<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998
REGISTRATION NO. 333-45719
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE TITAN CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8711 95-2588754
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
THE TITAN CORPORATION
3033 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121-1199
TELEPHONE: (619) 552-9500
(Address, including ZIP code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
GENE W. RAY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE TITAN CORPORATION
3033 SCIENCE PARK ROAD
SAN DIEGO, CALIFORNIA 92121-1199
TELEPHONE: (619) 552-9500
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
M. WAINWRIGHT FISHBURN, ESQ DONALD M. BARNES, ESQ.
JEREMY D. GLASER, ESQ. ANDREW C. LYNCH, ESQ.
COOLEY GODWARD LLP JENKENS & GILCHRIST
4365 Executive Drive, Suite A Professional Corporation
1100
San Diego, California 92121 1919 Pennsylvania Avenue, N.W., Suite 600.
Telephone: (619) 550-6000 Washington, D.C. 20006-3404
Telephone: (202) 326-1500
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS PROMPTLY AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE
AND AFTER THE EFFECTIVE TIME OF THE PROPOSED MERGER DESCRIBED IN THIS
REGISTRATION STATEMENT.
------------------------
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
HORIZONS TECHNOLOGY, INC.
3990 RUFFIN ROAD
SAN DIEGO, CA 92123
Dear Stockholder:
You are invited to attend a Special Meeting of the stockholders (the
"Special Meeting") of Horizons Technology, Inc. ("Horizons") to be held
on , , 1998 at 9:00 a.m. at the offices of Jenkens & Gilchrist, P.C.,
1919 Pennsylvania Avenue N.W., Suite 600, Washington, D.C. 20006 (in the Cabinet
Room). This Special Meeting will be held to consider and vote upon a proposal to
adopt an Agreement and Plan of Merger and Reorganization which, if approved,
will result in Horizon becoming a wholly-owned subsidiary of Titan Corporation
("Titan"). The proposed merger transaction is described in detail in the
enclosed Prospectus/Proxy Statement. You are encouraged to carefully review and
consider the important information set out in the Prospectus/Proxy Statement.
If the proposed merger transaction is approved, you will be able to exchange
your stock for stock in Titan, a public company whose stock is listed on the New
York Stock Exchange under the symbol "TTN." As more fully described in the
enclosed Prospectus/Proxy Statement, each share of Horizons Common Stock will be
converted into the right to receive approximately $2.25 of Titan Common Stock
and each outstanding share of Horizons Series A Preferred Stock will be
converted into the right to receive $5.00 of Titan Common Stock. The dollar
value of the Titan Common Stock to be received in the merger transaction may be
adjusted, however, in the event the average price of the Titan Common Stock over
the twenty trading days prior to the close of the transaction is less than $6.00
or greater than $8.00; and I urge you to review the Prospectus/Proxy Statement
in its entirety, particularly the section entitled "Terms of the Merger--Manner
and Basis for Converting Shares," for further information regarding this
potential adjustment.
THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED MERGER TRANSACTION IS IN
THE BEST INTEREST OF STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE TO APPROVE THE PROPOSAL.
Please complete, sign, date and return the enclosed proxy card promptly in
the accompanying envelope. You are, of course, welcome to attend the Special
Meeting and vote in person, even if you have previously returned your proxy
card.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATE WITH YOUR PROXY. CERTIFICATES
SHOULD NOT BE SURRENDERED UNLESS THE MERGER IS APPROVED. IF THE MERGER PROPOSAL
IS APPROVED, SHAREHOLDERS WILL RECEIVE A LETTER OF TRANSMITTAL FROM THE EXCHANGE
AGENT WHICH WILL CONTAIN DIRECTIONS FOR EXCHANGE OF YOUR CERTIFICATES.
Thank you,
Dr. James T. Palmer
<PAGE>
HORIZONS TECHNOLOGY, INC.
3990 RUFFIN ROAD
SAN DIEGO, CA 92123
Dear Participant in the Employee Stock Ownership Plan ("ESOP" or "Plan"):
A Special Meeting of the stockholders (the "Special Meeting") of Horizons
Technology, Inc. ("Horizons") will be held on , , 1998 at 9:00 a.m.
at the offices of Jenkens & Gilchrist, P.C., 1919 Pennsylvania Avenue N.W.,
Suite 600, Washington, D.C. 20006 (in the Cabinet Room). This Special Meeting
will be held to consider and vote upon a proposal to adopt an Agreement and Plan
of Merger and Reorganization which, if approved, will result in Horizon becoming
a wholly-owned subsidiary of Titan Corporation ("Titan"). The proposed merger
transaction is described in detail in the enclosed Prospectus/ Proxy Statement.
You are encouraged to carefully review and consider the important information
set out in the Prospectus/Proxy Statement.
If the proposed merger transaction is approved, the Trustees under the Plan
("Trustees") will be able to exchange stock held in the Plan for stock in Titan,
a public company whose stock is listed on the New York Stock Exchange under the
symbol "TTN." As more fully described in the enclosed Prospectus/Proxy
Statement, each share of Horizons Common Stock will be converted into the right
to receive approximately $2.25 of Titan Common Stock and each outstanding share
of Horizons Series A Preferred Stock will be converted into the right to receive
$5.00 of Titan Common Stock. The dollar value of the Titan Common Stock to be
received in the merger transaction may be adjusted, however, in the event the
average price of the Titan Common Stock over the twenty trading days prior to
the close of the transaction is less than $6.00 or greater than $8.00; and I
urge you to review the Prospectus/Proxy Statement in its entirety, particularly
the section entitled "Terms of the Merger--Manner and Basis for Converting
Shares" for further information regarding this potential adjustment.
THE BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED MERGER TRANSACTION IS IN
THE BEST INTEREST OF STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE TO APPROVE THE PROPOSAL.
Under the Plan, each Participant is entitled to direct the Trustees as to
the manner in which shares of Horizons common stock allocated to each
Participant's account shall be voted in connection with the proposed merger.
Please complete, sign, date and return the enclosed proxy card promptly to the
Plan Trustee in the accompanying envelope. If instructions are not received by
the Trustees with respect to any allocated shares of Horizon within three (3)
business days of the stockholders meeting, the Trustees will vote such shares in
the same proportions as the Trustees are instructed to vote with respect to the
allocated shares of Horizons stock for which instructions are received. At the
stockholders meeting, the Trustees will vote all unallocated shares of stock in
the manner which they determine to be in the best interests of Plan Participants
taking into account all facts and circumstances. Please refer to the ESOP Plan
documents for a more detailed description of the voting procedure.
Thank you,
Dr. James T. Palmer
<PAGE>
HORIZONS TECHNOLOGY, INC.
3990 RUFFIN ROAD
SAN DIEGO, CA 92123
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1998
------------------------
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders (the
"Special Meeting") of Horizons Technology, Inc., a Delaware corporation
("Horizons"), will be held on , 1998, at 9 o'clock a.m., local time, at
the offices of Jenkens & Gilchrist, P.C., located at 1919 Pennsylvania Avenue,
N.W., Suite 600, Washington, D.C.
The Special Meeting is for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt an
Agreement and Plan of Merger and Reorganization dated February 26, 1998,
(the "Merger Agreement"), among Horizons, The Titan Corporation, a
Delaware corporation ("Titan"), Sunrise Acquisition Sub, Inc. ("Titan
Sub"), a newly formed, wholly-owned Delaware subsidiary of Titan, and
certain stockholders of Horizons; and (ii) approve and consent to the
merger of Titan Sub with and into Horizons (the "Merger"), pursuant to
which, among other things, Titan Sub will cease to exist and Horizons
will survive as a wholly-owned subsidiary of Titan (collectively the
"Merger Proposal"). As a result of the Merger, each outstanding share of
Horizons Common Stock will be converted into the right to receive
approximately $2.25 of Titan Common Stock, and each outstanding share of
Horizons Series A Preferred Stock will be converted into the right to
receive $5.00 of Titan Common Stock. The dollar value of the Titan Common
Stock to be received in the Merger by stockholders of Horizons will
adjust in the event the average closing price (the "Titan Designated
Closing Price") of Titan Common Stock on the New York Stock Exchange over
the twenty trading days prior to the date of the Merger is less than
$6.00 (in which case the dollar value will go down) or more than $8.00
(in which case the dollar value will go up). See the section of the
Prospectus/Proxy Statement accompanying this Notice entitled "Terms of
the Merger--Manner and Basis for Converting Shares." In addition, options
and warrants to acquire Horizons Common Stock will be converted as a
result of the Merger into equivalent options and warrants to acquire
Titan Common Stock, based upon the fraction representing the ratio
pursuant to which shares of Horizons Common Stock convert in the Merger
into shares of Titan Common Stock.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the
Prospectus/Proxy Statement accompanying this Notice.
The Board of Directors of Horizons recommends that you vote FOR all of the
proposals described above.
Only the holders of record of Horizons Common Stock and Horizons Series A
Preferred Stock at the close of business on , 1998 are entitled to notice
of, and will be entitled to vote at, the Special Meeting or at any adjournment
or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
James T. Palmer
CHIEF EXECUTIVE OFFICER
San Diego, California
, 1998
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 17, 1998
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
THE TITAN CORPORATION
PROSPECTUS
----------------
HORIZONS TECHNOLOGY, INC.
PROXY STATEMENT
This Prospectus/Proxy Statement (the "Prospectus/Proxy Statement") is being
furnished to the stockholders of Horizons Technology, Inc., a Delaware
corporation ("Horizons"), on behalf of the Horizons Board of Directors (the
"Horizons Board") for use at the Special Meeting of stockholders of Horizons to
be held on , 1998 at 9 o'clock a.m., local time, at The offices of
Jenkens & Gilchrist, P.C., located at 1919 Pennsylvania Avenue, N.W., Suite 600,
Washington, D.C. and at any adjournments or postponements thereof (the "Horizons
Meeting").
The Horizons Meeting is being called in connection with the proposed merger
of Sunrise Acquisition Sub, Inc. ("Titan Sub"), a newly formed, wholly-owned
Delaware subsidiary of Titan, with and into Horizons (the "Merger"), pursuant to
an Agreement and Plan of Merger and Reorganization (the "Merger Agreement"),
dated February 26, 1998, among Titan, Titan Sub, Horizons and certain
stockholders of Horizons (the "Designated Stockholders"). The Merger will be
consummated on the terms and subject to the conditions set forth in the Merger
Agreement. As a result of the Merger, Titan Sub will cease to exist and Horizons
will survive as a wholly-owned subsidiary of Titan. Further, each outstanding
share of Horizons common stock, $.01 par value ("Horizons Common Stock"), will
be converted into the right to receive approximately $2.25 of Titan common
stock, $.01 par value ("Titan Common Stock"), and each outstanding share of
Horizons Series A Preferred Stock will be converted into the right to receive
$5.00 of Titan Common Stock. The dollar value of the Titan Common Stock to be
received in the Merger by Horizons stockholders will adjust in the event the
average closing price of Titan Common Stock (the "Titan Designated Closing
Price") on the New York Stock Exchange ("NYSE") over the twenty trading days
prior to the date of the Merger is less than $6.00 (in which case the dollar
value will go down) or more than $8.00 (in which case the dollar value will go
up). The dollar value of the Titan Common Stock to be received by Horizons
stockholders adjusts in such event because if the Titan Designated Closing Price
is less than $6.00 it will be treated as if it was $6.00 exactly, and if the
Titan Designated Closing Price is greater than $8.00 it will be treated as if it
was $8.00 exactly for purposes of determining the number of shares of Titan
Common Stock Horizons stockholders are entitled to receive in the Merger. See
"Terms of the Merger--Manner and Basis for Converting Shares" for a detailed
discussion regarding the formula utilized to determine the number of shares of
Titan Common Stock issuable to Horizons stockholders in the Merger. In addition,
options and warrants to acquire Horizons Common Stock will be converted as a
result of the Merger into equivalent options and warrants for Titan Common
Stock, based upon the fraction representing the ratio pursuant to which shares
of Horizon Common Stock convert in the Merger into shares of Titan Common Stock
(the "Applicable Fraction").
--------------------------
NO PERSON HAS BEEN AUTHORIZED BY TITAN OR HORIZONS TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS/PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY, AND, IF GIVEN OR MADE, ANY SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY TITAN,
HORIZONS OR ANY OTHER PERSON. THIS PROSPECTUS/PROXY STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OR THE SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION
OF THE SECURITIES TO WHICH THIS PROSPECTUS/PROXY STATEMENT RELATES SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
Titan Common Stock and Titan's $1.00 Cumulative Convertible Preferred Stock,
$1.00 par value ("Titan Public Preferred"), are listed on the NYSE under the
symbols "TTN" and "TTNP," respectively. It is a condition of the obligations of
Titan and Horizons to consummation of the Merger that the shares of Titan Common
Stock to be issued in the Merger be approved for listing on the NYSE.
--------------------------
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS , 1998.
<PAGE>
Because the exact value of the shares of Titan Common Stock to be received
by Horizons' stockholders in the Merger will not be known at the time of the
Horizons Meeting, stockholders of Horizons are encouraged to obtain current
market quotations for Titan Common Stock prior to the Horizons' Meeting to
understand whether the dollar value may be adjusted due to a Titan Designated
Closing Price that is less than $6.00 or greater than $8.00. Recorded
information with respect to day-to-day trading prices of Titan Common Stock may
be obtained until the Horizons Meeting by calling 1 (800) - .
In part because of the potential adjustments to the dollar value of Titan
Common Stock to be issued to Horizons' stockholders under the Merger Agreement,
(i) Titan may terminate the Merger Agreement prior to the consummation of the
Merger if the Titan Designated Closing Price is greater than $8.75, and (ii)
Horizons may terminate the Merger Agreement prior to the consummation of the
Merger if the Titan Designated Closing Price is less than $5.25. If Horizons'
termination right is triggered and the Horizons Board of Directors (the
"Horizons Board") determines to proceed with a re-negotiated transaction, if
any, with Titan, Horizons may conduct a resolicitation consistent with the
exercise of the fiduciary duties under Delaware law of the Horizons Board to
stockholders. In considering whether to at that time recommend approving the
Merger to the Horizons stockholders, the Horizons Board would consider
essentially the same factors it originally considered in determining whether to
enter into the Merger Agreement with Titan. These factors would include the then
current financial condition of Horizons and Titan, the trading history and share
value of Titan Common Stock, economic conditions and the Risk Factors enumerated
in this Prospectus/Proxy Statement.
Based upon the capitalization of Horizons as of the close of business on
March 6, 1998, if the Merger is consummated, the aggregate number of shares of
Titan Common Stock to be issued to Horizons stockholders (including shares not
issued at the time of the Merger but subject to outstanding options and
warrants) will range between approximately 2,452,174 and approximately 3,269,567
shares, with the actual number depending upon the Titan Designated Closing
Price. On a per share basis, the holders of Horizons Common Stock would receive
between .280997 and .374663 shares of Titan Common Stock, and the holders of
Horizons Series A Preferred Stock would receive between .625000 and .833333
shares of Titan Common Stock, with the actual number depending in each case as
upon the Titan Designated Closing Price.
This Prospectus/Proxy Statement also constitutes the Prospectus of Titan
with respect to the shares of Titan Common Stock to be issued in the Merger in
exchange for outstanding shares of Horizons Common Stock and Horizons Series A
Preferred Stock. Based upon the capitalization of Horizons as of the close of
business on March 6, 1998, and based on the $6.375 closing price of Titan Common
Stock on the NYSE on March 6, 1998 (and assuming no potential adjustments,
explained herein, are made to the conversion ratio of the Horizons Common
Stock), an aggregate of approximately 3,035,760 shares of Titan Common Stock
(the "Merger Consideration") will be issued in the Merger, and Titan will assume
all outstanding Horizons options and warrants which will be converted into
options and warrants to acquire approximately 41,477 additional shares of Titan
Common Stock. Based upon the number of shares of Titan Common Stock issued and
outstanding as of March 6, 1998, and after giving effect to such issuance of
Titan Common Stock and the exercise of all such options and warrants to purchase
Horizons Common Stock assumed by Titan, the former holders of Horizons Common
Stock and Horizons Series A Preferred Stock and options and warrants to purchase
Horizons Common Stock would hold, and have voting power with respect to,
approximately 12.1% of the total issued and outstanding Titan Common Stock,
which would constitute approximately 11.7% of the total voting power of Titan
capital stock.
For accounting purposes, the Merger is intended to be treated as a "pooling
of interests."
If the requisite approval and consent of the stockholders of Horizons is
received and other conditions to the Merger are satisfied or waived, the Merger
is expected to be consummated on or promptly after , 1998 (the
"Closing").
All information contained in this Prospectus/Proxy Statement relating to
Titan or Titan Sub has been supplied by Titan, and all information contained in
this Prospectus/Proxy Statement relating to Horizons has been supplied by
Horizons.
<PAGE>
This Prospectus/Proxy Statement is first being mailed to stockholders of
Horizons on or about , 1998.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY
STATEMENT. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS OF
HORIZONS ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROSPECTUS/
PROXY STATEMENT IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER
"RISK FACTORS," BEGINNING ON PAGE 16.
------------------------
THE SHARES OF TITAN COMMON STOCK TO BE ISSUED IN THE MERGER 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/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
TABLE OF CONTENTS
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<S> <C>
AVAILABLE INFORMATION...................................................................................... i
SUMMARY.................................................................................................... 1
General.................................................................................................... 1
The Parties................................................................................................ 1
Meeting of Horizons Stockholders........................................................................... 2
Risk Factors............................................................................................... 3
Opinions of Horizons' Financial Advisor.................................................................... 3
Interests of Certain Persons in the Merger................................................................. 3
Regulatory Matters......................................................................................... 4
Federal Income Tax Matters................................................................................. 4
Accounting Treatment....................................................................................... 4
Appraisal Rights of Horizons Stockholders.................................................................. 4
The Merger................................................................................................. 5
Market Price Data.......................................................................................... 9
SELECTED HISTORICAL FINANCIAL DATA......................................................................... 10
SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA....................................................... 14
COMPARATIVE PER SHARE DATA................................................................................. 15
RISK FACTORS............................................................................................... 16
Risks Related to the Merger................................................................................ 16
Integration of Operations.................................................................................. 16
Additional Shares to be Issued by Titan; Shares Eligible for Future Sale................................... 16
Potential Adjustment to Consideration to be Received by Holders of Horizons Common Stock................... 17
Risks Related to Titan's and Horizons' Businesses.......................................................... 17
Ability to Implement Spin-Out Strategy..................................................................... 17
Acquisition of DBA; Risks Associated with Acquisition Strategy............................................. 18
Dependence on Government Contracts......................................................................... 18
Fluctuations in Results of Operations...................................................................... 19
Rapid Industry Change; Technological Obsolescence.......................................................... 20
Ability to Commercialize New Technologies.................................................................. 20
Market Acceptance of New Technologies...................................................................... 20
Risks of International Operations; Risks of Doing Business in Developing Countries......................... 21
Competition................................................................................................ 21
Reliance on Strategic Relationships........................................................................ 22
Customer Concentration within Business Segments............................................................ 22
Government Regulations..................................................................................... 22
Dependence Upon Suppliers; Sole and Limited Sources of Supply.............................................. 23
Limited Intellectual Property Protection; Dependence on Proprietary Technology............................. 23
Risk of Budget Overruns in Fixed Price Contracts........................................................... 24
Reliance on Key Personnel.................................................................................. 24
Volatility of Stock Price.................................................................................. 25
Impact of the Year 2000 Issue.............................................................................. 25
Anti-Takeover Effects of Certain Charter Provisions; Rights Plan........................................... 26
THE HORIZONS MEETING....................................................................................... 27
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............................................................ 29
Background of the Merger................................................................................... 29
Titan Reasons for the Merger............................................................................... 30
Horizons Reasons for the Merger............................................................................ 31
Opinion of Slavitt Ellington............................................................................... 32
Interests of Certain Persons in the Merger................................................................. 36
Regulatory Matters......................................................................................... 36
Federal Income Tax Matters................................................................................. 37
Accounting Treatment....................................................................................... 39
Appraisal Rights of Horizons Stockholders.................................................................. 39
</TABLE>
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<TABLE>
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PAGE
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<S> <C>
TERMS OF THE MERGER........................................................................................ 41
Effective Time............................................................................................. 41
Manner and Basis for Converting Shares..................................................................... 41
Effect of the Merger....................................................................................... 43
Treatment of Employee Equity Benefit Plans................................................................. 43
Stock Ownership Following the Merger....................................................................... 44
Representations and Warranties............................................................................. 44
Covenants.................................................................................................. 44
No Solicitation............................................................................................ 45
Conditions to the Merger................................................................................... 46
Termination of the Merger Agreement........................................................................ 47
Effect of Termination...................................................................................... 48
Break-Up Fees.............................................................................................. 48
Merger Expenses and Fees and Other Costs................................................................... 48
Related Agreements......................................................................................... 49
Affiliates' Restrictions on Sale of Titan Common Stock..................................................... 49
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION............................................... 50
TITAN BUSINESS............................................................................................. 56
TITAN MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION................ 65
Operating Results.......................................................................................... 67
Liquidity and Capital Resources............................................................................ 70
Forward Looking Information; Certain Cautionary Statements................................................. 71
OWNERSHIP OF TITAN'S SECURITIES............................................................................ 72
TITAN MANAGEMENT AND EXECUTIVE COMPENSATION................................................................ 73
Executive Officers and Directors........................................................................... 73
Compensation Committee Interlocks and Insider Participation................................................ 74
Summary Of Cash And Certain Other Compensation............................................................. 75
Stock Options.............................................................................................. 76
Option Exercises And Holdings.............................................................................. 77
Agreements With Executive Officers......................................................................... 77
HORIZONS BUSINESS.......................................................................................... 78
HORIZONS' MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 82
Results of Operations...................................................................................... 82
Liquidity and Capital Resources............................................................................ 83
OWNERSHIP OF HORIZONS' SECURITIES.......................................................................... 83
COMPARISON OF RIGHTS OF TITAN STOCKHOLDERS AND HORIZONS STOCKHOLDERS....................................... 85
EXPERTS.................................................................................................... 88
LEGAL MATTERS.............................................................................................. 88
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
------------------------
The following appendices also constitute part of this Prospectus/Proxy
Statement:
A--Agreement and Plan of Merger and Reorganization
B--Fairness Opinion of The Slavitt Ellington Group
C--Fair Market Value Opinion of The Slavitt Ellington Group
D--Section 262 of the General Corporation law of the State of Delaware
ii
<PAGE>
AVAILABLE INFORMATION
Titan is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials may also be obtained from the Commission at
prescribed rates by writing to the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission at the address http://www.sec.gov.
Under the rules and regulations of the Commission, the solicitation of
proxies from stockholders of Horizons to approve the Merger Proposal (defined
below) constitutes an offering of the Titan Common Stock to be issued in
connection with the Merger. Accordingly, Titan has filed with the Commission a
Registration Statement on Form S-4 under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to such offering (as amended from time to
time, the "Registration Statement"). This Prospectus/Proxy Statement constitutes
the prospectus of Titan that is filed as part of the Registration Statement.
Other parts of the Registration Statement are omitted from this Prospectus/Proxy
Statement in accordance with the rules and regulations of the Commission. Copies
of the Registration Statement, including the exhibits to the Registration
Statement and other material that is not included herein, may be inspected,
without charge, at the regional offices of the Commission referred to above, or
obtained at prescribed rates from the Public Reference Section of the Commission
at the address set forth above.
Statements made in this Prospectus/Proxy Statement concerning the contents
of any contract, agreement or other document accurately describe the material
provisions of such contract, agreement or other document but are not necessarily
complete. With respect to each contract or other document filed as an exhibit to
the Registration Statement or attached as an appendix to the Prospectus/Proxy
Statement or otherwise filed with the Commission, reference is hereby made to
that exhibit or appendix for a more complete description of the matter involved,
and each such statement is hereby qualified in its entirety by such reference.
------------------------
This Prospectus/Proxy Statement contains trademarks and registered
trademarks of Titan, Horizons and other companies.
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS/PROXY STATEMENT. THE SUMMARY DOES NOT CONTAIN A COMPLETE
DESCRIPTION OF THE TERMS OF THE MERGER AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THIS PROSPECTUS/PROXY STATEMENT AND THE APPENDICES
HERETO. STOCKHOLDERS OF HORIZONS ARE URGED TO READ THIS PROSPECTUS/PROXY
STATEMENT AND THE APPENDICES IN THEIR ENTIRETY.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN
THIS PROSPECTUS/PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. TITAN'S, HORIZONS' AND THE COMBINED ENTITY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS/PROXY STATEMENT.
GENERAL
This Prospectus/Proxy Statement is being provided to stockholders of
Horizons in connection with the proposed Merger of Titan Sub with and into
Horizons, pursuant to which Titan Sub will cease to exist and Horizons will
survive the Merger as a wholly-owned subsidiary of Titan. The Merger will be
effected pursuant to the Merger Agreement, a copy of which is attached hereto as
Appendix A.
THE PARTIES
TITAN
Titan provides state-of-the-art information technology and electronic
systems and services to commercial and government customers. Titan groups its
businesses into four core business segments--Communications Systems; Software
Systems; Information Technologies; Medical Sterilization and Food
Pasteurization--and a fifth business segment, Emerging Technologies and
Businesses. The Communications Systems segment, through Titan's wholly owned
subsidiary Linkabit Wireless Inc. ("Linkabit Wireless"), develops and produces
advanced satellite ground terminals, satellite voice/data modems, networking
systems and other products used to provide bandwidth-efficient communications.
Linkabit Wireless currently has a registration statement on file with the
Commission for a proposed public offering of approximately 26% of its common
stock. The Software Systems segment is a systems integrator that provides a
broad range of information technology services and solutions. The Information
Technologies segment provides information systems solutions to defense-related
government customers with large data management, information manipulation,
information fusion, knowledge-based systems, and communications requirements.
The Information Technologies segment has recently grown significantly as a
result of Titan's acquisition of DBA Systems, Inc. ("DBA") in February 1998. The
Medical Sterilization and Food Pasteurization segment utilizes its linear
accelerator technology to provide sterilization systems and services for medical
device manufacturers. The Emerging Technologies and Businesses segment consists
of new technologies and early-stage businesses, including minority-owned
businesses, utilizing technologies originally developed by Titan. Titan was
incorporated in Delaware in 1969. Unless otherwise indicated, "Titan" refers to
The Titan Corporation, a Delaware corporation, and its subsidiaries. Titan's
executive offices are located at 3033 Science Park Road, San Diego, California
92121. Its telephone number is (619) 552-9500.
See "Risk Factors" for a discussion of the risks associated with the
ownership of Titan Common Stock, including risks related to the Merger.
TITAN SUB
Titan Sub was incorporated in Delaware in January 1998 for the sole purpose
of effecting the Merger. It is a wholly-owned subsidiary of Titan and has no
material assets or liabilities and has not engaged in any activities except in
connection with the proposed Merger. Titan Sub's executive offices are located
at 3033 Science Park Road, San Diego, California 92121. Its telephone number is
(619) 552-9500.
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HORIZONS
GENERAL DESCRIPTION OF BUSINESS
Horizons was founded in 1977 initially to conduct systems analysis and
software development for the Defense Nuclear Agency ("DNA"). Horizons' first
contract was to shrink supercomputer programs for calculating nuclear weapons
effect into applications hosted on first-generation hand-held computers. From
this beginning, Horizons has been predominantly involved in providing software,
computer systems integration and technical consulting services, primarily to the
United States' defense establishment.
The initial range of technical capabilities provided by Horizons encompassed
systems for aviation and operational mission planning, database design, modeling
and simulation, multimedia implementations and other computer-based
applications. In the technical consulting services area, Horizons has developed
a wide array of systems management experience and now provides essential
day-to-day technical and program management support to many government offices.
The technical consulting focus is on the development of defense command and
control ("C2") systems.
Unless otherwise indicated, "Horizons" refers to Horizons Technology, Inc.,
a Delaware corporation, and its subsidiaries. Horizons' executive offices are
located at 3990 Ruffin Road, San Diego, California, 92123. Its telephone number
is (619) 292-8331.
MEETING OF HORIZONS STOCKHOLDERS
DATE, TIME AND PLACE
The Horizons Meeting will be held on , 1998 at 9 o'clock a.m.,
local time, at Horizons' headquarters located at 3990 Ruffin Road, San Diego,
California.
PURPOSE OF THE MEETING
At the Horizons Meeting, stockholders of Horizons will be asked to consider
and vote upon a proposal to: (i) approve and adopt an Agreement and Plan of
Merger and Reorganization dated February 26, 1998, (the "Merger Agreement"),
among Horizons, The Titan Corporation, a Delaware corporation ("Titan"), Sunrise
Acquisition Sub, Inc. ("Titan Sub"), a newly formed, wholly-owned Delaware
subsidiary of Titan, and certain stockholders of Horizons; and (ii) approve and
consent to the merger of Titan Sub with and into Horizons (the "Merger"),
pursuant to which, among other things, Titan Sub will cease to exist and
Horizons will survive as a wholly-owned subsidiary of Titan (collectively, the
"Merger Proposal"). As a result of the Merger, each outstanding share of
Horizons Common Stock will be converted into the right to receive approximately
$2.25 of Titan Common Stock, and each outstanding share of Horizons Series A
Preferred Stock will be converted into the right to receive $5.00 of Titan
Common Stock. The dollar value of the Titan Common Stock to be received in the
Merger by Horizons stockholders will adjust in the event the average closing
price (the "Titan Designated Closing Price") of Titan Common Stock on the New
York Stock Exchange over the twenty trading days prior to the date of the Merger
is less than $6.00 (in which case the dollar value will go down) or more than
$8.00 (in which case the dollar value will go up). The dollar value of the Titan
Common Stock to be received by Horizons stockholders adjust in such event
because if the Titan Designated Closing Price is less than $6.00 it will be
treated as if it was $6.00 exactly, and if the Titan Designated Closing Price is
more than $8.00 it will be treated as if it was $8.00, exactly for purposes of
determining the number of shares of Titan Common Stock Horizons stockholders are
entitled to receive in the Merger. See "Terms of the Merger--Manner and Basis
for Converting Shares" for a detailed discussion regarding the formula utilized
to determine the number of shares of Titan Common Stock issued to Horizons
stockholders in the Merger. In addition, options and warrants to acquire
Horizons Common Stock will be converted as a result of the Merger into
equivalent options and warrants to acquire Titan Common Stock, based upon the
Applicable Fraction.
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RECORD DATE; SHARES ENTITLED TO VOTE
Only stockholders of record of Horizons at the close of business on
, 1998 (the "Record Date") are entitled to notice of and to vote at
the Horizons Meeting. At the close of business on the Record Date, there were
outstanding and entitled to vote [7,496,953] shares of Horizons Common Stock and
500,000 shares of Series A Preferred Stock ("Horizons Series A Preferred
Stock"), each of which will be entitled to one vote on each matter to be acted
upon at the Horizons Meeting.
VOTE REQUIRED
Approval of the Merger Proposal requires the affirmative vote of the
holders, entitled to vote on the Merger Proposal as of the Record Date, of a
majority of the Horizons Common Stock and the Horizons Series A Preferred Stock,
voting together as one class. As a group, all executive officers and directors
of Horizons and their respective affiliates beneficially owned approximately 65%
of the Horizons Common Stock as of the Record Date. The Designated Stockholders,
who are executive officers and directors of Horizons, have each agreed to vote
all shares of Horizons over which they have voting power or control in favor of
the Merger Agreement and the Merger.
Further, pursuant to the Certificate of Designations for the Horizons Series
A Preferred Stock, the consent of the holders of two-thirds ( 2/3) of the
outstanding shares of Horizons Series A Preferred Stock is required to
consummate the Merger.
RECOMMENDATION OF HORIZONS BOARD OF DIRECTORS
The Horizons Board has approved the Merger Agreement and the Merger and has
determined that the Merger is in the best interests of Horizons and its
stockholders. THE HORIZONS BOARD HAS UNANIMOUSLY RECOMMENDED APPROVAL OF THE
MERGER PROPOSAL BY THE HORIZONS STOCKHOLDERS. The primary factors considered and
relied upon by the Horizons Board in reaching its recommendation are described
below under "Approval of the Merger and Related Transactions--Horizons' Reasons
for the Merger."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the businesses of Titan and Horizons.
OPINIONS OF HORIZONS' FINANCIAL ADVISOR
The Slavitt Ellington Group ("Slavitt Ellington"), Horizons' financial
advisor, has delivered to Horizons its written opinion, dated February 26, 1998,
to the effect that, as of such date, the consideration to be received in the
Merger was fair, from a financial point of view, to Horizons stockholders. The
full text of such opinion of Slavitt Ellington, which sets forth the assumptions
made, matters considered and limitations on the review undertaken by Slavitt
Ellington, is attached as Appendix B to this Prospectus/ Proxy Statement.
Slavitt Ellington has also provided to Horizons its written opinion, dated
February 26, 1998, that the fair value of the Series A Preferred Stock is $5.00
per share. The full text of such opinion of Slavitt Ellington, which sets forth
the assumptions made, matters considered and limitations on the review
undertaken by Slavitt Ellington, is attached as Appendix C to this
Prospectus/Proxy Statement. Horizons stockholders are urged to read these
opinions in their entirety. See "Approval of the Merger and Related
Transactions--Opinion of Slavitt Ellington."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Horizons Board with respect to the
Merger Proposal, holders of Horizons Common Stock and Horizons Series A
Preferred Stock should be aware that certain
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members of the Horizons Board and certain Horizons executive officers may have
certain interests in the Merger that are in addition to the interests of the
holders of Horizons Common Stock and Horizons Series A Preferred generally. The
members of the Horizons Board were aware of these interests and took such
interests into account in approving the Merger Agreement and the transactions
contemplated thereby. See "Approval of the Merger and Related
Transactions--Interests of Certain Persons in the Merger," and "--Background of
the Merger."
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division"), and
specified waiting period requirements have been observed. The review of the
Merger pursuant to the HSR Act may substantially delay or proscribe consummation
of the Merger. There can be no assurance that a challenge to the Merger on
antitrust grounds will not be made, or if such a challenge is made, that Titan
would prevail or would not be required to terminate the Merger Agreement, to
divest certain assets, to license certain proprietary technology to third
parties or to accept certain conditions in order to consummate the Merger. Titan
and Horizons filed notification and report forms under the HSR Act with the FTC
and the Antitrust Division on March 3, 1998. Early termination of the 30-day
waiting period under the HSR Act was granted. See "Approval of the Merger and
Related Transactions--Regulatory Matters."
FEDERAL INCOME TAX MATTERS
It is the opinion of Cooley Godward LLP, counsel to Titan, and Jenkens &
Gilchrist, counsel to Horizons, that the Merger will be a tax-free
reorganization for federal income tax purposes under Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), so that no gain or loss
will be recognized by the Horizons stockholders on the exchange of Horizons
Common Stock and Horizons Series A Preferred for Titan Common Stock, except to
the extent that Horizons stockholders receive cash in lieu of fractional shares
or in payment for shares as to which appraisal rights have been perfected.
Neither Horizons nor Titan will obtain a ruling from the Internal Revenue
Service as to the tax consequences of the Merger. As a condition to each of
Titan's and Horizons' obligations to consummate the Merger, Titan and Horizons
must receive an opinion at the Effective Time from their respective legal
counsel to the effect that the Merger will be treated as a tax-free
reorganization for federal income tax purposes; provided, however, that if
counsel to Horizons does not render such opinion, this condition shall
nonetheless be deemed to be satisfied with respect to Horizons if counsel to
Titan renders such opinion to Horizons. See "Approval of the Merger and Related
Transactions--Federal Income Tax Matters."
ACCOUNTING TREATMENT
The Merger is intended to be treated as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting principles.
Titan management has concluded that no conditions exist relating to Horizons
that would preclude Titan from accounting for the Merger as a pooling of
interests. See "Approval of the Merger and Related Transactions--Accounting
Treatment."
APPRAISAL RIGHTS OF HORIZONS STOCKHOLDERS
Stockholders of record of Horizons capital stock may, by following certain
procedures prescribed by the Delaware General Corporation law (the "DGCL"),
demand appraisal rights and receive cash for their respective shares of Horizons
Common Stock and Horizons Series A Preferred Stock. The failure of any
dissenting stockholder of Horizons to follow the appropriate procedures may
result in the termination or waiver of such rights. To perfect any right of
appraisal a holder of shares must, prior to any stockholder vote on the Merger,
deliver a written demand for appraisal of such shares to Horizons. In addition,
any
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stockholder demanding an appraisal must not vote in favor of the Merger. If a
stockholder demands appraisal rights, such stockholder's shares shall not be
converted as described in the Merger Agreement, but shall only be entitled to
such rights and consideration as may be allowed by the DGCL. A copy of Section
262 of the DGCL is attached as Appendix D to this Prospectus. See "The
Merger--Appraisal Rights of Horizons Stockholders."
THE MERGER
TERMS OF THE MERGER; EXCHANGE OF STOCK. As a result of the Merger, Horizons
will become a wholly-owned subsidiary of Titan. Except as provided below, each
outstanding share of Horizons Common Stock will be converted into the right to
receive approximately $2.25 of Titan Common Stock, and each outstanding share of
Horizons Series A Preferred Stock will be converted into the right to receive
$5.00 of Titan Common Stock. Cash will be paid in lieu of issuing fractional
shares. The value of Titan Common Stock to be issued in connection with the
Merger for each share of Horizons Common Stock will be adjusted at the time of
the Merger if the Titan Designated Closing Price is determined to be less than
$6.00 (in which case the dollar value will go down) or greater than $8.00 (in
which case the dollar value will go up). See "Terms of the Merger--Manner and
Basis for Converting Shares." Neither Titan nor Horizons expect any such
adjustment in value will be necessary in connection with the Merger. Assuming no
such adjustments are made, based upon the capitalization of Horizons as of the
close of business on the Record Date, and based on the $6.375 closing price of
Titan Common Stock on the New York Stock Exchange on March 6, 1998, an aggregate
of approximately 3,035,760 shares of Titan Common Stock (the "Merger
Consideration") will be issued in the Merger. Further, Titan will assume all
outstanding Horizons options, which will be converted into options to acquire
approximately 9,767 additional shares of Titan Common Stock. Finally, all
outstanding Horizons warrants that do not terminate as of the Merger will be
substituted for warrants to acquire approximately 31,710 additional shares of
Titan Common Stock See "Terms of the Merger--Manner and Basis for Converting
Shares."
OTHER EFFECTS OF THE MERGER. The Merger will be consummated on a date to be
designated by the parties to the Merger Agreement which date shall be no later
than the second business day after the date of the approval by the stockholders
of Horizons of the Merger Proposal and the satisfaction or waiver of the other
conditions to consummation of the Merger (the "Closing Date"). The Merger will
become effective at the time that a properly executed Certificate of Merger
compliant with applicable law is duly filed with the Delaware Secretary of State
(the "Effective Time"). At the Effective Time, Titan Sub will merge with and
into Horizons, with the result that Horizons will be the surviving corporation
in the Merger and a wholly-owned subsidiary of Titan (the "Surviving
Subsidiary"). The stockholders of Horizons will become stockholders of Titan (as
described below), and their rights will be governed by Titan's Certificate of
Incorporation (the "Titan Certificate") and the Bylaws (the "Titan Bylaws"). See
"Terms of the Merger--Effect of the Merger" and "Comparison of Rights of
Stockholders of Titan and Horizons."
