company from time to time, upon request of the
Company, certain routine and ordinary corporate services, including financial,
insurance, accounting, employee benefits, payroll, tax and legal services. Titan
has also provided corporate planning, government relations and corporate quality
assurance services. The Company has also shared certain Titan systems, including
its management information system, accounting system and human resource system.
Prior to the completion of the Offering, the Company and Titan will enter into
the Corporate Services Agreement, pursuant to which Titan will continue to
provide such services to the Company and the Company will continue to share such
systems in a manner generally consistent with past practices. The Company's
Statement of Operations includes revenues and costs directly attributable to the
Company, as well as certain allocations from Titan of indirect costs associated
with such services and shared systems. As of September 30, 1997, the Company had
incurred a $26.1 million intercompany debt to Titan. As part of the
Reorganization, Titan contributed $21.1 million of such amount to the capital of
the Company. The Company's future statements of operations will include revenues
and costs directly attributable to the Company's operations as well as
allocations from Titan for indirect costs of shared services and systems.
Titan's cost of its human resources
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<PAGE>
department is allocated to the members of the Titan Group based upon the
member's average percentage of total Titan Group headcount as of the end of the
last fiscal year and as of the final day of each calendar quarter in the current
fiscal year ("measuring dates"). Other corporate services are allocated based
upon the average of three percentages: (i) the percentage of the Company's
payroll to the total payroll of the Titan Group, (ii) the percentage of the
Company's operating revenue to the total operating revenue of the Titan Group,
and (iii) the percentage of the average net book value of the sum of the
Company's tangible capital assets plus inventories to the total average net book
value of the tangible capital assets plus inventory of the Titan Group as of the
measuring dates. These allocations may be adjusted by Titan based upon its
assessment of the relative uses of these services by members of the Titan Group.
Titan's method of allocating its costs is based upon government cost accounting
standards and is consistent with Titan's past practices for allocating costs to
its subsidiaries. These costs will be included in the operating results of the
Company. The allocation of costs under this agreement will be consistently
applied with the methodology used to allocate such costs for all periods
presented in the Company's financial statements. The Company believes that the
charges under the Corporate Services Agreement are reasonable. The initial term
of this agreement will be one year. Thereafter, the Corporate Services Agreement
will be automatically renewed for successive one-year terms unless the Company
elects not to renew the agreement upon at least 45 days prior notice to Titan.
In addition, a withdrawal by or removal of the Company from the Titan Charter
will automatically terminate the Corporate Services Agreement. In the event that
the Corporate Services Agreement is terminated, there can be no assurance that
the Company would be able to secure alternative sources for such services or
that such services could be obtained for costs comparable to costs to be charged
by Titan.
TAX ALLOCATION AGREEMENT
For so long as Titan maintains beneficial ownership of at least 80% of the total
voting power and 80% of the total value of the outstanding Common Stock, the
Company will be included in the consolidated federal income tax returns filed by
Titan on behalf of the Titan Group. Similarly, the Company will file
consolidated and/or combined state tax returns with Titan and other members of
the Titan Group.
Prior to the completion of the Offering, the Company, Titan and the other
members of the Titan Group will enter into a Tax Allocation Agreement. Under the
Tax Allocation Agreement, the Company will agree to pay to Titan, as its share
of the consolidated federal income tax liability of the group, an amount
generally equal to the tax liability which it would have incurred had it
prepared and filed a separate return. Titan has broad discretion in determining
the amount of separate taxable income and tax liability which the Company will
realize on such a separate return. In computing this separate tax liability, the
tax attributes of the Company, including net operating loss and tax credit
carryovers, will be deemed to be the amount which the Company would have
possessed if it had always owned the divisions transferred to it in the
Reorganization and had never owned the divisions distributed to Titan in the
Reorganization. The allocation of costs under this agreement will be
consistently applied with the methodology used to allocate such costs for all
periods presented in the Company's financial statements.
As a result of the Reorganization, the Company may recognize a taxable gain as a
result of the distribution of the Broadband, Client/Server and Gamma Satcom
divisions to Titan. Titan will agree to pay to the Company the amount of any
liability incurred by the Company which is attributable to such gain.
It is possible that the net operating losses or tax credit carryforwards which
the Company is entitled to use under the Tax Allocation Agreement will be used
to offset taxable income of other members of the Titan Group. In such event,
Titan will make a payment to the Company equal to the tax benefit derived from
the use of the Company's net operating loss to offset the income generated by
other members.
In the event that the Company ceases to be a member of the Titan Group for
purposes of filing consolidated federal income tax returns, it may continue to
have the right to utilize the excess net operating losses and tax credit
carryovers for the purpose of filing separate tax returns. Pursuant to the Tax
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Allocation Agreement, any benefit realized by the Company from the use of any
such excess amount will be required to be paid to Titan.
As a member of the Titan Group filing consolidated federal income tax returns,
the Company will be jointly and severally liable for the tax liability of the
entire group. The Tax Allocation Agreement will not relieve the Company of such
liability. However, Titan will agree to indemnify and hold the Company harmless
from any liability in excess of the amount computed under the Tax Allocation
Agreement. Nevertheless, the Company will be liable for the federal income tax
of the Titan Group should Titan fail to pay such amount.
FACILITIES AGREEMENT
Prior to the completion of the Offering, the Company and Titan will enter into a
Facilities Agreement covering premises including 3033 Science Park Road, San
Diego, California (the "Premises"). During the term of the agreement, Titan
shall license to the Company on a non-exclusive basis access and occupancy up to
a base of 50,000 square feet of the Premises, subject to the parties' agreement
to increase or decrease such occupancy rights on a monthly basis. In addition,
Titan shall provide rent, maintenance, property taxes, utilities, landlord
pass-through expenses, property insurance, reception desk services, telephone
services and centralized mail and postage and other services and operating
expenses currently provided as part of Titan's regional occupancy services
allocated to its subsidiaries in the San Diego region ("Regional License
Services"). The Company shall pay Titan an annual fee determined by the
Company's percentage of Titan's annual costs of its Regional License Services.
The Company's percentage shall be the percentage of the Company's square footage
occupied in the total square footage occupied by Titan and its subsidiaries
occupying the Premises. Titan will estimate the Regional License Fee for each
fiscal year and the Company shall pay Titan the estimated Regional License Fee
in twelve equal monthly installments, subject to adjustment quarterly for any
material changes in the amount of square feet occupied or the amount of other
Regional License Services used. At the end of each fiscal year, Titan will
calculate the actual Regional License Fee and shall credit the Company for any
overpayments against the first payments due on the Regional License Fee for the
new fiscal year and invoice the Company for any underpayments of the Regional
License Fee. The allocation of costs under this agreement will be consistently
applied with the methodology used to allocate such costs for all periods
presented in the Company's financial statements.
ALLOCATED COSTS
Tax administrative, corporate services and facilities costs were $1.1 million,
$1.4 million and $1.8 million for the years ended December 31, 1995, 1996 and
1997, respectively.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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As of the date of this Prospectus, no shares of Class A Common Stock are
outstanding. Upon completion of the Offering, the only shares of Class A Common
Stock that will be outstanding are those that will be issued in the Offering
(including any shares issued if the Underwriters' over-allotment option is
exercised) and those issued under the Company's stock option plans. See
"Management--Stock Option Grants," "--Stock Option Plans." The following table
sets forth certain information with respect to the beneficial ownership of the
Company's Class A Common Stock as of March 31, 1998, and as adjusted to reflect
the sale of the shares of Class A Common Stock offered hereby, by (i) each of
the Named Executive Officers, (ii) each of the Company's directors, (iii) Titan
and (iv) all current directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
SHARES OF BENEFICIALLY OWNED(1)
CLASS A COMMON STOCK ----------------------------------
TITAN, DIRECTORS AND NAMED EXECUTIVE OFFICERS BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ----------------------------------------------- --------------------- ----------------- ---------------
<S> <C> <C> <C>
The Titan Corporation.......................... 7,800,000(2) 100% 74.3%
3033 Science Park Road
San Diego, CA 92121
Frederick L. Judge............................. 195,000(3) 2.4 1.8
Ronald B. Gorda................................ -- * *
Eric M. DeMarco................................ -- * *
Gene W. Ray.................................... -- * *
J. S. Webb..................................... -- * *
Thomas G. Pownall..............................
All Directors and Executive Officers as a Group
(5 persons).................................. 195,000 2.4 1.8
</TABLE>
- ----------------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 7,800,000 shares of Common
Stock outstanding as of March 31, 1998 and 10,500,000 shares of Common Stock
outstanding after completion of the Offering.
(2) Represents shares of Class A Common Stock issuable upon conversion of
7,800,000 shares of Class B Common Stock currently held by Titan.
(3) Includes 195,000 shares subject to stock options granted to Mr. Judge which
are exercisable within 60 days of the date of this Prospectus.
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DESCRIPTION OF CAPITAL STOCK
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The authorized capital stock of the Company consists of 30,000,000 shares of
Class A Common Stock, 7,800,000 shares of Class B Common Stock and 10,000,000
shares of Preferred Stock. None of the Class A Common Stock or Preferred Stock
is outstanding as of the date hereof. Of the 30,000,000 shares of Class A Common
Stock authorized, 2,700,000 are being offered in the Offering (3,105,000 shares
if the Underwriters' over-allotment option is exercised in full), 7,800,000
shares will be reserved for issuance upon conversion of Class B Common Stock
into Class A Common Stock and 1,183,000 shares have been reserved for issuance
pursuant to certain employee benefits plans. See "Management--Director
Compensation" and "Management--Executive Compensation." Of the 7,800,000 shares
of Class B Common Stock authorized, 7,800,000 will be outstanding and held by
Titan upon consummation of the Offering. The following summary description of
the capital stock of the Company is qualified by reference to the Restated
Certificate of Incorporation and Bylaws of the Company, copies of which are
filed as exhibits to the Registration Statement.
COMMON STOCK
VOTING RIGHTS. The holders of Class A Common Stock and Class B Common Stock
generally have identical rights except that holders of Class A Common Stock are
entitled to one vote per share while holders of Class B Common Stock are
entitled to ten votes per share on all matters to be voted on by stockholders.
Holders of shares of Class A Common Stock and Class B Common Stock are not
entitled to cumulate their votes in the election of directors. Generally, all
matters to be voted on by stockholders must be approved by a majority of the
votes entitled to be cast by all shares of Class A Common Stock and Class B
Common Stock present in person or represented by proxy, voting together as a
single class, subject to any voting rights granted to holders of any Preferred
Stock. Except as otherwise provided by law, and subject to any voting rights
granted to holders of any outstanding Preferred Stock, amendments to the
Company's Certificate of Incorporation generally must be approved by a majority
of the combined voting power of all Class A Common Stock and Class B Common
Stock voting together as a single class. However, amendments to the Company's
Certificate of Incorporation that would alter or change the powers, preferences
or special rights of the Class A Common Stock or the Class B Common Stock so as
to affect them adversely also must be approved by a majority of the votes
entitled to be cast by the holders of the shares affected by the amendment,
voting as a separate class. Notwithstanding the foregoing, any amendment to the
Company's Certificate of Incorporation to increase the authorized shares of any
class or authorize the creation, authorization or issuance of any securities
convertible into, or warrants or options to acquire, shares of any such class or
classes of stock shall be approved by the affirmative vote of the holders of a
majority of the Class A Common Stock and Class B Common Stock, voting together
as a single class.