EXCHANGE OF HORIZONS STOCK CERTIFICATES. Promptly after the Effective Time,
Titan, acting through American Stock Transfer & Trust Company as its exchange
agent (the "Exchange Agent"), will deliver to each holder of record, as of the
Effective Time, of a certificate or certificates that immediately prior to the
Effective Time represented outstanding shares of Horizons Common Stock or
Horizons Series A Preferred Stock, a letter of transmittal with instructions to
be used by such holder in surrendering such certificate(s) in exchange for
certificate(s) representing shares of Titan Common Stock. CERTIFICATES SHOULD
NOT BE SURRENDERED BY THE HOLDERS OF HORIZONS COMMON STOCK OR HORIZONS SERIES A
PREFERRED STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH THE TERMS OF SUCH LETTER OF
TRANSMITTAL. See "Terms of the Merger--Manner and Basis for Converting Shares."
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HORIZONS OPTIONS AND WARRANTS. At the Effective Time, each unexpired and
unexercised option to purchase Horizons Common Stock in effect on the date of
the Merger Agreement that has been granted by Horizons to current or former
directors, officers or employees of Horizons (each, a "Horizons Option"), and
each warrant to purchase shares of Horizons Common Stock that does not by its
terms terminate in connection with the Merger (each a "Horizons Warrant"), will
be assumed by Titan (or substituted in the case of Horizons Warrants) and will
be automatically converted into an option (a "Titan Exchange Option") or a
warrant (a "Titan Exchange Warrant"), as applicable, to purchase that number of
shares of Titan Common Stock equal to the number of shares of Horizons Common
Stock issuable immediately prior to the Effective Time upon exercise of the
Horizons Option or Horizons Warrant, as applicable (without regard to actual
restrictions on exercisability), multiplied by the Applicable Fraction, with an
exercise price per share equal to the exercise price per share that existed
under the corresponding Horizons Option or Horizons Warrant, as applicable,
divided by the Applicable Fraction, and with other terms and conditions (such as
vesting) that are the same as the terms and conditions of such Horizons Option
or Horizons Warrant, as applicable, immediately before the Effective Time. As of
the Record Date, 27,700 shares of Horizons Common Stock were issuable upon the
exercise of outstanding Horizons Options, which options will be assumed by Titan
and will be converted into Titan Exchange Options to acquire approximately 9,767
shares of Titan Common Stock at the Effective Time. The weighted average
exercise price per share of all Horizons Options outstanding as of the Record
Date is approximately $2.355 per share. Following the Merger the weighted
average exercise price per share of all Titan Exchange Options will be
approximately $6.68 per share (based on the capitalization of Horizons, and the
closing price of Titan Common Stock, on March 6, 1998). The unvested portion of
each Horizons Option will continue to vest as a Titan Exchange Option upon the
same schedule as the corresponding Horizons Option. As of March 6, 1998 89,927
shares of Horizons Common Stock were issuable upon the exercise of outstanding
Horizons Warrants that do not terminate as of the Merger, which warrants will be
substituted by Titan and will be converted into Titan Exchange Warrants to
acquire approximately 31,710 shares of Titan Common Stock at the Effective Time
(based on the capitalization of Horizons, and the closing price of Titan Common
Stock, on March 6, 1998). To the extent any Horizons Options or Horizons
Warrants are exercised from the date of the Merger Agreement to the Effective
Time, the issued Horizons Common Stock will be converted at the Applicable
Fraction. All outstanding warrants of Horizons expire by their terms as a result
of the Merger, except for certain warrants held by Imperial Bank (certain of
which expired by their terms in April 1998).
Following the Effective Time, Titan may file with the Commission a
registration statement on Form S-8 to register shares of Titan Common Stock
issuable as a result of the exercise of Titan Exchange Options. See "Terms of
the Merger--Treatment of Employee Equity Plans."
STOCK OWNERSHIP FOLLOWING THE MERGER. Based upon the capitalization of
Horizons as of the close of business on March 6, 1998, and the closing price per
share of Titan Common Stock on March 6, 1998 ($6.375), an aggregate of
approximately 3,035,760 shares of Titan Common Stock will be issued to Horizons
stockholders in the Merger and Titan will assume all outstanding Horizons
Options and substitute all Horizons Warrants which will be converted into
options or warrants, as applicable, to acquire up to approximately 41,477
additional shares of Titan Common Stock. Based upon the number of shares of
Titan Common Stock, Titan Public Preferred and Series B Preferred Stock issued
and outstanding as of March 6, 1998, and after giving effect to the issuance of
Titan Common Stock as described in the previous sentence and the exercise of all
Titan Exchange Options and Titan Exchange Warrants, the former holders of
Horizons Common Stock and Horizons Series A Preferred Stock and options and
warrants to purchase Horizons Common Stock would have approximately 11.7% of the
voting power of Titan's total issued and outstanding shares on a fully diluted
basis. The foregoing percentage is subject to change to reflect any changes in
the capitalization of either Titan or Horizons subsequent to the dates indicated
and prior to the Effective Time and there can be no assurance as to the actual
capitalization of Titan or Horizons as of the Effective Time or of Titan at any
time following the Effective Time. See "Terms of the Merger--Stock Ownership
Following the Merger."
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BOARD OF DIRECTORS; MANAGEMENT FOLLOWING THE MERGER. There will be no
change in the current Titan Board or officers of Titan as a result of the
Merger. At the Effective Time, the officers of Horizons (as the Surviving
Subsidiary) will be the same persons, holding the same offices, as immediately
prior to the Effective Time, except that James T. Palmer will resign as
Horizons' Chief Executive Officer, and Patrick J. Boyce will resign as Horizons'
Chief Financial Officer, and the directors of Horizons will be Gene W. Ray, Earl
A. Pontius, John L. Slack and J.S. Webb. See "Terms of the Merger--Effect of the
Merger."
COVENANTS. Pursuant to the Merger Agreement, Horizons has agreed (on behalf
of itself and its subsidiaries) that, until the earlier of the termination of
the Merger Agreement pursuant to its terms and the Effective Time, subject to
certain exceptions, and except to the extent that Titan consents in writing,
Horizons will conduct its business and operations in the ordinary course and in
accordance with past practices; use reasonable efforts to preserve intact its
current business organization; keep available the services of its current
officers and employees and maintain its relations and goodwill with all
suppliers, customers, landlords, creditors, employees and others with which it
has business relationships; and use all reasonable efforts to keep in full force
all of its existing insurance policies. In addition, subject to certain
exceptions, Horizons has agreed that, without the prior written consent of
Titan, it will not perform or engage in certain activities in the conduct of its
business and the businesses of its subsidiaries. Horizons has further agreed to
take actions necessary to give notice of, convene and hold a meeting of
stockholders, and solicit proxies with respect to the meeting. Each of Horizons
and Titan has agreed in the Merger Agreement, until the earlier of the Merger or
termination of the Merger Agreement, to notify the other of certain material
events prior to closing; and to provide certain documents to the other and keep
the other's information confidential. The Designated Stockholders have also made
certain covenants pursuant to the Merger Agreement. See "Terms of the
Merger--Covenants."
NO SOLICITATION. Pursuant to the Merger Agreement, except under certain
limited circumstances, Horizons has agreed (on behalf of itself and each of its
subsidiaries) that it will not, and each of the Designated Stockholders has
agreed that he will not, directly or indirectly (i) solicit any alternate
acquisition, (ii) furnish any non-public information concerning Horizons in
connection with or in response to an alternative acquisition proposal, and (iii)
participate in any discussions or negotiations with any other parties with
respect to an alternate acquisition proposal.
CONDITIONS TO THE MERGER. Consummation of the Merger is subject to certain
conditions, including (i) declaration by the Commission of the effectiveness of
the Registration Statement, (ii) approval of the Merger Proposal by the
stockholders of Horizons, (iii) absence of any material legal proceeding
relating to the Merger, (iv) receipt by Titan and Horizons of legal opinions
that the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code, (v) subject to certain materiality thresholds, the accuracy
of the representations and warranties made by each party in the Merger Agreement
and (vi) subject to certain materiality thresholds, performance of all covenants
required by the Merger Agreement.
TERMINATION; BREAK-UP FEES. The Merger Agreement may be terminated by
either party under certain circumstances. Titan and Horizons have agreed that,
if the Merger is not consummated under certain circumstances, including the
failure of Horizons' stockholders to approve the Merger Proposal, Titan or
Horizons, as the case may be, will pay to the other a sum of $250,000. See
"Terms of the Merger-- Termination of the Merger Agreement," "--Effect of
Termination" and "--Break-Up Fees."
STOCK VOTING AGREEMENT. In connection with the execution of the Merger
Agreement, all of the Designated Stockholders, owning in the aggregate
approximately 69% of the Horizons Common Stock, executed a Stock Voting
Agreement with Titan. Pursuant to such agreements, each of such persons agreed
to vote all shares of Horizons over which such person has voting power or
control in favor of the Merger Agreement and the Merger. See "Terms of the
Merger--Related Agreements--Stock Voting Agreement."
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AFFILIATE AGREEMENTS. As a condition to Titan's obligations to consummate
the Merger, each of the Designated Stockholders shall have, prior to the
Effective Time, entered into agreements restricting sales, dispositions or other
transactions reducing their risk of investment in respect of the shares of Titan
Common Stock to be received by them in the Merger so as to help ensure
compliance with the requirements of applicable federal securities laws. See
"Terms of the Merger--Related Agreements-- Affiliate Agreements.
MERGER EXPENSES AND FEES AND OTHER COSTS. Except for certain limited
exceptions, all fees and expenses incurred in connection with the Merger
Agreement and the transactions contemplated by the Merger Agreement shall be
paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that Titan shall pay all fees and expenses
incurred in connection with the printing and filing of the S-4 Registration
Statement and this Prospectus/Proxy Statement and any amendments or supplements
thereto, and in connection with forms and notifications required to be filed by
Horizons and Titan under the HSR Act (except that fees associated with any
filing by a Horizons stockholder shall be borne exclusively by Horizons). See
"Terms of the Merger--Merger Expenses and Fees and Other Costs."
Titan estimates that Titan and Horizons will incur direct transaction costs
of approximately $1 million associated with the Merger. These nonrecurring
transaction costs are expected to be charged to operations during the quarter
ending March 31, 1998. See "Unaudited Pro Forma Combined Condensed Financial
Information" and "Risk Factors--Integration of Operations."
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MARKET PRICE DATA
The following table sets forth, for the fiscal quarters indicated, the range
of high and low sale prices per share of Titan Common Stock and Titan Public
Preferred, as reported on the NYSE under the symbol "TTN" and "TTNP,"
respectively.
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Titan Common Stock:
Fiscal year ended December 31, 1995:
1st Quarter.................................................................................. $ 7.13 $ 5.63
2nd Quarter.................................................................................. 9.38 6.25
3rd Quarter.................................................................................. 10.38 8.50
4th Quarter.................................................................................. 9.63 6.63
Fiscal year ended December 31, 1996:
1st Quarter.................................................................................. $ 7.38 $ 6.00
2nd Quarter.................................................................................. 7.13 5.50
3rd Quarter.................................................................................. 5.63 3.63
4th Quarter.................................................................................. 4.38 2.50
Fiscal year ended December 31, 1997:
1st Quarter.................................................................................. $ 3.75 $ 2.88
2nd Quarter.................................................................................. 4.38 2.88
3rd Quarter.................................................................................. 7.31 4.44
4th Quarter.................................................................................. 8.19 5.38
Fiscal year ending December 31, 1998:
1st Quarter (through March 6, 1998).......................................................... $ 6.86 $ 5.50
<CAPTION>
QUARTERLY PERIOD HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Titan Public Preferred:
Fiscal year ended December 31, 1995:
1st Quarter.................................................................................. $ 11.88 $ 10.88
2nd Quarter.................................................................................. 12.25 11.63
3rd Quarter.................................................................................. 13.25 11.75
4th Quarter.................................................................................. 12.88 11.88
Fiscal year ended December 31, 1996:
1st Quarter.................................................................................. $ 12.63 $ 12.00
2nd Quarter.................................................................................. 12.13 11.38
3rd Quarter.................................................................................. 11.50 10.88
4th Quarter.................................................................................. 10.88 10.00
Fiscal year ended December 31, 1997:
1st Quarter.................................................................................. $ 11.88 $ 10.25
2nd Quarter.................................................................................. 12.75 10.13
3rd Quarter.................................................................................. 13.44 12.25
4th Quarter.................................................................................. 13.94 12.25
Fiscal year ending December 31, 1998:
1st Quarter (through March 6, 1998).......................................................... $ 13.44 $ 11.63
</TABLE>
There is no public trading market for Horizons' capital stock.
9
<PAGE>
As of March 6, 1998, there were approximately 3,783 stockholders of record
of Titan Common Stock and approximately 684 stockholders of record of Titan
Public Preferred, as shown on the stock records of Titan.
As of March 6, 1998, there were approximately 85 stockholders of record of
Horizons Common Stock and approximately 11 stockholders of record of Horizons
Series A Preferred, as shown on the stock records of Horizons.
Titan has never paid any cash dividends on its common stock. Since January
1973, Titan has paid a quarterly dividend of $0.25 to holders of Titan Public
Preferred. Other than earnings distributed as quarterly dividends to holders of
Titan Public Preferred, Titan anticipates that, for the foreseeable future, it
will continue to retain any earnings for use in the operation of its business.
As of March 6, 1998, there were 500,000 shares of Horizons Series A
Preferred Stock issued and outstanding. As of January 31, 1998 there were
accrued and unpaid dividends of, in aggregate, approximately $750,000 on the
Horizons Series A Preferred Stock, payable only as declared by the Horizons
Board. No dividends are expected to be declared by the Horizons Board prior to
the Merger; and in connection with the Merger, each outstanding share of
Horizons Series A Preferred Stock will be converted into the right to receive
$5.00 of Titan Common Stock.
On February 25, 1998, the last full trading day prior to the public
announcement of the execution and delivery of the Merger Agreement, the NYSE
closing prices for Titan Common Stock and Titan Public Preferred were $5.75 per
share and $11.81 per share, respectively. As of March 6, 1998, the closing
prices on the NYSE for Titan Common Stock and Titan Public Preferred
respectively, were $6.375 per share, and $12.50 per share respectively. There
can be no assurance as to the actual prices of Titan Common Stock or Titan
Public Preferred prior to or at the Effective Time of the Merger or of Titan
Common Stock or Titan Public Preferred at any time following the Effective Time
of the Merger. See "--Comparative Per Share Data" and "Risk Factors."
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below with respect to
Titan's consolidated statements of operations for each of the three years in the
period ended December 31, 1997, and with respect to Titan's consolidated balance
sheets at December 31, 1996 and 1997 are derived from the audited consolidated
financial statements of Titan included elsewhere in this Prospectus/Proxy
Statement. The selected historical financial data set forth below with respect
to Titan's consolidated statements of operations for each of the two years ended
December 31, 1994 and with respect to Titan's consolidated balance sheets at
December 31, 1993, 1994 and 1995, are derived from the audited consolidated
financial statements of Titan not included elsewhere in this Prospectus/Proxy
Statement. The selected historical financial data set forth below with respect
to the consolidated statements of operations of Horizons for each of the three
years in the period ended January 31, 1998 and with respect to Horizons'
consolidated balance sheets at January 31, 1997 and 1998 are derived from the
audited consolidated financial statements of Horizons included elsewhere in this
Prospectus/Proxy Statement. The selected historical financial data set forth
below with respect to the consolidated statements of operations of Horizons for
each of the two years in the period ended January 31, 1996 and with respect to
Horizons' consolidated balance sheets at January 31, 1994, 1995 and 1996 are
derived from the audited consolidated financial statements of Horizons not
included in this Prospectus/Proxy Statement.
10
<PAGE>
The data set forth below are qualified by reference to, and should be read
in conjunction with, the related consolidated financial statements and the notes
related thereto.
TITAN SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FY93(1) FY94 FY95 FY96 FY97
---------- ---------- ---------- ---------- ----------
Revenues............................................. $ 182,712 $ 160,522 $ 161,231 $ 155,954 $ 196,694
---------- ---------- ---------- ---------- ----------
Cost of revenues..................................... 164,825 122,793 123,914 124,477 151,140
Selling, general and administrative expense.......... 27,682 21,978 25,867 23,693 23,503
Research and development expense..................... 2,257 4,420 5,113 3,576 6,138
Restructuring and other (income) expense............. -- (1,200) 6,249 -- --
---------- ---------- ---------- ---------- ----------
Total costs and expenses............................. 194,764 147,991 161,143 151,746 180,781
---------- ---------- ---------- ---------- ----------
Operating profit (loss).............................. (12,052) 12,531 88 4,208 15,913
Interest expense..................................... (2,039) (1,278) (1,353) (3,201) (5,179)
Interest income...................................... 197 389 392 639 802
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle............................... (13,894) 11,642 (873) 1,646 11,536
Income tax provision (benefit)....................... (6,497) 3,674 (540) 221 4,243
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before
cumulative effective of change in accounting....... (7,397) 7,968 (333) 1,425 7,293
Cumulative effect of change in accounting
principle.......................................... 1,700 -- -- -- --
Loss from discontinued operation, net of tax......... -- (1,178) (1,972) (3,642) (343)
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... (5,697) 6,790 (2,305) (2,217) 6,950
Dividend requirements on preferred stock............. (695) (695) (695) (803) (875)
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common stock......... (6,392) 6,095 (3,000) (3,020) 6,075
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic earnings per share:
Income (loss) from continuing operations............. (0.37) 0.38 (0.05) 0.03 0.29
Loss from discontinued operation..................... -- (0.06) (0.10) (0.17) (0.02)
---------- ---------- ---------- ---------- ----------
Net income per common share.......................... (0.37) 0.32 (0.15) (0.14) 0.27
Weighted average shares outstanding.................. 17,050 19,042 19,438 21,418 22,267
Diluted earnings per share:
Income (loss) from continuing operations............. (0.37) 0.38 (0.05) 0.03 0.27
Loss from discontinued operation..................... -- (0.06) (0.10) (0.17) (0.01)
---------- ---------- ---------- ---------- ----------
Net income per common share.......................... (0.37) 0.32 (0.15) (0.14) 0.26
Weighted average shares outstanding.................. 17,050 19,042 19,438 21,418 27,506
---------- ---------- ---------- ---------- ----------
Ratio of earnings to fixed charges(2)................ -- 3.64 0.74 1.32 2.65
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
--------- --------- ------------ --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. 9,465 8,780 9,035 4,751 10,612
Investments............................................ -- -- 5,000 9,888 4,499
Working capital........................................ 33,341 35,638 35,873 59,330 68,828
Property and equipment, net............................ 21,421 24,862 29,411 26,445 23,936
Total assets........................................... 123,901 110,889 126,672 158,749 164,210
Total debt............................................. 23,575 4,052 16,426 42,081 50,764
Redeemable preferred stock............................. -- -- -- 3,000 3,000
Stockholders' equity................................... 51,392 63,400 65,063 74,460 73,789
</TABLE>
- ------------------------
(1) During 1993, Titan was involved in a contractual dispute with the U.S. Navy
over its Mini-DAMA fixed-price development contract. That dispute had a
material adverse impact on Titan's revenues and gross margins and was a
principal cause of Titan's $7.9 million net loss for the year.
(2) The ratio of earnings to fixed charges had been computed by dividing
earnings available for fixed charges (income before income taxes plus fixed
charges) by fixed charges. Fixed charges consist of interest expense
(including amortization of deferred financing costs) and the portion of
rental expense that is representative of an interest factor. For the year
ended December 31, 1993 earnings were insufficient to cover fixed charges by
$8,722.
12
<PAGE>
HORIZONS SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Revenues...................................................... $ 26,281 $ 29,551 $ 26,491 $ 22,401 $ 25,183
--------- --------- --------- --------- ---------
Cost of revenues.............................................. 18,335 20,008 17,931 15,512 16,940
--------- --------- --------- --------- ---------
Gross Profit.................................................. 7,946 9,543 8,560 6,889 8,243
Selling, general and administrative........................... 4,699 4,114 3,921 3,845 5,061
Research and development expense.............................. 81 105 49 73 27
--------- --------- --------- --------- ---------
Total costs and expenses...................................... 23,115 24,227 21,901 19,430 22,028
--------- --------- --------- --------- ---------
Operating Profit.............................................. 3,166 5,324 4,590 2,971 3,155
Interest Expense.............................................. (519) (592) (546) (361) (234)
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes......... 2,647 4,732 4,044 2,610 2,921
Income tax provision.......................................... 1,006 1,798 1,537 992 1,110
--------- --------- --------- --------- ---------
Income from continuing operations............................. 1,641 2,934 2,507 1,618 1,811
Loss from discontinued operations net of taxes................ (5,862) (1,990) (7,676) (2,731) (6,072)
--------- --------- --------- --------- ---------
Net income (loss)............................................. $ (4,221) $ 944 $ (5,169) $ (1,113) $ (4,261)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share
Income from continuing operations........................... $ 0.22 $ 0.40 $ 0.33 $ 0.22 $ 0.25
Loss from discontinued operation............................ $ (0.78) $ (0.27) $ (1.03) $ (0.37) $ (0.84)
--------- --------- --------- --------- ---------
Net income.................................................... $ (0.56) $ 0.13 $ (0.70) $ (0.15) $ (0.59)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares..................................... 7,497 7,496 7,424 7,300 7,239
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share
Income from continuing operations........................... $ 0.22 $ 0.39 $ 0.33 $ 0.22 $ 0.24
Loss from discontinued operation............................ $ (0.78) $ (0.26) $ (1.02) $ (0.37) $ (0.81)
--------- --------- --------- --------- ---------
Net income.................................................... $ (0.56) $ 0.13 $ (0.69) $ (0.15) $ (0.57)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares..................................... 7,510 7,542 7,542 7,487 7,504
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges(1)......................... 4.84 10.49 7.99 6.71 9.42
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------------------------
HTI 1998 1997 1996 1995 1994
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................... 523 416 179 400 805
Working capital (deficit)......................................... (5,862) (3,265) (4,803) 623 954
Property and equipment, net....................................... 305 700 889 592 660
Total assets...................................................... 7,130 10,096 12,178 10,300 13,682
Total debt........................................................ 5,511 6,001 8,965 2,935 4,499
Stockholders' equity (deficit).................................... (6,007) (1,786) (2,730) 2,278 645
</TABLE>
- --------------------------
(1) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (income before taxes plus fixed
charges) by fixed charges. Fixed charges consist of interest expense
(including amortization of deferred financing costs) and the portion of
rental expense that is representative of an interest factor.
13
<PAGE>
SELECTED PRO FORMA CONDENSED FINANCIAL DATA
The selected pro forma combined financial data are derived from the
unaudited pro forma combined condensed financial statements, which give effect
to the Merger as a pooling of interests transaction, and should be read in
conjunction with, and are qualified by reference to, such pro forma statements
and the notes thereto included elsewhere in this Prospectus/Proxy Statement.
The pro forma data is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have been achieved if the Merger had been consummated as of the beginning of the
periods indicated, nor is it necessarily indicative of future financial position
or results of operations.
SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF INCOME DATA:
Revenues................................................................... $ 222,975 $ 185,505 $ 187,722
---------- ---------- ----------
Costs and expenses:
Cost of revenues......................................................... 169,475 144,485 141,845
Selling, general and administrative expense.............................. 28,202 27,807 29,788
Research and development expense......................................... 6,219 3,681 5,162
Restructuring and other income (expense)................................. -- -- 6,249
---------- ---------- ----------
Total costs and expenses............................................... 203,896 175,973 183,044
---------- ---------- ----------
Operating Profit........................................................... 19,079 9,532 4,678
Interest expense........................................................... (5,698) (3,793) (1,899)
Interest income............................................................ 802 639 392
Income from continuing operations before income taxes...................... 14,183 6,378 3,171
Income tax provision....................................................... 5,249 2,019 997
---------- ---------- ----------
Income from continuing operations.......................................... $ 8,934 $ 4,359 $ 2,174
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share
Income from continuing operations........................................ $ 0.32 $ 0.14 $ 0.07
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares.................................................. 25,492 24,643 22,787
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share
Income from continuing operations........................................ $ 0.29 $ 0.14 $ 0.07
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares.................................................. 30,731 24,643 22,787
---------- ---------- ----------
---------- ---------- ----------
Ratio of earnings to fixed charges 3.16 3.10 2.85
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents......................................................................... 11,135
Investments....................................................................................... 4,499
Working capital................................................................................... 62,366
Property and equipment, net....................................................................... 24,241
Total assets...................................................................................... 168,463
Total debt........................................................................................ 56,275
Redeemable preferred stock........................................................................ 3,000
Stockholders' equity.............................................................................. 67,182
</TABLE>
14
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Titan
Common Stock and Horizons Common Stock and combined per share data on an
unaudited pro forma basis after giving effect to the Merger accounted for as a
"pooling of interests." This data should be read in conjunction with the
selected historical financial data, the unaudited pro forma combined condensed
financial data and the separate historical consolidated financial statements of
Titan and Horizons, and notes thereto. The pro forma combined financial data is
not necessarily indicative of the operating results that would have been
achieved had the Merger been consummated as of the beginning of the periods
indicated nor is such data necessarily indicative of future financial condition
or results of operations. For purposes of the comparative per share data, Titan
financial data at December 31, 1995, 1996 and 1997 have been combined with
Horizons' financial data at January 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,(1)
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Historical-Titan:
Net income (loss) per share......................................................... $ (.15) $ (.14) $ .26
Book value per share(2)............................................................. 2.40
Historical-Horizons:
Net income (loss) per share......................................................... (.70) .13 (.56)
Book value per share(2)............................................................. (.80)
Pro Forma Combined Per Titan Share(3):
Net income per share................................................................ (.36) (.08) .09
Book value per share(2)............................................................. 2.78
Equivalent Pro Forma Combined Per Horizons Share(3):
Net income per share................................................................ (.30) (.07) .05
Book value per share(2)............................................................. 2.19
</TABLE>
- ------------------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock and equivalents outstanding
at the end of each period. The pro forma book value per share is computed by
dividing pro forma stockholders' equity by the pro forma number of shares of
common stock and equivalents at the end of each period.
(2) Titan estimates that Titan and Horizons will incur transaction-related costs
of approximately $1 million associated with the Merger, including estimated
costs associated with integrating the two companies, which will be charged
to operations as the costs are incurred. The Pro Forma Combined Book Value
Per Share data give effect to estimated costs of $1 million, net of tax, as
if such costs had been incurred and charged to operations as of December 31,
1997. These costs and charge are not included in the pro forma income per
share data. See "Unaudited Pro Forma Condensed Combined Financial
Information" and accompanying notes thereto.
(3) The equivalent Horizons pro forma per share amounts are calculated by
dividing the Titan combined pro forma per share amounts by the Applicable
Fraction.
15
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED BY HOLDERS OF HORIZONS
CAPITAL STOCK IN EVALUATING WHETHER TO APPROVE THE MERGER PROPOSAL. THESE
FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH THE OTHER INFORMATION INCLUDED
IN THIS PROSPECTUS/PROXY STATEMENT.
THE DISCUSSION IN THIS PROSPECTUS/PROXY STATEMENT CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. TITAN'S, HORIZONS' AND THE
COMBINED ENTITY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS/PROXY STATEMENT.
RISKS RELATED TO THE MERGER
INTEGRATION OF OPERATIONS
If the combined company, and the stockholders of Titan and Horizons, are to
realize the anticipated benefits of the Merger, the operations of the two
companies must be integrated and combined efficiently. The process of
rationalizing product lines, management services, administrative organizations,
facilities, management information systems and other aspects of operations,
while managing a larger entity, will present a significant challenge to the
management of the combined company. There can be no assurance that the
integration process will be successful or that the anticipated benefits of the
business combination will be fully realized. Similarly, there can be no
assurance that stockholders of the combined company will achieve value through
share ownership greater that they would have achieved as stockholders of either
of Titan or Horizons as a separate entity. The dedication of management
resources to such integration may detract attention from the day-to-day business
of the combined company. The difficulties of integration may be increased by the
necessity of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. Such integration may also be more difficult due to Titan's integration
challenges as a result of its recent acquisition of DBA or other acquisitions.
See "--Acquisition of DBA; Risks Associated with Acquisition Strategy." There
can be no assurance that there will not be substantial costs associated with the
integration process, that such activities will not result in a decrease in
revenues or a decrease in the value of Titan capital stock, or that there will
not be other material adverse effects of these integration efforts. Further,
there can be no assurance that, upon learning of the proposed Merger, customers
will not defer purchasing decisions until the closing of the Merger or
thereafter. Such effects could materially reduce the short-term or long-term
earnings and earnings per share of the combined company. Titan estimates that it
will incur $1 million in transaction and integration costs associated with the
Merger, which will be charged to operations as incurred. This amount is a
preliminary estimate only. There can be no assurance that Titan will not incur
additional charges in subsequent quarters.
ADDITIONAL SHARES TO BE ISSUED BY TITAN; SHARES ELIGIBLE FOR FUTURE SALE
Based upon the capitalization of Horizons as of the close of business on
March 6, 1998, and the closing price on the NYSE of Titan Common Stock on March
6, 1998, $6.375, an aggregate of approximately 3,035,760 shares of Titan Common
Stock (the "Merger Consideration") will be issued in the Merger, and Titan will
assume all outstanding Horizons options and substitute all Horizons Warrants
which will be converted into options and warrants, as applicable, to acquire
approximately 41,477 additional shares of Titan Common Stock. In general, the
shares will be eligible for sale in the public market following the Merger,
subject to certain volume and other resale limitations for affiliates of
Horizons and Titan, pursuant to Rules 144 and/or 145 under the Securities Act.
See "Terms of the Merger--Affiliate Agreements." An aggregate of approximately
60% of the shares issued in the Merger will be beneficially owned by persons who
may be deemed to be affiliates of Horizons and, therefore, subject to such
limitations. The sale of a significant number of the foregoing shares may cause
substantial fluctuations in the market price of Titan Common Stock, and may
adversely effect remaining stockholders
16
<PAGE>
of Titan. Upon completion of the Merger, Titan will have outstanding an
aggregate of 23,346,839 shares of Titan Common Stock, assuming no exercise of
outstanding options; 694,872 shares of Titan Public Preferred; and 500,000
shares of Series B Preferred Stock; based upon the number of shares outstanding
as of the Record Date. Assuming 3,035,760 shares of Titan Common Stock are
issued as a result of the Merger, the current Titan stockholders' ownership of
Titan Common Stock will be reduced to 88% of the outstanding Titan Common Stock.
In addition, promptly following the Effective Time, Titan may file a Form S-8
registering a total of approximately 41,477 shares of Titan Common Stock
issuable as a result of the exercise of Titan Exchange Options and Titan
Exchange Warrants. Shares registered on such Form S-8 will, subject to vesting
restrictions and to Rule 144 and/or Rule 145 volume limitations applicable to
affiliates, be available for sale in the open market.
POTENTIAL ADJUSTMENT TO CONSIDERATION TO BE RECEIVED BY HOLDERS OF HORIZONS
COMMON STOCK
The dollar value of Titan Common Stock to be issued in connection with the
Merger to the Horizons stockholders will be adjusted at the time of the Merger
if the Titan Designated Closing Price is determined to be less than $6.00 (in
which case the dollar value will go down) or greater than $8.00 (in which case
the dollar value will go up). The dollar value of the Titan Common Stock to be
received by Horizons stockholders adjust in such event because if the Titan
Designated Closing Price is less than $6.00 it will be treated as if it was
$6.00 exactly, and if the Titan Designated Closing Price is greater than $8.00
it will be treated as if it was $8.00 exactly, for purposes of determining the
number of shares of Titan Common Stock Horizons stockholders are entitled to
receive in the Merger. Neither Titan nor Horizons expects any such adjustment in
value to be received will be necessary in connection with the Merger. There can
be no assurance that such an adjustment will not be required, which could reduce
(or increase) the amount of consideration to be received in the Merger. On March
6, 1998, the Closing Price for Titan Common Stock on the NYSE was $6.375. The
market price of Titan Common Stock has fluctuated significantly in the past, and
often has been near or below $6.00 over the past few months. Although the
parties expect holders of Horizons Common Stock will be entitled in the Merger
to approximately $2.25 of Titan Common Stock per share of Horizons Common Stock,
there can be no assurance that there will not be an adjustment to such
consideration required under the terms of the Merger Agreement at the time of
the Merger. Holders of Horizons Common Stock are therefore strongly urged, in
particular, to obtain current market quotations for Titan Common Stock prior to
the Horizons Meeting.
RISKS RELATED TO TITAN'S AND HORIZONS' BUSINESSES
ABILITY TO IMPLEMENT SPIN-OUT STRATEGY
In an effort to leverage its core technologies to build and expand its
commercial businesses, Titan has adopted a strategy of dividing its businesses
into focused subsidiaries and, when possible, seeking to fund the continued
operations and potential expansion of each subsidiary by selling a minority
equity interest to public investors. Titan refers to these transactions as
"spin-outs" of its subsidiaries. There are numerous risks inherent in this
strategy. Moreover, Titan has not demonstrated an ability to spin-out its
subsidiaries, nor has Titan demonstrated an ability to successfully manage a
public subsidiary. There can be no assurance that Titan can complete a spin-out
of any subsidiary or that any future spin-out will result in the public market
attributing any incremental value to Titan Common Stock.
There are many factors that could limit Titan's ability to successfully
complete spin-outs in the future. The inability of Titan to attract and retain
the entrepreneurial management and technical personnel necessary to successfully
develop commercial applications for Titan's technology would have a material
adverse effect on Titan's ability to manage and grow its commercial businesses
from start-up ventures to initial public offerings. Additionally, in recent
years, the stock market in general, and the shares of technology companies in
particular, have experienced extreme price fluctuations. Broad market
fluctuations may adversely affect or make impossible Titan's ability to complete
an initial public offering of a minority interest of any of its present or
future subsidiaries. If Titan fails in a planned spin-out, such failure
17
<PAGE>
could make potential investors less receptive of future spin-outs by Titan.
Furthermore, there can be no assurance that Titan can develop or acquire the
additional technologies, or can successfully overcome the numerous other
challenges inherent in the operations of a start-up venture, necessary to
complete a spin-out of any of its subsidiaries. See "--Ability to Commercialize
New Technologies."
If Titan is unable to implement its spin-out strategy, Titan may need to
complete additional equity or debt financings to fund the continued operations
and expansion of its subsidiaries and potential acquisitions of new
technologies. There can be no assurance that any such financing will be
available on acceptable terms or at all, or that such financings will be
adequate to meet Titan's capital requirements. Any additional equity or
convertible debt financings could result in substantial dilution to Titan's
stockholders. Successful spin-outs will initially result in dilution, and will
also result in a wider stockholder base at the subsidiary level, which could
adversely impact the ability of Titan's stockholders to influence events at the
subsidiary level.
If adequate funds are not available, Titan's ability to operate and expand
the businesses of its subsidiaries and to acquire additional technologies may be
materially adversely affected. Titan may also have difficulty attracting and
retaining key management and technical personnel because of an inability to
offer competitive equity opportunities for these individuals. Any failure by
Titan to spin-out its subsidiaries would have a material adverse effect on
Titan's business, financial condition, results of operations and market price.
ACQUISITION OF DBA; RISKS ASSOCIATED WITH ACQUISITION STRATEGY
In February 1998, Titan acquired DBA in a stock for stock merger. As part of
Titan's strategy, Titan intends to continue to acquire complementary businesses
or technologies that could expand its existing core businesses or constitute new
business. Titan's acquisition strategy entails the potential risks inherent in
assessing the value, strengths, weaknesses, corporate culture, contingent or
other liabilities and potential profitability of acquisition candidates. Titan's
recent acquisition of DBA and the proposed acquisition of Horizons are examples
of Titan's acquisition strategy. There can be no assurance that acquisition
opportunities will continue to be available, that Titan will correctly assess
all of these aspects of potential acquisition candidates, that Titan will have
access to the capital required to finance potential acquisitions or that Titan
will continue to acquire businesses or technologies. In particular, there can be
no assurance that Titan correctly assessed the business of DBA, or that the
acquisition by Titan of DBA will prove beneficial to Titan and its stockholders.
Titan's acquisition strategy also involves the potential risks inherent in
integrating the operations of acquired businesses and technologies, certain of
which as they relate to the Merger are described above. See "--Integration of
Operations." The integration of multiple acquisitions is likely to be
significantly more challenging than the integration of a single business.
Specifically, the integration of DBA and any other acquired businesses may
require substantial management resources and divert management attention from
the day-to-day business of the remainder of Titan. Although Titan intends to
seek to reduce the expenses of the combined business operations through
consolidation of facilities and other expense reductions, there can be no
assurance that Titan will be able to reduce expenses. There can be no assurance
that Titan will be successful in integrating the operations of DBA or any other
acquired businesses into Titan or that any business acquired will ultimately
prove to be profitable for Titan or for its stockholders.
DEPENDENCE ON GOVERNMENT CONTRACTS
A substantial portion of the revenues of both Titan and Horizons are
dependent upon continued funding of U.S. and allied government agencies as well
as continued funding of programs targeted by Titan's businesses. For the years
ended December 31, 1996 and 1997, U.S. government business represented
approximately 78% and 75% of Titan's revenues, respectively; and for the fiscal
years ended
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January 31, 1997 and 1998, U.S. government business represented substantially
all of Horizons' revenues. 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 the
funding of U.S. government agencies or in the funding areas targeted by Titan's
or Horizons' business could materially and adversely affect Titan's and
Horizons' business, results of operations and financial condition.
Titan's and Horizons' 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 Titan or Horizons subcontracts with prime contractors, such subcontracts
are also subject to the ability of the prime contractor to perform its
obligations under its prime contract. Titan and Horizons often have little or no
control over the resources allocated by the prime contractor to the prime
contract, and any failure by the prime contractor to perform its obligations
under the prime contract could result in the loss of its subcontract. In
addition, government contract-related costs and fees, including allocated
indirect costs, are subject to audits and adjustments by negotiation between the
contracting party and the U.S. government. As part of the audit process, the
government audit agency verifies that all charges made by a contractor against a
contract are legitimate and appropriate. Audits may result in recalculation of
contract revenues and non-reimbursement of some contract costs and fees. There
can be no assurance that any audits of contract-related costs and fees will not
result in material adjustments to Titan's revenues. In addition, 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. Any failure of such
agencies to continue to fund such contracts could have a material adverse effect
on the business, results of operations and financial condition of Titan and
Horizons. Such failures could adversely affect the value of the shares of each
of Titan and Horizons, and in the case of Horizons' stockholders in the event
the Merger did not occur, could delay or prevent stockholder liquidity through
the public market or another potential acquisition transaction.
FLUCTUATIONS IN RESULTS OF OPERATIONS
Titan has experienced and expects to continue to experience significant
fluctuations in quarterly and annual revenues, gross margins and operating
results. Factors that have contributed or may contribute to these fluctuations
include, among others: (i) varying demand for Titan's products due to revisions
in budgets or schedules for customer projects, or changes in demand for
customers' products that incorporate or utilize Titan's products, (ii)
announcements by Titan or its competitors of the development of new products or
technologies, or the pricing or availability thereof, that cause customers to
defer or cancel purchases of Titan's products, (iii) the timing and amount of
revenues resulting from the complex and lengthy procurement process of Titan's
customers or sales cycles for Titan's products, (iv) the delay, rescheduling or
cancellation of purchase orders from a significant customer of any of Titan's
core businesses, (v) the failure by Titan to operate within budgeted contract
costs for purchase orders and/or production contracts received and accepted
substantially in advance of delivery, (vi) fluctuations in average selling
prices for Titan's products due to a number of factors, including product mix,
competition, customer demand for products and unit volumes, (vii) inability to
reduce fixed expenses in a timely manner should revenues not meet Titan's
expectations, (viii) expenses relating to acquisitions, (ix) usage of different
distribution and sales channels, (x) warranty and customer support expenses,
(xi) stage of completion of projects subject to milestone payments and (xii)
general economic and political conditions. All of the above factors are
difficult for Titan to forecast or control, and any of these or other factors
could materially adversely affect Titan's business, financial condition and
results of operations from period to period. As a result, Titan believes that
period-to-period comparisons are not necessarily meaningful and should not be
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relied upon as indications of future performance. The above factors could also
adversely effect the value of Titan capital stock through the public market,
including the Titan Common Stock that will be issued to Horizons' stockholders
in the Merger.
RAPID INDUSTRY CHANGE; TECHNOLOGICAL OBSOLESCENCE
The industries in which Titan competes are characterized by rapid and
continuous technological change. Future technological changes in these
industries or the availability of new products could render Titan's products
noncompetitive or obsolete. Titan's success will depend in part upon the success
of new product introductions by Titan, 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 and market acceptance of new products. There
can be no assurance that Titan 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, or at all, or that
products or technologies developed by others will not render Titan's products
noncompetitive or obsolete. Titan may experience delays from time to time in
completing the development and introduction of new products. There can be no
assurance that defects will not be found in Titan's products after commencement
of deliveries, which could result in the loss of or delay in market acceptance.
Any failure by Titan 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 Titan's products
noncompetitive or obsolete could have a material adverse effect on Titan's
business, financial condition and results of operations, and could adversely
effect the market value of Titan's capital stock.
ABILITY TO COMMERCIALIZE NEW TECHNOLOGIES
Since 1991, Titan has sought to leverage the technologies developed as part
of its defense business into new business opportunities. Accordingly, many of
Titan's existing businesses, such as medical product sterilization and food
pasteurization, are at an early stage and Titan is continuing to develop new
businesses. As such, Titan is subject to all the risks inherent in the operation
of a start-up venture, including the need to secure funding, to develop and
maintain marketing, sales and support capabilities, to secure appropriate
third-party manufacturing arrangements, to respond to the rapid technological
advances inherent in the markets for these new technologies and, ultimately, to
design and manufacture products or provide services acceptable to buyers in its
target markets. Certain of Titan's new products, including products for which
Titan has contracts for delivery, are still in the testing stage. There can be
no assurance that such tests will be completed satisfactorily or that Titan will
be able to satisfy all of the requirements for delivery of and payment for these
products. In addition, many of the opportunities in the communications and
sterilization businesses involve projects with lengthy sales cycles. Titan's
efforts to address these risks have required, and will continue to require,
significant expenditures and dedicated management time and other resources.
There can be no assurance that Titan will be successful in addressing these
risks or in commercializing these new technologies. An inability to
commercialize new technologies could adversely affect the market value of
Titan's capital stock.
MARKET ACCEPTANCE OF NEW TECHNOLOGIES
Some of Titan's businesses are attempting to commercialize new products or
are attempting to develop new markets for existing products, such as food
pasteurization with Titan's E-Beam sterilization process. Because these markets
are relatively new, it is difficult to predict whether these markets will
develop or, if they develop, the rate at which these markets will grow, if at
all. If the markets for Titan's new products or new markets for Titan's existing
products fail to develop, or develop more slowly than anticipated, this may cast
doubt on Titan's ability to implement its overall business strategy and
materially adversely affect Titan's business, financial condition, results of
operations and share value.
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RISKS OF INTERNATIONAL OPERATIONS; RISKS OF DOING BUSINESS IN DEVELOPING
COUNTRIES
Titan, through its Communications Systems segment, conducts substantial
business in foreign countries, particularly in the Pacific Rim. As a result, a
decline in the value of certain foreign currencies relative to the U.S. dollar
could make certain of Titan's products less price-competitive. This risk is
particularly sensitive, given the recent currency devaluations in Indonesia,
Malaysia, Taiwan and the Philippines, countries in which Titan currently sells
or intends to sell its commercial products. Titan generally denominates its
foreign contracts in U.S. dollars, and Titan believes that its global
competitors follow similar business practices. Accordingly, Titan 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 Titan's products less affordable and
thus reduce the demand for such products. Furthermore, a precipitous decline in
such foreign currency values could result in certain of Titan's customers and
local subcontractors and partners refusing to perform their obligations under
contracts with Titan, the cancellation of projects from which Titan expects to
receive significant revenues, defaults on accounts receivable and the loss of
any investments by Titan to build infrastructure or develop business in these
countries. Accordingly, there can be no assurance that a decline in the value of
any one foreign currency relative to the U.S. dollar will not have a material
adverse effect on Titan's business, financial condition and results of
operations. Additional risks inherent in Titan's international business
activities include various and changing regulatory requirements, costs and risks
of relying upon local subcontractors, increased sales and marketing and research
and development expenses, export restrictions and availability of export
licenses, tariffs and other trade barriers, political and economic instability,
difficulties in staffing and managing foreign operations, longer payment cycles,
seasonal reduction in business activities, potentially adverse tax laws, complex
foreign laws and treaties and the potential for difficulty in accounts
receivable collection. Certain of Titan's customer purchase agreements are
governed by foreign laws, which may differ significantly from U.S. laws.
Therefore, Titan may be limited in its ability to enforce its rights under such
agreements and to collect amounts owing to Titan should any customer refuse to
pay such amounts. In addition, Titan is subject to the Foreign Corrupt Practices
Act (the "FCPA"), which may place Titan 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 Titan's business,
financial condition and results of operations. Further, public awareness of the
risks associated with international operations may increase the volatility of
the market price of Titan captial stock. This potential of volatility has been
evidenced recently by stock market fluctuations attributed to recent
developments in Asia.
COMPETITION
The industries and markets in which Titan and Horizons operate are highly
competitive, and Titan and Horizons expect that competition will increase in
these markets. Titan's and Horizons' ability to compete in their markets depends
to a large extent on their ability to provide technologically advanced products
and services with shorter lead times and at lower prices than competitors. All
of Titan's core businesses, and Horizons, compete with numerous other companies,
including large domestic and international companies. Many of these companies
have far greater financial, engineering, technological, marketing, sales and
distribution and customer service resources than Titan and Horizons. In
addition, many of these competitors have more experience in certain of Titan's
targeted markets. As a result, these competitors may be able to develop and
expand their product lines 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 Titan or Horizons. In
addition, current and potential competitors in Titan's targeted markets have
established or may establish cooperative relationships among themselves or with
third parties to improve the performance, quality or functionality or to reduce
the price of their products and services. 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
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profit margins and loss of market share, any of which could have a material
adverse effect on Titan's or Horizons' business, results of operations and
financial condition. There can be no assurance that Titan or Horizons will be
able to compete successfully against current or future competitors that
competitive pressures will not have a material adverse effect on Titan's or
Horizons' business, financial condition and results of operations. Competition
pressures could also suppress the market price of Titan captial stock, and, in
the case of Horizons' stockholders in the event the Merger does not occur, could
delay or prevent stockholder liquidity through the public market or another
potential acquisition transaction.
RELIANCE ON STRATEGIC RELATIONSHIPS
Titan is and will continue to be dependent on certain strategic
relationships for the development and expansion of its core businesses. For
instance, Titan's subsidiary Linkabit Wireless has a strategic arrangement with
its customer PT. Pasifik Satelit Nusantra ("PSN"). Pursuant to this
relationship, Linkabit Wireless and PSN market certain Linkabit Wireless
products in countries already covered by PSN's satellites, which efforts are
geared toward increasing use of both companies' products. Similarly, Linkabit
Wireless is part of a consortium led by Alcetel Telespace, pursuant to which the
companies pursue symbiotic successes in new markets. See "Titan
Business--Communications Systems Segment."
There can be no assurance that Titan will be able to maintain its existing
strategic relationships or negotiate any future strategic relationships
important to Titan's business, that its strategic partners will continue to
assist Titan by developing and expanding their businesses or that such strategic
partners in the future will not actually compete with or enter into alliances
with companies that are competitive with Titan. Titan's failure to maintain its
existing alliances or to form additional alliances with partners in other
markets, or the preemption or disruption of such alliances by the actions of
Titan's competitors or otherwise, could adversely affect Titan's ability to
penetrate and compete successfully in emerging and other markets.
CUSTOMER CONCENTRATION WITHIN BUSINESS SEGMENTS
Certain of Titan's business segments rely on a small number of customers for
a large portion of their revenues. For example the U.S. Navy, with respect to
Titan's Mini-DAMA product, and the Federal Aviation Administration (the "FAA")
represent significant customers of Titan's Communications Systems and Software
Systems segments, respectively. Any one such customer's product or services
scheduled for delivery can represent a significant portion of the potential
revenues in a quarter for a particular subsidiary. As a result, the operating
results for certain business segments for particular periods have in the past
been and may in the future be materially adversely affected by a delay,
rescheduling or cancellation of even one purchase order. There can be no
assurance that a reduction, delay or cancellation of any order from a single
customer would not have a material adverse effect on the business, financial
condition and results of operations of a particular subsidiary of Titan.
GOVERNMENT REGULATIONS
Several of Titan's products and the systems with which they operate are
subject to various government regulations. Regulatory changes could
significantly impact Titan's operations by restricting development efforts by
Titan's strategic partners or customers, making current products obsolete or
increasing the opportunity for additional competition. For example, certain
countries in which Titan's Communications Systems segment 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 impose new regulations that could have a material adverse effect on
Titan's and Horizons' business, financial condition and results of operations.
In addition, in certain circumstances strategic partners or customers must
obtain various local approvals, licenses and permits prior to the installation
or use of Titan's products. The regulatory schemes in each country are different
and there may be instances of noncompliance by strategic partners or customers.
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Changes in, or the failure by Titan or Horizons, or their strategic partners or
customers, to comply with, applicable domestic and international regulations
could have a material adverse effect on Titan's and Horizons' business,
financial condition and results of operations.
Titan's sterilization facilities are subject to regulation at the federal,
state and local levels. In particular, Titan's sterilization facilities are
subject to the requirements of the FDA when sterilizing medical devices or drug
packaging materials. In addition, if Titan were to begin pasteurizing meat or
poultry products, in addition to being subject to the FDA, it would become
subject to the requirements of the Food Safety and Inspection Service of the
United States Department of Agriculture, which would require preapproval of the
pasteurization process for meat and poultry. Any failure by Titan to obtain
required permits or approvals or comply with the regulations imposed by such
agencies could limit Titan's ability to operate in these markets.
The sale of Titan's products outside the United States is subject to
compliance with the United States Export Administration Regulations. The absence
of comparable restrictions on competitors in other countries may adversely
affect Titan's competitive position.
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
Titan's internal manufacturing capacity is limited. Therefore, Titan
utilizes contract manufacturers to produce several of its products or components
thereof. Certain components and services necessary for the manufacture of
certain of Titan's products are obtained from a sole supplier or a limited group
of suppliers in connection with specific contracts and Titan does not carry
significant inventories or have long-term or exclusive supply contracts with its
vendors for such supply. Titan'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 or
products, and reduced control over the price, delivery, reliability and quality
of finished products. If Titan were to change certain of its vendors or qualify
additional vendors for such components or products, Titan could be required to
negotiate acceptable arrangements with the new vendors, complete any required
technology transfers or perform additional testing procedures upon the
components or products supplied by such new vendors, which could prevent or
delay product shipments. Additionally, prices could increase significantly in
connection with changes of vendors or if Titan is required to manufacture such
components or products internally. Any inability to obtain timely deliveries of
components or products or deliveries of acceptable quality or any other
circumstance that would require Titan to seek alternative sources of supply,
could delay timely delivery of such products or raise issues regarding quality,
which could damage relationships with current or prospective customers and have
a material adverse effect on Titan's business, financial condition and results
of operations and, consequently, on the market value of Titan's capital stock.
LIMITED INTELLECTUAL PROPERTY PROTECTION; DEPENDENCE ON PROPRIETARY TECHNOLOGY
Titan's and Horizons' ability to compete may depend, in part, on their
ability to obtain and enforce intellectual property protection for their
technologies in the United States and internationally. Each of Titan and
Horizons 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. Titan and Horizons rely on a
combination of trade secrets, copyrights, patents, trademarks, service marks and
contractual rights to protect intellectual property. There can be no assurance
that the steps taken by Titan or Horizons to protect its intellectual property
will be adequate to deter misappropriation of Titan's or Horizons' technology or
to prevent others from independently developing or acquiring substantially
equivalent technologies or otherwise gaining access to Titan's or Horizons'
proprietary and confidential technological expertise or disclosing such
technologies or that Titan or Horizons can ultimately enforce all of its rights
to its proprietary technological expertise. Further, the laws of certain foreign
countries in which Titan's products are or may be sold may not protect Titan's
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intellectual property rights to the same extent as do the laws of the United
States. Any failure of Titan or Horizons to protect its proprietary information
could have a material adverse effect on Titan's or Horizons' business, financial
condition and results of operations.
Litigation may be necessary to enforce Titan's or Horizons' 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 Titan's or Horizons' business, financial
condition and results of operations. There can be no assurance that Titan's or
Horizons' products do not infringe the intellectual property rights of others or
that one or more parties will not make claims that Titan's or Horizons' products
infringe upon their proprietary rights or the proprietary rights of third
parties. Such claims might include infringement, 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 Titan or
Horizons, Titan or Horizons 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 Titan or
Horizons decide to litigate such claims, such litigation could be extremely
expensive and time consuming and could materially adversely affect Titan's or
Horizons' business, financial condition and results of operations, regardless of
the outcome of the litigation. There can be no assurance that the intellectual
property rights of Titan or Horizons would withstand claims brought by others in
such litigation. If Titan's or Horizons' products are found to infringe upon the
rights of third parties, Titan or Horizons may be prohibited from making and
selling the infringing products, ordered to pay monetary damages for past
infringement or forced to incur substantial costs to develop alternative
products. There can be no assurance that Titan or Horizons 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.
RISK OF BUDGET OVERRUNS IN FIXED PRICE CONTRACTS
Much of Titan's revenue was derived from fixed-price contracts in 1997.
Titan assumes greater financial risk on fixed-price contracts than on either
time-and-materials or cost-reimbursement contracts. Profitability of such
contracts is subject to inherent uncertainties due to fluctuations in the cost
of performance. Cost overruns may be incurred as a result of unforeseen
obstacles, including unexpected problems encountered in engineering, design
and/or testing. Since Titan's businesses in certain of its subsidiaries may at
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 such
subsidiary's business, financial condition and results of operations. Failure to
anticipate technical problems, estimate costs accurately or control costs during
performance of a fixed-price contract may reduce Titan's overall or consolidated
profit or cause a loss. Although Titan 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 the event significant unexpected losses are recognized, the
market price of Titan captial stock may be adversely affected.
RELIANCE ON KEY PERSONNEL
Each of Titan's and Horizons' success depends in large part upon its ability
to attract and retain highly qualified technical and management personnel,
including without limitation engineers and management personnel with security
clearances required for Titan's and Horizons' classified work and computer
programmers proficient in the C++ JAVA and other specialized languages. The loss
of the services of any of these individuals or group of individuals could have a
material adverse effect on Titan's or Horizons' business, financial condition
and results of operations. Although Titan's key personnel are generally not
subject to employment or noncompetition agreements, Horizons' key personnel are
generally covered by some form of employment or limited non-competition
agreement. Competition for such personnel from
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other companies, academic institutions, government entities and other
organizations is intense. In addition, if Titan is unable to successfully
implement its strategy to spin-out its subsidiaries into publicly-owned
companies, or if Titan is otherwise unable to preserve the entrepreneurial
atmosphere it believes is essential to continuing growth and development, Titan
will likely face difficulty in recruiting and retaining the personnel necessary
to successfully commercialize its products and to further implement its
strategy. See "--Ability to Implement Spin-Out Strategy." There can be no
assurance that Titan or Horizons will be successful in hiring or retaining such
key personnel.
VOLATILITY OF STOCK PRICE
Titan believes that factors such as developments related to Titan's
business, technological innovations or new products or enhancements by Titan or
its competitors, developments in Titan's relationships with its customers,
partners, distributors and suppliers, changes in analysts' estimates, regulatory
developments, fluctuations in results of operations, general conditions in
Titan's market or the markets served by Titan's customers or the economy, and
other factors described in these Risk Factors, could cause the price of Titan
Common Stock to fluctuate, perhaps substantially. In addition, in recent years
the stock market in general, and the market prices 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 Titan Common Stock. Horizons
stockholders would be subject to adverse consequences resulting from such
fluctuations as they will hold Titan Common Stock following the Merger.
Furthermore, since Titan intends to pursue its strategy of completing public
offerings of certain subsidiaries, the market price of Titan Common Stock may be
significantly affected by trading of the shares of Titan's subsidiaries in the
public markets. There can be no assurance that the market price of Titan Common
Stock will not experience significant fluctuations in the future, including
fluctuations that are unrelated to Titan's performance.
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 Titan' 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, Titan has determined that it will be required
to modify or replace significant portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. Titan presently
believes that with modifications to existing software and conversions to its new
software, the Year 2000 issue can be mitigated, primarily by utilizing Titan'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 Titan. Titan plans to implement the Year
2000 project during 1998, and the total cost of the Year 2000 project cannot be
reasonably estimated at this time. Estimates with respect to the costs of the
project and the date on which Titan plans to complete the Year 2000
modifications will be derived utilizing numerous assumptions of future events,
including the continued availability of certain internal resources. There can be
no assurance that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
Titan plans to maintain communications with all of its significant suppliers
and large customers to determine the extent to which Titan is vulnerable to
those third parties' failure to remediate their own Year 2000 issue. There can
be no assurance that the systems of other companies will be timely converted, or
that
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a failure to convert by another company, or a conversion that is incompatible
with Titan's systems, would not have a material adverse effect on Titan.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS; RIGHTS PLAN
Titan currently has Preferred Stock issued and outstanding, which entitles
the holders thereof to rights not available to holders of Titan Common Stock.
Furthermore, the Board of Directors of Titan may issue additional shares of
Preferred Stock without stockholder approval on such terms as such Board of
Directors may determine. The rights of the holders of Titan Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. In addition, Titan's Restated
Certificate of Incorporation and Bylaws contain certain provisions designed to
require significant corporate action prior to taking certain steps toward a
merger, tender offer or proxy contest involving Titan. Further, pursuant to the
terms of its preferred share purchase rights plan, Titan has distributed a
dividend of one right for each outstanding share of Titan Common Stock. These
rights will cause substantial dilution to the ownership of a person or group
that attempts to acquire Titan on terms not approved by the Titan Board and may
have the effect of deterring hostile takeover attempts. All of the foregoing
could have the effect of delaying, deferring or preventing a change in control
of Titan and could limit the price that certain investors might be willing to
pay in the future for shares of Titan Common Stock.
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THE HORIZONS MEETING
DATE, TIME AND PLACE OF MEETING
The Horizons Meeting will be held on , 1998 at 9 o'clock a.m.,
local time, at the offices of Jenkens & Gilchrist, P.C., located at 1919
Pennsylvania Avenue, N.W., Suite 600, Washington, D.C. Horizons intends to mail
this Prospectus/Proxy Statement on or about , 1998, to all Horizons
stockholders entitled to vote at the Horizons Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only stockholders of record at the close of business on , 1998
(the "Record Date") are entitled to notice of and to vote at the Horizons
Meeting. As of the Record Date, there were [7,996,953] shares of Horizons
capital stock outstanding and entitled to vote, held of record by [96]
stockholders. Each Horizons stockholder is entitled to one vote for each share
held of Horizons Common Stock and one vote for each share held of Horizons
Series A Preferred Stock.
VOTING OF PROXIES
The Horizons proxy accompanying this Prospectus/Proxy Statement is solicited
on behalf of the Horizons Board for use at the Horizons Meeting and at any
adjournment or postponement thereof. Horizons stockholders are requested to
complete, date and sign the accompanying proxy and promptly return it in the
accompanying envelope. All proxies that are properly executed and returned, and
that are not revoked, will be voted at the Horizons Meeting in accordance with
the instructions indicated on the proxies or, if no direction is indicated, to
approve the Merger Proposal and the other proposals submitted to the Horizons
stockholders, as recommended by the Horizons Board, as indicated herein. The
Horizons Board is not currently aware of any business to be brought before the
Horizons Meeting other than the specific proposal referred to in this
Prospectus/Proxy Statement and specified in the accompanying notice of the
Horizons Meeting. As to any other business that may properly come before the
Horizons Meeting, however, it is intended that proxies, in the form enclosed,
will be voted in respect thereof in accordance with the judgment of the persons
voting such proxies.
Beneficial owners of shares of Horizons Common Stock held by the Horizons
Employee Stock Ownership Plan ("ESOP") will be asked to submit executed and
completed proxies to the ESOP's trustees (the "Trustees") in order to direct the
Trustees as to the manner in which the shares of Horizon Common Stock that they
beneficially own shall be voted. If instructions are not received by the
Trustees with respect to any allocated shares of Horizons Common Stock prior to
three (3) business days before the Horizons Meeting, the Trustees shall vote
such shares in the same proportions as the Trustees are instructed to vote with
respect to the allocated shares of Horizons Common Stock for which instructions
are received.
REVOCABILITY OF PROXIES
A Horizons stockholder who has given a proxy may revoke it at any time
before it is exercised at the Horizons Meeting by (i) delivering to the
Secretary of Horizons (by any means, including facsimile) a written notice,
bearing a date later than the date of the proxy, stating that the proxy is
revoked, (ii) signing and so delivering a proxy relating to the same shares and
bearing a later date prior to the vote at the Horizons Meeting or (iii)
attending the Horizons Meeting and voting in person (although attendance at the
Horizons Meeting will not, by itself, revoke a proxy).
STOCKHOLDER VOTE REQUIRED; QUORUM; VOTING AGREEMENTS
The affirmative vote of the holders, as of the Record Date, of a majority of
the outstanding shares of Horizons Common Stock and Horizons Series A Preferred
Stock, voting together as one class, is required to approve the Merger Proposal.
Further, pursuant to the Certificate of Designations for the Horizons Series A
Preferred Stock, the consent of the holders of two-thirds (2/3) of the
outstanding shares of
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Horizons Series A Preferred Stock is required to consummate the Merger. As a
group, the directors and executive officers of Horizons and their respective
affiliates beneficially owned [5,172,500] shares of Common Stock, or
approximately [65%] of the voting power of Horizons capital stock as of the
Record Date. Of the 500,000 shares of Horizons Series A Preferred Stock
outstanding, 300,000 shares (or 60% of the outstanding shares) are owned by the
Horizons Retirement Plan (the "Retirement Plan"). The trustee of the Retirement
Plan is North American Trust Company, 225 Broadway, 4th Floor, San Diego, CA
92101.
The presence, in person or by proxy, of at least a majority of the
outstanding shares of each of the Horizons Common Stock and at least a majority
of the outstanding shares of Horizons Series A Preferred Stock, in each case as
of the Record Date, is necessary to constitute a quorum for the transaction of
business. Abstentions will be counted for purposes of determining whether a
quorum is present. For purposes of obtaining the required votes for approval of
the Merger Proposal, the effect of an abstention will have the same effect as a
vote against the proposal.
Certain executive officers and directors of Horizons owning in the aggregate
approximately 69% of the outstanding shares of Horizons Common Stock have each
agreed to vote or direct the vote of all Horizons capital stock over which they
have voting power or control in favor of the Merger Agreement and the Merger.
See "Terms of the Merger-Related Agreements--Stock Voting Agreement."
SOLICITATION OF PROXIES; EXPENSES
Titan will bear the cost of the solicitation of votes of Horizons
stockholders, including printing, assembly and mailing of this Prospectus/Proxy
Statement, the proxy and any additional information furnished to its
stockholders. Original solicitation of proxies by mail may be supplemented by
telephone, telegram, letter or personal solicitation by directors, officers or
other employees of Horizons.
BOARD RECOMMENDATION
THE HORIZONS BOARD HAS DETERMINED THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF HORIZONS AND ITS STOCKHOLDERS AND THEREFORE UNANIMOUSLY RECOMMENDS
A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
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APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
OTHER THAN STATEMENTS OF HISTORICAL FACT, THE STATEMENTS MADE IN THIS
SECTION, INCLUDING STATEMENTS AS TO THE BENEFITS EXPECTED TO RESULT FROM THE
MERGER AND AS TO FUTURE FINANCIAL PERFORMANCE AND THE ANALYSES PERFORMED BY
TITAN'S AND HORIZONS' RESPECTIVE FINANCIAL ADVISORS, ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION
21E OF THE EXCHANGE ACT. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS/PROXY STATEMENT.
BACKGROUND OF THE MERGER
Titan has a firmly established strategy of acquiring complementary
businesses that can be integrated into its existing core businesses in order to
strengthen and expand its overall business and leverage its business and
technologies into new markets. In particular, Titan developed an interest in
acquiring one or more businesses with expertise in the areas of intelligence and
digitizing and packaging information. Titan's management also recognized
potential value in acquiring management personnel in connection with an
acquisition with strengths relating to operations.
On November 18, 1997, Dr. Gene Ray, Titan's President and Chief Executive
Officer, contacted by telephone Mr. J.P. (Pat) Boyce of Horizons to discuss the
possibility of Titan's acquisition of Horizons. On that day, Titan and Horizons
entered into a confidentiality agreement, and Horizons provided certain
financial information to Titan.
On November 21, 1997, Dr. Ray and Mr. Boyce met and discussed the operations
of Horizons and Titan and the possibility of a business combination between
Horizons and Titan.
On December 4, 1997, at an informal meeting of the Horizons Board at which
all directors of Horizons were in attendance, Dr. Ray and Eric DeMarco, Senior
Vice President and Chief Financial Officer of Titan, met with the Horizons Board
to discuss a proposed business combination of Titan and Horizons. Titan's
management made a presentation to the Horizons Board concerning Titan, including
Titan's background, products, financial performance over the past five years and
current financial condition, and the terms of its proposed combination and
certain advantages and disadvantages of the proposed combination. The Horizons
Board discussed the presentation and although no vote was taken at the time, it
was the consensus of the Horizons Board members that Horizons should continue
discussions with Titan.
In late 1997, in regular and special meetings, the Titan Board discussed the
general terms of the proposed acquisition of Horizons, including various
financial aspects of the proposed acquisition. The Titan Board authorized the
officers of Titan to proceed with discussions with Horizons.
On December 18, 1997, the Horizons Board held a special meeting and
authorized the execution of a term sheet between Titan and Horizons.
During early 1998, representatives of Titan conducted a due diligence of
Horizons and Titan's legal counsel prepared a draft merger agreement. Horizons'
and Titan's legal counsel engaged in negotiations with respect to the terms of
the merger agreement. Horizons also conducted a due diligence review of Titan.
On January 20, 1998, Horizons engaged Slavitt Ellington to render an opinion
as to the fairness, from a financial point of view, of the proposed merger
consideration to be received by Horizons' stockholders.
On February 17, 1998, a meeting of the members of the Horizons Board was
held. All of the members of the Horizons Board attended the meeting in person or
by conference telephone. Prior to the meeting, drafts of the merger agreement
and related agreements had been provided to each of the directors. The terms of
the proposed merger, including the proposed ratios by which shares of Titan
Common Stock would be exchanged for each share of Horizons Common Stock and
Horizons Series A Preferred Stock were discussed. Prior to the meeting,
Horizons' officers and employees made presentations to the
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Horizons Board members on their due diligence investigation with respect to
Titan, and Horizons' legal counsel made a presentation to the Horizons Board
with respect to certain responsibilities of the directors in connection with
considering and acting upon a merger proposal. In addition, Slavitt Ellington
made a financial presentation to the Horizons Board and delivered to the
Horizons Board its oral opinion as to the fairness, from a financial point of
view, of the Merger Consideration to be received by the stockholders of Horizons
in the Merger. See "--Opinion of Slavitt Ellington."
On February 19, 1998 at a regular meeting of the Titan Board, the Titan
Board considered the agreed upon terms of the draft merger agreement and the
Merger and related arrangements. All directors were in attendance in person, as
were representatives of Titan's legal counsel. Prior to the meeting, near-final
versions of the draft merger agreement and related agreements had been made
available. Following discussion among the directors concerning the proposed
terms of the Merger and the Merger Agreement, and the business and management of
Horizons, the Titan Board unanimously (i) determined that the terms of the
proposed Merger Agreement and the transactions contemplated thereby are fair to,
and in the best interests of, Titan and its stockholders and (ii) approved the
proposed Merger Agreement and the Merger and all related arrangements
contemplated thereby, including the issuance by Titan of shares of Titan Common
Stock in connection therewith. The Titan Board also instructed Titan's
management to negotiate and finalize the terms of the draft merger agreement.
See "--Titan Reasons for the Merger."
On February 26, 1998, a final draft Merger Agreement was considered and the
Horizons Board (i) approved Horizons' execution and delivery of the Merger
Agreement as a condition to the Merger, (ii) determined that the Merger
Agreement and the transactions contemplated thereby, including the Merger, are
fair to, and in the best interests of, Horizons' stockholders, (iii) approved
the transactions contemplated thereby and (iv) resolved to recommend that the
holders of the Horizons Common Stock and Horizons Series A Preferred Stock adopt
the Merger Agreement and the transactions contemplated therein, including the
Merger. See "--Horizons Reasons for the Merger." Prior to such approval, the
Horizons Board received the written fairness opinion of Slavitt Ellington. See
"--Opinion of Slavitt Ellington."
On February 26, 1998, the Merger Agreement was executed, and the parties
issued a press release announcing the execution thereof on February 27, 1998,
prior to the opening of the NYSE trading session.
TITAN REASONS FOR THE MERGER
In the course of reaching its decision to approve the Merger, the Merger
Agreement, the issuance by Titan of shares of Titan Common Stock in connection
therewith, and each of the transactions and arrangements contemplated thereby,
the Titan Board consulted with Titan legal and financial advisors as well as
with Titan management, and considered a number of factors, including the
following:
- The combined company may possess increased opportunities and greater
government contract sales and product line coverage, thereby enhancing its
growth potential;
- The Merger represents a strategic opportunity to further diversify Titan's
product and services offerings with complementary information technology
services;
- The combined company may be able to achieve certain operating efficiencies
as a result of the Merger enabling the combined company to maintain
competitive rates;
- The Merger will provide Titan with additional skilled and experienced
management personnel; and
- The Merger may result in increased earnings per share for the combined
company.
In the course of its deliberations, the Titan Board reviewed with management
a number of other factors relevant to the Merger, including, among other things:
(i) information concerning Titan's and Horizons' respective businesses,
prospects, financial performances, financial conditions and operations; (ii) an
analysis of the respective contributions to revenues, operating profits and net
profits of the combined company; (iii) the compatibility of the managements of
Titan and Horizons; (iv) potential
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synergies and alternatives for growth within the combined company; and (v)
reports from management and legal advisors on the results of Titan's due
diligence investigation of Horizons.
The Titan Board also considered a variety of potentially negative factors
concerning the Merger, including (i) the risk that the combined company might
not achieve revenue equal to the sum of the separate companies' anticipated
revenue; (ii) the risk that the combined company might not achieve sufficient
operating efficiencies to ensure that the Merger would not have a negative
effect on Titan's earnings per share; (iii) the charges expected to be incurred
in connection with the Merger, including transaction costs and costs of
integrating the businesses of the companies, to be reflected in a charge
estimated to be approximately $1 million, to be expensed in the periods in which
the costs will be incurred (see "Unaudited Pro Forma Combined Condensed
Financial Information"); (iv) the risk that the combined company's ability to
increase or maintain revenue might be diminished by intensified competition
among providers of similar or related information technology services; (v) the
risk that other benefits sought to be obtained by the Merger would not be
obtained; and (vi) other risks related to the Merger and the business of
Horizons, including Horizons' negative working capital balance, Horizons'
significant losses in its commercial division, risks associated with Horizons'
government contracts subject to rebid, Horizons' compliance and noncompliance
with its lender covenants, Horizons' ability to commercialize certain
technologies such as its global positioning technology, customer contration
issues, Horizons' ability to sustain its operating margins, Horizons' ability to
retain key personnel such as Earl Pontius, and the Year 2000 issue. See "Risk
Factors."
Based on the factors described above, the Titan Board determined that the
Merger is fair to and in the best interests of Titan and its stockholders, and
approved the Merger, the Merger Agreement, the issuance by Titan of shares of
Titan Common Stock in connection therewith, and the transactions contemplated
thereby.
The foregoing discussion of the information and factors considered is not
intended to be exhaustive but is believed to include the material factors
considered by the Titan Board. In reaching a determination whether to approve
the Merger Agreement and the Merger, and the issuance by Titan of shares of
Titan Common Stock in connection therewith in view of the wide variety of
factors considered, the Titan Board did not find it practical to quantify or
otherwise attempt to assign any relative or specific weights to the foregoing
factors, and individual directors may have given differing weights to different
factors.
HORIZONS REASONS FOR THE MERGER
As part of its review, the Horizons Board considered, among other things,
(i) information concerning the financial performance, condition, business
operations and prospects of each of Horizons and Titan, (ii) the proposed terms
and structure of the Merger, (iii) the marketability and value of Horizons
Common and Preferred Stock and Titan Common Stock, (iv) the terms of the Merger
Agreement, including the parties' mutual representations, warranties and
covenants and the conditions to their respective obligations, (v) the
alternatives to the Merger (including discussions held with other companies),
(vi) the Slavitt Ellington opinion relating to the fairness, from a financial
point of view, to the Horizons stockholders of the consideration to be received
in the Merger by the Horizons stockholders and (vii) the business advantages
expected to result from the combination of Horizons and Titan.
The Horizons board believes that the Merger is fair to, and in the best
interests of, Horizons stockholders for the following reasons:
GROWTH POTENTIAL. The Horizons Board believes that the Merger will
constitute a strategic combination, accelerating the ability of Horizons to
achieve its strategic objectives, albeit as part of a combined entity. This
belief is based upon the opportunities arising from the combination of the two
companies, including (i) complementary product lines and government market
segments, (ii) complementary management and technical teams, as well as little
redundancy and greater overall management depth and (iii) the potential to
pursue larger business opportunities through the combination of the two
companies. The
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Horizons Board considered the risks associated with Titan's business and its
recent financial results and concluded that the prospective benefits of the
combination of Titan and Horizons outweighed the risks.
STOCKHOLDER VALUE AND LIQUIDITY. The Horizons Board believes that the
consideration to be received in the Merger by the Horizons stockholders is fair
to the Horizons stockholders and that the Titan Common Stock has prospects for
positive long-term performance. The Titan Common Stock, which is listed on the
NYSE, will also provide liquidity to the Horizons stockholders not currently
available to them to realize the value of their shareholdings.
ALTERNATIVE TRANSACTIONS. The Horizons Board considered that the Merger
Agreement provides that Horizons may not solicit any alternate transaction. The
Horizons Board reviewed the status of other acquisition discussions and
expressed the view that other acquisition proposals were speculative at this
time. Additionally, the Horizons Board noted that such alternatives could be
more disruptive to Horizons' established operations and, thus, less likely to
achieve the strategic values desired. The Horizons Board noted that the Merger
Agreement provides that Horizons may furnish information to and enter into
discussions or negotiations with, any party that makes an unsolicited bona fide
written proposal to acquire Horizons or substantially all of its assets on terms
which, in an exercise of the Horizons Board's fiduciary duty after the
consideration of advice from Horizons' legal advisors, a majority of Horizons'
directors determines is likely to be more beneficial to Horizons stockholders
than the Merger. The Horizons Board also noted that the Merger Agreement
provides for the payment of a termination fee of $250,000 if Horizons enters
into an alternate transaction with another party and was aware that Titan would
not have entered into the Merger Agreement without this provision. The Horizons
Board concluded that, while the existence of the termination fee provision might
reduce the likelihood that a third party would propose an alternative
transaction, the increased cost to a third party would not be material and the
benefits of the Merger to Horizons outweighed the risks.
In considering the Merger, the Horizons Board acknowledged that there are
certain risks associated with the Merger, including (i) the risk that the
combined company might not achieve revenues equal to the sum of the separate
companies' anticipated revenues, (ii) the risk that the combined company might
not achieve sufficient operating efficiencies to prevent the Merger from having
a negative effect on Titan's earnings per share, (iii) the risk that the other
benefits sough to be obtained by the Merger would not be obtained, (iv) each of
the other risks described above under "Risk Factors" and (v) the possibility
that the Merger might not be consummated, resulting in a potential adverse
effect upon the operations and financial position of Horizons. Notwithstanding
these risks, the Horizons Board concluded that the positive factors described
above outweighed the negative consideration.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger Agreement, the Horizons Board did not find it practical
to, and did not quantify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its decision.
For the reasons discussed above, the Horizons Board has determined that the
Merger is advisable and in the best interests of Horizons and its stockholders
and has recommended a vote for approval of the Merger Proposal.
OPINION OF SLAVITT ELLINGTON
(CAPITALIZED TERMS DEFINED IN THIS SECTION RELATING TO THE OPINION OF THE
SLAVITT ELLINGTON GROUP ARE INTENDED TO APPLY TO THIS SECTION ONLY.)
On February 17, 1998, THE SLAVITT ELLINGTON GROUP, Inc. ("SEG") delivered
its oral opinion to the Horizons Technology, Inc. Board of Directors ("Horizons
Board") that as of that date the amount of Titan common stock to be received by
the shareholders of the common shares and the Series A Preferred Shares
(collectively the "Shareholders") of Horizons Technology, Inc. ("Horizons" or
the "Company"), in connection with a merger between Horizons and The Titan
Corporation ("Titan")
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("Proposed Transaction") is fair to the Shareholders from a financial point of
view. On February 26, 1998, SEG updated its opinion and confirmed it in written
form (the "SEG Fairness Opinion"). There were no material differences between
the February 17, 1998 oral opinion and the February 26, 1998 written opinion.
All of the financial data delivered to SEG by Horizons in connection with its
opinions, however, did not include adjustments relating to Horizon's
discontinued operations, and the following information should be considered
accordingly. However, SEG reviewed the reported financial statements of Horizons
as of January 31, 1998 (which include the effect of the discontinuance of the
Information Systems Group) subsequent to the issuance of its opinions, and
determined that its opinions would not have been materially different had the
information been available prior to their issuance.
The full text of the SEG Fairness Opinion, which sets forth assumptions
made, matters considered and limitations on the review undertaken in connection
with such opinion, is attached as Appendix B. Shareholders are urged to read the
SEG Fairness Opinion in its entirety. No limitations were imposed by Horizons or
the Horizons Board with respect to the investigations made or procedures
followed by SEG in rendering its opinion. The summary of the opinion of SEG set
forth in this Proxy Statement is qualified in its entirety by reference to the
full text of the SEG Fairness Opinion.