Effective as of the first time at which Titan shall cease to be the beneficial
owner of an aggregate of at least a majority of the voting power of the Voting
Stock (as defined herein) of the Company then outstanding (the "Trigger Date"),
amendments to certain provisions of the Certificate of Incorporation will
require the approval of 80% of the combined voting power of all Class A Common
Stock and Class B Common Stock, voting together as a single class.
DIVIDENDS. Holders of Class A Common Stock and Class B Common Stock will share
in an equal amount per share in any dividend declared by the Board of Directors,
subject to any preferential rights of any outstanding Preferred Stock. Dividends
consisting of shares of Class A Common Stock and Class B Common Stock may be
paid only as follows: (i) shares of Class A Common Stock may be paid only to
holders of Class A Common Stock and shares of Class B Common Stock may be paid
only to holders of Class B Common Stock and (ii) shares shall be paid
proportionally with respect to each outstanding share of Class A Common Stock
and Class B Common Stock.
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<PAGE>
CONVERSION. While Titan does not have a current intention of effecting a
Tax-Free Spin-Off (as hereinafter defined), Titan will continually evaluate its
ownership of the Company and there can be no assurance as to whether Titan will
effect a Tax-Free Spin-Off in the future. Prior to the occurrence of a Tax-Free
Spin-Off, each share of Class B Common Stock is convertible at such holder's
option into one share of Class A Common Stock. Additionally, each share of Class
B Common Stock shall automatically convert into one share of Class A Common
Stock if at any time prior to a Tax-Free Spin-Off the number of outstanding
shares of Class B Common Stock owned by Titan or any of its subsidiaries (or a
Class B Transferee, as hereinafter defined, or any of its subsidiaries)
represents less than 50% of the total voting power of the Company. Following the
occurrence of a Tax-Free Spin-Off, if any, shares of Class B Common Stock shall
not be convertible into shares of Class A Common Stock at the option of the
holder thereof.
Except as provided below, any shares of Class B Common Stock transferred to a
person other than Titan or any of its subsidiaries or the Class B Transferee (as
defined below) shall automatically convert to shares of Class A Common Stock
upon such disposition. Shares of Class B Common Stock representing more than 50%
of the outstanding Common Stock of the Company transferred by Titan or any of
its subsidiaries in a single transaction to one unrelated person (the "Class B
Transferee") or any subsidiary of the Class B Transferee shall not automatically
convert to shares of Class A Common Stock upon such disposition. Any shares of
Class B Common Stock retained by Titan or its subsidiaries following any such
transfer of shares of Class B Common Stock to the Class B Transferee shall
automatically convert into shares of Class A Common Stock upon such transfer.
Shares of Class B Common Stock transferred to stockholders of Titan or
stockholders of the Class B Transferee in a transaction intended to be on a
tax-free basis (a "Tax-Free Spin-Off") under the Code shall not convert to
shares of Class A Common Stock upon the occurrence of such Tax-Free Spin-Off.
Following a Tax-Free Spin-Off, shares of Class B Common Stock shall be
transferred as Class B Common Stock, subject to applicable laws; provided,
however, that shares of Class B Common Stock shall automatically convert into
shares of Class A Common Stock on the fifth anniversary of the Tax-Free Spin-
Off, unless prior to such Tax-Free Spin-Off, Titan, or the Class B Transferee,
as the case may be, delivers to the Company an opinion of counsel reasonably
satisfactory to the Company to the effect that (i) such conversion could
adversely affect the ability of Titan, or the Class B Transferee, as the case
may be, to obtain a favorable ruling from the Internal Revenue Service that the
transfer would be a Tax-Free Spin-Off or (ii) the Internal Revenue Service has
adopted a general non-ruling policy on tax-free spin-offs and that such
conversion could adversely affect the status of the transaction as a Tax-Free
Spin-Off. If such an opinion is received, approval of such conversion shall be
submitted to a vote of the holders of the Common Stock as soon as practicable
after the fifth anniversary of the Tax-Free Spin-Off. Approval of such
conversion will require the affirmative vote of the holders of a majority of the
shares of both Class A Common Stock and Class B Common Stock present and voting,
voting together as a single class, with each share entitled to one vote for such
purpose. No assurance can be given that such conversion would be consummated.
The requirement to submit such conversion to a vote of the holders of the Common
Stock is intended to ensure that tax-free treatment of the Tax-Free Spin-Off is
preserved should the Internal Revenue Service challenge such automatic
conversion as violating the 80% vote requirement currently required by the Code
for a tax-free spin-off. Notwithstanding the foregoing, if Titan or the Class B
Transferee, as the case may be, delivers to the Company an opinion of counsel
reasonably satisfactory to the Company prior to such anniversary that such vote
could adversely affect the status of the Tax-Free Spin-Off, including the
ability to obtain a favorable ruling from the Internal Revenue Service, such
vote shall not be held and no such conversion shall take place.
OTHER RIGHTS. On liquidation, dissolution or winding up of the Company, after
payment in full of the amounts required to be paid to holders of Preferred
Stock, if any, all holders of Common Stock, regardless of class, are entitled to
share ratably in any assets available for distribution to holders of shares of
Common Stock. No shares of either class of Common Stock are subject to
redemption or have preemptive rights to purchase additional shares of Common
Stock. Upon consummation of the Offering, all the outstanding
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<PAGE>
shares of Class A Common Stock and Class B Common Stock will be legally issued,
fully paid and nonassessable.
PREFERRED STOCK
There are currently no shares of Preferred Stock outstanding. Under the
Company's Certificate of Incorporation, the Board of Directors has the
authority, without further action by stockholders, to issue up to 10,000,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon such Preferred Stock, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, liquidation preference and sinking fund
terms, any or all of which may be greater than the rights of the Common Stock.
The issuance of Preferred Stock could adversely affect the voting power of
holders of Common Stock and reduce the likelihood that such holders will receive
dividend payments and payments upon liquidation. Such issuance could have the
effect of decreasing the market price of the Common Stock. The issuance of
Preferred Stock could have the effect of delaying, deterring or preventing a
change in control of the Company. The Company has no present plans to issue any
shares of Preferred Stock.
DELAWARE ANTI-TAKEOVER LAW
The Company is governed by the provisions of Section 203 of the Delaware Law
("Section 203"). In general, Section 203 prohibits a public Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The existence of this provision would be expected to
have anti-takeover effects with respect to transactions not approved in advance
by the Board of Directors, such as discouraging takeover attempts that might
result in a premium over the market price of the Class A Common Stock.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The summary set forth below describes certain provisions of the Certificate of
Incorporation and Bylaws. The summary is qualified in its entirety by reference
to the provisions of the Certificate of Incorporation and Bylaws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The Company's Certificate of Incorporation provides
that any person purchasing or acquiring an interest in shares of capital stock
of the Company is deemed to have consented to the following provisions relating
to intercompany agreements and to transactions with interested parties and
corporate opportunities. The Company intends to disclose the existence of such
provisions in its Annual Reports on Form 10-K as well as in certain other
filings with the Commission. The corporate charter of Titan does not include
comparable provisions relating to intercompany agreements, transactions with
interested parties or corporate opportunities.
Certain of the provisions of the Certificate of Incorporation and Bylaws
discussed below may have the effect, either alone or in combination with the
provisions of Section 203 discussed above, of delaying or making more difficult
certain types of transactions involving an actual or potential change in control
of the Company or its management (including transactions in which stockholders
might otherwise receive a premium for their shares over then current prices) and
may limit the ability of stockholders to remove current management of the
Company or approve transactions that stockholders may deem to be in their best
interests and, therefore, could adversely affect the price of the Company's
Common Stock.
COMPETITION BY TITAN WITH THE COMPANY; CORPORATE OPPORTUNITIES. The Company's
Certificate of Incorporation provides that except as the Company and Titan may
otherwise agree in writing: (i) Titan shall not have a duty to refrain from
engaging directly or indirectly in the same or similar business activities or
lines
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<PAGE>
of business as the Company; and (ii) neither Titan nor any officer or director
thereof will be presumed liable to the Company or to its stockholders for breach
of any fiduciary duty by reason of any such activities of Titan or of such
person's participation therein.
The Company's Certificate of Incorporation also provides that if Titan acquires
knowledge of a potential transaction or matter which may be a corporate
opportunity both for Titan and the Company, Titan (and its officers and
directors) shall be entitled to offer such corporate opportunity to the Company
or Titan as Titan deems appropriate under the circumstances in its sole
discretion and shall not be presumed liable to the Company or its stockholders
for breach of fiduciary duty as a stockholder of the Company or controlling
person of a stockholder by reason of the fact that Titan pursues or acquires
such opportunity for itself, directs such corporate opportunity to another
person, or does not communicate information regarding, or offer, such corporate
opportunity to the Company.
Further, the Company's Certificate of Incorporation provides that in the event
that a director, officer or employee of the Company who is also a director,
officer or employee of Titan acquires knowledge of a potential transaction or
matter that may be a corporate opportunity both for the Company and Titan
(whether such potential transaction or matter is proposed by a third party or is
conceived by such director, officer or employee of the Company), such director,
officer or employee shall be entitled to offer such corporate opportunity to the
Company or Titan as such director, officer or employee deems appropriate under
the circumstances in his or her sole discretion, and no such director, officer
or employee shall be presumed liable to the Company or its stockholders for
breach of any fiduciary duty or duty of loyalty or failure to act in (or not
opposed to) the best interests of the Company or the derivation of any improper
personal benefit by reason of the fact that (i) such director, officer or
employee offered such corporate opportunity to Titan (rather than the Company)
or did not communicate information regarding such corporate opportunity to the
Company or (ii) Titan pursues or acquires such corporate opportunity for itself
or directs such corporate opportunity to another person or does not communicate
information regarding such corporate opportunity to the Company.
The enforceability of the provisions discussed above under Delaware Law has not
been established and, due to the absence of relevant judicial authority, counsel
to the Company is not able to deliver an opinion as to the enforceability of
such provisions. These provisions of the Company's Certificate of Incorporation
may eliminate certain rights that might have been available to stockholders
under Delaware Law had such provisions not been included in the Certificate of
Incorporation, although the enforceability of such provisions has not been
established.
The foregoing provisions of the Company's Certificate of Incorporation shall
expire on the date that Titan ceases to own beneficially Common Stock
representing at least 20% of the number of outstanding shares of Common Stock
and no person who is a director or officer of the Company is also a director or
officer of Titan.
Currently, Gene W. Ray, Frederick L. Judge, Ronald B. Gorda and Eric M. DeMarco,
the Company's Chairman of the Board, President, Chief Operating Officer and
Chief Financial Officer, respectively, also serve as President and Chief
Executive Officer, and Chief Financial Officer, respectively, of Titan. In
addition, J.S. Webb, a director of the Company, is also a member of Titan's
Board of Directors.