In connection with its opinion, SEG has, among other things, (a) reviewed
the Merger Agreement dated February 26, 1998, by and among Horizons and Titan
(the "Merger Agreement") and related documents; (b) reviewed certain publicly
available information concerning Titan which SEG believes to be relevant to its
analysis; (c) reviewed certain internal financial statements and other financial
and operating data concerning Horizons prepared by the management of Horizons;
(d) analyzed certain financial assumptions prepared by Horizons; (e) conducted
discussions with members of management of Horizons and Titan concerning current
and future business operations; (f) reviewed the reported prices and trading
activity for the common stock of Titan; (g) reviewed the historical market
prices and trading activity for Titan's shares and compared them with those of
certain publicly traded companies which SEG deemed to be reasonably similar to
Horizons and Titan; (h) compared the results of operations and present financial
condition of Horizons and Titan with those of certain publicly traded companies
which SEG deemed to be reasonably similar to Horizons and Titan, respectively;
(i) performed certain financial analyses with respect to Horizons' projected
future operating performance, including discounted cash flow analyses; and (j)
reviewed such other financial studies and analyses and performed such other
investigations and taken into account such other matters as SEG deemed
necessary.
In preparing its opinion, SEG has assumed and relied upon, without
independent verification, the accuracy and completeness of all financial and
other information publicly available or that was supplied or otherwise made
available to SEG by Horizons and/or Titan. SEG has not been engaged to, and
therefore has not, verified the accuracy or completeness of any such
information.
With respect to the financial forecasts for the years 1998 through 2002, SEG
assumed that the assumptions provided by Horizons' management were reasonably
prepared and reflect the best currently available estimates and judgment of
Horizons' management. In arriving at its opinion, SEG did not conduct an
extensive physical inspection of the properties or facilities of Horizons or
Titan. SEG did not make or obtain any evaluations or appraisals of the assets or
liabilities of Horizons or Titan. SEG's opinion is necessarily based upon
market, economic and other conditions as they exist and can only be evaluated as
of the date of its opinion. In addition, SEG was not requested or authorized to
solicit, and did not solicit, interest from any party with respect to an
acquisition of all or any portion of the outstanding common shares and the
Series A Preferred Shares of Horizons or its constituent businesses.
The following is a summary of the analysis performed by SEG in connection
with its February 26, 1998 fairness opinion. The analyses performed were based
upon an implied merger consideration (the "Implied Merger Consideration") for
the common shares and the Series A Preferred Shares of Horizons of approximately
$19.4 million, as outlined in the Merger Agreement.
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VALUATION OF THE PREFERRED STOCK. In order to issue its fairness opinion,
SEG was required to determine the value of the Series A Preferred Shares of
Horizons. The full text of the SEG Fair Market Value Opinion of the Series A
Preferred Shares of Horizons, which sets forth matters considered and
limitations on the review undertaken in connection with such opinion, is
attached as Appendix C. This analysis entailed a review of the financial
condition and performance of Horizons, the terms and conditions of the Series A
Preferred Shares of Horizons, the historical payment (or lack thereof) of
dividends on the Series A Preferred Shares of Horizons, and Horizons' ability to
pay dividends on the Series A Preferred Shares of Horizons in the future, among
other things. SEG made certain assumptions regarding the timing of the payment
of dividends in the future, as well as the payment of the dividends in arrears.
SEG also made certain assumption regarding the value of the conversion option of
the Series A Preferred Shares of Horizons. In its analysis, SEG discounted the
expected future dividend payments using various discount rates, and valued the
conversion option, where each share of the Series A Preferred Shares of Horizons
is converted into one share of Horizons Common Stock, using various options
pricing models including the Black-Scholes Model. SEG's analysis resulted in an
opinion of the fair market value of the Series A Preferred Shares of Horizons of
$5.00 per share, or a total value of consideration of $2.5 million based on
500,000 shares outstanding.
CALCULATION OF CONSIDERATION FOR SHAREHOLDERS. The applicable fraction
pertaining to each preferred share is defined as the fraction having the
numerator equal to $5.00 per share and the denominator equal to the "Designated
Parent Stock Price," as defined in the Merger Agreement. The Applicable Fraction
pertaining to Horizons common stock is defined as the fraction (A) having the
numerator equal to the amount by which (x) $23,850,000 minus the "Balance Sheet
Deduction" plus $65,240 exceeds (y) the Average Preferred Stock Valuation and
(B) having a denominator equal to the amount determined by multiplying (1) the
"Adjusted Company Share Amount" by (2) the "Designated Parent Stock Price."
The "Balance Sheet Deduction" is defined as (A) $4,500,000 plus or minus, as
described below, (B) the amount by which Horizons' Working Capital (determined
prior to the Closing as set forth in the Merger Agreement) is less than (in
which case such amount shall be added to the amount determined in (A) above) or
greater than (in which case such amount shall be subtracted from the amount
determined in (A) above) negative $2,150,000; provided, however, no such
adjustment shall be made unless Horizons' Working Capital is at least $200,000
less than or greater than, as the case may be, negative $2,150,000 (and in such
case such adjustment shall be made with respect to the entire amount less than
or greater than, as appropriate, negative $2,150,000).
ANALYSIS OF HORIZONS TECHNOLOGY, INC.
SUMMARY OF SELECTED COMPARABLE PUBLICLY TRADED COMPANIES. SEG reviewed and
compared certain fundamental financial information of Horizons to the following
publicly traded companies, among others, in the defense contractor/information
technology industry: Advanced Communication Systems, Inc., Analysis &
Technology, Inc., CACI International, Inc., Dynamics Research Corp., GRC
International, Inc., Nichols Research Corp. and VSE Corp. (the "Comparable
Companies"). The group consisted of companies who derive a significant portion
of their revenues from government (Department of Defense) contracts, and/or are
engaged in providing information technology-related services. SEG calculated,
among other things, the recent market price of those companies as a multiple of
their earnings before interest and taxes ("EBIT"), net income, and book value.
SEG reviewed those multiples, excluding the outlying observations, in order to
apply those multiples to the historical and projected financial results of
Horizons. SEG excluded outlying observations because it believes that the
outlying values for certain companies reflect temporary market aberrations and
can skew the analysis.
With respect to the EBIT multiples, SEG considered the market price of the
invested capital (total market capitalization plus book value of long-term debt)
as a multiple of EBIT estimated for the last fiscal year. For the Comparable
Companies reviewed, these multiples ranged from 9.6x to 18.1x (eliminating the
high and low), and had a mean less extremes of 16.9x. Based upon the estimated
last fiscal year
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(January 31, 1998) and projected fiscal 1999 EBIT provided by Horizons, the
Implied Merger Consideration (plus the long-term debt) is equal to 21.8x 1998
estimated EBIT and 8.9x projected 1999 EBIT. Based upon reported EBIT for fiscal
1998 (provided to SEG subsequent to the date of its opinion), the Implied Merger
Consideration (plus the long-term debt) is equal to 7.6 x 1998 reported EBIT.
With consideration given to the differences between private company multiples
and public company multiples, and the fundamentals of Horizons versus the
Comparable Companies, SEG believes that the implied multiples are equal or in
excess of those that one would normally expect in the valuation of a private
company such as Horizons.
With respect to the net income multiples, SEG considered the market price of
the common stock as a multiple of net income reported by the Comparable
Companies for the last fiscal year. For the Comparable Companies reviewed, those
multiples ranged from 11.6x to 34.8x (eliminating the high and low), and had a
mean less extremes of 27.8x. Based upon the estimated last fiscal year and
projected fiscal 1999 net income provided by Horizons, based upon reported net
income for fiscal 1998 (provided to SEG subsequent to the date of its opinion),
the Implied Merger Consideration is equal to 11.8 x 1998 reported net income
from continuing operations, the Implied Merger Consideration is equal to 36.0x
1998 estimated net income, and 9.5x projected 1999 net income. With
consideration given to the differences between private company multiples and
public company multiples, and the fundamentals of Horizons versus the Comparable
Companies, SEG believes that the implied multiples are equal or in excess of
those that one would normally expect in the valuation of a private company such
as Horizons.
With respect to the book value multiples, SEG considered the market price of
the common stock as a multiple of book value reported by the Comparable
Companies for the last fiscal year. For the Comparable Companies reviewed, those
multiples ranged from 1.4x to 4.4x (eliminating the high and low), and had a
mean less extremes of 2.1x. Based upon the estimated last fiscal year and
projected fiscal 1999 book value provided by Horizons, the Implied Merger
Consideration is equal to 61.4x 1998 estimated book value, and 7.9x projected
1999 book value. Based upon the reported book value for fiscal 1998 (provided to
SEG subsequent to the date of its opinion), the Implied Merger Consideration is
not meaningful as a multiple of book value due to the negative book value
reported by Horizons for fiscal 1998. With consideration given to the
differences between private company multiples and public company multiples, and
the fundamentals of Horizons versus the Comparable Companies, SEG believes that
the implied multiples are equal or in excess of those that one would normally
expect in the valuation of a private company such as Horizons.
DISCOUNTED CASH FLOW ANALYSIS. SEG performed a discounted cash flow
analysis using financial forecasts provided by Horizons management. SEG
estimated the present value of the future cash flows set forth in these
forecasts and estimated the terminal value as forth in these forecasts. The
estimated present value of the future cash flows and the estimated terminal
value added together yield an estimate of the market value of Horizons. SEG
derived the net present value of free cash flow (defined as net income plus
depreciation and amortization less any increases in required working capital and
less capital expenditures) for the fiscal years 1999 through 2002, using various
discount rates ranging from 18.0% to 23.0%. SEG estimated Horizons' terminal
values in the year 2002 based on capitalization rates derived by subtracting
long-term sustainable growth from the estimated discount rates. These
assumptions resulted in value conclusions ranging from 14.3 million to 12.1
million for the total equity of Horizons (common shares and the Series A
Preferred Shares of Horizons), all equal to or less than the Implied Merger
Consideration.
SUMMARY
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analysis or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying SEG's opinion. In arriving at its fairness determination, SEG
considered the results of all such analyses. SEG did not separately consider the
extent to which any one of the analyses supported or did not support SEG's
Fairness Opinion. No company or transaction used in the above analyses as a
comparison is
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identical to Horizons or Titan. The analyses were prepared solely for purposes
of SEG in providing its opinion to the Horizons Board as to the fairness of the
Implied Merger Consideration to be received by the Shareholders in the Proposed
Transaction, and do not purport to be appraisals or necessarily reflect the
prices at which businesses or securities actually may be sold. Analyses based
upon forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors none of SEG or any other person assumes responsibility
if future results are materially different from those forecast.
As described above, SEG's opinion to the Horizons Board was one of the many
factors taken into consideration by the Horizons Board in making its
determination to approve the Proposed Transaction. The foregoing summary does
not purport to be a complete description of the analysis performed by SEG and is
qualified by reference to the written SEG Fairness Opinion set forth in Appendix
B hereto.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Horizons Board with respect to the
Merger Proposal, holders of shares of Horizons Common Stock and Horizons Series
A Preferred Stock should be aware that certain directors and executive officers
of Horizons have certain interests in the Merger that are in addition to the
interests of holders of Horizons Common Stock and Series A Horizons Preferred
Stock generally. The Horizons Board has considered these interests, among other
matters, in approving the Merger Agreement and the Merger.
EMPLOYMENT ARRANGEMENTS. Except as described in the following sentence,
Titan expects to employ certain of Horizons' current officers upon consummation
of the Merger and such persons have been informed of that potential employment.
The Merger Agreement provides that Titan expects that Horizons' officers
following the Merger will be the same persons, holding the same offices, as the
officers of Horizons immediately prior to the Merger, except to the extent
otherwise agreed in writing by Titan and Horizons, and except for the
resignations of Horizons' Chief Executive Officer, Dr. James T. Palmer, and
Chief Financial Officer, J. Patrick Boyce.
Titan and Earl A. Pontius have agreed to an employment arrangement, pursuant
to which Titan will continue to employ Mr. Pontius following the Merger as
President of Horizons and Senior Vice President of the Titan Technologies and
Information Systems Corporation, a wholly-owned subsidiary of Titan.
Titan and Dr. James T. Palmer have entered into a two year Consulting
Agreement, pursuant to which Dr. Palmer will perform certain consulting services
for Titan following the Merger. Titan and Mr. Boyce have entered into a
Consulting Agreement to become effective upon the termination of Mr. Boyce's
employment, which Consulting Agreement will have an initial term of six months,
following which Titan may obtain Mr. Boyce's services as requested from time to
time by Titan in its discretion.
REGULATORY MATTERS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. Titan and Horizons
filed notification and report forms under the HSR Act with the FTC and Antitrust
Division on March 3, 1998. These filings commenced a 30-day waiting period under
the HSR Act, with respect to which Titan and Horizons requested and were granted
early termination.
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The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the Merger. At any time before or
after the consummation of the Merger, the FTC, the Antitrust Division, state
attorneys general or others could take action under antitrust laws with respect
to the Merger, including seeking to enjoin consummation of the Merger, seeking
to cause the divestiture of significant assets of Titan or Horizons or their
subsidiaries or seeking to impose conditions on Titan with respect to the
business operations of the combined companies. In addition, the review of the
Merger pursuant to the HSR Act may substantially delay or proscribe consummation
of the Merger. There can be no assurance that a challenge to the Merger on
antitrust grounds will not be made, or if such challenge is made, that Titan
would prevail or would not be required to terminate the Merger Agreement, to
divest certain assets, to license certain proprietary technology to third
parties or to accept certain conditions in order to consummate the Merger. Titan
does not have any obligation under the Merger Agreement to (i) dispose or cause
any of its subsidiaries to dispose of any assets, (ii) discontinue or make any
changes to its operations or proposed operations or to the operations or
proposed operations of any of its otherwise) regarding its future operations, or
the future operations of its subsidiaries, or the future operations of Horizons
or its subsidiaries, even though the disposition of such asset or the making of
such change or commitment might facilitate the obtaining of a required
governmental authorization or might otherwise facilitate the consummation of the
Merger.
FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of
Horizons Common Stock and Horizons Series A Preferred Stock. This discussion
assumes that holders of shares of Horizons Common Stock and Horizons Series A
Preferred Stock hold such shares as capital assets. This discussion is based on
currently existing provisions of the Code, existing Treasury Regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change. Any such change, which may or may not be retroactive,
could alter the tax consequences to Horizons' stockholders.
Horizons stockholders should be aware that this discussion does not deal
with all federal income tax considerations that may be relevant to particular
Horizons stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, banks, insurance companies or tax-
exempt organizations, who are subject to the alternative minimum tax provisions
of the Code, who are non-United States persons, who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions or who hold their shares as a hedge or as part of a hedging,
straddle, conversion or other risk reduction transaction. In addition, the
following discussion does not address the tax consequences of the Merger under
foreign, state or local tax laws or the tax consequences of transactions
effectuated prior to or after the Merger (whether or not such transactions are
in connection with the Merger).
It is the opinion of Cooley Godward LLP ("Cooley Godward"), counsel to
Titan, and Jenkens & Gilchrist P.C. ("Jenkens & Gilchrist"), counsel to
Horizons, that the Merger will constitute a reorganization (a "Reorganization")
pursuant to Section 368(a) of the Code (collectively, the "Tax Opinions"). The
respective obligations of the parties to consummate the Merger are conditioned
on the receipt by Titan of an opinion from Cooley Godward, and on the receipt by
Horizons of an opinion from Jenkens & Gilchrist, confirming that the Merger will
constitute a Reorganization (collectively, the "Closing Opinions"); provided,
however, that if Jenkens & Gilchrist does not render such opinion to Horizons,
the condition to Horizons' obligations shall nonetheless be deemed to be
satisfied with respect to Horizons if Cooley Godward renders such opinion to
Horizons. See "Terms of the Merger--Conditions to the Merger." The Tax Opinions
and the Closing Opinions of counsel as to such federal income tax consequences
(i) will not be binding on the Internal Revenue Service (the "IRS") nor preclude
the IRS from adopting a contrary position, (ii) will be based on certain
assumptions, as well as representations received from Titan, Titan Sub and
Horizons, (iii) will be based on the assumption that the Merger will be
consummated in
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accordance with the terms of the Merger Agreement and (iv) will be subject to
the limitations discussed below. Neither Titan nor Horizons has requested, or
will request, a ruling from the IRS with regard to any of the federal income tax
consequences of the Merger.
Subject to the limitations and qualifications referred to herein and in the
Tax Opinions and Closing Opinions, it is the opinion of Cooley Godward, counsel
to Titan, and Jenkens & Gilchrist, counsel to Horizons, that as a result of the
Merger's qualifying as a Reorganization, the following U.S. federal income tax
consequences will result:
- No gain or loss will be recognized for federal income tax purposes by the
holders of Horizons Common Stock and Horizons Series A Preferred Stock
upon the receipt of Titan Common Stock solely in exchange for such
Horizons Common Stock and Horizons Series A Preferred Stock in the Merger
(except to the extent, if any, that (i) cash is received in lieu of
fractional shares, or (ii) Titan Common Stock received by a Horizons
Series A Preferred Stock holder is attributable to any dividends in
arrears (see below)).
- The aggregate tax basis of the Titan Common Stock so received by Horizons
stockholders in the Merger (including any fractional shares of Titan
Common Stock and Horizons Series A Preferred Stock not actually received)
will be the same as the aggregate tax basis of the Horizons Common Stock
and Horizons Series A Preferred Stock surrendered in exchange therefor.
- The holding period of the Titan Common Stock so received by each Horizons
stockholder in the Merger will include the holding period of the shares of
Horizons Common Stock and Horizons Series A Preferred Stock surrendered in
exchange therefor.
- Cash payments received by holders of Horizons Common Stock and Horizons
Series A Preferred Stock in lieu of fractional shares of Titan Common
Stock will be treated as if such fractional shares had been issued in the
Merger and then redeemed by Titan. A Horizons stockholder receiving such
cash will recognize gain or loss upon such payment, measured by the
difference (if any) between the amount of cash received and the basis
allocated to such fractional share. The gain or loss should be capital
gain or loss, provided that each such fractional share of Titan Common
Stock was held as a capital asset at the Effective Time of the Merger.
- A holder of Horizons Common Stock and Horizons Series A Preferred Stock
who exercises appraisal rights with respect to a share of Horizons Common
Stock or Horizons Series A Preferred Stock and receives a cash payment for
such shares generally should recognize capital gain or loss (if such share
was held as a capital asset at the Effective Time of the Merger) measured
by the difference between the stockholder's basis in such share and the
amount of cash received, provided that such payment is not "essentially
equivalent to a dividend" within the meaning of Section 302 of the Code
nor has the effect of a distribution of a dividend within the meaning of
Section 356(a)(2) of the Code after giving effect to the constructive
ownership rules of the Code (collectively, a "Dividend Equivalent
Transaction"). A sale of shares pursuant to an exercise of appraisal
rights generally will not be a Dividend Equivalent Transaction if, as a
result of such exercise, the stockholder exercising the appraisal rights
owns no shares of capital stock of Titan (either actually or
constructively within the meaning of Section 318 of the Code) immediately
after the Merger. For non-corporate holders, any such capital gain will be
taxed at a maximum federal income tax rate of 39.6% if the holder's
holding period in the shares is 1 year or less, at a maximum federal tax
rate of 28% if the holder's holding period in the shares is more than 1
year but not more than 18 months and at a maximum federal income tax rate
of 20% if the holder's holding period in the shares is more than 18
months. For corporate holders, capital gain will continue to be subject to
tax at the ordinary income tax rates applicable to corporations.
A successful IRS challenge to the Reorganization status of the Merger could
result in significant adverse tax consequences to Horizons stockholders. A
Horizons stockholder would recognize gain or loss
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with respect to each share of Horizons Common Stock and Horizons Series A
Preferred Stock surrendered equal to the difference between the stockholder's
basis in such share and the fair market value, as of the Effective Time, of the
Titan Common Stock received in exchange therefor. In such event, a stockholder's
aggregate basis in the Titan Common Stock so received would equal its fair
market value, and the stockholder's holding period for such stock would begin
the day after the Merger is consummated.
Even if the Merger qualifies as a Reorganization, a recipient of Titan
Common Stock would recognize income to the extent that, for example, any such
shares were determined to have been received in exchange for services, to
satisfy obligations or in consideration for anything other than the Horizons
Common Stock or Horizons Series A Preferred Stock surrendered. In addition, to
the extent that a Horizons stockholder were treated as receiving (directly or
indirectly) consideration other than Titan Common Stock in exchange for such
stockholder's Horizons Common Stock or Horizons Series A Preferred Stock, gain,
if any, would have to be recognized. Moreover, to the extent, if any, Titan
Common Stock received by a Horizons Series A Preferred Stock holder is deemed to
be attributable to any Horizons Series A Preferred Stock dividends in arrears
("Preferred Stock Dividend"), such a holder would recognize dividend income to
the extent of Horizons' current or accumulated earnings and profits ("E & P").
For noncorporate taxpayers, the dividend income would be taxable as ordinary
income at a maximum federal tax rate of 39.6%. For corporate holders, the
dividend income would be eligible for the dividends received deduction and would
be taxable at ordinary income tax rates applicable to corporations. To the
extent that the deemed value of a Preferred Stock Dividend exceeds E & P, a
holders' basis in his, her or its stock will be reduced and any excess value
will be treated as capital gain.
Certain noncorporate Horizons stockholders may be subject to backup
withholding at a rate of 31% on cash payments received in lieu of a fractional
share interest in Titan Common Stock. Backup withholding will not apply,
however, to a stockholder who furnishes a correct taxpayer identification number
("TIN") and certifies that he, she or it is not subject to backup withholding on
the substitute Form W-9 included in the Transmittal Letter, who provides a
certificate of foreign status on Form W-8, or who is otherwise exempt from
backup withholding. A stockholder who fails to provide the correct TIN on Form
W-9 may be subject to a $50 penalty imposed by the IRS.
Each Horizons stockholder will be required to retain records and file with
such holder's U.S. federal income tax return a statement setting forth certain
facts relating to the Merger.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, HOLDERS OF
HORIZONS COMMON STOCK AND HORIZONS SERIES A PREFERRED STOCK ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND
EFFECT OF FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX LAWS AND THE EFFECTS OF
ANY PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
Titan expects to account for the acquisition of Horizons as a "pooling of
interests" pursuant to generally accepted accounting principles. Titan
management and Horizons management have concluded that no conditions exist
relating to Horizons that would preclude Titan from accounting for the Merger as
a pooling of interests.
APPRAISAL RIGHTS OF HORIZONS STOCKHOLDERS
THE FOLLOWING SUMMARY OF APPRAISAL RIGHTS UNDER THE DGCL IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SECTION 262 OF THE DGCL, THE COMPLETE TEXT OF WHICH IS
ATTACHED HERETO AS APPENDIX C.
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FAILURE TO STRICTLY FOLLOW THE PROCEDURES SET FORTH IN SECTION 262 OF THE
DGCL MAY RESULT IN THE LOSS, TERMINATION OR WAIVER OF APPRAISAL RIGHTS. A
HORIZONS STOCKHOLDER WHO FAILS TO ABSTAIN FROM VOTING OR WHO VOTES HIS OR HER
SHARES IN FAVOR OF THE MERGER WILL NOT HAVE A RIGHT TO EXERCISE HIS OR HER
APPRAISAL RIGHTS. A HORIZONS STOCKHOLDER WHO DESIRES TO EXERCISE APPRAISAL
RIGHTS MUST ALSO SUBMIT A WRITTEN DEMAND FOR APPRAISAL OF HIS OR HER SHARES
PRIOR TO THE DATE OF THE HORIZONS MEETING.
Under Section 262 of the DGCL, each Horizons stockholder as of the Record
Date who has not voted in favor of the Merger and who submits a written demand
for appraisal of his or her shares prior to the date of the Horizons Meeting is
entitled to receive payment of the fair value of all shares of Horizons Common
Stock and Horizons Series A Preferred Stock owned by such holder if the Merger
is consummated. Such notice must be sufficient for Horizons to identify the
stockholder. A proxy or vote by a holder of Horizons Common Stock or Horizons
Series A Preferred Stock abstaining or against the Merger shall not constitute a
sufficient notice or demand. Thereafter, the stockholder who has demanded
appraisal rights must continuously hold the shares of Horizons Common Stock
through the Effective Time and must not vote for the Merger at the Horizons
Meeting to perfect their appraisal right. Notwithstanding the foregoing, at any
time within 60 days after the Effective Time any holder of Horizons Common Stock
and Horizons Series A Preferred Stock who has demanded and perfected appraisal
rights may withdraw such demand and accept the conversion terms offered in the
Merger Agreement (without interest). Within 120 days after the Effective Time a
holder of Horizons Common Stock and Horizons Series A Preferred Stock who has
perfected appraisal rights or Horizons may file a petition in the Court of
Chancery of the State of Delaware demanding a determination of the fair value of
all Horizons Common Stock and Horizons Series A Preferred Stock for all holders
who have perfected appraisal rights. From and after the Effective Time no
stockholder who has demanded and perfected their appraisal rights shall be
entitled to vote, or receive any payments or dividends with respect to, the
Horizons Common Stock and Horizons Series A Preferred Stock or the Titan Common
Stock.
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TERMS OF THE MERGER
This section of the Prospectus/Proxy Statement describes certain aspects of
the proposed Merger. The Merger Agreement provides for the merger of Titan Sub,
a newly formed, wholly-owned Delaware subsidiary of Titan, with and into
Horizons. The discussion in this Prospectus/Proxy Statement of the Merger and
the description of the principal terms of the Merger Agreement are accurate in
all material respects but do not purport to be complete and are subject to and
qualified in their entirety by reference to the Merger Agreement, a copy of
which is attached to this Prospectus/Proxy Statement as Appendix A and
incorporated herein by reference. All stockholders of Horizons are urged to read
the Merger Agreement in its entirety.
EFFECTIVE TIME
The Merger will be consummated on , 1998, or as the parties may
otherwise agree, but in no event later than the second business day following
the satisfaction or waiver of all other conditions to consummation of the
Merger. The Merger will become effective on the date the Certificate of Merger
is duly filed with the Delaware Secretary of State (the "Effective Time"). At
the Effective Time, Titan Sub will merge with and into Horizons, with the result
that Horizons will be the Surviving Subsidiary in the Merger and will be
wholly-owned by Titan. As described below, the stockholders of Horizons will
become stockholders of Titan, and their rights will be governed by the Titan
Certificate and the Titan Bylaws. See "Comparison of Rights of Titan
Stockholders and Horizons Stockholders."
MANNER AND BASIS FOR CONVERTING SHARES
EXCHANGE OF STOCK. Except as provided below, at the Effective Time, each
outstanding share of Horizons Common Stock will be converted into the right to
receive approximately $2.25 of Titan Common Stock and each outstanding share of
Horizons Series A Preferred Stock will be converted into the right to receive
$5.00 of Titan Common Stock, based on the Designated Titan Closing Price.
The following is a description of the calculation that will be made to
determine the fractional share of Titan Common Stock to be issued in the Merger
to holders of Horizon Series A Preferred Stock and Horizons Common Stock,
respectively, for each such share held by them (and additional detail concerning
the determination of the following fractions is set forth in the following
paragraphs): (i) in the case of the Horizons Series A Preferred Stock, the
fraction to determine the fractional share shall have a numerator equal to $5.00
and a denominator equal to the Designated Titan Closing Price; and (ii) in the
case of the Horizons Common Stock, the fraction to determine the fractional
share shall have a numerator equal to $16,915,240 and a denominator equal to the
product of (a) the aggregate number of outstanding shares of Horizons Common
Stock plus the number of shares of Horizons Common Stock subject to outstanding
options (but not outstanding warrants), and (b) the Designated Titan Closing
Price.
Under the terms of the Merger Agreement, the amount of consideration payable
in the Merger to holders of Horizons Common Stock and Horizons Series A
Preferred Stock is set forth in a complex series of formulas and fractions. The
reason for the complexity is that certain components of the formulas were
indeterminable or variable at the time the Merger Agreement was signed. For
instance, the per share amount of consideration payable to holders of Horizons
Common Stock (defined in the Merger Agreement as the "Applicable Fraction") was
subject to possible adjustment in the event Horizons' Working Capital (as
defined in the Merger Agreement) as of January 31, 1998, fell outside certain
parameters. Also, provision had to be made for an adjustment to the per share
consideration payable in the event the total number of Horizons' outstanding
shares (including shares subject to options and warrants) changed from the time
of signing to consummation of the Merger (in order to ensure that the aggregate
consideration to be paid for all shares would not be unintentionally increased
or decreased as a result). Moreover, the parties determined that the Designated
Titan Closing Price would be determined based upon the average closing price of
Titan Common Stock over the twenty trading days prior to consummation of the
Merger
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but subject to a minimum amount of $6.00 and a maximum amount of $8.00. The
concept of such a minimum and maximum price is commonly known as a "collar."
After the Merger Agreement was entered into and prior to the date hereof,
the parties determined pursuant to the Merger Agreement that no adjustment to
Working Capital would be required. Thus, one contingency to the determination of
the consideration to be paid in the Merger to Horizons stockholders was removed.
With respect to the potential adjustments due to changes in the number of
outstanding shares of Horizons, Horizons stockholders should be aware that any
such per share price adjustment will not change the aggregate consideration to
be paid by Titan to Horizons stockholders. Further, Horizons does not expect,
nor does the Merger Agreement permit, a material change in the number of
outstanding Horizons shares; and therefore it is highly unlikely that any
material adjustment to the per share consideration would be made due to the
number of outstanding shares. (For purposes of this Prospectus/ Proxy Statement,
all calculations of such consideration are based on Horizon's outstanding shares
as of March 6, 1998.)
Because of the collar described above, however, the potential adjustment to
the consideration to be paid to Horizons stockholders could be material to the
parties and to the Horizons stockholders, because an adjustment would result in
an increase or decrease, as appropriate, in both the per share consideration and
the aggregate consideration to be received by the Horizons stockholders. This is
because (i) if the Designated Titan Closing Price is below $6.00 it will be
treated as if it was $6.00 exactly, which will result in Horizons stockholders
receiving stock in the Merger with an actual value less than its attributed
value, and (ii) if the Designated Titan Closing Price is above $8.00 it will be
treated as if it was $8.00 exactly, which will result in Horizons stockholders
receiving stock in the Merger with an actual value greater than its attributed
value. Notwithstanding the foregoing, neither Titan nor Horizons expects the
Designated Titan Closing Price to be less than $6.00 or greater than $8.00.
Stockholders of Horizons should consider, however, that due to the collar each
share of Horizons Common Stock may be converted in the Merger into a number of
shares of Titan Common Stock ranging from .280997 to .374663, and each share of
Horizons Series A Preferred Stock may be converted in the Merger into a number
of shares of Titan Common Stock ranging from .625000 to .833333 (assuming
Horizon's capitalization as of March 6, 1998). Horizons stockholders are urged
to review Section 1.5 of the Merger Agreement for further information as to how
the consideration to be received by Horizons stockholders will be determined at
the time of the Merger.
Based upon the capitalization of Horizons as of the close of business on
March 6, 1998, and based upon the $6.375 closing price of Titan Common Stock on
the NYSE for March 6, 1998 (and assuming no price adjustments as described
above), an aggregate of approximately 3,035,760 shares of Titan Common Stock
(the "Merger Consideration") will be issued in the Merger, and Titan will assume
all outstanding Horizons options and substitute all outstanding Horizons
warrants (except for warrants that expire by their terms in connection with the
Merger), which will be converted into options and warrants, as applicable, to
acquire approximately 41,477 additional shares of Titan Common Stock.
At the Effective Time, all options to purchase Horizons Common Stock then
outstanding under Horizons' 1988 Amended Stock Option Plan (the "Horizons Option
Plan") (each a "Horizons Option" and, collectively, the "Horizons Options") will
be assumed by Titan and all warrants to purchase Horizons Common Stock then
outstanding (except for warrants that expire by their terms in connection with
the Merger) (each a "Horizons Warrant" and, collectively, the "Horizons
Warrants") will be substituted by Titan. See "--Treatment of Employee Equity
Benefit Plans."
Each share of Common Stock, $.01 par value per share, of Titan Sub issued
and outstanding as of the Effective Time will be converted into one validly
issued, fully paid and nonassessable share of Common Stock of the Surviving
Subsidiary. Each certificate evidencing ownership of shares of Titan Sub Common
Stock will evidence ownership of such shares of capital stock of the Surviving
Subsidiary.
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Promptly after the Effective Time, Titan, acting through the Exchange Agent,
will deliver to each holder of record as of the Effective Time of a certificate
or certificates which immediately prior to the Effective Time represented
outstanding shares of Horizons Common Stock and Horizons Series A Preferred
Stock, a letter of transmittal with instructions to be used by such holder in
surrendering such certificates in exchange for certificates representing shares
of Titan Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF
HORIZONS COMMON STOCK AND HORIZONS SERIES A PREFERRED STOCK UNTIL SUCH HOLDERS
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT, AND THEN ONLY IN
ACCORDANCE WITH THE TERMS OF SUCH LETTER OF TRANSMITTAL.
FRACTIONAL SHARES. No fractional shares of Titan Common Stock will be
issued in the Merger. Instead, each Horizons stockholder who would otherwise be
entitled to receive a fraction of a share of Titan Common Stock will receive an
amount in cash (without interest) determined by multiplying such fraction by the
closing price of Titan Common Stock as reported on the NYSE on the last trading
date immediately preceding the Effective Time. Titan intends to use its current
cash resources to fund the payments for fractional shares.
EFFECT OF THE MERGER
Once the Merger is consummated, Titan Sub will cease to exist as a
corporation, and Horizons will remain as the Surviving Subsidiary.
Pursuant to the Merger Agreement, the Certificate of Incorporation and the
Bylaws of Titan Sub immediately prior to the Effective Time will be the
Certificate of Incorporation and the Bylaws of the Surviving Subsidiary. The
officers of the Surviving Subsidiary will be the respective individuals who are
serving as officers of Horizons immediately prior to the Effective Time, except
Dr. James T. Palmer will resign as Chief Executive Officer and J. P. (Pat) Boyce
will resign as Chief Financial Officer at the Effective Time. The directors of
the Surviving Subsidiary will be Gene W. Ray, Earl A. Pontius, John L. Slack and
J.S. Webb. There will be no change in the current Titan Board and officers of
Titan as a result of the Merger.
If the combined company is to realize the anticipated benefits of the
Merger, the operations of the two companies must be integrated and combined
efficiently. The process of rationalizing management services, administrative
organizations, facilities, management information systems and other aspects of
operations, while managing a larger and geographically expanded entity, will
present a significant challenge to the management of the combined company. There
can be no assurance that the integration process will be successful or that the
anticipated benefits of the business combination will be fully realized. The
dedication of management resources to such integration may detract attention
from the day-to-day business of the combined company. The difficulties of
integration may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. There can be no
assurance that there will not be substantial costs associated with the
integration process, that such activities will not result in a decrease in
revenues or that there will not be other material adverse effects of these
integration efforts. Such effects could materially reduce the short-term
earnings of the combined company. Subsequent to the Merger, Titan expects to
incur transaction and integration costs currently estimated to be $1 million, to
reflect the combination. This amount is a preliminary estimate only. There can
be no assurance that Titan will not incur additional charges to reflect costs
associated with the Merger.
TREATMENT OF EMPLOYEE EQUITY BENEFIT PLANS
STOCK OPTIONS AND WARRANTS. As of the Effective Time, each Horizons Option
and Horizons Warrant, whether or not exercisable, will be assumed or substituted
by Titan, as applicable, and will continue to have, and be subject to, the same
terms and conditions set forth in the stock option plan under which it was
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<PAGE>
issued (if applicable) and the stock option agreement or Horizons Warrant, as
applicable, by which it is evidenced. From and after the Effective Time, (i)
each Horizons Option and Horizons Warrant will be or become exercisable for
Titan Common Stock rather than Horizons Common Stock, (ii) the number of shares
of Titan Common Stock subject to each Horizons Option and Horizons Warrant shall
be equal to the number of shares of Horizons Common Stock subject to such option
or warrant, as applicable immediately prior to the Effective Time multiplied by
the Applicable Fraction, rounding down to the nearest whole share (with cash,
less the applicable exercise price, being payable for any fraction of a share),
(iii) the per share exercise price under each Horizons Option and Horizons
Warrant shall be adjusted by dividing the per share exercise price under such
option and warrant, as applicable, by the Applicable Fraction and rounding up to
the nearest cent and (iv) any restriction on the exercise of any such option or
warrant, as applicable, shall continue in full force and effect and the term,
exercisability, vesting schedule and other provisions of each such option or
warrant, as applicable, shall otherwise remain unchanged.
FORM S-8 FILING. Titan may file with the Commission a registration
statement on Form S-8, following the Effective Time to register shares of Titan
Common Stock issuable as the result of the assumption of the Horizons Options.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the capitalization of Horizons as of the close of business on
March 6, 1998, and based on the $6.375 closing price of Titan Common Stock on
the NYSE on March 6, 1998, an aggregate of approximately 3,035,760 shares of
Titan Common Stock will be issued in the Merger and Titan will assume options
and warrants and substitute warrants to acquire approximately 41,477 additional
shares of Horizons Common Stock. Based upon the number of shares of Titan Common
Stock issued and outstanding as of March 6, 1998, and after giving effect to
such issuance of Titan Common Stock and the exercise of all such options and
warrants to purchase Horizons Common Stock assumed by Titan, the former holders
of Horizons Common Stock and Horizons Series A Preferred Stock and options and
warrants to purchase Horizons Common Stock would hold, and have voting power
with respect to, approximately 12.1% of the total issued and outstanding Titan
Common Stock, which would constitute approximately 11.7% of the total voting
power of Titan Capital Stock. The foregoing numbers of shares and percentages
are subject to change to reflect any changes in the capitalization of either
Titan or Horizons subsequent to the dates indicated and prior to the Effective
Time, and there can be no assurance as to the actual capitalization of Titan or
Horizons as of the Effective Time or of Titan at any time following the
Effective Time.
REPRESENTATIONS AND WARRANTIES
Pursuant to the Merger Agreement, each of Titan, Horizons, Titan Sub and the
Designated Stockholders made certain representations and warranties relating to
its respective business and various other matters. None of the representations
and warranties made by Titan, Horizons and Titan Sub will survive the Merger.
The representations and warranties made by the Designated Stockholders shall
survive the Merger and shall expire on the first anniversary of the Effective
Time.
COVENANTS
Pursuant to the Merger Agreement, Horizons has agreed (on behalf of itself
and each of its direct and indirect majority-owned subsidiaries) that, until the
earlier of the termination of the Merger Agreement pursuant to its terms and the
Effective Time (the "Pre-Closing Period"), subject to certain exceptions, and
except to the extent that Titan consents in writing, it will conduct its
business and operations in the ordinary course and in accordance with past
practices use reasonable efforts preserve intact its current business
organization, keep available the services of its current officers and employees
and maintains its relations and goodwill with all suppliers, customers,
landlords, creditors, employees and others with which
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<PAGE>
it has business relationships, and use all reasonable efforts to keep in full
force all of its existing insurance policies.