TRANSACTIONS WITH INTERESTED PARTIES. The Company's Certificate of
Incorporation provides that no contract, agreement, arrangement or transaction
(or any amendment, modification or termination thereof) between the Company and
Titan or any Related Entity (as hereinafter defined), or between the Company and
any director or officer of the Company, Titan or any Related Entity, shall be
void or voidable solely for the reason that Titan, a Related Entity or any one
or more of the officers or directors of the Company, Titan or any Related Entity
are parties thereto, or solely because any such directors or officers are
present at, participate in or vote with respect to the authorization of such
contract, agreement, arrangement or transaction (or any amendment, modification
or termination thereof). The term "Related Entity" means a
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corporation, partnership, joint venture, association or other organization in
which one or more of the directors of the Company has or have a direct or
indirect financial interest. Further, the Company's Certificate of Incorporation
provides that neither Titan nor any officer or director thereof or of any
Related Entity shall be presumed liable to the Company or its stockholders for
breach of any fiduciary duty or duty of loyalty or failure to act in (or not
opposed to) the best interests of the Company or the derivation of any improper
personal benefit by reason of the fact that Titan or an officer or director
thereof or of such Related Entity in good faith takes any action or exercises
any rights or gives or withholds any consent in connection with any agreement or
contract between Titan or such Related Entity and the Company. No vote cast or
other action taken by any person who is an officer, director or other
representative of Titan or any Related Entity, which vote is cast or action is
taken by such person in his capacity as a director of the Company, shall
constitute an action of or the exercise of a right by or a consent of Titan or
such Related Entity for the purpose of any such agreement or contract.
These provisions may also have the effect of limiting the liability of Titan and
its subsidiaries for certain breaches of their fiduciary duties in connection
with action that may be taken or not taken in good faith under the intercompany
agreements. See "Relationship with Titan and Certain Transactions."
STOCKHOLDER ACTION; SPECIAL MEETINGS; OTHER PROVISIONS. The Bylaws of the
Company provide that, effective as of the Trigger Date, and subject to the
rights of any holders of Preferred Stock or any other series or class of stock
to elect additional directors under specified circumstances, stockholder action
can be taken only at an annual or special meeting of stockholders and
stockholder action may not be taken by written consent in lieu of a meeting. In
addition, special meetings of the stockholders of the Company may be called only
by the Chairman of the Board of Directors, the President of the Company or by
the Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors; provided that, prior to the Trigger Date,
special meetings can also be called at the request of the holders of a majority
of the voting power of the then outstanding Voting Stock. Effective as of the
Trigger Date, stockholders are not permitted to call a special meeting or to
require that the Board of Directors call a special meeting of stockholders.
The Certificate of Incorporation and Bylaws of the Company provide that, subject
to the rights of holders of Preferred Stock or any other series or class of
stock to elect directors under specified circumstances, effective as of the
Trigger Date, directors may be removed only for cause and only upon the
affirmative vote of holders of at least 80% of the voting power of all the then
outstanding shares of stock entitled to vote generally in the election of
directors ("Voting Stock"), voting together as a single class; provided however,
that prior to the Trigger Date, directors may be removed, without cause, with
the affirmative vote of the holders of at least a majority of the voting power
of the then outstanding Voting Stock, voting together as a class.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY. The Certificate of
Incorporation authorizes the Board of Directors to create and issue rights
entitling the holders thereof to purchase from the Company shares of capital
stock or other securities or property. The times at which and terms upon which
such rights are to be issued would be determined by the Board of Directors and
set forth in the contracts or instruments that evidence such rights. The
authority of the Board of Directors with respect to such rights includes, but is
not limited to, determination of (i) the purchase price of the capital stock to
be purchased upon exercise of such rights; (ii) provisions relating to the times
at which and the circumstances under which such rights may be exercised or sold
or otherwise transferred, either together with or separately from, any other
stock or other securities of the Company; (iii) provisions which adjust the
number or exercise price of such rights or amount or nature of the stock
receivable upon exercise of such rights in the event of a combination, split or
recapitalization of any stock of the Company, a change in ownership of the
Company's stock or other securities or a reorganization, merger, consolidation,
sale of assets or other occurrence relating to the Company or any stock of the
Company, and provisions restricting the ability of the Company to enter into any
such transaction absent an assumption by the other party or parties thereto of
the obligations of the
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Company under such rights; (iv) provisions which deny the holder of a specified
percentage of the outstanding securities of the Company the right to exercise
such rights and cause such rights held by such holder to become void; (v)
provisions which permit the Company to redeem or exchange such rights; and (vi)
the appointment of the rights agent with respect to such rights. This provision
is intended to confirm the authority of the Board of Directors to issue such
share purchase rights or other rights to purchase stock or securities of the
Company or any other corporation.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Co.
SHARES ELIGIBLE FOR FUTURE SALE
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Prior to the Offering there has been no public market for the Common Stock of
the Company, and no predictions can be made regarding the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. As described below, only a limited
number of shares will be available for sale shortly after the Offering due to
certain contractual and legal restrictions on resale. Nevertheless, sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price.
Upon completion of the Offering, the Company will have 2,700,000 shares of Class
A Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option). In addition, as of December 31, 1997, the Company had
granted stock options to certain employees and directors for the purchase of an
aggregate of approximately 865,000 shares of Class A Common Stock. The 2,700,000
shares of Class A Common Stock being sold hereby will be freely tradable (other
than by an "affiliate" of the Company as such term is defined in Rule 144 of the
Securities Act) without restriction or registration under the Securities Act.
All remaining shares are Restricted Shares and are eligible for public sale if
registered under the Securities Act or sold in accordance with Rule 701
thereunder.
Titan, which will own 7,800,000 shares of Class B Common Stock upon completion
of the Offering, and certain restricted persons have agreed they will not sell
any shares of Common Stock owned by them without the prior written consent of
SBC Warburg Dillon Read Inc. for a period of 180 days from the effective date of
the Registration Statement of which this Prospectus is a part (the "Lockup
Period"). See "Underwriting." Following the expiration of the Lockup Period,
Titan and such restricted persons may sell such shares only pursuant to the
requirements of Rule 144 or pursuant to an effective registration statement
under the Securities Act. Furthermore, the shares held by Titan and such
restricted persons are "restricted securities" within the meaning of Rule 144.
Following the expiration of the Lockup Period, 3,900,000 of the shares of Class
B Common Stock held by Titan will be eligible for sale in the public market
subject to compliance with Rule 144. The remaining 3,900,000 shares of Class B
Common Stock held by Titan will be eligible for sale in compliance with Rule 144
in September 1998.
Subject to certain limitations on the aggregate offering price of a transaction
and other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from the Company by its employees, directors,
officers, consultants or advisers prior to the closing of the Offering, pursuant
to written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to stock options granted by
the Company before the Offering, along with the shares acquired upon exercise of
such options. Securities issued in reliance on Rule 701 are deemed to be
Restricted Shares and, beginning 90 days after the date of this Prospectus
(unless subject to the contractual restrictions described above), may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.
- --------------------------------------------------------------------------------
70
<PAGE>
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this Prospectus, an affiliate of the Company, or a holder of Restricted
Shares who beneficially owns shares that were not acquired from the Company or
an affiliate of the Company within the previous year, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock (approximately
105,000 shares of Class A Common Stock immediately after the Offering, assuming
no exercise of the Underwriters' over-allotment option) or the average weekly
trading volume of Class A Common Stock during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities and Exchange
Commission. Sales under Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about the
Company. However, a person (or persons whose shares are aggregated ) who is not
deemed to have been an affiliate of the Company at any time during the 90 days
immediately preceding the sale and who owns beneficially Restricted Shares is
entitled to sell such shares under Rule 144(k) without regard to the limitations
described above, provided that at least two years have elapsed since the later
of the date the shares were acquired from the Company or from an affiliate of
the Company. The foregoing is a summary of Rule 144 and is not intended to be a
complete description of it.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering approximately 1,183,000 shares of Class A Common Stock
reserved for issuance under the 1994 and 1997 Plans, the Directors' Plan and the
Purchase Plan. Such registration statement is expected to be filed soon after
the Offering and will automatically become effective upon filing. Accordingly,
shares registered under such registration statements will be available for sale
in the open market, unless such shares are subject to vesting restrictions with
the Company or the contractual restrictions described above.
- --------------------------------------------------------------------------------
71
<PAGE>
UNDERWRITING
- --------------------------------------------------------------------------------
The names of the Underwriters of the shares of Class A Common Stock offered
hereby and the aggregate number of shares of Class A Common Stock which each has
severally agreed to purchase from the Company, subject to the terms and
conditions specified in the Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------- -----------
<S> <C>
SBC Warburg Dillon Read Inc..............................................
Needham & Company, Inc...................................................
C.E. Unterberg, Towbin...................................................
-----------
Total.................................................................. 2,700,000
-----------
-----------
</TABLE>
The Managing Underwriters are SBC Warburg Dillon Read Inc., Needham & Company,
Inc. and C.E. Unterberg, Towbin (the "Managing Underwriters").
If any shares of Class A Common Stock offered hereby are purchased by the
Underwriters, all such shares will be so purchased. The Underwriting Agreement
contains certain provisions whereby if any Underwriter defaults in its
obligation to purchase such shares and if the aggregate obligations of the
Underwriters so defaulting do no exceed ten percent of the shares offered
hereby, the remaining Underwriters, or some of them, must assume such
obligations.
The Underwriters propose to offer the shares of Class A Common Stock to the
public initially at the offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not to exceed
$ per share. The Underwriters may allow, and such dealers may re-allow,
a concession not to exceed $ per share on sales to certain other
dealers. The offering of the shares of Class A Common Stock is made for delivery
when, as and if accepted by the Underwriters and subject to prior sale and
withdrawal, cancellation or modification of the offer without notice. The
Underwriters reserve the right to reject any order for the purchase of the
shares. After the shares are released for sale to the public, the public
offering price, the concession and the reallowance may be changed by the
Managing Underwriters.
The Company has granted to the Underwriters an option for 30 days from the date
of the Underwriting Agreement to purchase up to an additional 405,000 shares of
Class A Common Stock from them at the offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriters may
exercise such option only to cover over-allotments made of the shares in
connection with the Offering. To the extent the Underwriters exercise this
option, each of the Underwriters will be obligated, subject to certain
conditions, to purchase the number of additional shares proportionate to such
Underwriter's initial commitment.
- --------------------------------------------------------------------------------
72
<PAGE>
The Company, each of its directors and officers and certain of its
securityholders, including Titan, have agreed that they will not sell, contract
to sell, grant any option to sell or otherwise dispose of, directly or
indirectly, any shares of the Common Stock or any securities convertible into or
exchangeable for Common Stock or warrants or other rights to purchase Common
Stock, for a period of at least 180 days after the date of this Prospectus,
without the prior written consent of SBC Warburg Dillon Read Inc., except for
(i) the registration and sale of shares of Class A Common Stock pursuant to the
Offering; (ii) the issuance of shares of Class A Common Stock by the Company
upon the exercise of outstanding options, provided that the Company shall have
obtained an agreement substantially to the effect set forth in this paragraph
from each such person to whom such shares of Class A Common Stock are issued;
and (iii) the grant of options and other rights by the Company to purchase up to
an aggregate of approximately 695,000 shares of Class A Common Stock to the
Company's employees, officers and directors pursuant to the 1997 Plan, provided
that the Company shall have obtained an agreement substantially to the effect
set forth in this paragraph from each such employee, officer and director of the
Company to whom such options and rights are granted.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including any liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Managing Underwriters, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Managing
Underwriters to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Prior to the Offering, there has been no public market for the Class A Common
Stock. Consequently, the initial public offering price will be determined by
negotiations among the Company and the Managing Underwriters. Among the
principal factors to be considered in determining the initial public offering
price are prevailing market and general economic conditions, the
price-to-earnings ratios of other publicly traded companies, projected revenues
and earnings of the Company, the current financial position of the Company,
estimates of the business potential of the Company, the present state of the
Company's development, the Company's management and other factors deemed
relevant. Additionally, consideration will be given to the general state of the
securities market, the market conditions for new issues of securities and the
demand for securities of comparable companies at the time the Offering was made.