In addition, except as permitted by the terms of the Merger Agreement, and
subject to certain exceptions, during the Pre-Closing Period, Horizons has
agreed not to do any of the following or to permit its subsidiaries to do any of
the following without the prior written consent of Titan:
(a) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities;
(b) sell, issue, authorize the issuance of (i) any capital stock or
other security, (ii) any option, call, warrant or right to acquire any
capital stock or other security, or (iii) any instrument convertible into or
exchangeable for any capital stock or other security; provided, however,
that Horizons may issue Horizons Common Stock upon the valid exercise of
Horizons Options (and make certain other limited grants and issuances);
(c) amend or permit the adoption of any amendment to its certificate of
incorporation or bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;
(d) form any subsidiary or acquire any equity interest or other interest
in any other entity;
(e) make any capital expenditure that exceeds (when aggregated with
other capital expenditures during the Pre-Closing Period) in the aggregate
$150,000;
(f) enter into or become bound by or permit any of the assets owned or
used by it to become bound by, any material contract or (ii) amend or
prematurely terminate or waive any material right or remedy under, any
material contract, except in the ordinary course of business and consistent
with prior practices;
(g) acquire, lease or license any material right or other material asset
from any other person or entity or sell or otherwise dispose of, or lease or
license, any material right or other material asset to any other person or
entity (except that Titan may make routine borrowings) or waive or
relinquish any material right except in compliance with clause (e) above;
(h) lend money to any person or entity, or incur or guarantee any
indebtedness (except that Titan may make routine borrowings in the ordinary
course of business under its line of credit);
(i) change any of its methods of accounting or accounting practices in
any respect (except as required under generally accepted accounting
principles, consistently applied ("GAAP");
(j) make any tax election;
(k) commence or settle any legal proceeding; or
(l) agree or commit to take any of the actions described in clauses (a)
through (l) above.
Horizons has agreed that during the Pre-Closing Period it will not (a) amend
or waive any of its rights under, or accelerate the vesting under, any provision
of any of Horizons' stock option plans, any provision of any agreement
evidencing any outstanding stock option or any restricted stock purchase
agreement, or otherwise modify any of the terms of any outstanding option,
warrant or other security or any related contract, or (b) establish, adopt or
amend any employee benefit plan, pay any bonus or make any profit-sharing or
similar payment to, or increase the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of its
directors, officers or employees, or hire any indirect employee whose aggregate
annual compensation is expected to exceed $40,000. Horizons has further agreed
to take actions necessary to give notice of, convene and hold a meeting of
stockholders and
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solicit proxies with respect to the meeting. Finally, Horizons has made certain
covenants with respect to its Employee Stock Ownership Plan.
Each of Horizons and Titan has agreed in the Merger Agreement, until the
earlier of the Merger or termination of the Merger Agreement, to notify the
other of certain material events prior to closing; and to provide certain
documents to the other and keep the other's information confidential.
NO SOLICITATION
Under the terms of the Merger Agreement, each of Horizons and the Designated
Stockholders has agreed that, during the Pre-Closing Period, neither Horizons
nor the Designated Stockholders will directly or indirectly, (i) solicit or
encourage the initiation of any inquiry proposal or offer from and person other
than Titan) relating to an Acquisition Transaction (as defined below), (ii)
participate in any discussions or negotiations or enter into any agreement with,
or provide any non-public information or afford access to the properties, books
or records of Horizons to any person, entity or group; or (iii) consider,
entertain or accept any proposal or offer from any person, entity or group. An
"Acquisition Transaction" means any transaction not contemplated by this Merger
Agreement involving: (a) any sale, license, disposition or acquisition of all or
a material portion of Horizons' business assets; or (b) the issuance,
disposition or acquisition of (i) any capital stock or other equity security of
Horizons (other than common stock issued to employees of Horizons, upon exercise
of Horizons Options or otherwise, in routine transactions in accordance with
Horizons' past practices), (ii) any option, call, warrant or right (whether or
not immediately exercisable) to acquire any capital stock or other equity
security of Horizons (other than stock options granted to employees of Horizons
in routine transactions in accordance with Horizons' past practices), or (iii)
any security, instrument or obligation that is or may become convertible into or
exchangeable for any capital stock or other equity security of Horizons; or (c)
any merger, consolidation, business combination, reorganization or similar
transaction involving Horizons. Pursuant to the Merger Agreement, Horizons
further agreed that it will promptly advise Titan in writing of any material
inquiry, proposal or offer relating to a possible Acquisition Transaction
received by Horizons or any of the Designated Stockholders.
Notwithstanding the foregoing, but subject to the restrictions on the
conduct of Horizons' business described above, prior to the Effective Time, to
the extent the Horizons Board determines, in good faith, based upon written
advice of its outside legal counsel, that the Board's fiduciary duties under
applicable law require it to do so, Horizons may participate in discussions or
negotiations with, and furnish nonpublic information and afford access to the
properties, books or records of Horizons to, any person, entity or group after
such person, entity or group has delivered to Horizons in writing an unsolicited
bona fide proposed Acquisition Transaction which the Horizons Board in its good
faith reasonable judgment determines, could reasonably be expected to result in
a transaction more favorable than the Merger to the stockholders of Horizons (a
"Superior Proposal").
CONDITIONS TO THE MERGER
The respective obligations of each party to the Merger Agreement to effect
the Merger are subject to the satisfaction at or prior to the Effective Time of
the following conditions (subject to certain materiality qualifications): (i)
the Merger Agreement shall have been approved and adopted, and the Merger shall
have been duly approved, by the requisite vote under applicable law by the
stockholders of Horizons; (ii) the Commission shall have declared the
Registration Statement of which this Prospectus/Proxy Statement is a part
effective and no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding for that
purpose, and no similar proceeding in respect of this Prospectus/Proxy
Statement, shall have been initiated or threatened in writing by the Commission;
(iii) there shall have been no material legal proceedings relating to the Merger
or prohibiting the consummation of the Merger or any of the other transactions
contemplated by the Merger Agreement; (iv) all waiting periods, if any, under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
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<PAGE>
amended, relating to the transactions contemplated hereby will have expired or
terminated early; (v) Titan and Horizons shall have received a legal opinion
from Jenkens & Gilchrist and Cooley Godward, respectively, dated as of the
Closing Date, reasonably satisfactory in form and substance to the receiving
party; (vi) Titan and Horizons shall each have received written opinions from
their respective tax counsel (Cooley Godward and Jenkens & Gilchrist,
respectively), in form and substance reasonably satisfactory to them, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and such opinions shall not have been withdrawn;
provided, however, that, if the counsel to Horizons does not render such
opinion, this condition shall nonetheless be deemed to be satisfied with respect
to Horizons if counsel to Titan renders such opinion to Horizons; (vii) the
shares of Titan Common Stock issuable to stockholders of Horizons in the Merger
shall have been authorized for listing on the NYSE upon official notice of
issuance; (iv) Titan shall have received a certificate from Horizons' Chief
Executive Officer and Horizons shall have received a certificate from Titan's
Chief Executive Officer confirming that certain conditions have been duly
satisfied; or (v) no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall have
been issued by any court of competent jurisdiction and remain in effect, and
there shall not be any legal requirement enacted or deemed applicable to the
Merger that makes consummation of the Merger illegal.
In addition, the obligation of Horizons to consummate and effect the Merger
is subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, exclusively by
Horizons: (i) subject to certain materiality thresholds, the representations and
warranties of Titan and Titan Sub contained in the Merger Agreement shall have
been true and correct on and as of the date of the Merger Agreement and such
representations and warranties shall be true and correct on and as of the
Effective Time except for changes contemplated by the Merger Agreement and
except in such cases where the failure to be so true and correct would not have
a material adverse effect on Titan; and (ii) Titan and Titan Sub shall have
performed or complied in all material respects with all agreements and covenants
required by the Merger Agreement to be performed or complied with by them at or
prior to the Effective Time.
Further, the obligations of Titan and Titan Sub to consummate and effect the
Merger are subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, exclusively
by Titan: (i) subject to certain materiality thresholds, the representations and
warranties of Horizons contained in the Merger Agreement shall have been true
and correct on and as of the date of the Merger Agreement and such
representations and warranties shall be true and correct on and as of the
Effective Time except for changes contemplated by the Merger Agreement and
except in such cases where the failure to be so true and correct would not have
a material adverse effect on Horizons; and (ii) Horizons shall have performed or
complied in all material respects with all agreements and covenants required by
the Merger Agreement to be performed or complied with by it at or prior to the
Effective Time.
Finally, the obligation of Titan to consummate and effect the Merger are
subject to Titan's receipt of the following agreements and documents (i) written
resignations of certain officers and directors of Horizons and its
majority-owned subsidiaries as requested by Titan; (ii) a letter from Arthur
Andersen LLP, Titan's independent accountants, relating to the applicability of
pooling of interests treatment to the Merger; and (iii) Affiliate Agreements in
the form attached to the Merger Agreement, executed by each person who is
reasonably determined to be an "affiliate" of Horizons (as that term is used in
Rule 145 promulgated under the Act). See "Approval of the Merger and Related
Transactions--Certain Federal Income Tax Matters."
Finally, each of Titan and Horizons has a condition to its obligation to
consummate the Merger concerning the Titan Designated Closing Price. In the
event the Titan Designated Closing Price is less than $5.25, Horizons has no
obligation to consummate the Merger. Further, in the event the Titan Designated
Closing Price is greater than $8.75 per share, Titan has no obligation to
consummate the Merger.
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TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement provides that it may be terminated at any time prior to
the Effective Time without either party incurring any termination fee as
follows:
(a) by Titan if Titan reasonably determines that the timely satisfaction
of any condition to Titan's performance under the Merger Agreement has
become impossible (other than as related to Horizons' Stockholders' Meeting
covered by Section 7.2 of the Merger Agreement or as a result of any failure
on the part of Titan or Titan Sub to comply with or perform any covenant or
obligation of Titan or Titan Sub set forth in the Merger Agreement);
(b) by Horizons if Horizons reasonably determines that the timely
satisfaction of any condition to Horizons' performance under the Merger
Agreement has become impossible other than as a result of any failure on the
part of Horizons or any of the Designated Stockholders to comply with or
perform any covenant or obligation set forth in the Merger Agreement or in
any other agreement or instrument delivered to Titan;
(c) by either Titan or Horizons, if the Merger is not consummated by
June 30, 1998 for any reason, provided that the right to terminate the
Merger Agreement as provided in this clause (c) is not available to any
party whose failure to comply with or perform any covenant or obligation set
forth in the Merger Agreement resulted in the failure of the Merger to occur
on or before such date and such action or failure to act constitutes a
breach of the Merger Agreement; and
(d) by mutual written consent of Titan and Horizons.
In addition, Horizons may terminate the Merger Agreement if Horizons and its
Board of Directors conclude in good faith that Horizons must accept a Superior
Proposal; PROVIDED, HOWEVER, that Horizons shall pay Titan a nonrefundable fee
of $250,000 in cash upon Titan's election to accept such Superior Proposal.
Titan may terminate the Merger Agreement and Horizons shall pay to Titan a
termination fee of $250,000 payable upon termination of the Merger Agreement if
at any time prior to the Merger Horizons accepts a Superior Proposal or Horizons
fails to hold the Horizons Meeting or the Horizons stockholders fail to approve
the Merger.
EFFECT OF TERMINATION
If the Merger Agreement is terminated by Titan or Horizons as described
above, the Merger Agreement will be of no further force or effect, except that
certain provisions contained therein, including those discussed below relating
to "break-up" fees payable by Titan to Horizons or by Horizons to Titan under
certain circumstances, will survive such termination, and Titan, Horizons and
Titan Sub will remain liable for certain breaches of the Merger Agreement
occurring prior to such termination.
BREAK-UP FEES
The Merger Agreement provides that Horizons shall be obligated to pay to
Titan a termination fee of $250,000 if the Merger Agreement is terminated under
certain circumstances described above. Further, the Merger Agreement provides
that a termination fee of $250,000 will be incurred by Titan or Horizons, as
applicable, if the Merger Agreement is terminated by either party other than as
permitted in the Merger Agreement.
MERGER EXPENSES AND FEES AND OTHER COSTS
Except as described above, all fees and expenses incurred in connection with
the Merger Agreement and the transactions contemplated by the Merger Agreement
shall be paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that Titan shall pay all fees and
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expenses incurred in connection with the printing and filing of the Registration
Statement and this Prospectus/Proxy Statement and any amendments or supplements
thereto. See "--Termination of the Merger Agreement."
Pursuant to the Slavitt Ellington engagement letter, Horizons has agreed to
pay Slavitt Ellington for its services a fee of $25,000 in connection with the
delivery of the opinion of Slavitt Ellington. In addition, Horizons may pay
Slavitt Ellington for additional services beyond the scope of the original
engagement letter up to an additional $25,000. Horizons also has agreed to
indemnify Slavitt Ellington against certain liabilities, including liabilities
under the federal securities laws arising in connection with its engagement by
Horizons.
Titan estimates that Titan and Horizons will incur direct transaction costs
of approximately $1 million associated with the Merger. These nonrecurring
transaction costs will be charged to operations upon consummation of the Merger,
expected in the quarter ending March 31, 1998. See "Unaudited Pro Forma Combined
Condensed Financial Information" and "Risk Factors--Integration of Operations."
RELATED AGREEMENTS
STOCK VOTING AGREEMENT
In connection with the execution of the Merger Agreement, the Designated
Stockholders entered into a Stock Voting Agreement with Titan pursuant to which
each Designated Stockholder agreed that he will vote all shares of Horizons held
by him in favor of the Merger Proposal and each of the other actions
contemplated by the Merger Agreement.
AFFILIATE AGREEMENTS
To help ensure that its stockholders comply with applicable securities laws,
each of the Designated Stockholders has entered into an agreement pursuant to
which he has agreed not to sell, pledge or otherwise transfer such shares except
to the extent covered by and in compliance with Rule 145. Such agreements also
restrict such persons rights to transfer shares of Horizons Common Stock and
Horizons Series A Preferred Stock prior to the Merger and Titan Common Stock (or
any other securities of Titan) following the Merger until such time as Titan has
published financial results showing at least 30 days of combined operations of
Titan and Horizons. See "--Affiliates' Restrictions on Sale of Titan Common
Stock."
AFFILIATES' RESTRICTIONS ON SALE OF TITAN COMMON STOCK
The shares of Titan Common Stock to be issued pursuant to the Merger and the
Merger Agreement will have been registered under the Securities Act pursuant to
the Registration Statement, thereby allowing such shares to be traded without
restriction by all former holders of Horizons Common Stock and Horizons Series A
Preferred Stock who (i) are not deemed to be affiliates of Horizons at the time
of the Horizons Meeting (as "affiliates" is defined for purposes of Rule 145)
and (ii) who do not become affiliates of Titan after the Merger. The directors
of Horizons, certain officers and certain significant stockholders of Horizons
may be deemed to be affiliates of Horizons at the time of the Horizons Meeting.
The Designated Stockholders have entered into agreements not to make any
public sale of any Titan Common Stock received upon conversion of Horizons
Common Stock in the Merger except in compliance with Rule 145 or under certain
other limited circumstances. Such agreements also restrict such persons' rights
to transfer shares of Horizons Common Stock prior to the Merger and Titan Common
Stock (or any other securities of Titan) following the Merger until such time as
Titan has published financial results showing at least 30 days of combined
operations of Titan and Horizons. See "Terms of the Merger-- Related
Agreements--Affiliate Agreements" above. In general, Rule 145, as currently in
effect, imposes restrictions on the manner in which such affiliates may make
resales of Titan Common Stock and also on the number of shares of Titan Common
Stock that such affiliates and others (including persons with whom the
affiliates act in concert) may sell within any three-month period. Rule 145 will
not generally preclude sales by affiliates. These Rule 145 restrictions will
generally apply for a period of at least one year after the Effective Time (or
longer if the person remains or becomes an affiliate of Titan).
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
give effect to the Merger of Titan and Horizons under the pooling of interests
method of accounting. These pro forma financial statements are presented for
illustrative purposes only and therefore are not necessarily indicative of the
operating results or financial position that might have been achieved had the
Merger occurred as of an earlier date, nor are they necessarily indicative of
operating results or financial position which may occur in the future.
A pro forma combined condensed balance sheet is provided as of December 31,
1997, giving effect to the Merger as though it had been consummated on that
date. Pro forma combined condensed statements of operations are provided for
fiscal years ended December 31, 1995, 1996 and 1997, giving effect to the Merger
as though it had occurred at the beginning of the earliest period presented. For
purposes of the pro forma operating data, Titan's consolidated financial
statements for the three fiscal years ended December 31, 1997 have been combined
with Horizons' consolidated financial statements for the three fiscal years
ended January 31, 1996, 1997 and 1998.
The pro forma combined condensed statements of operations for each of the
three years in the period ended December 31, 1997 are derived from the audited
historical consolidated financial statements of Titan and historical
consolidated financial statements of Horizons, and should be read in conjunction
with historical financial statements and accompanying notes for Titan and
Horizons included elsewhere in this Prospectus/Proxy Statement.
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<PAGE>
THE TITAN CORPORATION AND HORIZONS TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN HORIZONS (NOTE 2) COMBINED
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues........................................................ $ 161,231 $ 26,491 $ -- $ 187,722
Costs and expenses:
Cost of revenues.............................................. 123,914 17,931 -- 141,845
Selling, general and administrative expense................... 25,867 3,921 -- 29,788
Research and development expense.............................. 5,113 49 -- 5,162
Restructuring and other (income) expense...................... 6,249 -- -- 6,249
---------- --------- ----------- -----------
Total costs and expenses.................................... 161,143 21,901 -- 183,044
Operating profit................................................ 88 4,590 -- 4,678
Interest expense................................................ (1,353) (546) -- (1,899)
Interest income................................................. 392 -- -- 392
---------- --------- ----------- -----------
Income from continuing operations before income taxes........... (873) 4,044 -- 3,171
Income tax provision (benefit).................................. (540) 1,537 -- 997
---------- --------- ----------- -----------
Income from continuing operations............................... $ (333) $ 2,507 -- $ 2,174
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Basic earnings per share
Income from continuing operations............................. $ (0.05) $ 0.33 $ -- $ 0.07
Weighted average shares....................................... 19,438 7,424 (4,075) 22,787
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Diluted earnings per share
Income from continuing operations............................. $ (0.05) $ 0.33 $ -- $ 0.07
Weighted average shares....................................... 19,438 7,424 (4,075) 22,787
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
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THE TITAN CORPORATION AND HORIZONS TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN HORIZONS (NOTE 2) COMBINED
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues......................................................... $ 155,954 $ 29,551 $ -- $ 185,505
Costs and expenses:
Cost of revenues............................................... 124,477 20,008 -- 144,485
Selling, general and administrative expense.................... 23,693 4,114 -- 27,807
Research and development expense............................... 3,576 105 -- 3,681
Restructuring and other (income) expense....................... -- -- -- --
---------- --------- ----------- -----------
Total costs and expenses..................................... 151,746 24,227 -- 175,973
Operating profit................................................. 4,208 5,324 -- 9,532
Interest expense................................................. (3,201) (592) -- (3,793)
Interest income.................................................. 639 -- -- 639
---------- --------- ----------- -----------
Income from continuing operations before income taxes............ 1,646 4,732 -- 6,378
Income tax provision............................................. 221 1,798 -- 2,019
---------- --------- ----------- -----------
Income from continuing operations................................ $ 1,425 $ 2,934 -- $ 4,359
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Basic earnings per share
Income from continuing operations.............................. $ 0.03 $ 0.39 $ -- $ 0.14
Weighted average shares........................................ 21,418 7,497 (4,272) 24,643
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Diluted earnings per share
Income from continuing operations.............................. $ 0.03 $ 0.39 $ -- $ 0.14
Weighted average shares........................................ 21,418 7,497 (4,272) 24,643
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
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THE TITAN CORPORATION AND HORIZONS TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN HORIZONS (NOTE 2) COMBINED
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues......................................................... $ 196,694 $ 26,281 $ -- $ 222,975
Costs and expenses:
Cost of revenues............................................... 151,140 18,335 -- 169,475
Selling, general and administrative expense.................... 23,503 4,699 -- 28,202
Research and development expense............................... 6,138 81 -- 6,219
Restructuring and other income (expense)....................... -- -- -- --
---------- --------- ----------- -----------
Total costs and expenses..................................... 180,781 23,115 -- 203,896
Operating profit................................................. 15,913 3,166 -- 19,079
Interest expense................................................. (5,179) (519) -- (5,698)
Interest income.................................................. 802 -- -- 802
---------- --------- ----------- -----------
Income from continuing operations before income taxes............ 11,536 2,647 -- 14,183
Income tax provision............................................. 4,243 1,006 -- 5,249
---------- --------- ----------- -----------
Income from continuing operations................................ $ 7,293 $ 1,641 -- $ 8,934
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Basic earnings per share
Income from continuing operations.............................. $ 0.29 $ 0.22 $ -- $ .32
Weighted average shares........................................ 22,267 7,497 (4,272) 25,492
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Diluted earnings per share
Income from continuing operations.............................. $ 0.27 $ 0.22 $ -- $ 0.29
Weighted average shares........................................ 27,506 7,497 (4,272) 30,731
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
53
<PAGE>
THE TITAN CORPORATION AND HORIZONS TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN HORIZONS (NOTE 2) COMBINED
---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash........................................................... $ 10,612 $ 523 $ -- $ 11,135
Investments.................................................... 4,499 -- -- 4,499
Accounts receivable--net....................................... 58,108 6,064 -- 64,172
Inventories.................................................... 15,980 -- -- 15,980
Net assets of discontinued operation........................... 11,512 (3,277) -- 8,235
Prepaid expenses and other..................................... 2,160 238 -- 2,398
Deferred income taxes.......................................... 6,845 -- 400 7,245
---------- ----------- ------ -----------
Total Current Assets......................................... 109,716 3,548 400 113,664
Property and equipment--net...................................... 23,936 305 -- 24,241
Goodwill--net.................................................... 20,367 -- -- 20,367
Other assets..................................................... 7,905 -- -- 7,905
Net assets of discontinued operation............................. 2,286 -- -- 2,286
---------- ----------- ------ -----------
Total assets................................................. $ 164,210 $ 3,853 $ 400 $ 168,463
---------- ----------- ------ -----------
---------- ----------- ------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit................................................. $ 12,350 $ 5,327 $ -- $ 17,677
Accounts payable............................................... 11,258 1,403 -- 12,661
Current portion of long-term debt.............................. 1,104 -- -- 1,104
Accrued compensation and benefits.............................. 8,899 2,561 -- 11,460
Other accrued liabilities...................................... 7,277 119 1,000 8,396
---------- ----------- ------ -----------
Total current liabilities.................................... 40,888 9,410 1,000 51,298
---------- ----------- ------ -----------
Long-term debt................................................... 37,310 184 -- 37,494
Other non-current liabilities.................................... 9,223 266 -- 9,489
Series B Cumulative convertible redeemable Preferred stock,
$3,000 liquidation preference, 6% cumulative annual dividend,
500,000 shares issued and
outstanding.................................................... 3,000 -- -- 3,000
Stockholders' equity:
Preferred stock; $1 par value; authorized 2,500,000 shares:.... 5 (5) --
Cumulative convertible, $13,897 liquidation preference: 694,872
shares issued and outstanding................................ 695 -- -- 695
Series A junior participating: authorized 250,000 shares: none
issued....................................................... -- -- -- --
Common stock; ($.01 par value, authorized 45,000,000 shares;
issued and outstanding: 23,804,809 shares)................... 238 75 (45) 268
Capital in excess of par value................................... 50,936 3,762 50 54,748
Retained earnings................................................ 24,511 (9,849) (600) 14,062
Treasury stock: (971,894 shares, at cost)........................ (2,591) -- -- (2,591)
---------- ----------- ------ -----------
Total stockholders' equity................................... 73,789 (6,007) (600) 67,182
---------- ----------- ------ -----------
Total liabilities and stockholders' equity....................... $ 164,210 $ 3,853 $ 400 $ 168,463
---------- ----------- ------ -----------
---------- ----------- ------ -----------
</TABLE>
54
<PAGE>
THE TITAN CORPORATION AND HORIZONS TECHNOLOGY, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma combined statements of operations combine the
historical statements of operations for The Titan Corporation ("Titan") for the
years ended December 31, 1997, 1996 and 1995 with the historical statements of
operations of Horizons Technology, Inc. ("Horizons") for the years ended January
31, 1998, 1997 and 1996.
NOTE 2. MERGER COSTS
Titan estimates that Titan and Horizons will incur direct transaction costs
of approximately $1 million associated with the Merger, consisting primarily of
investment banking, filings with regulatory agencies, accounting, legal,
financial printing and other related costs.
These estimates are preliminary and are therefore subject to change. These
costs will be charged to operations as incurred. The unaudited pro forma
combined balance sheet gives effect to such charges as if they had been incurred
as of December 31, 1997, but the effect has not been reflected in the unaudited
pro forma combined statements of operations as they are nonrecurring in nature.
The income tax effect of these charges has also been reflected as a pro
forma adjustment.
NOTE 3. PRO FORMA NET INCOME (LOSS) PER SHARE
The unaudited pro forma combined net income (loss) per common share is based
upon the weighted average number of common and equivalent shares of Titan and
Horizons outstanding for each period at the exchange ratio of approximately
$2.25 of Titan Common Stock for each share of Horizons Common Stock. The effect
of the assumed conversion of Titan's convertible subordinated debentures was
antidilutive with the exception of the year ended December 31, 1997, for the
periods presented.
55
<PAGE>
TITAN BUSINESS
GENERAL DEVELOPMENT AND DESCRIPTION OF BUSINESS
Titan provides state-of-the-art information technology and electronic
systems and services to commercial and government customers. Titan groups its
businesses into four core business segments-Communications Systems, Software
Systems, Information Technologies, and Medical Sterilization and Food
Pasteurization-and a fifth business segment, Emerging Technologies and
Businesses. The Communications Systems segment, through Titan's wholly owned
subsidiary Linkabit Wireless, Inc. ("Linkabit Wireless"), develops and produces
advanced satellite ground terminals, satellite voice/data modems, networking
systems and other products used to provide bandwidth-efficient communications.
Linkabit Wireless currently has a registration statement on file with the
Commission for a proposed public offering of approximately 26% of its common
stock. There can be no assurance that the proposed public offering will be
consummated. The Software Systems segment, through Titan's wholly owned
subsidiary Titan Software Systems, is a systems integrator that provides a broad
range of information technology services and solutions. The Information
Technologies segment, through Titan's wholly owned subsidiary Titan Technologies
and Information Systems Corporation, provides information systems solutions to
defense-related government customers with large data management, information
manipulation, information fusion, knowledge-based systems and communications
requirements, and develops and manufacturers digital imaging products,
electro-optical systems and threat simulation/training systems primarily used by
the defense and intelligence communities. The Medical Sterilization and Food
Pasteurization segment, through Titan's wholly owned subsidiary Titan
Purification, Inc., utilizes its linear accelerator technology to provide
sterilization systems and services for medical device manufacturers and for the
reduction of contamination from E. coli, salmonella and other microorganisms in
food. The Emerging Technologies and Businesses segment consists of new
technologies and early-stage businesses, including minority-owned businesses,
utilizing technologies originally developed by Titan.
In February 1998, Titan merged with DBA, in a stock for stock transaction.
Titan issued approximately 6,100,000 shares of common stock in exchange for all
the outstanding common shares of DBA. The merger has been accounted for as a
pooling of interests. Accordingly, all information and/or other disclosures
included in this registration statement, including the consolidated financial
statements of The Titan Corporation and its subsidiaries, have been restated to
include DBA for all periods presented.
COMMUNICATIONS SYSTEMS SEGMENT
The Communications Systems segment, through Linkabit Wireless, develops and
produces advanced satellite ground terminals, satellite voice/data modems,
networking systems and other products used to provide bandwidth-efficient
communications for commercial and government customers. Linkabit Wireless'
market-driven product development efforts have resulted in products which are
particularly well suited for two significant market opportunities, rural
telephony and secure defense communications.
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. Linkabit Wireless' commercial products leverage the advanced
technologies and broad technical competencies developed from the substantial
investment in its government business. Similarly, the government business has
benefited from Linkabit Wireless' investment in the design and production of
cost-effective commercial products which can satisfy the government's demand for
more commercial off-the-shelf products.
RURAL TELEPHONY. Linkabit Wireless' 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.
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<PAGE>
Linkabit Wireless develops and markets its rural telephony products through
strategic alliances. In September 1995, Linkabit Wireless received an
approximately $10 million contract from PT. Pasifik Satelit Nusantra ("PSN") to
develop the Xpress Connection system for use in a rural telephony network in
Indonesia. In December 1997, Linkabit Wireless received a follow-on order from
PSN for 10,000 additional terminals at a contract value of approximately $27
million, with delivery to begin immediately and be completed by May 1999. 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. Linkabit
Wireless and PSN are marketing Xpress Connection to other countries covered by
PSN's satellites. In addition, Linkabit Wireless is working with Alcatel
Telspace ("Alcatel") to market Xpress Connection to other developing regions,
including Africa and Latin America.
Linkabit Wireless 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 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. Linkabit
Wireless will develop key portions of the ground terminals, primarily RF
circuits, software and Application Specific Integrated Circuit (ASIC) chip sets
incorporating technology derived from Linkabit Wireless' Xpress Connection.
Linkabit Wireless is leveraging its experience in rural telephony to
selectively pursue private networking opportunities in developing countries. In
Thailand, Linkabit Wireless is providing elements of a private voice, data and
facsimile communications network for use by The Bank for Agriculture and
Agricultural Cooperatives.
SECURE DEFENSE COMMUNICATIONS PRODUCTS. Linkabit Wireless' leading defense
product, 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. This terminal condenses the communications capabilities
formerly housed in two six-foot high racks into a single 25-inch high terminal
and provides a weight savings of over 500 pounds and a power savings of
approximately 60% to 70% over prior systems. In October 1997, Linkabit Wireless
was awarded an $8.2 million production option to its ongoing U.S. Navy contract
for Mini-DAMA UHF satellite communications terminals for delivery through
February 1999.
The industries and markets in which Linkabit Wireless competes are highly
competitive, and Titan expects that competition will increase in such markets.
Linkabit Wireless encounters intense competition from numerous other companies,
including large and emerging domestic and international companies, many of which
have far greater financial, engineering, technological, marketing, sales and
distribution and customer service resources than Linkabit Wireless. Some of
Linkabit Wireless' competitors in the secure defense communications market
include GEC (UK), Raytheon Corporation, Rockwell International and ViaSat, Inc.
Some of Linkabit Wireless' commercial competitors include Gilat Satellite
Networks Ltd., Hughes Network Systems, Scientific Atlanta Inc., STM Wireless
Inc. and ViaSat, Inc. Furthermore, the satellite communications industry itself
competes with other technologies such as terrestrial wireless, copper wire and
fiber optic communications systems.
As of December 31, 1997, Linkabit Wireless had a total of 195 employees.
SOFTWARE SYSTEMS SEGMENT
Titan's Software Systems segment ("Titan Software") is a systems integrator
that provides a broad range of information technology ("IT") services and
solutions to commercial and non-defense government clients.
Titan Software provides integration services and solutions for companies
with distributed computing environments. Titan Software's services include
systems integration and package software implementation services, business
process re-engineering, data warehousing and database administration,
client/server
57
<PAGE>
application development, Year 2000 solutions, intranet/internet infrastructure
and development, and electronic commerce solutions.
To enhance its service offerings and expand its customer base, Titan
Software is actively developing relationships with software companies offering
products that require integration. For example, Titan Software and PointCast are
approaching large PointCast users and offering Titan Software's services to
install, integrate and develop custom features, including executive systems
interfaced with PointCast, to add value to PointCast's push technology.
The IT services industry is highly competitive. Titan Software competes
against a large number of multinational, national, regional and local firms,
including system integrators, custom software developers and service groups of
software vendors. Many of Titan Software's competitors have substantially
greater financial, technical and marketing resources and greater name
recognition than Titan Software. In addition, many of Titan Software's clients
have internal IT resources and may elect to do work in-house instead of using
Titan Software's services. Titan Software believes that the primary competitive
factors for its IT services include technical skills, knowledge of specific
industry operations for which software is integrated or developed, customer
relationships and quality and cost of service.
As of December 31, 1997, Titan Software had a total of 74 employees.
INFORMATION TECHNOLOGIES SEGMENT
Titan's Information Technologies segment ("Titan Information Technologies")
provides information systems solutions to defense-related government customers
with large data management, information manipulation, information fusion,
knowledge-based systems and communications requirements. Additionally,
Information Technologies develops and manufactures digital imaging products,
electro-optical systems and threat simulation/training systems primarily used by
the defense and intelligence communities.
Titan Information Technologies focuses on marketing its services to U.S.
government agencies, in particular the intelligence community, NATO and other
U.S. defense partners around the world where Titan Information Technologies has
extensive knowledge of the enterprise's operations, relationships and
information systems needs. In addition, Titan Information Technologies has
expanded its defense systems business capabilities to provide a full range of
systems engineering procurement and technical support for the Command, Control,
Communication, Computing and Intelligence (C4I) initiatives of the Department of
Defense. This expertise assists Titan Information Technologies in providing a
comprehensive solution to a customer's problem which is compatible with the
customer's overall information systems architecture and strategy, as opposed to
developing merely a technical solution to a specific problem. Titan plans to
further support this segment's growth through active participation in the
on-going defense industry consolidation, taking advantage of synergistic
acquisition opportunities. As discussed previously, in February 1998, Titan
acquired DBA, a defense contractor specializing in imaging and electro-optical
systems.
Titan Information Technologies' services include systems analysis and
design, object-oriented software development services and systems integration.
Titan Information Technologies' initial work generally involves a joint analysis
of the customer's enterprise structure and processes and information system
needs. Once this analysis is completed, Titan Information Technologies provides
process re-engineering and designs the technology solution to meet the
customer's needs. This process typically involves software development by Titan
Information Technologies, coupled with integration of off-the-shelf software and
hardware as available. Titan Information Technologies also provides a variety of
professional and technical support services, including electronics and
mechanical design and fabrication, computer-aided drafting and manufacturing
services, technical documentation and prototyping.
During 1997, Titan Information Technologies was awarded four contracts with
an aggregate potential value exceeding $145 million. These contracts provide for
communications systems integration, engineering and technical support services
for the U.S. Government over a five-year period.
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Titan's newly acquired subsidiary, DBA, provides specialized products and
services in two areas of concentration: imaging systems and electro-optical
systems. The imaging systems area includes the acquisition of image data, the
processing, manipulation and exploitation of that data, its dissemination in
either electronic or hard copy form, and the development of derivative products
from imagery. Applications include development and support of precise mapping
and targeting systems, development and support of imagery intelligence systems,
development of geographic information systems and their data bases, and
development of products to convert images from the hard copy to digital form and
output digital images in hard copy form. The electro-optical systems area
encompasses the design, development and manufacture of electronic products and
systems. This equipment is primarily used in the test and evaluation of weapons
systems and is employed in both test and training environments. Specific
products include automatic video trackers for use in precision test range
applications and tactical fire control systems and infrared sources used in the
calibration of infrared images and heat seeking missiles. Systems include range
systems for crew and system training against high fidelity replications of air
defense threats in simulations as well as test range command and control systems
for evaluation of crew and system effectiveness.
Titan Information Technologies is one of many companies involved in
providing information systems solutions for a variety of programs for agencies
of the U.S. government and prime contractors for these agencies. Most activities
in which Titan Information Technologies engages are very competitive and require
highly skilled and experienced technical personnel. Many of Titan Information
Technologies' competitors have significantly greater financial and personnel
resources than does Titan Information Technologies. Competitors in this industry
include Booz-Allen Hamilton Inc., Science Applications International
Corporation, Computer Science Corporation, BDM Corporation, Anteon Corp.,
Raytheon/E-Systems, General Dynamics, Intergraph, Lockheed-Martin, TRW,
Contraves, Morpho, Autometrics and Metric. Titan Information Technologies
believes that the primary competitive factors for its information systems
services include technical skills, experience in the industry and customer
relationships.
As of December 31, 1997, Titan Information Technologies had a total of 984
employees.
MEDICAL STERILIZATION AND FOOD PASTEURIZATION SEGMENT
Titan's Medical Sterilization and Food Pasteurization Segment ("Titan
Purification") utilizes its linear accelerator technology to provide
sterilization systems and services for medical device manufacturers.
Titan Purification has developed a proprietary electronic beam sterilization
process that utilizes linear accelerator technology. Titan believes its E-Beam
sterilization system offers a reliable, environmentally acceptable and efficient
alternative to both Gamma sterilization and EtO sterilization. Titan
Purification E-Beam sterilization process disrupts the DNA structure of
microorganisms on or within the product rendering them sterile.
Titan Purification provides an on-site system which is a compact, low-cost,
turnkey system currently available for customers' in-house manufacturing use. In
February 1997, Titan Purification agreed to install its first turnkey on-site
sterilization system at Guidant Corporation, one of the leading medical device
manufacturers in the United States. Titan Purification also provides contract
sterilization services through its facilities in Denver and San Diego. Titan
Purification has been providing such contract services since 1993.
POTENTIAL MARKETS. Although contaminated food is one of the most widespread
health problems in the world, lack of regulatory approval and consumer
acceptance historically has limited the development of the market for food
pasteurization. Estimates from the Centers for Disease Control and Prevention in
Washington, D.C. suggest that up to 33 million people in the United States are
stricken with food-borne diseases each year. In addition, nearly 200 people in
the United States die each week from illnesses they contract from food. Although
the recent outbreaks of E. coli and salmonella have increased public interest in
food pasteurization, the potential market for food pasteurization remains
largely undeveloped. Titan
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believes the absence of a market for food pasteurization has been due in part to
the lack of FDA approval for the pasteurization of most foods, including red
meat. On December 3, 1997, however, the FDA approved irradiation of red meat.
The FDA also found that irradiation of meat, at its recommended doses, affects
neither the food's taste nor its nutritional value in any detectable way. The
meat pasteurization process is still subject to final approval by the USDA,
which approval the USDA expects to provide sometime in 1998. Despite the FDA's
approval, however, the development of this potential market is still dependent
on broad consumer acceptance of pasteurized foods, which may not occur. Although
Titan Purification, until recently, has focused its efforts in the area of
medical device products, Titan Purification believes it is well-positioned to
take advantage of the food pasteurization market if it develops.
Although Titan Purification believes that it is the only provider of small,
low-cost, turnkey systems for in-house manufacturers, Titan Purification
currently faces competition from several providers of contract Gamma
sterilization services, several providers of contract E-Beam sterilization
services and a significantly larger number of providers of contract
sterilization services. Certain of Titan Purification's competitors and
potential competitors have substantially greater financial, marketing,
distribution, technical and other resources than Titan Purification, or offer
multiple sterilization technologies or operate multiple sterilization facilities
at geographically advantageous sites, which may enable them to address a broader
range of the sterilization requirements of individual customers.
As of December 31, 1997, Titan Purification had a total of 28 employees.
EMERGING TECHNOLOGIES AND BUSINESSES SEGMENT
The Emerging Technologies and Businesses segment consists of new
technologies and early-stage businesses, including minority-owned businesses,
utilizing technologies originally developed by Titan. In addition to its
minority-owned businesses, the Emerging Technologies and Businesses segment owns
patents relating to technologies derived from research and development
activities of Titan. Titan intends to utilize both public and private
investments as the primary funding source for the continued development of its
technologies. Examples of such technologies and businesses of Titan are as
follows:
IPIVOT, INC. IPivot, Inc. ("IPivot") is a minority-owned company of Titan
that develops software to enable internet and intranet providers to reduce
server blockage and scale to high-end complex environments in a cost-effective
manner. IPivot products are still in the development stage.
TOMOTHERAPEUTICS, INC. TomoTherapeutics, Inc. is a majority-owned company
of Titan that is developing an x-ray needle system designed to rapidly generate
x-rays at a local level in the treatment of tumors and other abnormal tissues.
This system is still in the development stage. Tomo Therapeutics Inc. recently
licensed its technology to Influence, Inc. in exchange for a potential equity
interest in Influence, Inc., and royalty payments.
The Emerging Technologies and Businesses segment is attempting to
commercialize new technologies and products in relatively new markets. The
success of these technologies and businesses will depend on many factors,
including the ability of Titan or its partners to raise the capital necessary to
fund development, to attract, retain and motivate key personnel and to develop
markets for new products.
GOVERNMENT CONTRACTS
A substantial portion of Titan's revenues are dependent upon continued
funding of U.S. and allied government agencies as well as continued funding of
the programs targeted by Titan's businesses. For the years ended December 31,
1997, 1996 and 1995, U.S. government business represented approximately 75%, 78%
and 67% of Titan's revenues, respectively. U.S. defense budgets and the budgets
of other government agencies have been declining in real terms since the
mid-1980's, and may continue to do so in the future. Any significant reductions
in the funding of U.S. government agencies or in the funding areas
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targeted by Titan's businesses could materially and adversely affect Titan's
business, results of operations and financial condition.
Titan's direct contracts with the U.S. government and its subcontracts with
prime contractors that have direct contracts with the U.S. government are
subject to termination for the convenience of the government, and termination,
reduction or modification in the event of any change in the government's
requirements or budgetary constraints. When Titan subcontracts with prime
contractors, such subcontracts are also subject to the ability of the prime
contractor to perform its obligations under its prime contract. Titan often has
little or no control over the resources allocated by the prime contractor to the
prime contract, and any failure by the prime contractor to perform its
obligations under the prime contract could result in Titan's loss of its
subcontract. In addition, Titan's contract-related costs and fees, including
allocated indirect costs, are subject to audits and adjustments by negotiation
between Titan and the U.S. government. As part of the audit process, the
government audit agency verifies that all charges made by a contractor against a
contract are legitimate and appropriate. Audits may result in recalculation of
contract revenues and non-reimbursement of some contract costs and fees. Any
audits of Titan's contract-related costs and fees could result in material
adjustments to Titan's revenues. In addition, 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. Any failure of such agencies to
continue to fund such contracts could have a material adverse effect on Titan's
business, results of operations and financial condition.
The following table gives the percentage of revenues realized by Titan from
the three primary types of Government contracts during the years indicated.
<TABLE>
<CAPTION>
CONTRACT TYPE 1997 1996 1995
- --------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Cost Reimbursement................................................... 56.4% 55.7% 49.7%
Fixed Price.......................................................... 36.8 39.0 46.3
Time and Materials................................................... 6.8 5.3 4.0
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
INDUSTRY SEGMENTS, SIGNIFICANT CUSTOMERS AND EXPORT REVENUES
Reference is made to Note 6 to the accompanying consolidated financial
statements.
RAW MATERIALS
Titan operates both fabrication and assembly facilities and also purchases
certain components and assemblies from other suppliers. No one supplier accounts
for a significant portion of total purchases.
In connection with the sale of various products, Linkabit Wireless enters
into supplier agreements with various contract manufacturers to purchase certain
components incorporated into certain of the segment's products. As of December
31, 1997 Linkabit Wireless has non-cancelable commitments of $4,354,000,
primarily with two vendors, for purchases through 1998. Titan believes that the
loss of one or more of these agreements would not have a material adverse impact
on Titan's operations.
PATENTS, TRADEMARKS AND TRADE SECRETS
The policy of Titan is to apply for patents and other appropriate statutory
protection when it develops new or improved technology. Titan presently holds
over 45 U.S. patents, as well as a number of trademarks and copyrights. However,
it does not rely solely on such statutory protection to protect its technology
and intellectual property. In addition to seeking patent protection for its
inventions, Titan relies on the laws of
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unfair competition and trade secrets to protect its unpatented proprietary
rights. Titan attempts to protect its trade secrets and other unpatented
proprietary information through agreements with customers, vendors, employees
and consultants. In addition, various names used by Titan for its products and
services have been registered with the U.S. Patent and Trademark Office.
BACKLOG
Contracts undertaken by Titan 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 projects, no assurance can be
given as to when revenue will be realized on projects included in Titan's
backlog. Although backlog represents only business which is considered to be
firm, there can be no assurance that cancellations or scope adjustments will not
occur. The majority of backlog represents contracts under the terms of which
cancellation by the customer would entitle Titan to all or a portion of its
costs incurred and potential fees.
Titan's commercial backlog, by segment, is approximately $28.0 million,
$11.5 million, $4.3 million, $2.5 million and $1.2 million for Communications
Systems, Medical Sterilization and Food Pasteurization, Information
Technologies, Emerging Technologies and Businesses, and Software Systems,
respectively.
Many of Titan'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 Titan 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 Titan's customers
incrementally allot funding to existing contracts, whether Titan 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 Titan.
"Backlog" is the total of the commercial and government funded and unfunded
backlog.
Titan's backlog consists of the following approximate amounts as of December
31:
<TABLE>
<CAPTION>
BACKLOG 1997 1996
- ------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Commercial backlog........................................... $ 48,512,000 $ 33,193,000
U.S. Government funded backlog............................... 95,448,000 60,368,000
U.S. Government unfunded backlog............................. 206,001,000 115,722,000
-------------- --------------
$ 349,961,000 $ 209,283,000
-------------- --------------
-------------- --------------
</TABLE>
In addition to the backlog described above, at December 31, 1997, Titan had
remaining priced options of over $56 million from the U.S. Navy for full-scale
production of its Mini-DAMA satellite communications terminal. Titan expects
that a substantial number of these options will be exercised in the future,
although there is no assurance that any options will be exercised.
Management believes that year-to-year comparisons of backlog are difficult
and not necessarily indicative of future revenues. Titan'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.
Titan expects to realize approximately 35% of its 1997 backlog by the end of
1998.
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RESEARCH AND DEVELOPMENT
Titan maintains a staff of engineers, other scientific professionals and
support personnel engaged in development of new applications of technology and
improvement of existing products. These programs' costs are expensed as
incurred. Total expenditures for research and development were $11,279,000,
$8,082,000 and $15,876,000 in 1997, 1996 and 1995, respectively. These
expenditures included company funded research and development of $6,138,000,
$3,576,000 and $5,113,000, and customer sponsored research and development of
$5,141,000, $4,506,000 and $10,763,000, in 1997, 1996 and 1995, respectively.
The majority of Titan's customer sponsored research and development activity is
funded under contract to the U.S. Government.
EMPLOYEES
At the end of fiscal 1997, Titan employed approximately 1,400 employees,
predominantly located in the United States.
PROPERTIES
Titan's operations occupy approximately 786,100 square feet of space located
throughout the United States. The large majority of the space is office space.
Substantially all of Titan's facilities are leased. For lease commitment
information, reference is made to Note 9 to the accompanying financial
statements.
It is management's policy to maintain Titan's facilities and equipment in
good condition and at a high level of efficiency. Existing facilities are
considered to be generally suitable and adequate for Titan's present needs.
Substantially all of the machinery and equipment employed by Titan in its
business is owned by Titan.
The locations of the principal operating facilities of Titan and its
consolidated subsidiaries at the end of 1997 were as follows:
COMMUNICATIONS SYSTEMS
San Diego, California
INFORMATION TECHNOLOGIES
Reston, Virginia
Norfolk, Virginia
Hanover, Maryland
San Leandro, California
Vallejo, California
San Diego, California
Heathrow, Florida
Denver, Colorado
Westborough, Massachusetts
Akron, Ohio
Huntsville, Alabama
Niantic, Connecticut
Chatsworth, California
Albuquerque, New Mexico
Middleton, Rhode Island
National City, California
Port Huenome, California
Gates Ferry, Connecticut
Melbourne, Florida
Fairfax, Virginia
SOFTWARE SYSTEMS
San Diego, California
Reston, Virginia
Washington, D.C.
Colorado Springs, Colorado
Tampa, Florida
Dallas, Texas
Dublin, California
MEDICAL STERILIZATION AND
FOOD PASTEURIZATION
San Diego, California
Denver, Colorado
Dublin, California
EMERGING TECHNOLOGIES AND BUSINESSES
Tempe, Arizona
Phoenix, Arizona
San Diego, California
Dublin, California
Richmond, Virginia
Albuquerque, New Mexico
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LEGAL PROCEEDINGS
In the ordinary course of business, defense contractors are subject to many
levels of audit and investigation by various government agencies. Further, Titan
and its subsidiaries are subject to claims and from time-to-time are named as
defendants in legal proceedings. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of Titan.
Titan is involved in the appeal of a judgment resulting from the trial of a
lawsuit filed by a former employee claiming, among other things, wrongful
termination and discrimination. Titan intends to vigorously pursue and defend
against the appeal of this case. While it is not feasible to predict the outcome
of this case, management believes that its ultimate disposition will not have a
material adverse effect on the financial position or results of operations of
Titan.
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TITAN MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS.)
COMPANY OVERVIEW
Titan provides state-of-the-art information technology, electronic systems,
digital imaging products and services to commercial and government customers.
These systems and services enable Titan's customers to cost-effectively
generate, digitize, process, compress, transmit, store or distribute information
in a timely manner. Titan operates its business primarily through subsidiaries
that are focused on targeted markets and/or technologies. In 1991, Titan
implemented a market-driven strategy to leverage the technologies and expertise
developed through its defense businesses into targeted commercial markets.
Initially, Titan made the investments necessary to commercialize its core
technologies.
A substantial portion of Titan's revenues is dependent upon continued
funding of U.S. and allied government agencies as well as continued funding of
the programs targeted by Titan's businesses. For the years ended December 31,
1997, 1996 and 1995, U.S. government business represented approximately 75%, 78%
and 67% of Titan's revenues, respectively. U.S. defense budgets and the budgets
of other government agencies have been declining in real terms since the
mid-1980's, and may continue to do so in the future. Any significant reductions
in the funding of U.S. government agencies or in the funding areas targeted by
Titan's businesses could materially and adversely affect Titan's business,
results of operations and financial condition.
Several of Titan's businesses conduct substantial business in foreign
countries, primarily within Asia. Titan generally denominates its foreign
contracts in U.S. dollars, and Titan believes that its global competitors follow
similar business practices. Accordingly, Titan 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 Titan's products less affordable and thus reduce the demand
for such products. Titan attempts to mitigate credit risk relative to sales to
foreign customers through its policy of generally requiring payment in the form
of stand-by letters of credit, advance deposits or wire transfers prior to
shipment.
In the fourth quarter of 1997, Titan realigned certain operations within its
segments and added a fifth segment to better position these operations for
strategic transactions pursuant to Titan's corporate strategy. Titan now groups
its businesses into four core business segments--Communications Systems,
Software Systems, Information Technologies, and Medical Sterilization and Food
Pasteurization--and a fifth business segment, Emerging Technologies and
Businesses. This realignment conforms to the provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." All segment data for prior years have been
restated to conform to the 1997 presentation.
Throughout 1997, Titan closely followed its well-defined strategy designed
to create value for Titan's stockholders, and positioned itself to continue
successfully executing this strategy in the future. Titan expanded and improved
upon its existing products and services in each of its five business segments
and continued to successfully leverage its technologies and expertise into
additional targeted markets.
In December 1997, Titan filed a registration statement with the Commission
in connection with a proposed public offering of approximately 26% of its
Linkabit Wireless common stock. Linkabit Wireless, which constitutes Titan's
Communications Systems segment, develops and produces advanced satellite ground
terminals, satellite voice/data modems, networking systems and other products
used to provide bandwidth-efficient communications for commercial and government
customers. Its market-driven product development efforts have resulted in
products which are particularly well-suited for rural telephony and secure
defense communications. There can be no assurance that the proposed public
offering will be consummated.
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In 1997, Linkabit Wireless successfully completed its initial contract with
PSN to deliver 2,000 rural telephony terminals, was awarded a $27 million
purchase agreement for delivery of an additional 10,000 Xpress Connection
terminals to PSN, and was awarded a subcontract from Alcatel to participate in a
consortium formed to supply the ground segment for the Multi Media Asia
Satellite Telecommunications System. The Company is continually assessing the
impact of the recent events in Asia, including the currency devaluation in
Indonesia, Malaysia, Taiwan and the Philippines, on its Communications Systems
segment. Linkabit Wireless also received an $8.2 million production option to
its ongoing Navy contract for Mini-DAMA UHF satellite communications terminals
and, in December 1997, achieved U.S. Navy certification for its Mini-DAMA
products. Through Linkabit Wireless, Titan's Communications Systems segment also
expanded the number of its strategic relationships, and the breadth of such
relationships, which now include Motorola, Alcatel and PSN.
Titan's Software Systems segment continued to diversify its customer base
and significantly improved its operating performance in 1997. Software Systems
is a systems integrator that provides system integration services and solutions
for commercial and non-defense government clients with distributed computing
environments. The services provided in this business include systems
integration, business process re-engineering, data warehousing and database
administration, client/server application development, Year 2000 solutions, and
intranet/internet infrastructure design and development.
During 1997, an operating entity in the Software Systems segment was awarded
master service agreements to provide a complete menu of Year 2000 services for
four domestic telecommunications companies. A contract for the design and
installation of a fully integrated back-up system for the FAA is nearing
successful completion, and efforts to increase activities with the FAA have
shown positive results.
This segment's customer base expanded throughout the year. Its revenues,
however, continue to be dependent on a limited number of customers, and the
recruitment of specially qualified software engineers and software code writers
continues to be a challenge.
Record revenues and operating profits were achieved by Titan's Information
Technologies segment in 1997. This segment provides information systems
solutions primarily to government customers with large data management,
information manipulation, information fusion, knowledge-based systems, and
communications requirements. This segment also supports high priority government
programs by providing system integration, information systems engineering
services, development of systems and specialized products, as well as systems
research, development and prototyping. Other services provided include research
and development under government funded contracts for the DoD and other
customers.
During 1997, operating entities in the Information Technologies segment were
awarded four contracts with an aggregate potential value exceeding $145 million.
These contracts provide for communications systems integration, engineering and
technical support services for the U.S. government over a five-year period.
Titan plans to further support this segment's growth through active
participation in the on-going defense industry consolidation, taking advantage
of synergistic acquisition opportunities. In February 1998, Titan merged with
DBA, a defense contractor specializing in imaging products, electro-optical
systems and threat simulation/training systems. On February 26, 1998, Titan
entered into a definitive merger agreement with Horizons Technology, Inc.
("Horizons"), a Delaware Corporation, whereby, if approved by the stockholders
of Horizons, Horizons will become a wholly-owned subsidiary of Titan, in a
stock-for-stock transaction. The merger will be accounted for as a pooling of
interests.
Titan's Medical Sterilization and Food Pasteurization segment achieved
record revenues and significantly improved its operating performance during
1997. This segment currently provides medical product sterilization services at
two Titan facilities and manufactures and sells turnkey electron beam
sterilization and food pasteurization systems to customers for use in their own
facilities.
1997 operating results for this segment include the sale of an in-house
sterilization system to Baxter Healthcare as well as the design and
near-complete installation of a compact turnkey sterilization system to
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Guidant Corporation. More than a dozen new customers for medical product
sterilization services were added to this segment's customer base during 1997,
and, at December 31, 1997, each of its two facilities achieved record
utilization levels.
The Emerging Technologies and Businesses segment experienced a decline in
revenues and approximately break even operating results in 1997. Revenues and
profitability can vary widely in this segment as a result of both the number of
business ventures within this segment and their start-up nature. This segment
applies Titan's proprietary knowledge and core competencies to industrial and
commercial opportunities. Titan views this segment as an incubator for potential
new businesses which can be developed with minimal Titan investment by
leveraging off of market resources and capital to develop products and bring
them to market. Titan's strategy is to ultimately maintain less than a majority
interest in these businesses, thereby reducing financial risk while maintaining
the potential to achieve a significant return on these investments. During 1997,
Titan spun-off a majority interest in an emerging technologies business which
has developed an internet software product which significantly reduces server
bottlenecks. One Emerging Technologies operating entity was awarded several
contracts to provide specialized system integration. Titan believes that it will
continue to generate valuable technology in this segment and plans to pursue
development and licensing of these technologies, joint ventures, spin-offs, and
other transactions which may ultimately add value to Titan stockholders.
OPERATING RESULTS
In February 1998, Titan acquired DBA, in a stock for stock transaction. The
merger has been accounted for as a pooling of interests. Accordingly, the
operating results and related discussion that follow reflect the restatement of
the consolidated operating results of The Titan Corporation and its subsidiaries
to include DBA for all periods presented.
The table below sets forth Titan's operating results for each of the three
years in the period ended December 31, 1997:
<TABLE>
<CAPTION>
1997 1996(1) 1995(1)
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................................. $ 196,694 $ 155,954 $ 161,231
Operating profit......................................... 15,913 4,208 88
Interest expense, net.................................... 4,377 2,562 961
Income (loss) from continuing operations, before income
taxes.................................................. 11,536 1,646 (873)
Income tax provision (benefit)........................... 4,243 221 (540)
Loss from discontinued operation, net.................... (343) (3,642) (1,972)
Net income (loss)........................................ 6,950 (2,217) (2,305)
</TABLE>
The following table sets forth, as a percentage of total revenues, certain
operations data for the periods indicated.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................. 100.0% 100.0% 100.0%
Operating profit..................................................... 8.1 2.7 0.1
Interest expense, net................................................ 2.2 1.7 0.6
Income (loss) from continuing operations, before income taxes........ 5.9 1.0 (0.5)
Income tax provision (benefit)....................................... 2.2 0.1 (0.3)
Loss from discontinued operation, net................................ (0.2) (2.3) (1.2)
Net income (loss).................................................... 3.5 (1.4) (1.4)
</TABLE>
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<PAGE>
As noted above, Titan's consolidated revenues were $196,694, $155,954 and
$161,231 in 1997, 1996 and 1995, respectively. Increased revenues were reported
in the Communications Systems, Information Technologies, and Medical
Sterilization and Food Pasteurization segments in 1997. Revenue growth in 1997
was primarily attributable to increased deliveries of rural telephony units and
Mini-DAMA units in the Communications Systems segment, and from the revenues
generated by Eldyne and Unidyne, which were acquired in May 1996 in the
Information Technologies segment.
Titan's consolidated operating profit has been significantly impacted by a
number of factors in each of the three years shown above. The primary factor in
the lower performance in operations for 1996 and 1995 compared to 1997 was
Titan's continuing investment in and funding of its commercial ventures.
Selling, general and administrative ("SG&A") expenses were $23,503, $23,693 and
$25,867 in 1997, 1996 and 1995, respectively. The 1997 and 1996 decreases in
both absolute dollars and as a percentage of revenues reflect cost cutting
efforts, economies of scale and efficiencies that have been achieved. Since
1996, Titan has taken actions to reduce administrative costs commensurate with
changes in revenue volumes. Most notably, reductions were made in the Software
Systems segment in 1996 when revenues were significantly impacted by reduced
demand from a major telecommunications customer. In addition, Titan eliminated
many duplicate functions and costs as part of its process of integrating the
Eldyne and Unidyne businesses. In early 1997, Titan implemented a reengineering
process of its administrative functions. This reengineering focused on the
elimination of redundancies, resulting in increased efficiencies and reduced
infrastructures, and ultimately resulted in reduced costs. Titan intends to
continue this process through 1998. As such, general and administrative expenses
are not expected to increase as a percentage of revenues in 1998.
Research and development ("R&D") expenses were $6,138, $3,576 and $5,113, in
1997, 1996 and 1995, respectively, primarily reflecting the significant
development of satellite communications products in Titan's Communications
Systems segment. An increased level of R&D spending in 1997 was planned, though
not at the magnitude incurred, as certain development and certification efforts
in Linkabit Wireless took longer than expected to complete. The level of R&D
expense incurred, though anticipated to remain significant, is expected to
decrease as a percentage of revenues in 1998 as demand increases for existing
developed products.
Net interest expense has increased over the three-year period ended December
31, 1997, primarily as a direct result of the level of Titan's borrowings. In
1997, the principal component of interest expense is related to the convertible
subordinated debentures issued by Titan in November 1996. In 1996 and 1995, the
principal component of interest expense is related to Titan's borrowings under
its bank lines of credit. Borrowings from Titan's bank lines of credit averaged
$10,803, $12,315 and $6,400 at weighted average interest rates of 8.1%, 8.2% and
8.8% during 1997, 1996 and 1995, respectively. Also included in interest expense
is interest on Titan's deferred compensation and retiree medical obligations.
Interest expense related to these items was $767, $801 and $726 for 1997, 1996
and 1995, respectively. Increased interest income from 1995 to 1996 resulted
from increasing levels of cash available for investment.
Income taxes reflect effective rates of 37%, 13% and 62% in 1997, 1996 and
1995, respectively. The difference between the actual provision and the
effective rate (based on the United States statutory tax rate) in 1997 was due
primarily to state income taxes. The 1996 and 1995 tax rates reflect variation
in timing of utilization of net operating losses by Titan and DBA, due to the
inability to file a consolidated tax return in prior periods. Titan expects its
effective income tax rate to remain stable in the foreseeable future.
Early in 1997, Titan announced its decision to divest its broadband
communications business in order to focus on businesses that are better aligned
with Titan's available resources and offer a greater opportunity to add
stockholder value. At that time Titan took actions to significantly reduce the
broadband communications business operating costs. Revenues for the broadband
communications business were $551, $2,238 and $2,432 in 1997, 1996 and 1995,
respectively. Included in the loss from discontinued operation is a tax benefit
of $177, $1,876 and $625 for 1997, 1996 and 1995, respectively. Titan deferred
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losses from the discontinued operation of $9,271 in 1997, which primarily
represented amortization costs of intangible assets, and to a lesser degree,
wind-down costs of the business. Titan continues to identify potential strategic
investors for the broadband communications business. To date, Titan has
identified several potential strategic investors and is presently involved in
negotiations while it continues to search for others.
COMMUNICATIONS SYSTEMS
Revenues in this segment were $48,980, $27,850 and $25,506 in 1997, 1996 and
1995, respectively. Revenues increased over 75% in 1997 from 1996, primarily
reflecting the fulfillment of Titan's initial contract for Xpress Connection
units with PSN, increased market acceptance for certain of Titan's modem and
networking products, and an increase in deliveries of Mini-DAMA, LSM-1000 and
the LST-5D products. Revenues increased slightly from 1995 to 1996, primarily as
a result of growth in defense related production contracts, mostly associated
with Titan's Mini-DAMA and other defense communications products.
Segment operating income was $1,074 in 1997 compared to operating losses of
$4,187 and $578 in 1996 and 1995, respectively. Operating income was achieved in
1997 primarily due to increased revenue volume. Despite an increase in SG&A and
R&D expenses on an absolute dollar basis, these costs decreased as a percentage
of revenues. The operating losses in 1996 compared to 1995 reflect the ramp up
of operations in this segment, including the addition of sales, marketing and
customer service personnel required to support the revenue growth. R&D efforts
increased in 1997 as the business completed development and certification of
certain products. In addition, R&D expenses increased from 1995 to 1996,
reflecting the increased labor and related costs associated with the ongoing
development of the Mini-DAMA, Xpress Connection and other products during the
period. Revenues and operating profit for 1995 included approximately $1,400
received in settlement of a termination for convenience claim with the U.S.
Government for work performed in prior years.
SOFTWARE SYSTEMS
Revenues in this segment were $17,374, $18,505 and $33,175 in 1997, 1996 and
1995, respectively. One federal agency accounted for approximately $8,900 of
this segment's revenue in 1997, $6,800 in 1996, and $4,600 in 1995, and one
telecommunications customer accounted for approximately $4,500 of this segment's
revenue in 1997, $8,300 in 1996 and $24,500 in 1995. In the second half of 1995,
this segment experienced reduced demand from the aforementioned
telecommunications customer. This trend continued in 1996 and 1997, resulting in
an overall revenue decline. Reduced revenues from this customer in 1997 were
substantially offset by revenues from several new and existing customers. During
1997, significant efforts were made to diversify this segment's customer base so
that operating performance will become less dependent on a few customers.
Segment operating income was $4,580 in 1997 compared to an operating loss of
$137 in 1996, and operating income of $3,803 in 1995. The 1997 results reflect
the impact of cost reductions achieved, offset somewhat by additional costs
associated with a negotiated conclusion of certain contracts. The 1996 operating
loss was due primarily to reduced sales from the previously mentioned
telecommunications customer, the timing of corresponding decreases in SG&A, and
additional costs associated with the aforementioned contract conclusion.
TITAN INFORMATION TECHNOLOGIES
Revenues in this segment were $113,733, $94,874, and $90,487 for 1997, 1996
and 1995, respectively. The increase in 1997 reflects a full year's results from
Eldyne and Unidyne, which were acquired in May 1996, and increased revenues
generated by DBA resulting from a contract awarded in 1996, offset partially by
the loss of revenue from a division sold in mid 1996 and the wind-down of work
subcontracted to the
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buyer of a business unit sold in April 1994. These subcontracted revenues
amounted to $300, $6,100 and $18,300, in 1997, 1996 and 1995, respectively. The
increase in revenues from 1995 to 1996 reflects the revenues of $31,700
generated from the acquired companies Eldyne and Unidyne, offset by the decline
in subcontract revenue and loss of revenue from the division sold in mid 1996 as
noted above.
Segment operating income in 1997 was $11,739, compared to $9,191 in 1996,
and $4,402 in 1995. The increases in 1997 and 1996 are primarily attributable to
the revenue growth discussed previously. No operating income was recognized on
the above mentioned subcontract revenue for any period presented. Furthermore,
1997 and 1996 revenues and operating income include certain non-recurring
credits resulting from the reevaluation of estimates of contract costs based
upon favorable developments with certain government audit agencies, as well as
changes in the carrying value of assets being disposed of.
MEDICAL STERILIZATION AND FOOD PASTEURIZATION
Revenues in this segment were $5,983, $2,818 and $3,459 in 1997, 1996 and
1995, respectively. The increase in 1997 was directly related to increased
processing of medical products at Titan's two facilities, and to sales of
Titan's turnkey sterilization systems to Guidant Corporation and Baxter Medical.
Segment operating income increased to $189, compared to operating losses of
$1,080 in 1996 and $1,340 in 1995. The achievement of operating income is
directly related to the increase in revenues mentioned above.
EMERGING TECHNOLOGIES AND BUSINESSES
Revenues in this segment were $10,624, $11,907 and $8,604 in 1997, 1996 and
1995, respectively. The decrease in 1997 was primarily due to the completion of
certain contracts in Titan's linear electron accelerator and environmental
consulting businesses, offset partially by the inclusion of a full year's
revenues generated from a division acquired in May 1996. The revenue growth in
1996 compared to 1995 primarily reflects the impact of the division acquired in
1996.
Segment operating loss was $25 in 1997, compared to operating income of $964
in 1996 and $151 in 1995. The change in operating results reflects the
fluctuation in revenue volume, combined with reduced margins in this segment's
various businesses.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, Titan generated $10,599 cash from its continuing operations.
Titan's income from continuing operations of $7,293 was offset partially by
increases in receivables and inventories of $5,799 and $1,101, respectively,
principally related to commercial rural telephony products and to government
satellite communications products. Significant funding requirements included
liabilities of continuing operations of $5,359, which included approximately
$1,500 in payments of certain accrued costs related to Titan's acquisition of
Eldyne and Unidyne in 1996. Additionally, $5,573 of cash was used by
discontinued operations.
Cash was also provided by Titan's line of credit ($12,350). In May 1997,
Titan completed an agreement with Sumitomo Bank of California and Imperial Bank
for a $24,000 line of credit maturing May 31, 1998, amending and replacing the
previous $14,000 line with Sumitomo Bank, and replacing the existing line of
credit with Crestar Bank. Titan has the option to borrow at a bank prime rate or
at LIBOR plus 2%. As of December 31, 1997, there was $12,350 of borrowings
outstanding under this agreement, at a weighted average interest rate of 8.02%.
Titan also had commitments under letters of credit under this agreement of
$1,368, which reduced availability under the line of credit to $10,282. On May
23, 1997, Titan repaid in full the line of credit agreement and equipment note
with Crestar Bank. A mortgage note with a balance of $1,196 at December 31,
1997, remains outstanding with Crestar Bank. At December 31, 1997 Titan was in
compliance with all financial covenants under its various debt agreements.
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Funding for the advancement of Titan's strategic goals, including continued
investment in targeted commercial businesses and start-up ventures, is expected
to continue in 1998. Titan plans to finance these requirements from a
combination of sources, which include cash generation from Titan's core
businesses and continuation and expansion of Titan's bank line of credit. Titan
is negotiating to extend its current line of credit past its expiration date of
May 1998. Furthermore, Titan anticipates selling its broadband communications
business in 1998, and is also exploring several equity alternatives as potential
sources of capital. As previously noted, one of Titan's primary strategies is
the funding of growth in specific subsidiaries through spin-out transactions. If
Titan is unable to implement this strategy, whether in whole or in part, then
Titan may need to complete additional equity or debt financings to fund the
continued expansion of its operations and potential acquisitions of new
technologies. Any additional equity or convertible debt financings could,
however, result in substantial dilution to Titan's stockholders. Management is
continually monitoring and reevaluating its level of investment in all of its
operations and the financing sources available to achieve Titan's goals in each
business area.
FORWARD LOOKING INFORMATION; CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this Management's Discussion and Analysis of
Results of Operations and Financial Condition that are not related to historical
results are forward looking statements based upon a number of factors, including
without limitation, those described herein under "Risk Factors." Actual results
may differ materially from those stated or implied in the forward looking
statements. Further, certain forward looking statements are based upon
assumptions of future events which may not prove to be accurate.
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OWNERSHIP OF TITAN'S SECURITIES
The following table sets forth certain information as to the number of
shares beneficially owned as of March 6, 1998 (a) by each person who is known to
Titan to own beneficially 5% or more of the outstanding shares of any class of
its voting stock, (b) by each present Titan director, and each of the Named
Executive Officers (as defined below), and (c) by all Titan officers and
directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
IDENTITY OF OWNER OR GROUP(1) TITLE OF CLASS OWNERSHIP CLASS
- ----------------------------------------------------------------- ----------------- ------------ -----------
<S> <C> <C> <C>
Wechsler & Company, Inc.(2)...................................... Common Stock 1,607,092(2) 7.18%
Charles R. Allen................................................. Common Stock 31,217(2) *
Joseph F. Caligiuri.............................................. Common Stock 27,250(2) *
Daniel J. Fink................................................... Common Stock 28,600(2) *
Robert E. La Blanc............................................... Common Stock 16,750(2) *
Thomas G. Pownall................................................ Common Stock 29,457(2) *
Gene W. Ray...................................................... Common Stock 521,474(2) 2.33%
J. S. Webb....................................................... Common Stock 112,037(2) *
Louis L. Fowler.................................................. Common Stock 29,884(2) *
Ronald B. Gorda.................................................. Common Stock 112,203(2) *
Cornelius L. Hensel.............................................. Common Stock 53,516 (3) *
Frederick L. Judge............................................... Common Stock 66,645(2) *
John L. Slack.................................................... Common Stock 355,672(2) 1.59%
All Directors and Officers as a Group (15 Persons)............... Common Stock 1,076,295(2) 10.9%
</TABLE>
- ------------------------
* Less than 1%
(1) The address of each owner other than Mr. Wechsler is c/o The Titan
Corporation, 3033 Science Park Road, San Diego, California 92121.
(2) Norman J. Wechsler is the sole stockholder and Chairman of the Board,
President and Chief Executive Officer of Wechsler & Company, Inc., 39
Broadway, New York, NY 10006.
(3) Including (A) 16,250; 11,250; 16,250; 8,750; 10,000; 230,000; 40,000;
13,500; 95,000; 51,250; 50,000; 88,833; and 659,708 shares subject to
outstanding options held by Messrs. Allen, Caligiuri, Fink, La Blanc,
Pownall, Ray, Webb, Fowler, Gorda, Hensel, Judge, Slack and all directors
and officers as a group, respectively, which are currently exercisable or
may become exercisable within 60 days after March 6, 1998; (B) 21,428 and
14,285 shares that may be obtained upon conversion of convertible debentures
held by Messrs. Ray and Judge, respectively; and (C) 83,552; 25,140; 16,271;
14,703; 2,166; 2,358; and 157,428 shares held by the trustees of Titan's
401(k) Retirement Plan and Employee Stock Ownership Plan for the accounts of
Messrs. Ray, Webb, Fowler, Gorda, Hensel, Judge and all directors and
officers as a group, respectively.
(4) Mr. Hensel resigned from Titan in January 1998.
Except as otherwise indicated in the above notes, shares shown as
beneficially owned are those as to which the named person possesses sole voting
and investment power. However, under California law, personal property owned by
a married person may be community property that either spouse may manage and
control, and Titan has no information as to whether any shares shown in this
table are subject to California community property law.
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TITAN MANAGEMENT AND EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of Titan and their respective positions
with Titan and ages are set forth in the following table. Biographical
information on each executive officer who is not a director is set forth
following the table. There are no family relationships between any director or
executive officer and other director or executive officer of Titan. Executive
officers serve at the discretion of the Titan Board.
<TABLE>
<CAPTION>
YEAR IN
WHICH
HE/SHE
BECAME
OFFICER OR
NAME POSITION AGE DIRECTOR
- --------------------------- ------------------------------------------------------------------- --- -------------
<S> <C> <C> <C>
J.S. Webb.................. Chairman of the Board of Directors 78 1984
Gene W. Ray................ President and Chief Executive Officer 59 1985
Eric DeMarco............... Senior Vice President and Chief Financial Officer 34 1997
Louis L. Fowler............ Vice President and Assistant Secretary 59 1989
Ira Frazer................. Senior Vice President, General Counsel and Secretary 43 1998
Ronald B. Gorda............ Senior Vice President 42 1994
Frederick L. Judge......... Senior Vice President 64 1994
John L. Slack.............. President, Titan Technologies and Information Systems Corporation 59 1998
Deanna H. Petersen......... Corporate Controller 30 1996
Charles R. Allen........... Director 72 1989
Joseph F. Caligiuri........ Director 70 1984
Daniel J. Fink............. Director 71 1985
Robert E. La Blanc......... Director 64 1996
Thomas G. Pownall.......... Director 76 1992
</TABLE>
The term of office of each executive officer is until his or her respective
successor is elected and has been qualified, or until his or her death,
resignation or removal. Officers are elected by the Titan Board annually at its
first meeting following the Titan Annual Meeting of Stockholders.
Mr. Webb 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.
Dr. Ray was a co-founder of Titan Systems, Inc., 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 the merger. He has
been President and Chief Executive Officer of Titan since the merger.
Mr. DeMarco has been Senior Vice President and Chief Financial Officer of
Titan since January 1997. From June 1986 to January 1997 he was employed by
Arthur Andersen LLP, most recently as Senior Manager.
Mr. Fowler has been Vice President since September 1989. From March 1987 to
September 1989 he served as Vice President of Titan Systems, Inc. Prior thereto,
Mr. Fowler was Director of Contracts of Titan Systems, Inc. from March 1985 to
March 1987.
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Mr. Frazer has been Senior Vice President, General Counsel and Secretary of
Titan since February 1998. From August 1995 through January 1998 he served as
General Counsel for California Steel Industries, Inc. a joint venture
Japanese/Brazilian steel company. From June 1994 to August 1995 he had a private
legal and consulting practice. From 1989 until June 1994 he was General Counsel
and Chief Administrative Officer of Daihatsu America, Inc., an automotive
distributor.
Mr. Gorda has been Senior Vice President since February 1995 and President
of the Linkabit division of Titan since June 1993. 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 the Linkabit
division. Prior thereto, he was Senior Program Manager of the SATCOM Command and
Control division of Rockwell International from April 1986 to July 1991.
Mr. Judge has been Senior Vice President 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.
Mr. Slack became President of Titan Technologies and Information Systems
Corporation, a wholly-owned subsidiary of Titan, in February 1998, upon the
acquisition of DBA by Titan. Mr. Slack is also President and Chief Executive
Officer of DBA and is a director of the DBA Board, both of which positions he
has held since 1989.
Ms. Petersen has been Corporate Controller since December 1996. From
September 1993 to December 1996, Ms. Petersen was Corporate Manager of
Operations Analysis at Titan. From January 1990 to September 1993 she was a
Senior Auditor at Arthur Andersen LLP.
Mr. Allen was employed by TRW, Inc., a diversified manufacturing company,
from 1955 to 1986, where he held a number of executive management positions,
including director from 1972 to 1986, and Executive Vice President and Chief
Financial Officer from 1977 to 1986.
Mr. Caligiuri was employed by Litton Industries, Inc., a diversified
manufacturing and services company, from 1969 to 1993, where he held a number of
executive management positions, including Executive Vice President from
September 1981 to April 1993.
Mr. Fink was employed by General Electric Co. from 1967 to 1982, where he
held a number of executive management positions, including Senior Vice President
of Corporate Planning and Development, after which he founded and has been the
President of D. J. Fink Associates, Inc., a management consulting firm.
Mr. La Blanc was a General Partner with Salomon Brothers, an investment
banking firm, from 1969 to 1979. From 1979 to 1981 he was Vice Chairman of
Continental Telecom, Inc., after which he founded and has been the President of
Robert E. La Blanc Associates, Inc., a financial and technical consulting firm.
Mr. Pownall was employed by Martin Marietta Corporation, a diversified
manufacturing and services company, from 1963 to 1992 where he held a number of
executive management positions, including director from September 1971 to April
1992, Chief Executive Officer from April 1982 to April 1988, and Chairman of the
Board of Directors from January 1983 to April 1988.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Titan Board has, among others, a compensation, stock option and pension
committee. The committee is comprised of Messrs. Pownall (Chairman), Allen,
Caligiuri, Fink and La Blanc. No member of the Committee is a former or current
officer or employee of Titan or any of its subsidiaries.
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<PAGE>
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ended December 31, 1997,
1996 and 1995, the cash compensation paid by Titan and its subsidiaries, as well
as certain other compensation paid or accrued for those years, to each of the
most highly compensated executive officers of Titan in 1997 (the "Named
Executive Officers") in all capacities in which they served.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
-------------------- ------------- ALL OTHER
SALARY BONUS OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(A) ($)(B) (#) ($)(C)
- ----------------------------------------------------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Gene W. Ray.......................................... 1997 337,500 210,000 150,000 107,572
President and Chief 1996 337,500 0 150,000 44,311
Executive Officer 1995 328,462 0 50,000 43,886
Louis L. Fowler...................................... 1997 146,000 102,000 25,000 36,284
Vice President 1996 144,519 46,000 25,000 19,364
1995 138,039 0 5,000 17,322
Ronald B. Gorda...................................... 1997 196,490 92,000 60,000 38,845
Senior Vice President 1996 183,111 12,951 60,000 25,748
1995 173,563 176,000 25,000 25,638
Cornelius L. Hensel(D)............................... 1997 197,138 (E) 60,000 34,187
Senior Vice President 1996 189,013 19,667 60,000 25,428
1995 175,219 85,200 55,000 21,918
Frederick L. Judge................................... 1997 204,326 90,000 0 19,181
Senior Vice President 1996 234,001 0 0 31,857
1995 232,271 0 0 32,773
</TABLE>
- ------------------------
(A) Amounts shown include cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers.
(B) Amounts shown include bonus cash 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.