- --------------------------------------------------------------------------------
73
<PAGE>
LEGAL MATTERS
- --------------------------------------------------------------------------------
The validity of the shares of Class A Common Stock offered hereby is being
passed upon for the Company by Cooley Godward LLP, San Diego, California.
Certain legal matters in connection with the Offering are being passed upon for
the Underwriters by Brobeck, Phleger & Harrison LLP, San Diego, California.
EXPERTS
- --------------------------------------------------------------------------------
The audited financial statements included in this Prospectus and elsewhere in
the Registration Statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included in reliance upon the authority of said firm as experts in giving said
reports.
The statements in the Prospectus under the captions "Risk Factors--Limited
Intellectual Property Protection; Dependence on Proprietary Technology" and
"Business--Patents, Trademarks and Trade Secrets" have been reviewed and
approved by Edward W. Callan, Esq., as expert in such matters, and are included
herein in reliance upon such review and approval.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act,
with respect to the Class A Common Stock offered hereby. As permitted by the
rules and regulations of the Commission, this Prospectus, which is a part of the
Registration Statement, omits certain information, exhibits, schedules and
undertakings set forth in the Registration Statement. For further information
pertaining to the Company and the Class A Common Stock offered hereby, reference
is made to such Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents or provisions of any
contract or other document referred to herein are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the office of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of all or any part of the Registration
Statement may be obtained from such offices upon the payment of the fees
prescribed by the Commission. In addition, registration statements and certain
other filings made with the Commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system are publicly available through the
Commission's web site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
- --------------------------------------------------------------------------------
74
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
LINKABIT WIRELESS, INC.
Report of Independent Public Accountants............................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997........................... F-3
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1997 ................................................................... F-4
Consolidated Statements of Stockholder's Equity for each of the three years in the
period ended December 31, 1997 ...................................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1997 ................................................................... F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>
- --------------------------------------------------------------------------------
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Linkabit Wireless, Inc.:
We have audited the accompanying consolidated balance sheets of Linkabit
Wireless, Inc. (a Delaware corporation and wholly owned subsidiary of the Titan
Corporation) and subsidiary as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 consolidated financial position of Linkabit Wireless,
Inc. and subsidiary as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
January 19, 1998
- --------------------------------------------------------------------------------
F-2
<PAGE>
LINKABIT WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share values)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................................. $ -- $ 717
Accounts receivable--net.............................................. 11,130 17,006
Inventories........................................................... 3,249 3,251
Prepaid expenses and other............................................ 62 487
Deferred income taxes................................................. 3,655 3,035
------------- -------------
Total current assets................................................ 18,096 24,496
Property and equipment--net............................................. 3,133 3,462
Goodwill--net of accumulated amortization of $897 and $1,036............ 1,200 1,061
Deferred income taxes--noncurrent....................................... 724 --
------------- -------------
Total assets........................................................ $ 23,153 $ 29,019
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable...................................................... $ 4,529 $ 4,602
Accrued compensation and benefits..................................... 1,947 2,323
Other accrued liabilities............................................. 576 818
------------- -------------
Total current liabilities........................................... 7,052 7,743
------------- -------------
Long-term Liabilities:
Customer advance payments............................................. 500 --
Deferred income taxes--noncurrent..................................... -- 9
------------- -------------
Total long-term liabilities......................................... 500 9
------------- -------------
Note payable to parent company.......................................... -- 3,000
------------- -------------
Commitments and contingencies:
Stockholder's Equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized, none
issued and outstanding................................................ -- --
Class A Common Stock, $.001 par value, 30,000,000 shares authorized,
none issued and outstanding........................................... -- --
Class B Common Stock, $.001 par value, 7,800,000 shares authorized,
7,800,000 issued and outstanding...................................... 8 8
Additional paid-in capital.............................................. -- 29,760
Parent company investment............................................... 21,649 --
Retained deficit........................................................ (6,056) (11,501)
------------- -------------
Total stockholder's equity.......................................... 15,601 18,267
------------- -------------
Total liabilities and stockholder's equity.......................... $ 23,153 $ 29,019
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-3
<PAGE>
LINKABIT WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues................................................................. $ 25,506 $ 27,850 $ 48,980
Cost of revenues......................................................... 15,490 18,655 31,908
--------- --------- ---------
Gross profit........................................................... 10,016 9,195 17,072
Operating expenses:
Selling, general and administrative.................................... 6,298 7,230 7,690
Research and development............................................... 5,416 7,544 10,117
--------- --------- ---------
Operating loss before interest and income taxes........................ (1,698) (5,579) (735)
Parent company interest charge........................................... 578 1,171 1,820
--------- --------- ---------
Loss before income taxes................................................. (2,276) (6,750) (2,555)
Income tax provision (benefit)........................................... (546) (2,295) 2,890
--------- --------- ---------
Net loss................................................................. $ (1,730) $ (4,455) $ (5,445)
--------- --------- ---------
--------- --------- ---------
Net loss per share - basic and dilluted.................................. $ (0.22) $ (0.57) $ (0.70)
--------- --------- ---------
--------- --------- ---------
Weighted average common shares and common share equivalents used in
computing net loss per share........................................... 7,800 7,800 7,800
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-4
<PAGE>
LINKABIT WIRELESS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON COMMON
PARENT STOCK, STOCK, ADDITIONAL RETAINED
COMPANY $.001 PAR $.001 PAR PAID-IN EARNINGS
INVESTMENT VALUE VALUE CAPITAL (DEFICIT) TOTAL
----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995...................... $ 4,401 $ -- $ 8 $ -- $ 129 $ 4,538
Net loss....................................... -- -- -- -- (1,730) (1,730)
Titan investment, net.......................... 7,264 -- -- -- -- 7,264
----------- ----------- ----- ----------- ----------- ---------
Balances at December 31, 1995.................... 11,665 -- 8 -- (1,601) 10,072
Net loss....................................... -- -- -- -- (4,455) (4,455)
Titan investment, net.......................... 9,984 -- -- -- -- 9,984
----------- ----------- ----- ----------- ----------- ---------
Balances at December 31, 1996.................... 21,649 -- 8 -- (6,056) 15,601
Net loss....................................... -- -- -- -- (5,445) (5,445)
Titan investment, net.......................... 8,111 -- -- -- -- 8,111
Contribution of capital from Titan............. (29,760) -- -- 29,760 -- --
----------- ----------- ----- ----------- ----------- ---------
Balances at December 31, 1997.................... $ -- $ -- $ 8 $ 29,760 $ (11,501) $ 18,267
----------- ----------- ----- ----------- ----------- ---------
----------- ----------- ----- ----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-5
<PAGE>
LINKABIT WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................. $ (1,730) $ (4,455) $ (5,445)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................... 601 820 1,291
Deferred income taxes................................................... (985) (2,394) 1,353
Change in operating assets and liabilities:
Accounts receivable..................................................... (2,088) (3,355) (5,876)
Inventories............................................................. (857) (2,005) (2)
Prepaid expenses and other.............................................. (15) 27 (425)
Accounts payable........................................................ 1,069 2,777 73
Accrued compensation and benefits....................................... 15 330 376
Other accrued liabilities............................................... (2,169) 80 (258)
--------- --------- ---------
Net cash used in operating activities................................. (6,159) (8,175) (8,913)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................... (1,101) (1,830) (1,438)
Other..................................................................... (4) 21 (43)
--------- --------- ---------
Net cash used in investing activities................................. (1,105) (1,809) (1,481)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable to Titan..................................................... -- -- 3,000
Investment by Titan....................................................... 7,264 9,984 8,111
--------- --------- ---------
Net increase in cash...................................................... $ -- $ -- $ 717
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-6
<PAGE>
LINKABIT WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Linkabit Wireless, Inc., ("Linkabit Wireless" or the
"Company"), a wholly owned subsidiary of The Titan Corporation ("Titan") , was
established in its present form when in September 1997, Titan reorganized
several of its divisions and one of its subsidiaries as follows: (a) Transferred
the Client-Server and the discontinued Broadband Communications and Gamma Satcom
divisions out of its Titan Information Systems Corporation ("TISC") subsidiary
to Titan, (b) Contributed the assets, net of related liabilities, of its
Linkabit division to TISC, (c) Renamed TISC to Linkabit Wireless, Inc., and (d)
Contributed its parent company investment to additional paid-in capital. In the
accompanying financial statements, the transfer of the Client-Server, Broadband
Communications and Gamma Satcom divisions' net assets has been treated as a
disposal in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 93 and their operations have been excluded for all periods
presented. The contribution of the Linkabit division into TISC has been treated
as a combination of entities under common control and accordingly, the
operations of the Linkabit division and the remaining operations of TISC have
been accounted for in a manner similar to a pooling of interests for all periods
presented.
Linkabit Wireless specializes in the development and production of advanced
satellite ground terminals, satellite voice/data modems, networking systems, and
other products used to provide bandwidth efficient communications for commercial
and government customers.
See "Risk Factors" in the accompanying prospectus for a more complete discussion
of risks faced by the Company.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Linkabit Wireless, Inc. and its wholly-owned subsidiary. All
significant intercompany transactions and balances have been eliminated.
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.
CONCENTRATIONS OF CREDIT RISK AND GEOGRAPHIC OPERATIONS. The Company believes
that a significant portion of its business will come from international
customers in developing countries. Further, the Company anticipates that future
business will be with the U.S. government and a few international customers.
While accounts receivable are generally not collateralized, the Company limits
its exposure by performing ongoing credit evaluations of its customers'
financial condition. To mitigate credit risk, the Company has a policy of
requiring payment, primarily in the form of stand-by letters of credit, advance
deposits, or wire transfers, prior to shipment.
REVENUE RECOGNITION. A significant portion of the Company's revenues, both
commercial and government, is derived from products manufactured and services
performed under cost-reimbursement and fixed-price contracts wherein revenues
are generally recognized using the percentage-of-completion method. Estimated
contract losses are fully charged to operations when identified. Revenues earned
on contracts in process in excess of billings are classified as unbilled
accounts receivable and included in accounts receivable in the accompanying
balance sheets. Certain other revenues are recognized as units are shipped. The
Company provides a reserve for its estimate of warranty costs at the time of
shipment.
- --------------------------------------------------------------------------------
F-7
<PAGE>
RESEARCH AND DEVELOPMENT. Independent research and development costs are
expensed as incurred. Certain other research and development costs are customer
funded and are accounted for as contract costs included in cost of sales with a
portion of fee earned ratably in proportion to the costs incurred as such
activities are performed.
INVENTORIES. Inventories include the cost of material, labor and overhead, and
are stated at the lower of cost, determined on the weighted average method, or
market.
PROPERTY AND EQUIPMENT. Property and equipment are stated at acquisition cost.
Depreciation is provided using the straight-line method, with estimated useful
lives of 2 to 13 years for leasehold improvements and 3 to 7 years for machinery
and equipment and furniture and fixtures.
GOODWILL. In 1990, Titan acquired the operations of Linkabit. The related
excess of Titan's cost over the fair value of the Linkabit net assets acquired
is shown as goodwill in the accompanying balance sheets. The goodwill is being
amortized on a straight-line basis over a life of fifteen years. The Company has
assessed the realizability of this goodwill considering such factors as
Linkabit's prior history of profitability, ongoing ability to generate profits
and cash flow and believes that the carrying value of this asset is fully
recoverable.
LONG-LIVED ASSETS. The Company has adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets" (SFAS
121). The statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be fully recoverable. The Company periodically re-evaluates the
original assumptions and rationale utilized in the establishment of the carrying
value and estimated lives of its long-lived assets. 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 any intangible asset to the
Company's business objectives.
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. The adoption of SFAS 123 by the Company had no effect on the Company's
financial position or results of operations.
INCOME TAXES. The Company and Titan entered into a tax allocation agreement
under which the Company will be included in Titan's consolidated federal and
certain state tax returns. The agreement will provide that in the years in which
the Company has taxable income, it will pay Titan amounts comparable to the
taxes the Company would have paid if it had filed separate tax returns. For so
long as Titan maintains beneficial ownership of at least 80% of the total voting
power and 80% of the total value of the outstanding Common Stock, the Company
will be included in the consolidated federal and certain state income tax
returns filed by Titan. Pursuant to the tax allocation agreement, the Company
has a $3 million note payable to Titan which represents the cumulative future
benefit of net operating losses funded by Titan in prior years. For periods
prior to the execution of the tax allocation agreement, the accompanying
statements of operations reflect tax provisions (benefits) calculated on the
separate return basis.
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", 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 temporary 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.
NET LOSS PER SHARE. In December 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). The
statement specifies the computation, presentation, and
- --------------------------------------------------------------------------------
F-8
<PAGE>
disclosure requirements for earnings per share (EPS). The adoption of this
statement had no material impact to the Company due to its simple capital
structure. Pursuant to certain Securities and Exchange Commission requirements,
net loss per share has been presented for all periods. The weighted average
number of common shares for all periods presented represents the 7,800,000
shares issued to Titan as of December 31, 1997. Common Stock equivalents have
not been considered in the calculation of net loss per share as their impact
would be anti-dillutive.
PARENT COMPANY INVESTMENT. Prior to September 30, 1997, the cash receipts and
disbursements of the Company's operations were combined with other Titan cash
transactions and balances. Titan funded all of the Company's cash requirements
through September 30, 1997. Through December 31, 1997, the Company has
contributed $29,760 of the related parent company investments to the Company's
capital. The note payable to parent company as of December 31, 1997, represents
the Company's estimate of the value of tax net operating losses utilized by
Linkabit Wireless that are to be repaid to Titan.
NEW ACCOUNTING STANDARDS. In July 1997, the Financial Accounting Standards
Board issued 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 ("comprehensive income"). Comprehensive income is the total of net
income and all other nonowner changes in equity. SFAS 130 is effective for
fiscal years beginning after December 15, 1997, with earlier application
permitted. The Company does not anticipate that the adoption of the accounting
and disclosure provisions of SFAS 130 will have a material impact on the
Company's financial statements and results of operations.
NOTE 2. OTHER FINANCIAL DATA
Following are details concerning certain balance sheet accounts as of December
31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Accounts Receivable:
Billed.................................................................................... $ 3,987 $ 9,673
Unbilled.................................................................................. 7,178 7,496
Less allowance for doubtful accounts........................................................ (35) (163)
--------- ---------
$ 11,130 $ 17,006
--------- ---------
--------- ---------
</TABLE>
Unbilled receivables represent work-in-process that will be billed in accordance
with contract terms and delivery schedules. Also included in unbilled
receivables are amounts billable upon final execution of contracts, contract
completion, milestones or completion of rate negotiations. Generally, unbilled
receivables 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 and other
- --------------------------------------------------------------------------------
F-9
<PAGE>
government agencies. Revenues have been recorded at amounts expected to be
realized upon final settlement.
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Inventories:
Materials.................................................................................. $ 210 $ 684
Work-in-process............................................................................ 1,651 1,537
Finished goods............................................................................. 1,388 1,030
--------- ---------
$ 3,249 $ 3,251
--------- ---------
--------- ---------
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Property and Equipment:
Machinery and equipment.................................................................... $ 4,122 $ 6,318
Furniture, fixtures and leasehold improvements............................................. 1,123 99
Construction in progress................................................................... 585 347
--------- ---------
5,830 6,764
Less accumulated depreciation and amortization............................................... (2,697) (3,302)
--------- ---------
$ 3,133 $ 3,462
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1996 and 1997, other current liabilities include customer
advance payments of approximately $297 and $260, respectively.
- --------------------------------------------------------------------------------
F-10
<PAGE>
NOTE 3. RELATED PARTY TRANSACTIONS
CORPORATE SERVICES AGREEMENT. The Company and Titan have entered into a
corporate services agreement (the "Corporate Services Agreement") pursuant to
which Titan will provide various corporate services to the Company. These
services include certain routine and ordinary corporate services, including
financial, insurance, accounting, employee benefits, payroll, tax and legal
services as well as corporate planning, government relations and corporate
quality assurances as described in the Corporate Services Agreement. The
accompanying statements of operations include revenues and costs directly
attributable to the Company, as well as certain allocations from Titan of
indirect costs associated with such services and shared systems. Such
allocations include charges for costs of administrative functions and services
performed on behalf of the Company by centralized staff groups within Titan and
Titan's general corporate expenses. These allocations were generally based on
the proportionate total cost incurred of the Company to the rest of Titan.
Amounts aggregating $1,107, $1,466 and $1,805 are included in the Company's
results of operations in the accompanying financial statements for the years
ended December 31, 1995, 1996 and 1997, respectively. Management believes that
these allocations have been and will be reasonable.
FACILITIES AGREEMENT. The Company and Titan have entered into a facilities
agreement pursuant to which the Company will occupy general corporate offices
and manufacturing facilities under a sublease agreement with Titan. The Company
will be allocated costs generally based on square footage utilized as a
percentage of the total facility square footage in the buildings occupied by the
Company. Amounts aggregating $4,054, $3,864 and $2,512 are included in the
Company's results of operations in the accompanying financial statements for the
years ended December 31, 1995, 1996 and 1997, respectively.
EMPLOYEE BENEFIT PLANS. The Company's employees are eligible to participate in
the Titan benefit plans. Those plans include a "401(k)" plan, an employee stock
ownership plan, a non-qualified executive deferred compensation plan, an
employee stock purchase plan, and a health and welfare cafeteria plan. The
direct cost of these plans for the Company's employees are charged by Titan to
the Company.
The Company has financed its operations and growth through advances from Titan
and does not currently have its own lines of credit or other external financing
facilities. Although the Company presently does not anticipate a need for such
outside financing facilities, the Company believes that, if and when such need
arises, the Company will, subject to certain limitations and restrictions set
forth in Titan's loan agreements, have access to lines of credit or financing
facilities available to Titan.
NOTE 4. COMMON STOCK
The Company has two classes of common stock, Class A and Class B. Class A common
stock has 30,000,000 shares authorized with one vote per share. Class B common
stock has 7,800,000 shares authorized with ten votes per share.
As of December 31, 1997, Titan owned 7,800,000 shares of Class B common stock of
the Company, which represents 100 percent of the Class B shares issued and
outstanding. With the exception of certain block transfers in excess of 50% by
Titan of the Class B common stock, if transferred, each share of the Class B
common stock automatically converts to one share of Class A common stock.
No shares of Class A common stock are issued or outstanding as of December 31,
1997. The Company has reserved 1,183,000 shares of its Class A common stock for
possible issuance under stock-based compensation plans.
NOTE 5. SIGNIFICANT CUSTOMERS
Sales to the U.S. government, including both defense and non-defense agencies,
and sales as a subcontractor as well as direct sales, aggregated approximately
$21,713, $25,211 and $28,804 for the years ended December 31, 1995, 1996 and
1997, respectively.
Sales to PT. Pasifik Satelit Nusantara and its affiliates totaled $13,953 for
the year ended December 31, 1997.
No other single customer accounted for 10% or more of the revenues for these
periods.
- --------------------------------------------------------------------------------
F-11
<PAGE>
NOTE 6. CONCENTRATION OF RISK, COMMITMENTS AND CONTINGENCIES
Various components of the Company's products are supplied by sole-source
vendors. The Company has not experienced significant difficulty in obtaining
adequate supplies from these vendors and has identified alternate suppliers.
However, there can be no assurance that the unanticipated loss of a single
vendor would not result in delays in shipment or in delay of the introduction of
new products.
In connection with the sale of various products, the Company enters into
supplier agreements with various contract manufacturers to purchase certain
components incorporated into certain of the Company's products. The Company
believes that the loss of one or more of these agreements would not have a
material adverse impact on the Company's operations.
As of December 31, 1997, the Company has non-cancelable commitments of the
following:
<TABLE>
<CAPTION>
PERIOD OF
SUPPLIER COMMITMENT PERFORMANCE
<S> <C> <C>
- ----------------------------------------------
Xetel $ 3,481 1998
Others 873 1998
</TABLE>
These commitments relate to firm orders received by the Company.
The Company periodically is a defendant in cases incidental to its business
activities. Furthermore, providers of products and services to the U.S.
government are generally subject to multiple levels of audit and investigation
by various U.S. government agencies. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position or results of operations of the Company.
NOTE 7. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 238 $ 94 $ 1,452
State................................................ 14 5 85
--------- --------- ---------
252 99 1,537
Deferred............................................... (798) (2,394) 1,353
--------- --------- ---------
$ (546) $ (2,295) $ 2,890
--------- --------- ---------
--------- --------- ---------
</TABLE>
Following is a reconciliation of the income tax provision (benefit) expected
(based on the United States federal income tax rate applicable in each year) to
the actual tax provision (benefit) on income (loss):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected Federal tax (benefit)......................... $ (774) $ (2,295) $ (869)
State income taxes, net of Federal income tax
benefits............................................. (46) (135) (51)
Valuation allowance.................................... 252 38 2,988
Other.................................................. 22 97 822
--------- --------- ---------
Actual tax provision (benefit)......................... $ (546) $ (2,295) $ 2,890
--------- --------- ---------
--------- --------- ---------
</TABLE>
- --------------------------------------------------------------------------------
F-12
<PAGE>
The deferred tax assets as of December 31, 1996 and 1997, result from the
following temporary differences:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Capitalized non-recurring engineering........................... $ 2,410 $ 1,798
Inventory and contract loss reserves............................ 1,245 1,237
Employee benefits............................................... 299 392
Contract revenue................................................ -- --
Tax credit carryforwards........................................ 542 650
Depreciation.................................................... (160) (156)
Tax benefit of certain foreign intangibles...................... -- 2,880
Other........................................................... 585 (245)
Valuation allowance............................................. (542) (3,530)
--------- ---------
Net deferred tax assets......................................... $ 4,379 $ 3,026
--------- ---------
--------- ---------
</TABLE>
Realization of certain components of the net deferred tax asset is dependent
upon Linkabit Wireless generating sufficient taxable income in the appropriate
jurisdiction and/or prior to expiration of loss and credit carryforwards.
Although realization is not assured, management believes it is more likely than
not that certain components of 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 the estimate of future taxable income during the
carryforward period changes. 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.
NOTE 8. STOCK-BASED AND OTHER COMPENSATION PLANS
The Company provides stock-based compensation to officers, directors and key
employees through two stock option plans. The Company's Board of Directors
currently has options available for grant under the 1994 (as amended) and 1997
Linkabit Wireless Stock Option Plans (the "Plans") of 695,000 shares. Total
options authorized for grant under these Plans are 1,560,000. Under the Plans,
an option's maximum term is ten years, and the exercise price of each option
equals the fair market value of the Company's stock on the date of grant, except
as discussed below. Employee options may be granted throughout the year. All
options vest in 25 percent increments beginning one year after the grant date.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995, 1996 and 1997: zero dividend yield;
expected volatility of 87%; a risk-free interest rate of 6.57%; and an expected
life of five years.