(C) 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 Internal Revenue Code). Amounts shown for fiscal year
1997 for each Named Executive Officer consist of the following elements of
compensation: Dr. Ray: (i) $7,500; (ii) $33,000; (iii) $1,612; and (iv)
$65,460; Mr. Fowler: (i) $7,300; (ii) $14,000; (iii) $618; and (iv) $14,366;
Mr. Gorda: (i) $7,500; (ii) $18,502; (iii) $152; and (iv) $12,691; Mr.
Hensel: (i) $7,500; (ii) $18,402; (iii) $0; and (iv) $8,285; Mr. Judge: (i)
$7,500; (ii) $0; (iii) $0; and (iv) $11,681.
(D) Mr. Hensel resigned from Titan in January 1998.
(E) Mr. Hensel's bonus for 1997 has not been determined.
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<PAGE>
STOCK OPTIONS
The following table contains information concerning the grant of stock
options made during fiscal 1997 under Titan's long-term incentive program to the
Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR (A)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------ VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
GRANTED TO FOR
OPTIONS EMPLOYEES EXERCISE OPTION TERM (F)
GRANTED IN FISCAL PRICE EXPIRATION ---------------------
NAME (B) YEAR (C) ($/SH)(D) DATE (E) 5% ($) 10% ($)
- ------------------------------------------- --------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gene W. Ray................................ 150,000 25.91% 5.625 7/16/07 530,630 1,344,720
Louis L. Fowler............................ 25,000 4.32% 5.625 7/16/07 88,438 224,120
Ronald B. Gorda............................ 60,000 10.36% 5.625 7/16/07 212,252 537,888
Cornelius L. Hensel........................ 60,000 10.36% 5.625 7/16/07 212,252 537,888
Frederick L. Judge......................... -- -- -- -- -- --
</TABLE>
- ------------------------
(A) No SARs were granted to any of the Named Executive Officers during the last
fiscal year.
(B) 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.
(C) In 1997, employees of Titan received stock options covering a total of
579,000 shares.
(D) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares or by offset of the underlying
shares, subject to certain conditions.
(E) The options were granted for a term of 10 years, subject to earlier
termination in certain events related to termination of employment.
(F) Present value was calculated using an assumed annual compounded growth over
the term of the option of 5% and 10%, respectively. Use of this model should
not be viewed in any way as a forecast of the future performance of Titan's
stock, which will be determined by future events and unknown factors.
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<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during the last fiscal
year and unexercised options held as of the end of the fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUE (A)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE- MONEY OPTIONS AT
VALUE OPTIONS AT FY-END (#) FY-END ($)(C)
SHARES ACQUIRED REALIZED -------------------------- --------------------------
NAME ON EXERCISE (#) ($)(B) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gene W. Ray....................... -- -- 230,000 300,000 636,040 520,450
Louis L. Fowler................... -- -- 13,500 47,500 27,881 85,023
Ronald B. Gorda................... -- -- 95,000 130,000 233,948 223,653
Cornelius L. Hensel............... -- -- 42,500 132,500 60,798 216,468
Frederick L. Judge................ -- -- 37,500 12,500 128,925 42,975
</TABLE>
- ------------------------
(A) No SARs were owned or exercised by any of the Named Executive Officers
during the last fiscal year.
(B) Market value of underlying securities on date of exercise, minus the
exercise or base price.
(C) Market value of underlying securities at year-end, minus the exercise or
base price.
AGREEMENTS WITH EXECUTIVE OFFICERS
Titan has entered into agreements with its senior executives (each
hereinafter referred to as the "Executive") to reinforce and encourage their
continued dedication without distraction arising from the possibility of a
change in control of Titan. The terms of the agreements provide that, in the
event of a Change in Control (as defined), and the termination of the
Executive's employment at any time during the two-year period thereafter by
Titan other than for cause or by the Executive for good reason, the Executive
will be paid a lump sum amount equal to two times his base salary 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 2 years following the termination. The payments
are limited to ensure deductibility for tax purposes under Section 280G of the
Internal Revenue Code.
Under the agreements, Change in Control is deemed to have occurred in the
event of (i) the acquisition by any person, together with its affiliates, of
beneficial ownership of 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 Titan Board 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 Titan Board still in office who were members of
the Titan Board 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.
77
<PAGE>
HORIZONS BUSINESS
OVERVIEW
Founded in San Diego, California in 1977, Horizons initially conducted
computer systems analysis and software development for the DNA. Horizons' first
contract was to modify the supercomputer programs used for calculating nuclear
weapons effects into applications that could be run on first-generation hand-
held computers. From this beginning, Horizons has been predominantly involved in
providing software, computer systems integration and technical consulting
services, primarily for the United States' defense establishment.
Horizons' Systems Engineering Group ("SEG") segment was started in 1984 to
address the growing defense engineering and technical services market and
continues today. Another segment, the Information Systems Group ("ISG"), was
formed in 1993 to convert Horizons' proprietary technologies into software
products for commercial markets. In December 1997, the Horizons Board adopted a
plan to wind down and exit ISG. See "Horizons Management's Discussion and
Analysis of Results of Operations and Financial Condition."
SEG is an engineering management consulting organization primarily serving
agencies of the United States government. SEG is retained by various government
entities to assist in the acquisition, development, testing and fielding of
major defense communications, surveillance and information systems. SEG is both
a prime and subcontractor, at times managing multi-million dollar contracts with
large subcontractor teams. Principal clients include the United States Air Force
(the "Air Force"), certain other military services; and the Federal Aviation
Administration (the "FAA"). SEG presently employs 250 people at 22 offices and
work sites worldwide. SEG's technical focus is on the design, development,
management and support of C2 systems, including integration of these systems
into an inter-operable architecture.
Horizons has multi-disciplined technical teams that support all phases of
the systems acquisition and development process, including program management,
requirements analysis, system and facility engineering, testing and evaluation,
integrated logistics and information systems. The technical staff includes
engineers and systems integration management experts; architectural and civil
engineering personnel who perform site surveys and installation preparation;
computer scientists and systems analysts who configure and operate computer
networks, write data reduction programs and analyze data; logistics
professionals who complete system logistics tasks; and program management
experts who plan and assist in the management of programs in order to meet
performance, cost and schedule objectives. Horizons also performs information
systems software and hardware services.
PROGRAM MANAGEMENT
For the past fifteen years, SEG has provided program management services to
government program managers, including consulting services and software tools.
Examples of SEG's program management support include comprehensive program
management plans for the Joint Surveillance and Target Attack Radar System (the
"Joint STARS") program, a technologically advanced airborne sensor C2 platform
with a unique capability to see and communicate the ground battlefield picture.
In addition, SEG provides services related to the United States government's
Joint Tactical Information Distribution System and Automated Weather
Distribution Systems. SEG also provides support in the area of technical
specifications, risk assessments, industrial base analyses and manufacturing
plans for the Airborne Warning and Control System ("AWACS"). Furthermore, SEG
works on Advanced Entry Control Systems, Tactical Automated Security Systems and
integrated Engineering programs. SEG also specializes in program planning and
scheduling.
The technical challenges of program management have changed dramatically
over the past few years, particularly those relating to C2 program. Such
engineering challenges focus on defining C2 architecture in place and
subsequently integrating commercial "off-the-shelf" solutions consistent with
the standards and
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<PAGE>
specifications of the government's Defense Information Infrastructure, Common
Operating Environment and the Global Command and Control System. In addition to
systems engineering and systems integration, SEG provides specialized software
development services necessary for the software-intensive C2 systems currently
under development.
SEG also provides financial analyses of program cost performance in order to
provide management with insight into the program progress. In connection with
the analysis, SEG performs cost estimates, "earned-value analysis" and analyses
of the cost of operational effectiveness.
TESTING AND EVALUATION
SEG has broad experience in designing and conducting test programs designed
to enhance technical specification compliance and the operational effectiveness
of a variety of programs. SEG personnel design and conduct detailed test
programs for the purpose of maximizing design specification compliance. Many of
these programs involve multi-service developmental testing and joint operations
on a worldwide basis.
Horizons and the SEG staff have supported the Joint STARS government
developmental testing and evaluation program of the Department of Defense (the
"DoD") since 1987. SEG supports both the air and ground segments of the test
program.
SEG has also participated in the testing and evaluation of many strategic
and tactical military radar communications and command center systems, as well
as radar systems used in air traffic control and weather monitoring. At the
Sacramento Air Logistics Center (an "ALC"), SEG engineers and analysts plan and
test modifications to long-range radar, air traffic control systems and weather
equipment.
SEG also assists the DoD joint services in updating and deploying fully
tested software for the Tri-Service Joint Tactical Information Distribution
System. Horizons developed and staffed the central software support facility at
Robins Air Force Base in Georgia and helped to achieve a Level 3 software
process capability certification, as defined by the Software Engineering
Institute of Carnegie Mellon University.
SURVEILLANCE SYSTEMS
Horizons and SEG provide systems engineering support to a wide variety of
government surveillance programs. Certain C2 infrastructure relies on airborne
radar technology programs developed at the Air Force's Electronic System Center,
most notably Joint STARS and AWACS. SEG's staff tests radar performance and
analyzes the results and SEG engineers design radar data reduction programs
designed to give the Air Force rapid feedback on how well the radar meets
operational requirements. Horizons also works with ground-based radar systems.
Horizons' activities in this area include hardware and software design
evaluation, facilities design criteria, site activation, performance testing and
problem resolution.
Horizons currently provides hardware and software engineering support, as
well as facility and long-term logistics support for the FAA's/Air Force's Air
Route Surveillance Radar ("ARSR-4" system). SEG currently assists the FAA's
program office in the testing and evaluation of ARSR-4 installations and
provides site surveys at various ARSR-4 locations within the FAA's Western
Pacific region. SEG is also presently modifying and updating the AN/TPS-117 long
range radar system in direct support of the Sacramento ALC. In addition,
Horizons has supported, and continues to support, the Caribbean Basin Radar
Network ("CBRN") program, including the installation of nine new long-range 3D
radar systems in the Caribbean and the networking of these nine systems with
seven existing radar systems into two regional operations control centers, in
order to improve air traffic control and international relations in the
Caribbean area.
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<PAGE>
C2 SYSTEMS
The Air Force's Theater Battle Management Core Systems ("TBMCS") program
links the organizational levels of command with the automated tools necessary
for air operations, thereby creating functional capabilities for planning,
intelligence and operational execution. An important TBMCS subsystem is the
Contingency Theater Automated Planning System ("CTAPS"). CTAPS is a hardware and
software system composed of a number of workstations on a local area network
("LAN") linked with geographically remote terminals. The focus of CTAPS is the
Air Tasking Order that assigns operational units to fly specified combat and
combat support missions, and to maintain aircraft and aircrews at specified
alert status condition.
Horizons provides C2, TBMCS and CTAPS support worldwide in the areas of
requirements, system development, software testing, training and operations. SEG
personnel are on-site at Ramstein air base in Germany, Air Force headquarters at
the Barksdale, Shaw and Davis-Monthan Air Force bases, sites in Alaska and Guam,
as well as to the Air Force's Pacific headquarters. Horizons also supports the
United States Marine Corps at each of the Marine Air Wings in the United States
and Okinawa, Japan.
Horizons provides support to these worldwide military operations by
configuring, maintaining, and operating a variety of hardware systems and
software applications, using workstations and servers, LAN management software,
network protocols, systems and database administration and management software.
SEG technical support personnel are also part of the computer security
activities at CTAPS site locations.
SEG is also involved in the development and fielding of the Air Mobility
Command's (the "AMC") primary C2 tool referred to as the C2 Integrated
Processing System ("C2IPS").
AIR TRAFFIC MANAGEMENT
SEG supports air traffic management ("ATM") projects that range from
airspace and airport planning to design and engineering services for several
terminal and en-route surveillance radar programs for the both FAA and the Air
Force. SEG provides expertise in conducting systems analysis, development,
integration, and installation of many evolving ATM system components. SEG
professionals that work on such systems include systems engineers, air traffic
controllers, airway facilities engineers, software engineers, communications
engineers, radar engineers, meteorologists and weather system experts, financial
analysts and trainers and technicians.
PHYSICAL SECURITY
Horizons, through its SEG team, provides integrated security systems for
detection, surveillance, assessment, access control and automated response to
identified and potential security threats or challenges. Horizons' engineers and
technicians, through SEG, have helped the DoD develop and deploy physical
security technology. In addition to its support of the DoD, SEG's staff also
serves as a facility security consultant to the FAA.
INTEGRATED LOGISTICS
The overall objective of Air Force's Integrated Logistics Supports System
("ILS") program is the fielding of supportable and affordable support systems
that meet the Air Force's performance and readiness requirements in the planned
operational environment. SEG logistics and sustainment specialists participate
in all phases of life cycle support activities for many Air Force C2 programs.
BACKLOG
Horizons' backlog of unfilled orders at January 31, 1998 was approximately
$17.6 million compared to $12.9 million at January 31, 1997. The backlog at
January 31, 1998 consists of $16.4 million in backlog relating to government
contracts and $1.2 million in commercial backlog. The January 31, 1997 backlog
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consists of $12.7 million in backlog relating to government contracts and
$200,000 in commercial backlog. Horizons expects that all of the January 31,
1998 backlog will be converted into revenue during the fiscal year ended January
31, 1999.
Orders are entered into backlog only when Horizons receives a definite
commitment for products or services from a customer. Delivery orders received by
Horizons for its government contracts are generally issued under long term
contracts that have a maximum dollar ceiling. The difference between the dollar
value of delivery orders received and the maximum contract dollar ceiling is
considered unfunded backlog. At January 31, 1998, unfunded backlog was
approximately $59 million.
Horizons' backlog is typically subject to a number of contingencies due to
various factors. Such factors include funding constraints, the cancellation or
modification of government programs and changes in allocation of work between
prime and subcontractors. The amount of backlog, therefore, should not be viewed
as the sole determinant of Horizons' future contract revenue and consequently,
the dollar amount of the backlog is not necessarily indicative of the future
revenue of Horizons.
COMPETITION
Horizons experiences competition in its target markets and competes with
both large and small businesses. In the large business arena, competitors
include such companies as Booz Allen Hamilton, Arthur D. Little, ARINC, Inc.,
Lockheed Martin, Dynamics Research Corporation and TASC. Many of those companies
have far greater financial, engineering, technological, marketing, sales and
distribution and customer service resources than Horizons. In addition, many of
these competitors have more experience in certain of Horizons' targeted markets.
Horizons and its competitors compete in their target markets often by
emphasizing technical and management skills, reputation and performance record,
comprehensive understanding of the Department of Defense life cycle and
acquisition process, multiple locations and the capability for quick reaction
customer support. Further, the ability of Horizons to compete in its target
market depends to a large extent on its ability to provide technologically
advanced products and services with shorter lead times and at lower prices than
competitors. See "Risk Factors-- Competition."
EMPLOYEES
As of December 31, 1997 Horizons had 293 employees. Horizons is not subject
to any collective bargaining agreements with its employees.
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HORIZONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS)
The forward-looking statements included in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which reflect
Horizons management's best judgment based on factors currently known, involve
risks and uncertainties. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors. Forward-looking information provided by Horizons pursuant to the safe
harbor established by recent securities legislation should be evaluated in the
context of these factors.
Horizons has incurred significant net losses and has negative working
capital of approximately $5,900. Management recognizes the need to generate
positive cash flows in future periods and/or to acquire additional capital from
various sources. There can be no guarantee that Horizons will be successful in
generating significant revenues and/or sufficient cash flows in future periods
to meet its ongoing obligations. Furthermore, Horizons presently is highly
dependent on its ability to find additional sources of funding in the form of
debt financing or equity issuances. Horizons has entered into the Merger
Agreement with Titan (See Note 10 to the accompanying financial statements);
however, there is no assurance that the partner will be able to complete the
Merger on terms favorable to Horizons.
Horizons formed the SEG segment in 1984 to address the growing defense
engineering and technical services market and continues today. A second segment,
ISG, was formed in 1993 to convert the company's proprietary technologies into
software products for commercial markets. Due to insufficient capitalization and
changes in the software product markets in the mid 1990's, Horizons began a
process of restructuring the ISG operations in a series of right-sizing steps.
In December 1997, Horizons' Board of Directors adopted a plan to restructure
and wind down and exit its ISG segment, in order to better focus Horizons'
available resources on it's government information technology business in the
Systems Engineering Group ("SEG") segment. Accordingly, the following discussion
on the results of operations applies to continuing operations. References to
fiscal years refer to Horizons' fiscal year ended January 31.
RESULTS OF OPERATIONS:
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997:
Revenues for fiscal year 1998 were approximately $26,281, a decrease of
$3,270 compared to fiscal year 1997. The decrease in revenue is primarily the
result of reduced "pass through" subcontract activity and lower fees on service
contracts.
Systems Engineering operating profits were $3,166 in fiscal year 1998, a
decrease of $2,158 compared to fiscal year 1997. This reduction was primarily
the result of lower margins.
Interest expense for fiscal year 1998 was $519 as compared to $592 in fiscal
year 1997. The decrease was the result of carrying less accounts receivable
credit line debt through fiscal year 1998 than in the prior fiscal year.
Taxes have been allocated to continuing operations at a combined federal and
state income tax rate of 38%, and tax benefits related to net operating loss
(NOL) carryforwards have been reported as a benefit to the loss from
discontinued operations.
FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996:
Revenues for fiscal year 1997 were $29,551, an increase of $3,060 from
fiscal year 1996. This increase was due to expanded "pass thru" of subcontract
costs and increased direct labor volume on service contracts in SEG.
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Operating Profit totaled $5,324 for fiscal year 1997. Systems Engineering
operating profits increased $734 in fiscal year 1997 primarily due to improved
margins on service contracts.
Interest expense in fiscal year 1997 totaled $592, an increase of $46 over
fiscal year 1996. During the fiscal year, bank accounts receivable credit line
and term debt decreased from a total of approximately $8,965 to $5,855. Paydowns
were made with $4,311 in proceeds from the sale of the Advanced Systems
division.
An income tax provision of $1,798, a loss from discontinued operations of
$1,990 and other results described above, yielded net income of $944 for the
fiscal year ended January 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1998, cash totaled $523 comprised primarily of money
market funds. Trade receivables totaled $6,064, a decrease of $1,212 from
January 31, 1997. The receivable decrease is primarily due to improved
collections and a decline in revenues.
At January 31, 1998, Horizon's bank debt is comprised of $5,327 against the
secured accounts receivable line of credit and a $184 balance on a term note
payable monthly through December 18, 2000. The interest rate on both the line
and term note is 2% in excess of the bank prime lending rate, and the effective
rate was 10.5% at January 31, 1998. The existing bank agreements provides for
advances against the line not to exceed a balance of $7,000 and matures on May
15, 1998.
The Company has incurred net losses of approximately $4,200 and $5,200 for
the years ended January 31, 1998 and 1996, respectively. Pro forma net loss for
the year ended January 31, 1997 was approximately $2,100 after excluding the
one-time gain of $3,050 on sale of the net assets of ASG included in the loss
from discontinued operations. At January 31, 1998, the Company had negative
working capital of approximately $5,900. The working capital deficits in the
years ended January 31, 1998 and 1997 were primarily related to the investments
Horizons has made in its ISG business, which was discontinued in December 1997.
Management recognizes the need to generate positive cash flows in future periods
and/or to acquire additional capital from various sources. Management has
undertaken to discontinue its commercial software business in order to reduce or
eliminate future losses from operations related to this business. There can be
no guarantee that the Company's remaining government business will be successful
in generating significant revenues and/or sufficient cash flows in future
periods to enable the Company to meet its ongoing obligations. Furthermore, the
Company presently is highly dependent on its ability to find additional sources
of funding in the form of debt financing or equity issuances. Management is
currently engaged in a merger transaction with The Titan Corporation; however,
there is no assurance that the Company will be able to complete this transaction
on terms favorable to the Company. All of these factors create a substantial
doubt about the Company's ability to continue as a going concern.
During fiscal year 1998, there has been no activity related to common or
preferred stock.
OWNERSHIP OF HORIZONS' SECURITIES
Set forth below is information regarding beneficial ownership of Horizons'
capital stock as of the Record Date, by Horizons' directors and executive
officers (and the directors and officers as a group) and each person
beneficially owning 5% or more of the outstanding shares of Horizons Common
Stock or
83
<PAGE>
Horizons Series A Preferred Stock. Unless otherwise indicated, each of the
stockholders listed below has sole voting and sole investing power with respect
to the shares listed opposite such stockholder's name.
<TABLE>
<CAPTION>
AMOUNT OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OWNERSHIP CLASS OF STOCK CLASS
- ---------------------------------------------------------- ------------------- --------------------- -----------
<S> <C> <C> <C>
Earl A. Pontius........................................... 225,000 Common Stock 3.0%
James T. Palmer........................................... 3,960,000 Common Stock 52.8%
J. Patrick Boyce.......................................... 987,500 Common Stock 13.2%
North American Trust Co., for the HTI Retirement Plan and
Trust................................................... 300,000 Series A Preferred 60.0%
Wells Fargo Equity Capital, Inc........................... 100,000 Series A Preferred 20.0%
All Directors and Executive Officers as a Group (3
persons)................................................ 5,172,500 Common Stock 69.0%
</TABLE>
84
<PAGE>
COMPARISON OF RIGHTS OF TITAN STOCKHOLDERS AND HORIZONS STOCKHOLDERS
The rights of Titan stockholders are governed by the Restated Titan
Certificate of Incorporation (the "Titan Certificate"), its Bylaws (the "Titan
Bylaws") and the DGCL. The rights of Horizons stockholders are currently
governed by Horizons' Certificate of Incorporation (the "Horizons Certificate"),
its Bylaws (the "Horizons Bylaws") and the DGCL. Upon consummation of the
Merger, Horizons stockholders will become stockholders of Titan with their
rights as stockholders governed by the DGCL, the Titan Certificate and the Titan
Bylaws.
The following is a summary of certain similarities and differences between
the rights of Titan stockholders and Horizons stockholders under the foregoing
governing documents and applicable law. This summary does not purport to be a
complete statement of such similarities and differences. The identification of
specific similarities and differences is not meant to indicate that other
equally or more significant similarities and differences do not exist. Such
similarities and differences can be examined in full by reference to the
respective corporate documents of Titan and Horizons.
CAPITAL STOCK. The authorized capital stock of Titan consists of 45,000,000
shares of Titan Common Stock, of which 23,346,839 shares were issued and
outstanding on March 6, 1998, and 2,500,000 shares of Preferred Stock, $1.00 par
value, (A) 250,000 shares of which have been designated as Series A Junior
Participating Preferred Stock, none of which has been issued as of the date
hereof, (B) 1,068,102 shares of which have been designated as $1.00 Cumulative
Convertible Preferred Stock, $1.00 par value per share, 694,872 of which have
been issued and are outstanding as of the date hereof, and (C) 500,000 shares of
which have been designated as Series B Cumulative Convertible Redeemable
Preferred Stock (the "Series B Preferred Stock"), all of which have been issued
as of the date hereof. Each outstanding share of $1.00 Cumulative Convertible
Preferred Stock is convertible at any time into two-thirds (2/3) of a share of
Titan Common Stock. The Series B Preferred Stock is convertible at the holder's
option into shares of Titan Common Stock at a conversion price of $9.00 per
share. In addition, Titan issued $34,500,000 of convertible subordinated
debentures in November 1996. The debentures are convertible into common stock at
a conversion price of $3.50 per share. The authorized capital stock of Horizons
consists of 12,000,000 shares of Horizons Common Stock, $.01 par value, of which
7,496,953 shares were issued and outstanding on March 6, 1998, and 2,500,000
shares of Preferred Stock ($.01) par value, all of which have been designated
"Series A Preferred Stock," of which 500,000 shares were issued and outstanding
on March 6, 1998.
AMENDMENT OF BYLAWS. The Titan Bylaws may be amended or repealed either by
the Titan Board or by the holders of a majority in interest of the outstanding
shares of Titan, except that a change in the authorized number of directors may
only be effected by a vote of the majority of the outstanding shares entitled to
vote.
The Horizons Bylaws state that they may be amended, repealed or replaced
with new Bylaws by the affirmative vote of a majority of the Board of Directors,
provided that notice of any proposal to make, alter or repeal the Bylaws, or to
adopt new Bylaws is included in the notice of the meeting of the Board of
Directors at which such action takes place.
AMENDMENT OF HORIZONS CERTIFICATE AND TITAN CERTIFICATE. The DGCL provides
that approval of a majority of the outstanding stock entitled to vote thereon is
required to amend a certificate of incorporation. The Titan Certificate does not
modify this provision. Pursuant to the Horizons Certificate, the Horizons
certificate may only be amended by the approval of two-thirds (2/3) of Horizons'
outstanding capital stock entitled to vote on, or consent to, such amendment.
SPECIAL MEETINGS OF STOCKHOLDERS. Under the Titan Bylaws, a special meeting
of stockholders may be called by the Titan Board, the Chairman of the Board of
Directors, or the President. The Horizons Bylaws permit a special meeting to be
called by the Chairman of the Board, if any, the President or Secretary, and
85
<PAGE>
only upon the request of a majority of Horizons' directors duly elected and
acting directors. Notices of such special meeting must be in writing and state
the purpose of the proposed meeting.
ACTIONS BY WRITTEN CONSENT OF STOCKHOLDERS. The Titan Bylaws provide that
any action which may be taken at a meeting of stockholders may be taken without
a meeting and without prior notice if written consents setting forth the action
so taken are signed by the holders of outstanding shares having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. The Horizons Certificate provides that any action which may be taken
at any annual or special meeting may be taken without a meeting, without prior
notice and without a vote if two-thirds (2/3) of the holders of Horizons'
outstanding capital stock otherwise entitled to vote on such action sign a
consent setting forth the action so taken.
SIZE OF THE BOARD OF DIRECTORS. The Titan Bylaws currently provide that the
number of directors presently authorized is seven (7). The Horizons Bylaws
currently provide that the number of directors presently authorized is no less
than three (3) and no more than seven (7).
CLASSIFICATION OF BOARD OF DIRECTORS. The DGCL permits, but does not
require, a classified board of directors, divided into as many as three classes
with staggered terms under which one-half or one-third of the directors are
elected for terms of two or three years, respectively. Neither the Titan Bylaws
nor the Horizons Certificate provide for a classified board.
CUMULATIVE VOTING. Under the DGCL, cumulative voting in the election of
directors is not available unless specifically provided for in the certificate
of incorporation. There is no provision for cumulative voting in either the
Titan Certificate or the Horizons Certificate.
REMOVAL OF DIRECTORS. Under the DGCL, a director of a corporation with a
classified board of directors may be removed only for cause, unless the
certificate of incorporation otherwise provides. A director of a corporation
that does not have a classified board of directors or cumulative voting may be
removed with the approval of a majority of the outstanding shares entitled to
vote with or without cause. The Titan Bylaws provide that the Board of Directors
or any individual director may be removed from office at any time with or
without cause by the affirmative vote of the holders of the majority of the
voting power of all the outstanding stock entitled to vote thereon subject to
the provisions of the Titan Certificate. The Titan Certificate provides that the
removal of a director elected by the holders of Titan's $1.00 Cumulative
Convertible Preferred Stock, or elected by the directors to fill a vacancy,
requires the affirmative vote of the holders of a majority of the $1.00
Cumulative Convertible Preferred Stock entitled to vote thereon.
The Horizons Certificate contains no provisions relating to the removal of
directors. The Horizons Bylaws provide that one director may be removed with or
without cause at any meeting of the stockholders called expressly for such
purpose, by a vote of stockholders holding a majority of shares issuable and
outstanding and entitled to vote at an election of directors.
FILLING VACANCIES IN THE BOARD OF DIRECTORS. Under the DGCL, vacancies may
be filled by a majority of the directors then in office (even though less than a
quorum) unless otherwise provided in the certificate of incorporation or bylaws.
The DGCL further provides that if, at the time of filling any vacancy, the
directors then in office constitute less than a majority of the board (as
constituted immediately prior of any such increase), the Delaware Court of
Chancery may, upon application of any holder or holders of at least ten percent
of the total number of the outstanding stock having the right to vote for
directors, summarily order a special election be held to fill any such vacancy
or to replace directors chosen by the board to fill such vacancies. The Titan
Certificate does not alter this provision.
The Horizons Bylaws provide that any vacancy on the board of directors may
be filled by the majority of the remaining directors, though less than a quorum
or by the sole remaining director. When one or more directors resigns, effective
at a future date, a majority of directors then in office, including those who
86
<PAGE>
resigned, have the power to fill such vacancy or vacancies. The vote thereon to
take effect after such resignation or resignations becomes effective, and each
director so chosen holds office until the next annual meeting of stockholders or
until his successor has been elected.
PAYMENT OF DIVIDENDS; REDEMPTION OR REPURCHASE OF SHARES. The DGCL permits
a corporation to declare and pay dividends out of statutory surplus or, if there
is no surplus, out of net profits for the fiscal year in which the dividend is
declared and/or for the preceding fiscal year as long as the amount of capital
of the corporation following the declaration and payment of the dividend is not
less than the aggregate amount of capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets. In addition, the DGCL generally provides that a corporation may redeem
or repurchase its shares only if such redemption or repurchase would not impair
the capital of the corporation. The Titan Bylaws provide for the declaration of
dividends in accordance with the DGCL. The Titan Bylaws also provide that the
Titan Board may set aside as a reserve any funds the Titan Board believes
necessary prior to the payment of dividends.
The Horizons Bylaws provide that, subject to the provisions of the DGCL, the
Board of Directors may declare dividends at any annual, regular or special
meeting, and may be paid in cash, property or in shares of Horizons' stock.
Horizons' Bylaws also provide that the Board of Directors, in its sole
discretion, may set aside or reserve any sum, over and above the paid-in capital
of Horizons for any proper purpose.
LIMITATION OF LIABILITY OF DIRECTORS. The DGCL permits corporations to
adopt a provision in their certificate of incorporation eliminating, with
certain exceptions, the personal liability of a director to the corporation or
its stockholders for monetary damages for breach of the director's fiduciary
duty as a director. Under the DGCL, Titan may not eliminate or limit director
monetary liability for (a) breaches of the director's duty of loyalty to the
corporation or its stockholders; (b) acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law; (c) unlawful
dividends, stock repurchases or redemptions; or (d) transactions from which the
director received an improper personal benefit. Such limitation of liability
provision also may not limit a director's liability for violation of, or
otherwise relieve directors from the necessity of complying with federal or
state securities laws, or affect the availability of nonmonetary remedies such
as injunctive relief or rescission. The Titan Certificate eliminates the
liability of the Titan Board to the fullest extent permissible under the DGCL.
The Horizons Certificate provides that a director of Horizons is not personally
liable to Horizons or its stockholders for monetary damages for beach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to Horizons or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, which provides for
liability for the unlawful payment of dividends, unlawful stock purchase or
unlawful stock redemption, or (iv) for any transaction from which the director
derived any improper personal benefit. If the DGCL is amended to further
eliminate or limit the liability of a director of a corporation, then a director
of Horizons, in addition to the circumstances in which a director is not
personally liable as set forth in (i) to (iv) above, will not be liable to the
fullest extent permitted by the DGCL as amended.
INDEMNIFICATION. The DGCL generally permits indemnification in the defense
or settlement of a derivative or third-party action, provided there is a
determination by a disinterested quorum of the directors, by independent legal
counsel or by the stockholders, that the person seeking indemnification acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to a criminal proceeding,
which such person had no reasonable cause to believe his or her conduct was
unlawful. Without court approval, however, no indemnification may be made in
respect of any derivative action in which such person is adjudged liable to the
corporation. The DGCL requires indemnification of expenses when the individual
being indemnified has successfully defended the action on the merits or
otherwise. The Titan Bylaws state Titan shall indemnify the Titan Board to the
fullest extent provided for by the DGCL. The Horizons Certificate states that
Horizons shall indemnify officers, directors, employees and agents of Horizons
to the full extent of the DGCL, and if,
87
<PAGE>
prior to indemnification, Horizons must make certain investigations on a
case-by-case basis, Horizons shall pursue such investigations with diligence. To
the extent not prohibited by the DGCL, the indemnified parties shall not be
liable to Horizons or its stockholders except for their own individual willful
misconduct or actions taken in bad faith.
LOANS TO DIRECTORS, OFFICERS AND EMPLOYEES. The DGCL and the Titan Bylaws
permit Titan to make loans to, guarantee the obligations of, or otherwise
assists its officers or other employees when such action, in the judgment of the
directors, may reasonably be expected to benefit Titan. The Horizons Bylaws
contain no similar provisions.
EXPERTS
The consolidated financial statements of both The Titan Corporation and
Horizons Technology, Inc. included in this Prospectus/Proxy Statement and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and the federal
income tax consequences of the Merger will be passed upon for Titan by Cooley
Godward LLP, San Diego, California. Certain legal matters in connection with the
Merger Agreement and the federal income tax consequences of the Merger will be
passed upon for Horizons by Jenkens & Gilchrist, a Professional Corporation,
Washington, D.C.
88
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
THE TITAN CORPORATION
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants............................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996........................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995............. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995............. F-6
Notes to Consolidated Financial Statements............................................................. F-7
HORIZONS TECHNOLOGY, INC.
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants............................................................... F-23
Consolidated Balance Sheets as of January 31, 1998 and 1997............................................ F-24
Consolidated Statements of Operations for the Years Ended January 31, 1998, 1997 and 1996.............. F-25
Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 1998, 1997 and 1996.... F-26
Consolidated Statements of Cash Flows for the Years Ended January 31, 1998, 1997 and 1996.............. F-27
Notes to Consolidated Financial Statements............................................................. F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE TITAN CORPORATION:
We have audited the accompanying consolidated balance sheets of The Titan
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of Titan'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 financial position of The Titan Corporation and
subsidiaries as of December 31, 1997 and 1996, 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
February 27, 1998
F-2
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................ $ 10,612 $ 4,751
Investments.............................................................................. 4,499 9,888
Accounts receivable--net................................................................. 58,108 50,985
Inventories.............................................................................. 15,980 14,979
Net assets of discontinued operation..................................................... 11,512 1,304
Prepaid expenses and other............................................................... 2,160 2,245
Deferred income taxes.................................................................... 6,845 6,037
--------- ---------
Total current assets................................................................... 109,716 90,189
Property and equipment--net................................................................ 23,936 26,445
Goodwill--net of accumulated amortization of $5,780 and $4,824............................. 20,367 21,580
Other assets--net.......................................................................... 7,905 13,271
Net assets of discontinued operation....................................................... 2,286 7,264
--------- ---------
Total assets............................................................................... $ 164,210 $ 158,749
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit........................................................................... $ 12,350 $ --
Accounts payable......................................................................... 11,258 8,986
Current portion of long-term debt........................................................ 1,104 1,010
Accrued compensation and benefits........................................................ 8,899 8,725
Other accrued liabilities................................................................ 7,277 11,138
Note payable to related party............................................................ -- 1,000
--------- ---------
Total current liabilities.............................................................. 40,888 30,859
--------- ---------
Long-term debt............................................................................. 37,310 40,071
--------- ---------
Other non-current liabilities.............................................................. 9,223 10,359
--------- ---------
Commitments and contingencies
Series B cumulative convertible redeemable preferred stock, $3,000 liquidation preference,
6% cumulative annual dividend, 500,000 shares issued and outstanding..................... 3,000 3,000
--------- ---------
Stockholders' Equity:
Preferred stock: $1 par value, authorized 2,500,000 shares:
Cumulative convertible, $13,897 liquidation preference:
694,872 shares issued and outstanding................................................ 695 695
Series A junior participating, authorized 250,000 shares:
None issued.......................................................................... -- --
Common stock: $.01 par value, authorized 45,000,000 shares, issued and outstanding:
23,804,809 and 23,199,000 shares......................................................... 238 232
Capital in excess of par value............................................................. 50,936 49,073
Retained earnings.......................................................................... 24,511 27,420
Treasury stock (971,894 and 1,106,114 shares), at cost..................................... (2,591) (2,960)
--------- ---------
Total stockholders' equity............................................................. 73,789 74,460
--------- ---------
Total liabilities and stockholders' equity................................................. $ 164,210 $ 158,749
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues..................................................................... $ 196,694 $ 155,954 $ 161,231
Costs and expenses:
Cost of revenues........................................................... 151,140 124,477 123,914
Selling, general and administrative expense................................ 23,503 23,693 25,867
Research and development expense........................................... 6,138 3,576 5,113
Restructuring and other expense, net....................................... -- -- 6,249
---------- ---------- ----------
Total costs and expenses................................................... 180,781 151,746 161,143
---------- ---------- ----------
Operating profit............................................................. 15,913 4,208 88
Interest expense............................................................. (5,179) (3,201) (1,353)
Interest income.............................................................. 802 639 392
---------- ---------- ----------
Income (loss) from continuing operations
before income taxes........................................................ 11,536 1,646 (873)
Income tax provision (benefit)............................................... 4,243 221 (540)
---------- ---------- ----------
Income (loss) from continuing operations..................................... 7,293 1,425 (333)
Loss from discontinued operation, net of taxes............................... (343) (3,642) (1,972)
---------- ---------- ----------
Net income (loss)............................................................ 6,950 (2,217) (2,305)
Dividend requirements on preferred stock..................................... (875) (803) (695)
---------- ---------- ----------
Net income (loss) applicable to common stock................................. $ 6,075 $ (3,020) $ (3,000)
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share:
Income (loss) from continuing operations................................... $ .29 $ .03 $ (.05)
Loss from discontinued operation........................................... (.02) (.17) (.10)
---------- ---------- ----------
Net income (loss).......................................................... $ .27 $ (.14) $ (.15)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares.................................................... 22,267 21,418 19,438
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share:
Income (loss) from continuing operations................................... $ .27 $ .03 $ (.05)
Loss from discontinued operation........................................... (.01) (.17) (.10)
---------- ---------- ----------
Net income (loss).......................................................... $ .26 $ (.14) $ (.15)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares.................................................... 27,506 21,418 19,438
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
CONVERTIBLE CAPITAL IN
PREFERRED COMMON EXCESS OF RETAINED TREASURY
STOCK STOCK PAR VALUE EARNINGS STOCK TOTAL
------------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994................ $ 695 $ 206 $ 33,165 $ 33,938 $ (4,604) $ 63,400
Stock issuance............................. -- -- 1,579 -- 912 2,491
Exercise of stock options and other........ -- 5 1,293 (60) (381) 857
Shares contributed to employee benefit
plans.................................... -- -- 583 (161) 549 971
Income tax benefit from employee stock
transactions............................. -- -- 344 -- -- 344
Dividends on preferred stock--
$1 per share............................. -- -- -- (695) -- (695)
Net loss................................... -- -- -- (2,305) -- (2,305)
----- ----- ----------- --------- --------- ---------
Balances at December 31, 1995................ 695 211 36,964 30,717 (3,524) 65,063
Stock issuance for acquisition............. -- 18 10,659 -- -- 10,677
Exercise of stock options and other........ -- 3 553 (16) (62) 478
Shares contributed to employee benefit
plans.................................... -- -- 827 (261) 626 1,192
Income tax benefit from employee stock
transactions............................. -- -- 70 -- -- 70
Dividends on preferred stock--
Cumulative Convertible, $1.00 per
share.................................. -- -- -- (695) -- (695)
Series B, 6% annual...................... -- -- -- (108) -- (108)
Net loss................................... -- -- -- (2,217) -- (2,217)
----- ----- ----------- --------- --------- ---------
Balances at December 31, 1996................ 695 232 49,073 27,420 (2,960) 74,460
Conversion of subordinated debt............ -- 5 1,597 -- -- 1,602
Exercise of stock options and other........ -- 1 759 (52) 37 745
Shares contributed to employee benefit
plans.................................... -- -- 12 -- 332 344
Shares purchased from benefit plan......... -- -- (545) -- -- (545)
Income tax benefit from employee stock
transactions............................. -- -- 40 -- -- 40
Pooling of interests with DBA.............. -- -- -- (8,932) -- (8,932)
Dividends on preferred stock--
Cumulative Convertible, $1.00 per
share.................................. -- -- -- (695) -- (695)
Series B, 6% annual...................... -- -- -- (180) -- (180)
Net income................................. -- -- -- 6,950 -- 6,950
----- ----- ----------- --------- --------- ---------
Balances at December 31, 1997................ $ 695 $ 238 $ 50,936 $ 24,511 $ (2,591) $ 73,789
----- ----- ----------- --------- --------- ---------
----- ----- ----------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THE TITAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations...................................... $ 7,293 $ 1,425 $ (333)
Adjustments to reconcile income (loss) from continuing operations to net cash
used for continuing operations:
Depreciation and amortization............................................... 7,229 6,222 5,044
Deferred income taxes and other............................................. 3,006 (1,830) 304
Change in operating assets and liabilities, net of effects from businesses
sold and acquired:
Accounts receivable....................................................... (5,799) 7,060 (2,770)
Inventories............................................................... (1,101) (5,144) (3,048)
Prepaid expenses and other assets......................................... 3,765 199 1,788
Accounts payable.......................................................... 2,272 (4,356) 4,051
Income taxes payable...................................................... -- (653) --
Accrued compensation and benefits......................................... 108 (2,542) (1,673)
Restructuring activities.................................................. (815) (4,099) (486)
Other liabilities......................................................... (5,359) (419) (542)
---------- ---------- ----------
Net cash provided by (used for) continuing operations......................... 10,599 (4,137) 2,335
---------- ---------- ----------
Loss from discontinued operation.............................................. (343) (3,642) (1,972)
Changes in net assets of discontinued operation............................... (5,230) (4,943) (2,894)
---------- ---------- ----------
Net cash used for discontinued operation...................................... (5,573) (8,585) (4,866)
---------- ---------- ----------
Net cash provided by (used for) operating activities.......................... 5,026 (12,722) (2,531)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (4,202) (5,507) (9,101)
Proceeds, net of transaction costs, from sale of businesses................... 200 2,492 1,835
Payment for purchase of businesses, net of cash acquired...................... -- (2,679) --
Proceeds from sale of investments............................................. 19,199 5,000 --
Purchase of investments....................................................... (15,410) (9,888) (5,000)
Other......................................................................... 300 223 49
---------- ---------- ----------
Net cash provided by (used for) investing activities.......................... 87 (10,359) (12,217)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to debt............................................................. 12,350 37,000 13,800
Retirements of debt........................................................... (2,065) (15,841) (1,426)
Deferred debt issuance costs.................................................. -- (2,035) --
Proceeds from stock issuances................................................. 741 476 3,324
Purchase of stock from benefit plan........................................... (471) -- --
Dividends paid................................................................ (875) (803) (695)
---------- ---------- ----------
Net cash provided by financing activities..................................... 9,680 18,797 15,003
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 14,793 (4,284) 255
Net cash used by DBA in interim period........................................ (8,932) -- --
Cash and cash equivalents at beginning of year................................ 4,751 9,035 8,780
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 10,612 $ 4,751 $ 9,035
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. The Titan Corporation provides information technology
and electronic systems and services to commercial and government customers.