A summary of the status of the Company's Plans as of December 31, 1995, 1996 and
1997, and changes during the periods ended on those dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ----------------------- -----------------------
SHARES WEIGHTED-AVG. SHARES WEIGHTED-AVG. SHARES WEIGHTED-AVG.
OPTIONS (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period...... 279 $1.80 294 $1.88 436 $2.26
Granted................................. 15 3.08 142 3.08 429 5.12
------ ------ ------
Outstanding at end of period............ 294 1.88 436 2.26 865 3.68
------ ------ ------
------ ------ ------
Options exercisable at end of period.... 70 144 242
------ ------ ------
------ ------ ------
</TABLE>
- --------------------------------------------------------------------------------
F-13
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
----------------------------------- ------------------
OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE
EXERCISE AT 12/31/97 REMAINING AT 12/31/97
PRICE (000) CONTRACTUAL LIFE (000)
- -------- ----------- ---------------- ------------------
<C> <C> <S> <C>
$1.80 279 6.7 years 203
3.08 157 8.6 39
5.12 429 10.0 --
----- ---
865 242
----- ---
----- ---
</TABLE>
As permitted, the Company has adopted the disclosure only provisions of SFAS
123. Accordingly, no compensation expense has been recognized for the stock
option plans. Had compensation expense related to the stock option plans been
determined on the fair value at the date of the grant for the years ended
December 31, 1995, 1996 and 1997 consistent with the provisions of SFAS 123, the
Company's net loss and net loss per share would have been reported as the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Net loss--as reported........................ $ (1,730) $ (4,455) $ (5,445)
Net loss--pro forma.......................... (1,733) (4,539) (5,548)
Net loss per share--as reported.............. $ (0.22) $ (0.57) $ (0.70)
Net loss per share--pro forma................ (0.22) (0.58) (0.71)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
Certain officers and key employees participate in the Titan non-qualified
executive deferred compensation plan. The Company also has performance bonus
plans for certain of its employees. Related expense for these two plans amounted
to approximately $398, $467, and $408 in the years ended December 31, 1995,
1996, and 1997, respectively. Expense for the Company's participation in Titan's
401(k) plan was $437, $446, and $464 for the years ended December 31, 1995, 1996
and 1997, respectively.
NOTE 9. EMPLOYEE STOCK PURCHASE PLAN
In December 1997, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 390,000 shares of Class A common
stock. The Purchase Plan will enable eligible employees to have up to 15% of
their earnings withheld to purchase shares of the Company's Class A common stock
on specified dates determined by the Board of Directors. The price of Class A
common stock purchased under the Purchase Plan will be equal to 85% of the lower
of the fair market value of the Class A common stock at the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in the Purchase Plan at any time, and participation ends
automatically on termination of employment with the Company.
NOTE 10. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In December 1997, the Company adopted its Non-Employee Directors' Stock Option
Plan (the "Directors' Plan") to provide for the automatic grant of options to
purchase shares of Class A common stock to non-employee directors of the
Company. The Company has reserved 97,500 shares of Class A common stock for
issuance under the Directors' Plan. The Directors' Plan provides a one-time
option to purchase 5,000 shares of Class A common stock for each individual who
is a Non-Employee Director on the effective date of the Directors' Plan.
Thereafter, the Directors' Plan provides for a one-time option to purchase 5,000
- --------------------------------------------------------------------------------
F-14
<PAGE>
shares of Class A common stock for each person who after the effective date of
the Offering for the first time becomes a Non-Employee Director by appointment
or election. The exercise price per share of all options granted under the
Directors' Plan will be equal to the fair market value of the Company's Class A
common stock on the date of grant. Options granted under the Directors' Plan are
generally non-transferable and expire ten years from the date of grant. Options
granted under the Directors' Plan vest in 25 percent increments beginning one
year after the grant date.
NOTE 11. GEOGRAPHIC OPERATIONS
The Company operates exclusively in a single industry segment, the satellite
communications industry. A summary of the Company's operations by geographic
area for the years ended December 31, 1995, 1996 and 1997, is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Revenues:
United States.................................................................. $ 22,779 $ 25,380 $ 31,599
Asia........................................................................... 2,610 2,374 15,261
Other.......................................................................... 117 96 2,120
</TABLE>
All operating profit and identifiable assets correspond to the United States
geographic area. The Company has only sales related activities in other
geographic areas; the only area with significant sales activity outside the
United States is Asia.
- --------------------------------------------------------------------------------
F-15
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer contained herein, and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, shares of
Class A Common Stock in any jurisdiction to any person to whom it is not lawful
to make such offer or solicitation in such jurisdiction or in which the person
making such offer or solicitation is not qualified to do so. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to the date of this Prospectus.
TABLE OF CONTENTS
- -------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 7
Use of Proceeds............................ 21
Dividend Policy............................ 21
Capitalization............................. 22
Dilution................................... 23
Selected Financial Data.................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 25
Business................................... 32
Management................................. 50
Relationship with Titan and Certain
Transactions............................. 59
Security Ownership of Certain Beneficial
Owners and Management.................... 64
Description of Capital Stock............... 65
Shares Eligible for Future Sale............ 70
Underwriting............................... 72
Legal Matters.............................. 73
Experts.................................... 74
Additional Information..................... 74
Index to Financial Statements.............. F-1
</TABLE>
- ------------------------
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Class A Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS , 1998
[LINKABIT WIRELESS, INC. LOGO]
2,700,000
LINKABIT
WIRELESS, INC.
Class A Common Stock
SBC WARBURG DILLON READ INC.
NEEDHAM & COMPANY, INC.
C.E. UNTERBERG, TOWBIN
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Registrant's Class A Common Stock ("Class A
Common Stock") being registered. All the amounts shown are estimates except for
the Securities and Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
<S> <C>
Registration fee.................................................................. $ 12,824
NASD filing fee................................................................... 4,847
Nasdaq Stock Market Listing Application fee....................................... 20,525
Blue sky qualification fees and expenses.......................................... 5,000
Printing and engraving expenses................................................... 150,000
Legal fees and expenses........................................................... 400,000
Accounting fees and expenses...................................................... 275,000
Transfer agent and registrar fees................................................. 5,000
Miscellaneous..................................................................... 26,804
----------
Total........................................................................... $ 900,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law ("Delaware Law"),
the Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
The Registrant's Amended and Restated Certificate of Incorporation and
Bylaws include provisions to (i) eliminate the personal liability of its
directors for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by Section 102(b)(7) of Delaware Law and (ii) require
the Registrant to indemnify its directors and officers to the fullest extent
permitted by Section 145 of Delaware Law, including circumstances in which
indemnification is otherwise discretionary. Pursuant to Section 145 of Delaware
Law, a corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are or are threatened to be made, a party
by reason of their serving in such positions so long as they acted in good faith
and in a manner they reasonably believed to be in or not opposed to, the best
interests of the corporation and with respect to any criminal action, they had
no reasonable cause to believe their conduct was unlawful. The Registrant
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers. These provisions do not eliminate the
directors' duty of care, and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware Law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant, for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for acts or omissions that the director believes to
be contrary to the best interests of the Registrant or its stockholders, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to the
Registrant or its stockholders when the director was aware or should have been
aware of a risk of serious injury to the Registrant or its stockholders, for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Registrant or its
stockholders, for improper transactions between the director and the Registrant
and for improper distributions to stockholders and loans to directors and
officers. The provision also does not affect a director's responsibilities under
any other law, such as the federal securities law or state or federal
environmental laws.
II-1
<PAGE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (CONTINUED)
Prior to the effectiveness of this Registration Statement, the Registrant
plans to enter into indemnity agreements with each of its Directors and
executive officers that require the Registrant to indemnify such persons against
expenses, judgments, fines, settlements and other amounts incurred (including
expenses of a derivative action) in connection with any proceeding, whether
actual or threatened, to which any such person may be made a party by reason of
the fact that such person is or was a Director or an executive officer of the
Registrant or any of its affiliated enterprises, provided that such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder. The
Registrant has entered into similar indemnity agreements with certain of its key
employees.
At present, there is no pending litigation or proceeding involving a
Director, officer or key employee of the Registrant as to which indemnification
is being sought nor is the Registrant aware of any threatened litigation that
may result in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception in November 1993, the Registrant has sold and issued the
following unregistered securities:
(a) In connection with the Reorganization in September 1997, the Registrant
issued 3,900,000 (on a post-split basis) shares of Class B Common Stock to
Titan. The Registrant issued such shares in reliance on the exemption
provided by Section 4(a) of the Securities Act.
The recipient of the above-described securities represented its intention to
acquire the securities for investment only and not with a view to distribution
thereof. The recipient had adequate access, through its relationship with the
Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement (2)
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
3.3 Form of Certificate of Amendment of Amended and Restated Certificate of Incorporation, to be filed and
become effective prior to the effectiveness of this Registration Statement (2)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2* Sample of Common Stock Certificate
5.1 Opinion of Cooley Godward LLP (2)
10.1* Registrant's 1997 Stock Option Plan, as amended (the "1997 Plan")
10.2* Registrant's 1994 Stock Option Plan, as amended
</TABLE>
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.3* Form of Incentive Stock Option Agreement under the 1997 Plan
10.4* Form of Nonstatutory Stock Option Agreement under the 1997 Plan
10.5* Registrant's Employee Stock Purchase Plan and restated offering document
10.6* Registrant's Non-Employee Directors' Stock Option Plan (the "Directors' Plan")
10.7* Form of Nonstatutory Stock Option agreement under the Directors' Plan
10.8* Supplemental Retirement Plan
10.9* Form of Indemnity Agreement
10.10* Letter Agreement dated August 1, 1996 between The Titan Corporation and Frederick L. Judge
10.11* Amended and Restated Equipment Purchase Agreement dated as of September 17, 1996 between the Registrant
and PT. Pasifik Sutelit Nusantura as amended on December 4, 1997, as amended on December 6, 1997, as
amended on December 31, 1997 (1)
10.12* Equipment Purchase Agreement dated as of June 27, 1996 between the Registrant and United Communications
Industry Public Company, Ltd as amended by a Memorandum of Understanding dated September 18, 1997 (1)
10.13* Award Contract dated July 15, 1989 between the Registrant and the U.S. Navy (1)(P)
10.14 Tax Allocation Agreement (2)
10.15 Corporate Services Agreement (2)
10.16* Reorganization Agreement
10.17 Facilities Agreement (2)
10.18 Titan Corporate Charter
10.19* Letter agreement between The Titan Corporation and Eric DeMarco dated as of December 19, 1996
10.20* Form of Change-In-Control Agreement
10.21* The Titan Corporation Stock Option Plan of 1986, as amended through January 1, 1987 (3)
10.22* The Titan Corporation Stock Option Plan of 1990 (4)
10.23* The Titan Corporation Stock Option Plan of 1994 (5)
10.24* The Titan Corporation Stock Option Plan of 1997 (6)
11.1* Statement regarding computation of per share earnings
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1
23.3* Consent of Edward W. Callan, Esq.
24.1* Power of Attorney. Reference is made to page II-5
27.1* Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
(1) Confidential Treatment will be requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
(2) To be filed by amendment.
(3) Previously filed as an exhibit to The Titan Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1987, and incorporated herein
by reference.
(4) Previously filed with The Titan Corporation's proxy statement filed in
connection with its 1990 Annual Meeting of Stockholders and incorporated herein
by reference.
(5) Previously filed with The Titan Corporation's proxy statement filed in
connection with its 1994 Annual Meeting of Stockholders and incorporated herein
by reference.
(6) Previously filed with The Titan Corporation's proxy statement filed in
connection with its 1997 Annual Meeting of Stockholders and incorporated herein
by reference.
(P) To be filed in paper format pursuant to a continuing hardship exemption
under Rule 202 of Regulation S-T.
(B) SCHEDULES
All schedules are omitted because they are not required, are not applicable
or the information is included in the consolidated financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 15 above or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration
II-4
<PAGE>
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(4) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-1 and has duly caused this Amendment No. 3 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, County of San Diego, State of California,
on the 24th day of April, 1998.
<TABLE>
<S> <C> <C>
By: /s/ FREDERICK L. JUDGE
-----------------------------------------
Frederick L. Judge
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Frederick L. Judge, Ronald B. Gorda and Eric M.
DeMarco, and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments, exhibits thereto and other documents in
connection therewith) to this Registration Statement and any subsequent
registration statement filed by the Registrant pursuant to Rule 462(b) of the
Securities Act, which relates to this Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Amendment No. 3 to
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------------------- -------------------
<S> <C> <C>
/s/ FREDERICK L. JUDGE President, Chief Executive Officer and
- --------------------------------------------- Director April 24, 1998
Frederick L. Judge (PRINCIPAL EXECUTIVE OFFICER)
* Chief Financial Officer
- --------------------------------------------- (PRINCIPAL FINANCIAL AND April 24, 1998
Eric M. DeMarco ACCOUNTING OFFICER)
*
- --------------------------------------------- Director April 24, 1998
Gene W. Ray
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------------------- -------------------
<S> <C> <C>
/s/ RONALD B. GORDA
- --------------------------------------------- Chief Operating Officer and Director April 24, 1998
Ronald B. Gorda
*
- --------------------------------------------- Director April 24, 1998
J.S. Webb
- --------------------------------------------- Director
Thomas G. Pownall
* By: /s/ FREDERICK L. JUDGE
- --------------------------------------------
Frederick L. Judge
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement (2)
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
3.3 Form of Certificate of Amendment of Amended and Restated Certificate of Incorporation, to be filed and
become effective prior to the effectiveness of this Registration Statement (2)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2* Sample of Common Stock Certificate
5.1 Opinion of Cooley Godward LLP (2)
10.1* Registrant's 1997 Stock Option Plan, as amended (the "1997 Plan")
10.2* Registrant's 1994 Stock Option Plan, as amended
10.3* Form of Incentive Stock Option Agreement under the 1997 Plan
10.4* Form of Nonstatutory Stock Option Agreement under the 1997 Plan
10.5* Registrant's Employee Stock Purchase Plan and restated offering document
10.6* Registrant's Non-Employee Directors' Stock Option Plan (the "Directors' Plan")
10.7* Form of Nonstatutory Stock Option agreement under the Directors' Plan
10.8* Supplemental Retirement Plan
10.9* Form of Indemnity Agreement
10.10* Letter Agreement dated August 1, 1996 between The Titan Corporation and Frederick L. Judge
10.11* Amended and Restated Equipment Purchase Agreement dated as of September 17, 1996 between the Registrant
and PT. Pasifik Sutelit Nusantura as amended on December 4, 1997, as amended on December 6, 1997, as
amended on December 31, 1997 (1)
10.12* Equipment Purchase Agreement dated as of June 27, 1996 between the Registrant and United Communications
Industry Public Company, Ltd as amended by a Memorandum of Understanding dated September 18, 1997 (1)
10.13* Award Contract dated July 15, 1989 between the Registrant and the U.S. Navy (1)(P)
10.14 Tax Allocation Agreement (2)
10.15 Corporate Services Agreement (2)
10.16* Reorganization Agreement
10.17 Facilities Agreement (2)
10.18 Titan Corporate Charter
10.19* Letter agreement between The Titan Corporation and Eric DeMarco dated as of December 19, 1996
10.20* Form of Change-In-Control Agreement
10.21* The Titan Corporation Stock Option Plan of 1986, as amended through January 1, 1987 (3)
10.22* The Titan Corporation Stock Option Plan of 1990 (4)
10.23* The Titan Corporation Stock Option Plan of 1994 (5)
10.24* The Titan Corporation Stock Option Plan of 1997 (6)
11.1* Statement regarding computation of per share earnings
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1
23.3* Consent of Edward W. Callan, Esq.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
24.1* Power of Attorney. Reference is made to page II-5
27.1* Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
(1) Confidential Treatment will be requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
(2) To be filed by amendment.
(3) Previously filed as an exhibit to The Titan Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1987, and incorporated herein
by reference.
(4) Previously filed with The Titan Corporation's proxy statement filed in
connection with its 1990 Annual Meeting of Stockholders and incorporated herein
by reference.
(5) Previously filed with The Titan Corporation's proxy statement filed in
connection with its 1994 Annual Meeting of Stockholders and incorporated herein
by reference.
(6) Previously filed with The Titan Corporation's proxy statement filed in
connection with its 1997 Annual Meeting of Stockholders and incorporated herein
by reference.
(P) To be filed in paper format pursuant to a continuing hardship exemption
under Rule 202 of Regulation S-T.
<PAGE>
EHIBIT 10.18
THE TITAN CORPORATION
CORPORATE CHARTER
_______________________________________________________________________________
I. STATEMENT OF PURPOSE
This Charter has been adopted by the Board of Directors of the Titan
Corporation and by the Board of Directors of certain of its subsidiaries.
Titan companies that have adopted this Charter are referred to as "Members"
and all Members in the aggregate, are referred to as the "Titan Group".
Titan may own, directly or indirectly, through one or more subsidiaries, a
controlling interest in a Member, and must consent to the adoption of the
Charter by any other Member. This Charter will be applicable to all
subsidiaries which are majority owned and controlled by Titan. Titan
subsidiaries which are "spun-off" will, by definition, not be part of the
Titan Group, unless, through contractual agreement, such minority interest
companies and the Titan Corporation mutually elect to do so.
Each Member enjoys benefits and support derived from its affiliation
with the Titan Group and recognizes that these benefits and support are
important for the success of the Members' business. Each Member acknowledges
that the arrangements by which these benefits and support are shared by all
Members are designed to ensure that: (1) all Members and their stockholders
are treated consistently and fairly; (2) the scope and nature of the
cooperation among Members and each Member's responsibilities are adequately
defined; (3) the combined resources and financial, managerial and
technological strengths of the Titan Group are accessible to all Members; and
(4) the Titan Group is able to obtain the most favorable terms from outside
parties.
In addition to the benefits and support derived from affiliation with
the Titan Group, each member acknowledges the rights and obligations of
Titan. For so long as it may own directly or indirectly the controlling
interest in a Member, Titan has a responsibility to its stockholders to take
appropriate action to ensure that its rights as a majority stockholder of the
Member are protected. In accordance with its legal obligations to minority
shareholders in the Members, and subject to the reasonable business judgment
of its management and Board of Directors, Titan intends to exercise its
rights to satisfy itself that each Member follows business practices and
strategies consistent with the objectives and goals of the Titan Group.
In adopting this Charter, each Member acknowledges that Titan, as a
majority stockholder, has the authority to administer the policies and
procedures of the Titan Group. The policies and procedures may include
procedures to protect the financial security of the Titan Group, to ensure
compliance with regulations imposed by law or to
<PAGE>
require compliance with financial and other covenants agreed upon by The
Titan Corporation on behalf of the Titan Group.
This Charter governs the relationships and delineates the cooperation
among, and obligations of, the Members in four major areas: principles and
policies, management structure, management support and administrative services,
and banking and credit services.
II. PRINCIPLES AND POLICIES
In order for the Titan Group to operate in a coherent manner it is
important that its members follow a common set of principles and policies.
A. PRINCIPLES
We believe in a single standard of conduct which at all times
considers the best interest of our investors, our customers, our employees and
the public. To this end,
FOR TITAN INVESTORS
we strive - to create high returns on their investment by
increasing the intrinsic value of their
shares over the long term;
- to maintain a program of sound growth supported
by the profitable reinvestment of retained
earnings;
- to maintain a sound balance sheet;
- to communicate effectively and on a timely
basis the activities and progress of our
operations so that the market value of our
shares reflects as nearly as possible the
underlying intrinsic values of our stocks; and
- to develop a corporate structure and depth of
management capable of sustaining a high rate of
value-creation over a long period of time
<PAGE>
FOR TITAN CUSTOMERS
we strive - to provide innovative products and services of
the highest quality;
- to work consistently and diligently to increase
our knowledge of our customers and their
requirements
- to give the best possible service to our
customers in prompt response to their needs;
and
- to deal with our customers consistently, with
honesty and integrity, and without
discrimination
FOR TITAN EMPLOYEES
we strive - to recognize the intrinsic value of each
employee as an individual;
- to treat our employees and applicants for
employment without discrimination as to race,
creed, color, sex, age or national origin;
- to maintain an atmosphere that combines
professional achievement with personal
enjoyment;
- to provide training opportunities that permit
employees to enlarge their capacities to
perform their jobs in a better and more
meaningful manner;
- to provide each employee with opportunity for
career growth and advancement within the Titan
Group based upon individual ability and
performance;
- to recognize the value and potential of self-
motivation of people who thoroughly understand
their jobs -- not only what they are supposed
to do, but the reason why -- so that individual
initiative and thought will be encouraged in
the accomplishment of all tasks;
- to compensate employees fairly and
competitively; and
- to maintain and enhance the strengths of the
Titan Group.
<PAGE>
FOR THE PUBLIC
we strive - to emphasize businesses which meet important
societal needs consistent with meeting our
criteria for return on investment and growth;
- to conduct our businesses in ways beneficial to
the communities in which we operate and without
adverse effect on the environment.
AS THE TITAN GROUP
we strive - to enhance the synergy of all Members; and
- to maximize the ability of each Member to
succeed by making available intracompany
support.
B. POLICIES
Titan members follow a set of mutually agreed-upon operating and
financial policies consistent with the principles of the Titan Group. These
policies establish the minimum standards that each Member must meet in
setting its own policies, which may, where appropriate, be more stringent
than or address matters not covered by the Titan Group policies. The
adoption by the Titan Group of a set of common policies enhances our ability
to accomplish our corporate purpose and ensures that we live up to our
corporate principles and legal obligations. The current financial policies
of the Titan Group are summarized in Table B (see attachment). The operating
policies of the Titan Group are collected in the Titan Corporation Policies
and Procedures Manual. In adopting this Charter, each Member acknowledges
that the Titan Corporation, as its majority stockholder, has the
responsibility to administer, revise and adopt such policies and procedures
as it deems necessary or appropriate, in its reasonable business judgment,
for the Titan Group as a whole.
III. MANAGEMENT STRUCTURE OF TITAN GROUP MEMBERS
Each Member has its own Board of Directors. The Board of Directors of
Members usually consists of its CEO, one or more Titan officers working with
the subsidiary, and one or more independent outside directors (individuals
who are not employees of Titan or its subsidiaries).
The Board of Directors of each Titan Group Member has the authority to
make business decisions for that company in a manner consistent with its
fiduciary obligations and the best interests of all of its stockholders. The
Board of Directors of each Titan Group Member that has outside investors
appoints an audit committee responsible for supervising the work of the
outside auditors of the Member, and, reviewing with the auditors financial
transactions between the Member and the Titan Group. The audit committee
normally has a majority comprised of independent outside directors. The
Board of Directors of each Titan Group Member may also appoint such other
<PAGE>
committees as it deems appropriate, including a human resources committee
and/or a compensation committee. The human resources committee, if
appointed, is responsible for administering each Titan Group Member's
stock-based plans and for reviewing executive compensation. The human
resources committee is normally comprised entirely of outside directors.
The operating authority of the CEO of each Titan Group Member is
determined by its Board of Directors. Each CEO is responsible for informing
his Board of Directors of all significant matters affecting the business. In
addition, the Board of Directors directs the CEO to consult with the line
management of the Titan Corporation on all significant cross operational
matters.
Each Titan Group Member works closely with this Titan Corporate office
to ensure uniformity of financial and accounting policies and consistency of
financial information, and to maintain controls and achieve compliance with
financial and regulatory obligations and the policies and procedures of the
Titan Group. The management team of each Titan Member that has outside
investors has the same chief financial officer, treasurer, and general
counsel as that of the Titan Corporation.
IV. MANAGEMENT SUPPORT AND ADMINISTRATIVE SERVICES
The Titan Corporation provides to the Members of the Titan Group
management support and administrative services. The pricing of these
services are covered by Corporate Services Agreements between the Titan
Corporation and each Member.
A. MANAGEMENT SUPPORT
The managerial resources of the Titan Group Members are varied and
extensive. The interdependence of the Members provides individual Members
with access to people of recognized expertise and standing in their
respective fields These individuals are continuously available to advise and
consult with on the operation of a Member's business. The types of expertise
provided may include but are not necessarily limited to:
Entrepreneurial Network
- Benefit derived from association with the Titan Group,
rather than a single company
- Ability of the Titan Group to attract key executives
with recognized industry standing
Strategic Guidance
- Broad industry knowledge, technological expertise and
experienced management team of the Titan Corporation
<PAGE>
Market Planning and Development
- Economic forecasting
- Monitoring and influencing of legislative
actions pertaining to Members
- Market identification through anticipation of national
needs and priorities
- High-level contact with selected key customers
- Involvement in national policymaking
Corporate Development
- Business planning and budgets
- Analysis of acquisitions
- Analysis of industries
- Due Diligence
Technological Assistance
- Access to specialized expertise and
facilities in various technical disciplines
- Environmental affairs
- Facilities planning and management
B. ADMINISTRATIVE SERVICES
The Titan Group Members recognize that it is to their mutual advantage to
centralize certain administrative services rather than to duplicate
administrative staff for each Member. The centralized services and support
staff are most efficiently administered by the corporate office of the Titan
Corporation and provided to each Member. They are as follows:
Risk Management
- Centralized insurance purchasing
- Claims handling
- Support for product, worker safety and
environmental programs (principal
responsibility for compliance rests with the
Member)
Tax Planning and filing
- General tax consultation
- State and Federal returns and audits
- Acquisition tax analysis
Accounting Services
- Corporate records
- SEC filings (periodic reporting &
registrations)
- Annual and quarterly financial reports
- Internal audit support services
- Income Tax Filings
<PAGE>
Contracting Services
- Contract negotiations
- Primary DCAA interface
- Facilities management
Legal Services
- General Counsel
- Litigation management
- SEC filings (including periodic reporting and
proxy statements)
- Contract negotiation/preparation
- Legal/regulatory compliance
- Acquisition negotiation/documentation
- Patent and trademark protection
- Preventative Counseling
Human Resources
- Administration of benefits (group and
disability)
- Administration of stock and pension plans
(such as employee stock purchase, ESOP,
401(K), and options)
- Advice on employee relations, executive
recruiting, training, compensation,
termination, etc.
- Access to pool of specialists and other key
personnel
Corporate Record Keeping Services
- Minutes of meetings of the boards of
directors and shareholders
- Supervision of transfer agents and registrars
- Maintenance of stock records
- Insider trading records/compliance
Financial Services
- See Table A - Attached
<PAGE>
V. BANKING AND CREDIT SERVICES
In addition to management support and administrative services, the Titan
Corporation provides to the Members of the Titan Group banking and credit
services. These services are administered by the Titan Corporation Treasury
Department, in the office of the Chief Financial Officer of the Titan
Corporation.
The principal objective of the Titan Corporation Treasury Department is
to maximize the financial strength of the Titan Group through the centralized
management of its Members' financial and banking resources. The services
provided by the Treasury Department include managing cash generated by
Members, coordinating the Titan Group's access to external debt sources,
ensuring compliance with external financial covenants and internal financial
policies, assisting in the formulation of Members' long-range financial
planning and providing other banking and credit services.
The Titan Corporation Treasury Department serves as a central depository
for cash held by the Titan Group. The Titan Group's sources of cash are: (a)
initial cash deposits by Members; (b) interest income earned by the cash
deposits; (c) cash flow generated by Members; (d) available borrowings under
bank lines of credit; and (e) additional cash generated through equity and
debt financing.
Deposits by Members, and investments made with such funds, are held by
the Treasury Department in segregated accounts, available for use by Members
in accordance with the Titan Group's financial policies.
Titan's Treasury Department will invest the funds deposited by Members
in taxable, tax-exempt or tax-preferred securities with certain defined risk
parameters based upon each Member's tax considerations. Funds deposited with
Titan's Treasury Department also may be loaned to other Members at interest
rates not less than would be received from comparable term interest-bearing
securities. Titan's Treasury Department advises each Member on a quarterly
basis as to the earnings it may expect on its cash deposits.
The Titan Group combines its financial resources to gain access to
external financing on the most advantageous terms. To that effect, Members
may be required to provide credit support to, or on behalf of, the
consolidated entity in the form of letters of credit, guarantees, bonds, or
other credit instruments. In appropriate cases, Members may obtain financing
directly from external financing sources, and, Titan may provide guarantees
or other credit support in connection with such financing.
On a continuing basis, Titan's Treasury Department is responsible for
determining that the Titan Group remains in compliance with all covenants
imposed by external debt holders, and for apportioning such constraints within
the Titan Group. Titan's Treasury Department also
<PAGE>
is responsible for making sure that Members comply with Titan Group financial
policies.
Titan's Treasury Department assists the management of each Member in the
development of long-term financial plans based upon the Member's strategic
operating plans, and in obtaining the financing necessary to support the
growth and capital needs of each Member. It attempts to identify the most
cost-effective sources of financing which have terms and other conditions
consistent with the Titan Group's needs. Titan's Treasury Department
assesses the total financial needs of the Titan Group and recommends the
appropriate sources of debt and equity financing. It is responsible for
maintaining a high level of understanding of current sources of domestic and
international financing and the terms upon which such financing can be
obtained.
Finally, Titan's Treasury Department provides to each Member the broad
spectrum of financial services summarized in Table A.
VI. ADMINISTRATION OF CHARTER; TERM AND WITHDRAWAL PROVISIONS.
The Charter was initially adopted in 1997 for a five-year term. The
Charter presently provides that it shall continue in effect so long as the
Titan Corporation and at least one other Member participate. The Charter may
be terminated at any time with the agreement of the Titan Corporation and all
of the companies that are then Members. Companies may become Members of the
Charter upon the adoption of the Charter by their Board of Directors and with
the consent of the Titan Corporation.
A Member of the Titan Group may withdraw from the Charter by giving at
least thirty days prior notice AND UPON OBTAINING THE CONSENT OF THE TITAN
CORPORATION. In addition, the Titan Corporation may terminate a Member's
participation in the Charter in the event the Member ceases to be controlled
by, or, ceases to comply with the Charter or the policies and procedures
applicable to the Titan Group. A withdrawal from the Charter by a Member
shall terminate the corporate services agreement and any tax allocation
agreement in effect between the Member and Titan. However, the termination
of the corporate services agreement shall not relieve the Member from
maintaining certain administrative functions of a level or type that Titan,
in its reasonable business judgment, deems necessary or appropriate for the
Member to conduct its business in a responsible manner, consistent with the
objectives and goals of the Titan Group.
A Member of the Titan Groups withdrawal from the Charter will not
terminate any outstanding commitments to third parties made by such Member,
or made by Titan Corporation or other Members of the Titan Group, prior to
such withdrawal. A withdrawing Member will be required to continue to comply
with all policies and procedures applicable to the Titan Group as a whole for
so long as the Member is controlled by or is an affiliate of Titan. Under
certain laws and regulations, companies under common ownership may be deemed
responsible for the failure of related companies to comply with
<PAGE>
applicable laws, as in the areas of federal securities law or government
contracting, and may be subject to fines, penalties or other adverse
consequences as a result of the violation.
The Titan Corporation has formed an Advisory Committee on the Charter
(the "Committee") for the purpose of monitoring and reviewing the
implementation of the Charter. The committee has been assigned the
responsibility to periodically review the provisions of the Charter, and
bring to the attention of the Board of Directors of the Members both
provisions that may require clearer interpretation, and changes that may have
to be made to the Charter.
The Committee is an advisory committee only and shall not have the power
or authority to implement changes to the Charter or any agreement adopted
pursuant to the Charter, as the power and authority to implement such changes
resides in the Board of Directors of the Members. The Committee is composed
of representatives of the Members, appointed by the Board of Directors of a
Member. A representative may represent the interests of more than one Member.
The Committee will meet from time to time to review the operation of the
Charter, policies and procedures applicable to the Titan Group as a whole and
financial covenants applicable to the Titan Group as a whole.
<PAGE>
TABLE A
FINANCIAL SERVICES PROVIDED TO
MEMBERS OF THE TITAN GROUP
Banking Services Administration
- Bank accounts Administration
- Loan administration
- Covenant compliance administration
- Maintain cash collections/disbursement systems
- Arrange letters of credit, foreign exchange, cash
transfers
Financial Management/Information
- Cash management
- Pension fund management
- Leasing
- Customer financing
- Information on financial markets and products
- Information on foreign currency, risk assessment and
hedge strategies
Arrange Credit Support
- Insurance performance and bid bonds
- Letters of credit
- Corporate guarantees
Investment Banking Services
- Advice and support for equity and debt financing
- Mange relationships with debt rating agencies
- Analysis, negotiations, advice and support for mergers
and acquisitions
- Investor relations
- Manage relationships with equity financial analysts
<PAGE>
TABLE B
SELECTED FINANCIAL POLICIES OF THE TITAN GROUP
Certain financial policies of the Titan Group, on a consolidated basis, are
as follows:
The Titan Group shall
- maintain a strong consolidated balance sheet with
substantial liquid reserves under normal economic conditions
so as to enable the Titan Group to take advantage of
investment opportunities that become available under adverse
economic conditions;
- invest in technology, market development, fixed assets,
acquisitions and repurchase of Titan Group Members' stock
using as a principal criterion a long-term, risk-adjusted
after-tax hurdle rate of return; and
- maintain a low capital intensity to retain maximum
flexibility to exit businesses and redeploy assets more
profitably.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated January 19, 1998, (and all references to our Firm) included in or made a
part of this registration statement.
ARTHUR ANDERSEN LLP
San Diego, California
April 24, 1998