Titan groups its businesses into four core business segments--Communications
Systems, Software Systems, Information Technologies, and Medical Sterilization
and Food Pasteurization--and a fifth business segment, Emerging Technologies and
Businesses. Titan provides engineering, technical, management and consulting
services in the areas of national security, software systems, communication
systems, information systems, threat simulation/training systems, electronic
control systems, advanced research and development, and medical products
sterilization and food pasteurization. Titan also develops, designs,
manufactures and markets satellite communications subsystems, digital imaging
products, electro-optical systems, and pulsed power products including linear
accelerators.
Titan is involved in a number of start-up ventures, most notably the
commercial satellite communications business in Titan's Communications Systems
segment. Titan believes that the primary source of revenues for this business
will be international customers in developing countries, primarily within Asia.
Titan's investment in this business is reflected in the balance sheet primarily
within the captions of Accounts Receivable, Inventories, and Property and
Equipment and aggregates approximately $14,400 at December 31, 1997. Also at
December 31, 1997, this business has non-cancelable commitments of $4,354,
primarily with two contract manufacturers, for purchases through 1998 of certain
components incorporated into the segment's products. While accounts receivable
are generally not collateralized, Titan limits its exposure by performing
ongoing credit evaluations of its customers' financial condition. To mitigate
credit risk in foreign countries, Titan has a policy of requiring payment,
primarily in the form of stand-by letters of credit, advance deposits, or wire
transfers, prior to shipment.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of The Titan Corporation ("Titan") and its subsidiaries. All
significant intercompany transactions and balances have been eliminated. Certain
prior year amounts have been reclassified to conform to the 1997 presentation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION. A majority of Titan's revenue, 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, which includes revenues
recognized as units are delivered. Total estimated costs are based on
management's assessment of costs to complete the project based upon evaluation
of the level of work achieved and costs expended to date. Estimated contract
losses are fully charged to operations when identified.
CASH EQUIVALENTS. All highly liquid investments purchased with an original
maturity of three months or less are classified as cash equivalents.
INVESTMENTS. Titan does not invest in securities as its primary business
and does not maintain a trading account. Occasionally, however, Titan purchases
financial instruments with maturities greater than three months from the date of
acquisition. Such securities are classified as "available for sale" as required
F-7
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
by Statement of Financial Accounting Standards No. 115 (SFAS 115) "Accounting
for Certain Investments in Debt and Equity Securities." As of December 31, 1997
and 1996, all such investment securities owned by Titan mature in one year or
less and were carried at their current market value, which approximates their
cost, as required by SFAS 115.
INVENTORIES. Inventories include the cost of material, labor and overhead,
and are stated at the lower of cost, determined on the first-in, first-out
(FIFO) and weighted average methods, or market.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is provided using the straight-line method, with estimated useful
lives of 32 years for buildings, 2 to 15 years for leasehold improvements and 3
to 10 years for machinery and equipment and furniture and fixtures. Certain
machinery and equipment in Titan's medical sterilization business is depreciated
based on units of production.
GOODWILL. The excess of the cost over the fair value of net assets of
purchased businesses ("goodwill") is amortized on a straight-line basis over
varying lives ranging from 5 to 30 years. Titan periodically re-evaluates the
original assumptions and rationale utilized in the establishment of the carrying
value and estimated lives of its goodwill. The criteria used for these
evaluations include management's estimate of the asset's continuing ability to
generate positive income from operations and positive cash flow in future
periods as well as the strategic significance of the intangible asset to Titan's
business objectives.
CAPITALIZED SOFTWARE COSTS. Titan's policy is to amortize capitalized
software costs over the shorter period of (a) the ratio that current gross
revenues for a product bears to the total of current and amortized future gross
revenues for that product, or (b) the straight-line method over the remaining
estimated economic life of the product, including the period being reported on.
Notwithstanding the above, the maximum amortization period is four years.
IMPAIRMENT OF LONG-LIVED ASSETS. Periodically, Titan reviews for possible
impairment its long-lived assets and certain identifiable intangibles to be held
and used by an entity. Whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be fully recoverable, asset values are
adjusted accordingly.
STOCK BASED COMPENSATION. Titan has elected to adopt the disclosure only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). Accordingly, Titan will continue to
account for its stock based compensation plans under the provisions of APB No.
25.
INCOME TAXES. Titan accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which
requires the use of the liability method of accounting for deferred income
taxes. Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end. If it is
more likely than not that some portion or all of a deferred tax asset will not
be realized, a valuation allowance is recognized.
PER SHARE INFORMATION. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accountings Standards No. 128 "Earnings Per
Share" (SFAS 128), which has been adopted by
F-8
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Titan. The statement specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS"), and is effective for periods ending
after December 15, 1997. Prior year per share information is presented in
accordance with the statement. The following data summarize information relating
to the per share computations for 1997:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
------------- --------------- -----------
<S> <C> <C> <C>
Income from continuing operations........................................ $ 7,293
Less preferred stock dividends........................................... (875)
------
Basic EPS:
Income from continuing operations
Available to common stockholders....................................... 6,418 22,267 $ .29
Effect of dilutive securities:
Stock options.......................................................... -- 313 (.01)
Warrants............................................................... -- 30 (.00)
Convertible subordinated debentures.................................... 978 4,896 (.01)
------ ------ -----
Diluted EPS:
Income from continuing operations
Available to common stockholders plus assumed conversions.............. $ 7,396 27,506 $ .27
------ ------ -----
------ ------ -----
</TABLE>
In 1997, options to purchase 709,351 shares of common stock at prices
ranging from $4.02 to $9.50 per share were not included in the computation of
diluted EPS for 1997, because the options' exercise price was greater than the
average market price of the common shares. Also in 1997, 463,248 shares of
common stock that could result from the conversion of cumulative convertible
preferred stock, as well as 333,333 shares that could result from the conversion
of Series B Cumulative Convertible Redeemable Preferred stock (until November
24, 1997 when the conversion privilege expired), were not included in the
computation of diluted EPS, as the effect would have been anti-dilutive.
Common shares that could result from the conversion of stock options in 1996
and 1995, and from the conversion of Titan's convertible subordinated debentures
and Series B cumulative convertible redeemable preferred stock in 1996 were not
included in the computation of diluted EPS in 1996 and 1995, as the effect would
have been anti-dilutive.
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. Titan does not anticipate that the adoption of the accounting and
disclosure provisions of SFAS 130 will have a material impact on Titan's
financial statements and results of operations.
F-9
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131). This Statement establishes standards for reporting and
disclosure of operating segments on a basis consistent with that of the
management structure. In accordance with the statement, the Company restated its
segments for all periods presented.
NOTE 2. MERGER AND ACQUISITION
On February 27, 1998, Titan consummated a merger with DBA Systems, Inc.
("DBA"), in a stock-for-stock transaction. DBA is a developer and manufacturer
of digital imaging products, electro-optical systems and threat
simulation/training systems. DBA's products and systems are primarily used by
the defense and intelligence communities; accordingly, it will become part of
Titan's Information Technologies segment.
Titan issued approximately 6,100,000 shares of common stock in exchange for
all the outstanding shares of DBA stock based on an exchange ratio of
approximately 1.37 shares of Titan's common stock for each share of DBA common
stock. Titan also assumed and exchanged all options to purchase DBA's Stock for
options to purchase approximately 441,000 shares of Titan's Common Stock. The
merger constituted a tax-free reorganization and has been accounted for as a
pooling of interests. In connection therewith, DBA's June 30 fiscal year-end has
been changed to coincide with Titan's year-end. Accordingly, the financial
statements presented have been restated to include the combined results of
operations, financial position and cash flows of DBA as if the merger had
occurred at the beginning of the periods presented.
Prior to the merger, DBA used a fiscal year ending June 30. Accordingly, the
combined results reflect the results for the Titan fiscal years ended December
31, 1997, 1996 and 1995 combined with DBA's results for the fiscal years ended
June 30, 1997, 1996 and 1995, respectively. DBA revenues and net loss for the
six months ended December 31, 1997 were $11,660 and $8,932, respectively. The
net loss, which included certain non-recurring charges approximating $9,900 to
conform DBA to Titan's accounting policies, has been reflected as an adjustment
to retained earnings.
The non-recurring charges to conform DBA to Titan's accounting policies
include approximately $1,800 of reserves provided to certain unbilled
receivables related to contract claims and estimated settlement amounts. Titan
generally does not record revenues relating to claims until such amounts are
billable. Approximately $1,300 of reserves were provided related to the carrying
value of inventory balances to conform to Titan's policy for excess and obsolete
inventory. Cost of approximately $5,200 primarily related to adjustments to the
carrying value of certain fixed assets to conform to Titan's methodologies of
applying the provisions of SFAS No. 121 was provided. Approximately $1,600 of
costs related to the carrying value of investments in certain start-up
enterprises which does not meet Titan's threshold policy for capitalization in
start-up ventures was provided.
F-10
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2. MERGER AND ACQUISITION (CONTINUED)
The following schedule details the results of operations of the previously
separate enterprises for the period before the combination was consummated that
are included in the current combined results of operations of Titan:
<TABLE>
<CAPTION>
TITAN DBA COMBINED
DECEMBER 31, 1997 JUNE 30, 1997 DECEMBER 31, 1997
----------------- ------------- -----------------
<S> <C> <C> <C>
Revenues................................ $ 171,186 $ 25,508 $ 196,694
Net income.............................. 5,165 1,785 6,950
</TABLE>
<TABLE>
<CAPTION>
TITAN DBA COMBINED
DECEMBER 31, 1996 JUNE 30, 1996 DECEMBER 31, 1996
----------------- ------------- -----------------
<S> <C> <C> <C>
Revenues................................ $ 135,484 $ 20,470 $ 155,954
Net income.............................. (3,378) 1,161 (2,217)
</TABLE>
<TABLE>
<CAPTION>
TITAN DBA COMBINED
DECEMBER 31, 1995 JUNE 30, 1995 DECEMBER 31, 1995
----------------- ------------- -----------------
<S> <C> <C> <C>
Revenues................................ $ 131,535 $ 29,696 $ 161,231
Net income.............................. (3,807) 1,502 (2,305)
</TABLE>
On May 24, 1996, Titan completed the acquisition of three privately-held
affiliated businesses-- Eldyne, Inc. ("Eldyne"), Unidyne Corporation ("Unidyne")
and Diversified Control Systems, LLC ("DCS"). The overall transaction
consideration, excluding associated transaction costs and expenses, consisted of
$1 million cash, 1,779,498 shares of Titan common stock with an assigned value
of $6.00 per share, the issuance of 500,000 shares of a new class of cumulative
convertible redeemable preferred stock (see Note 10), assumption of indebtedness
and a promissory note for $1 million issued to the principal stockholder of the
acquired companies. The $1 million note was due and paid on March 15, 1997, and
earned interest of 10% per annum. Titan also entered into an agreement with the
principal stockholder, providing for annual payments of $.3 million, payable
monthly, for 6 years beginning May 24, 1996. The net present value of this
agreement ($1.5 million) was recorded as additional purchase price at the
acquisition date. This obligation was settled in full on January 2, 1997.
Estimated other direct costs of the acquisition were approximately $3 million.
The acquisition has been accounted for as a purchase, and, accordingly,
Titan's consolidated financial statements include the operating results of the
three acquired companies since May 24, 1996. The excess of the purchase price
over the estimated fair value of net assets acquired of $17,474 at December 31,
1997 is being amortized using a straight-line method over 30 years.
Unaudited pro forma data giving effect to the purchase of Eldyne, Unidyne
and DCS as if they had been acquired at the beginning of 1995 are shown below:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Revenues.............................................................. $ 180,290 $ 212,316
Net income (loss)..................................................... (265) 118
Net loss per share.................................................... (0.05) (0.03)
</TABLE>
F-11
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3. DISCONTINUED OPERATION
On April 11, 1997, Titan's Board of Directors adopted a plan to divest
Titan's broadband communications business. The results of the broadband
communications business have been accounted for as a discontinued operation in
accordance with Accounting Principles Board Opinion No. 30, which among other
provisions, anticipates that the plan of disposal will be carried out within one
year.
Revenues for the broadband communications business were $551, $2,238 and
$2,432 for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in the loss from discontinued operation is a tax benefit of $177,
$1,876 and $625 for the years ended December 31, 1997, 1996 and 1995
respectively. Titan deferred losses from the discontinued operation of $9,271 in
1997, which primarily represented amortization and wind-down costs of the
business. Included in the deferred loss is interest of $509 allocated to the
discontinued operation based on the ratio of net assets to be sold to the sum of
total net assets of Titan. Net current assets of discontinued operation consist
primarily of accounts receivable, inventory, and deferred losses from the date
of discontinuance net of accounts payable, accrued compensation and other
current liabilities. Net noncurrent assets of discontinued operation consist of
property and equipment and intangible assets, primarily capitalized software
costs. Prior year consolidated financial statements have been restated to
present the broadband communications business as a discontinued operation.
NOTE 4. RESTRUCTURING
In 1995, the Board of Directors adopted a formal plan of restructuring,
which resulted in a $5,431 charge to 1995 results of operations. The
restructuring plan generally provided for the dispositions of certain non-core
businesses as well as severance and related costs. The planned restructuring
activities were substantially accomplished in 1996.
NOTE 5. OTHER FINANCIAL DATA
Following are details concerning certain balance sheet accounts:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accounts Receivable:
U.S. Government--billed............................................. $ 20,992 $ 19,869
U.S. Government--unbilled........................................... 21,603 22,564
Trade............................................................... 15,964 8,956
Less allowance for doubtful accounts................................ (451) (404)
--------- ---------
$ 58,108 $ 50,985
--------- ---------
--------- ---------
</TABLE>
Unbilled receivables include approximately $10,400 and $11,200 at December
31, 1997 and 1996, respectively, representing work-in-process which 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
Titan for performance on certain
F-12
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5. OTHER FINANCIAL DATA (CONTINUED)
U.S. Government contracts are subject to audit by the Defense Contract Audit
Agency. Revenues have been recorded at amounts expected to be realized upon
final settlement.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Inventories:
Materials.......................................................... $ 2,285 $ 2,012
Work-in-process.................................................... 11,668 9,238
Finished goods..................................................... 2,027 3,729
--------- ---------
$ 15,980 $ 14,979
--------- ---------
--------- ---------
Property and Equipment:
Machinery and equipment............................................ $ 38,648 $ 37,909
Furniture and fixtures............................................. 5,382 6,670
Land, buildings and leasehold improvements......................... 14,011 13,593
Construction in progress........................................... 406 938
--------- ---------
58,447 59,110
Less accumulated depreciation and
amortization....................................................... (34,511) (32,665)
--------- ---------
$ 23,936 $ 26,445
--------- ---------
--------- ---------
</TABLE>
Deferred income taxes of $314 and $4,094 are included in Other Assets at
December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996,
respectively, other liabilities, current and non-current, include $2,570 and
$1,623 related to estimated losses on contracts, $1,006 and $2,019 of customer
advance payments, and liabilities for post-retirement benefits for employees of
previously discontinued operations of $2,436 and $2,923.
NOTE 6. SEGMENT INFORMATION
In the fourth quarter of 1997, Titan realigned certain operations within its
existing segments and added a fifth segment to better position these operations
for strategic transactions pursuant to Titan's corporate strategy. This
realignment conforms with the provisions of Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information". All prior year segment data have been restated to conform to the
1997 presentation.
The Communications Systems segment contains Titan's wholly owned subsidiary,
Linkabit Wireless, Inc., ("Linkabit Wireless"), which develops and produces
advanced satellite communications products and systems for commercial and
government customers. In December 1997, Titan filed a registration statement
including a preliminary prospectus with the Securities and Exchange Commission
("SEC") for an initial public offering of 2,700,000 shares of Linkabit Wireless
common stock. The underwriters will be granted a 30-day option to purchase up to
an additional 405,000 shares to cover over-allotments. If and when the offering
is consummated, then immediately following the offering, Titan will own
approximately 74% of the common stock of Linkabit Wireless.
The Software Systems segment is a systems integrator that provides systems
integration services and solutions for commercial and non-defense clients with
distributed computing environments.
F-13
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
The Information Technologies segment provides information systems solutions
primarily to government customers with large data management, information
manipulation, information fusion, knowledge-based systems and communications
requirements, and develops and manufactures digital imaging products,
electro-optical systems and threat simulation/training systems primarily used by
the defense and intelligence communities. This segment also supports high
priority government programs by providing systems integration, information
systems engineering services, development of systems and specialized products,
as well as systems research, development and prototyping. Other services
provided include research and development under government funded contracts for
the Department of Defense (DoD) and other customers.
The Medical Sterilization and Food Pasteurization segment provides medical
product sterilization services at two Titan facilities and manufactures and
sells turnkey electron beam sterilization and food pasteurization systems to
customers for use in their own facilities.
The Emerging Technologies and Businesses segment applies Titan's proprietary
knowledge and core competencies to industrial and commercial opportunities.
Substantially all operations are located in the United States. Export
revenues amounted to approximately $21,365, $10,693, and $14,209 in 1997, 1996
and 1995, respectively, primarily to countries in the Far East and Western
Europe. All international sales are denominated in U.S. dollars.
The following tables summarize industry segment data for 1997, 1996 and
1995.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Communications Systems..................................................... $ 48,980 $ 27,850 $ 25,506
Software Systems........................................................... 17,374 18,505 33,175
Information Technologies................................................... 113,733 94,874 90,487
Medical Sterilization and
Food Pasteurization...................................................... 5,983 2,818 3,459
Emerging Technologies and
Businesses............................................................... 10,624 11,907 8,604
---------- ---------- ----------
$ 196,694 $ 155,954 $ 161,231
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Sales to the United States Government, including both defense and
non-defense agencies, and sales as a subcontractor as well as direct sales,
aggregated approximately $148,095 in 1997, $122,302 in 1996, and $107,739 in
1995. Within the Software Systems segment, sales to one customer, a telephone
company, totaled $4,500, $8,300 and $24,500 in 1997, 1996 and 1995,
respectively. No other single customer
F-14
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
accounted for 10% or more of the consolidated revenues for these years.
Intersegment sales were not significant in any year.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING PROFIT (LOSS):
Communications Systems.......................................................... $ 1,074 $ (4,187) $ (578)
Software Systems................................................................ 4,580 (137) 3,803
Information Technologies........................................................ 11,739 9,191 4,402
Medical Sterilization and Food
Pasteurization................................................................ 189 (1,080) (1,340)
Emerging Technologies and Businesses............................................ (25) 964 151
Corporate....................................................................... (1,644) (543) (6,350)
--------- --------- ---------
$ 15,913 $ 4,208 $ 88
--------- --------- ---------
--------- --------- ---------
</TABLE>
Corporate includes corporate general and administrative expenses, certain
corporate restructuring charges, and gains or losses from the sale of
businesses. Corporate general and administrative expenses are generally
recoverable from contract revenues by allocation to operations.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
Communications Systems..................................................... $ 29,019 $ 18,774 $ 13,826
Software Systems........................................................... 8,114 6,139 8,945
Information Technologies................................................... 69,623 80,257 57,645
Medical Sterilization and Food
Pasteurization........................................................... 11,854 10,222 10,446
Emerging Technologies and Businesses....................................... 7,589 7,649 5,508
Discontinued operation, net................................................ 13,798 8,568 3,558
General corporate assets................................................... 24,213 27,140 23,596
---------- ---------- ----------
$ 164,210 $ 158,749 $ 123,524
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-15
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
General corporate assets are principally cash, prepaid expenses, property
and equipment, deferred income taxes and other assets.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Depreciation and Amortization of Property and Equipment, Goodwill, and Other Assets:
Communications Systems............................................................... $ 1,292 $ 820 $ 601
Software Systems..................................................................... 617 1,152 1,032
Information Technologies............................................................. 3,551 2,953 2,510
Medical Sterilization and Food Pasteurization........................................ 499 510 287
Emerging Technologies and Businesses................................................. 288 374 207
Corporate............................................................................ 982 413 407
--------- --------- ---------
$ 7,229 $ 6,222 $ 5,044
--------- --------- ---------
--------- --------- ---------
Capital Expenditures:
Communications Systems............................................................... $ 1,438 $ 1,831 $ 1,101
Software Systems..................................................................... 453 261 1,700
Information Technologies............................................................. 1,493 1,727 1,095
Medical Sterilization and Food Pasteurization........................................ 429 1,024 4,183
Emerging Technologies and Businesses................................................. 270 437 668
Corporate............................................................................ 119 227 354
--------- --------- ---------
$ 4,202 $ 5,507 $ 9,101
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 7. INCOME TAXES
The components of the income tax provision (benefit) from continuing
operations are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................................. $ 848 $ 85 $ (1,621)
State............................................................................... 178 -- (164)
--------- --------- ---------
1,026 85 (1,785)
Deferred.............................................................................. 3,217 136 1,245
--------- --------- ---------
$ 4,243 $ 221 $ (540)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7. INCOME TAXES (CONTINUED)
Following is a reconciliation of the income tax provision (benefit) from
continuing operations 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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Expected Federal tax provision (benefit) on continuing operations...................... $ 3,922 $ 560 $ (297)
State income taxes, net of Federal income tax benefit.................................. 310 (256) (44)
Research credit........................................................................ (324) -- --
Goodwill amortization.................................................................. 351 88 160
Alternative minimum tax................................................................ -- -- 100
Keyman life insurance.................................................................. 24 36 75
Other.................................................................................. (40) (207) (534)
--------- --------- ---------
Actual tax provision (benefit) on continuing operations................................ $ 4,243 $ 221 $ (540)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The deferred tax asset as of December 31, 1997 and 1996, results from the
following temporary differences:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Loss carryforward............................................................................ $ 4,672 $ 6,973
Employee benefits............................................................................ 3,807 4,644
Loss from discontinued operation............................................................. (3,338) --
Tax credit carryforwards..................................................................... 2,546 1,383
Inventory and contract loss reserves......................................................... 2,335 1,770
Depreciation................................................................................. (2,420) (4,033)
Deferred tax on foreign profit............................................................... 1,123 --
Restructuring................................................................................ -- 361
Other........................................................................................ (366) 233
--------- ---------
8,359 11,331
Valuation allowance.......................................................................... (1,200) (1,200)
--------- ---------
Net deferred tax asset....................................................................... $ 7,159 $ 10,131
--------- ---------
--------- ---------
</TABLE>
Realization of certain components of the net deferred tax asset is dependent
upon Titan generating sufficient taxable income prior to expiration of loss and
credit carryforwards. Although realization is not assured, management believes
it is more likely than not that the net deferred tax asset will be realized. The
amount of the net deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are changed. Also, under Federal tax law, certain potential
changes in ownership of Titan which may not be within Titan's control may limit
annual future utilization of these carryforwards.
Cash paid for income taxes was $1,117 in 1997. Net tax refunds in 1996 and
1995 were $233 and $808, respectively.
F-17
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8. DEBT
At December 31, 1997, Titan had borrowings of $12,350 outstanding at a
weighted average interest rate of 8.02% under a $24,000 line of credit maturing
May 31, 1998 with two banks. This line amended and replaced the existing lines
of credit. Titan had commitments under letters of credit at December 31, 1997 of
$1,368, which reduced availability under the line of credit. Titan has the
option to borrow at a bank prime rate or at LIBOR plus 2%. The agreement
contains, among other financial covenants, provisions which require Titan to
have annual net income, as defined, prohibits two consecutive quarterly losses
in aggregate of greater than $500, and contains other financial covenants which
require Titan to maintain stipulated levels of net worth and minimum interest
coverage, and fixed charge coverage and quick ratios. Under the agreement and a
subsequent amendment in contemplation of the Linkabit Wireless transaction (see
Note 6), Titan and its wholly owned subsidiaries, Eldyne and Unidyne, granted
the banks a security interest in substantially all of their non-real property
assets, including accounts receivable, inventory, equipment and patents, and
certain limitations have been placed on transactions between Titan and Linkabit
Wireless. Borrowings under Titan's lines of credit averaged $10,803, $12,315 and
$6,400 at weighted average interest rates of 8.1%, 8.2% and 8.8% during 1997,
1996 and 1995, respectively.
In November 1996, Titan issued $34,500 of 8.25% convertible subordinated
debentures due 2003. The debentures are convertible into common stock of Titan
at a conversion price of $3.50 per share, subject to adjustment upon the
occurrence of certain events. The debentures are redeemable, on or after
November 2, 1999, initially at 104.125% of principal amount and at decreasing
prices thereafter to 100% of principal amount through maturity, in each case
together with accrued interest. The debentures also may be repaid at the option
of the holder upon a change in control, as defined in the indenture governing
the debentures, at 100% of principal amount plus accrued interest. The net
proceeds of the offering were used to repay borrowings under Titan's bank lines
of credit and for working capital and general corporate purposes. At December
31, 1997, Other assets include $1,778 in capitalized costs related to the
issuance, which are being amortized to interest expense ratably over the life of
the debt.
At December 31, 1997 and 1996, Titan had $3,328 and $5,215, respectively,
outstanding under two promissory notes, secured by certain machinery and
equipment, at interest rates of 8.5% and 7.42%, respectively. At December 31,
1997, $992 is due within one year. At December 31, 1996, Titan also had
outstanding a mortgage note and an equipment note, collateralized by real estate
and equipment, with balances of $1,244 and $122, respectively, at an interest
rate of LIBOR plus 2.5%. At December 31, 1997, only the mortgage note remains,
with a balance of $1,196, of which $112 is due within one year.
Cash paid for interest, primarily on these borrowings, was $4,703, $2,175,
and $771, in 1997, 1996, and 1995, respectively. At December 30, 1997, Titan was
in compliance with all financial covenants under its various debt agreements.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Titan is obligated for aggregate rentals of $34,504 under operating lease
agreements, principally for facilities. These leases generally include renewal
options and require minimum payments of $5,632 in 1998, $4,411 in 1999, $3,879
in 2000, $3,741 in 2001, $4,775 in 2002, and $12,066 for the years thereafter.
Rental expense under these leases was $6,691 in 1997, $8,363 in 1996 and $7,880
in 1995. Titan has entered into a long-term lease agreement for facilities which
are owned by an entity in which Titan has a minority ownership interest. Rental
expense in 1997, 1996 and 1995 includes $904, $884, and $868, respectively, paid
under this agreement.
F-18
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Titan is involved in the appeal of the judgment resulting from the trial of
a lawsuit filed by a former employee claiming, among other things, wrongful
termination and discrimination. Titan intends to vigorously pursue and defend
against the appeal of this case. While it is not feasible to predict the outcome
of this case, management believes that its ultimate disposition will not have a
material adverse effect on the financial position or results of operations of
Titan.
In the ordinary course of business, defense contractors are subject to many
levels of audit and investigation by various government agencies. Further, Titan
and its subsidiaries are subject to claims and from time to time are named as
defendants in legal proceedings. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of Titan.
NOTE 10. SERIES B CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK
Titan's Series B Preferred Stock has a par value of $1.00, accrues dividends
at a rate of 6% per annum payable quarterly in arrears cumulatively, has a
liquidation preference of $6.00 per share plus accrued and unpaid dividends (the
"Series B Liquidation Preference") and entitles the holder thereof to one vote
per outstanding share, voting together as a class with the holders of shares of
outstanding Common Stock (and any other series or classes entitled to vote
therewith) on all matters submitted for a shareholder vote. The Series B
Preferred Stock is redeemable at the Series B Liquidation Preference (i) at the
holder's option, after May 24, 1998 until May 24, 2001, and (ii) at Titan's
option, after May 24, 2001 until May 24, 2006.
NOTE 11. CUMULATIVE CONVERTIBLE PREFERRED STOCK
Each share of $1.00 cumulative convertible preferred stock is entitled to
1/3 vote, annual dividends of $1 per share and is convertible at any time into
2/3 share of Titan's common stock. Common stock of 463,248 shares has been
reserved for this purpose. Upon liquidation, the $1.00 cumulative convertible
preferred stockholders are entitled to receive $20 per share, plus cumulative
dividends in arrears, before any distribution is made to the common
stockholders.
NOTE 12. COMMON STOCK
At December 31, 1997, approximately 36,804,900 common shares were reserved
for future issuance for conversion of convertible subordinated debentures,
preferred stock, all stock incentive plans and warrants.
In September 1995, Titan completed a private placement of 300,000 shares of
its common stock, receiving net proceeds of $2,325. Treasury shares were used
for the issuance. Titan's shares were placed with offshore institutional
investors pursuant to Regulation S under the Securities Act of 1933, as amended.
On August 17, 1995, the Board of Directors adopted a Shareholder Rights
Agreement and subsequently distributed one preferred stock purchase right
("Right") for each outstanding share of Titan's common stock. Each Right
entitles the registered holder to purchase from Titan one one-hundredth of a
share of Series A Junior Participating Preferred Stock, par value $1.00 per
share (the "Preferred Shares") at a price of $42.00 per one one-hundredth of a
Preferred Share, subject to adjustment. The Rights become exercisable if a
person or group acquires, in a transaction not approved by Titan's Board of
Directors
F-19
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12. COMMON STOCK (CONTINUED)
("Board"), 15% or more of Titan's common stock or announces a tender offer for
15% or more of the stock.
If a person or group acquires 15% or more of Titan's common stock, each
Right (other than Rights held by the acquiring person or group which become
void) will entitle the holder to receive upon exercise a number of shares of
Titan common stock having a market value of twice the Right's exercise price. If
Titan is acquired in a transaction not approved by the Board, each Right may be
exercised for common shares of the acquiring company having a market value of
twice the Right's exercise price. Titan may redeem the Rights at $.01 per Right,
subject to certain conditions. The Rights expire on August 17, 2005.
NOTE 13. STOCK-BASED COMPENSATION PLANS
Titan provides stock-based compensation to officers, directors and key
employees through various fixed stock option plans and to all non-executive
employees through an employee stock purchase plan. Titan has adopted the
disclosure only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the fixed stock option or stock purchase plans. Had
compensation cost for Titan's stock-based compensation plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS 123, Titan's results of operations would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss)................................................ As reported $ 6,950 $ (2,217) $ (2,305)
Pro forma 5,243 (2,887) (2,479)
Net income (loss) per share, basic............................... As reported $ .27 $ (.14) $ (.15)
Pro forma .20 (.17) (.16)
Net income (loss) per share, diluted............................. As reported $ .26 $ (.14) $ (.15)
Pro forma .16 (.17) (.16)
</TABLE>
Titan currently has options available for grant under the Stock Option Plans
of 1990, 1994 and 1997, The 1989 Directors' Stock Option Plan and The 1996
Directors' Stock Option and Equity Participation Plan (the "1996 Directors'
Plan"). Options authorized for grant under the employee plans and under the
directors' plans are 3,000,000 and 185,000, respectively. Under the 1996
Directors' Plan, a director may elect to receive stock in lieu of fees, such
stock to have a fair market value equal to the fees. Under all plans, the
exercise price of each option equals the market price of Titan's stock on the
date of grant. Under the employee plans, an option's maximum term is ten years.
Under the directors' plans, options expire 90 days after the option holder
ceases to be a director. Employee options may be granted throughout the year;
directors' options are granted annually during the first two or three years as a
director. All options vest in 25% increments beginning one year after the grant
date.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using the following weighted-average
assumptions: zero dividend yield and an expected life of 5 years in all years;
expected volatility of 70% in 1997 and 87% in 1996 and 1995; and a risk free
interest rate of 5.72% in 1997 and 6.57% in 1996 and 1995.
F-20
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
A summary of the status of Titan's fixed stock option plans as of December
31, 1997, 1996 and 1995, and changes during the years ending on those dates is
presented below:
FIXED OPTIONS
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ------------------------------ ------------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
--------- ----------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... 1,993 $ 4.34 1,661 $ 4.60 1,845 $ 3.16
Granted......................... 786 4.77 873 4.16 601 6.68
Exercised....................... (201) 2.79 (162) 2.82 (540) 2.59
Canceled........................ (284) 3.66 (379) 5.55 (245) 5.13
--------- ----- -----
Outstanding at end of year...... 2,294 4.69 1,993 4.34 1,661 4.60
--------- ----- -----
--------- ----- -----
Options exercisable at
year-end...................... 993 721 660
Weighted-average fair value of
options granted during the
year.......................... $ 3.52 $ 3.25 $ 5.40
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED- ------------------------------
AVERAGE NUMBER
NUMBER REMAINING WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF OUTSTANDING AT CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE PRICES 12/31/97 LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
- ----------------------------------- -------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$2.63 - 3.63....................... 607,900 6.18 years $ 3.33 437,800 $ 3.21
4.00 - 5.88....................... 1,363,700 8.59 4.43 435,900 4.50
6.25 - 9.50....................... 322,200 8.22 8.06 119,400 8.39
-------------- -------------
2,293,800 7.98 4.65 993,100 4.40
-------------- -------------
-------------- -------------
</TABLE>
Under the 1995 Employee Stock Purchase Plan, Titan is authorized to issue up
to 500,000 shares of common stock to its full-time employees. Elected officers
are not eligible to participate. Under the terms of the plan, employees may
elect to have between 1 and 10 percent of their regular earnings, as defined in
the plan, withheld to purchase Titan's common stock. The purchase price of the
stock is 85 percent of the lower of its market price at the beginning or at the
end of each subscription period. A subscription period is six months, beginning
January 1 and July 1 of each year. The first subscription period under the plan
began January 1, 1996. Approximately 11% of eligible employees participated in
the Plan in both 1997 and 1996 and purchased 110,461 and 89,865 shares of Titan
stock in 1997 and 1996, respectively. The weighted-average fair value of the
purchase rights granted in 1997 and 1996 was $1.06 and $1.71, respectively.
Three of Titan's wholly-owned subsidiaries have stock option plans for the
granting of subsidiary stock, which is not publicly traded. The exercise price
of all options granted under these plans equals the
F-21
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
fair value of the subsidiary stock at the date of grant as determined by the
subsidiaries' board of directors. If all options available for grant in these
plans were exercised, Titan's ownership in each of the subsidiaries would be
diluted by no greater than 12.5%, 25% and 37.5%.
NOTE 14. BENEFIT PLANS
Titan has various defined contribution benefit plans covering certain
employees. Titan's contributions to these plans were $2,197, $2,320, and $2,594
in 1997, 1996 and 1995, respectively. Titan's discretionary contributions to its
Employee Stock Ownership Plan was $290, $100 and $100 in 1997, 1996 and 1995,
respectively. Discretionary contributions to a profit sharing plan covering
certain employees were $175, $150 and $150 in 1997, 1996 and 1995, respectively.
During 1997, 1996 and 1995, Titan utilized treasury stock of $344, $1,092, and
$871, respectively, for benefit plan contributions.
Titan has a non-qualified executive deferred compensation plan for certain
officers and key employees. Titan's expense for this plan was $821, $901, and
$970 in 1997, 1996, and 1995, respectively. At December 31, 1997 and 1996,
respectively, other non-current liabilities include $3,954 and $3,492 for
obligations under this plan. Interest expense for the years ended December 31,
1997, 1996, and 1995 includes $527, $561, and $486, respectively, related to the
plan. Titan also has performance bonus plans for certain of its employees.
Related expense amounted to approximately $1,507, $1,315, and $2,516 in 1997,
1996 and 1995, respectively.
Titan has previously provided for post-retirement benefit obligations of
operations discontinued in prior years. Titan has no post-retirement benefit
obligations for any of its continuing operations nor for its recently
discontinued broadband communications business.
NOTE 15. SUBSEQUENT EVENT
On February 26, 1998, Titan entered into a definitive merger agreement with
Horizons Technology, Inc. ("Horizons"), a Delaware corporation, whereby, if
approved by the stockholders of Horizons, Horizons will become a wholly-owned
subsidiary of Titan Technologies and Information Systems Corporation, a
wholly-owned subsidiary of Titan, in a stock-for-stock transaction.
F-22
<PAGE>
THE TITAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
1997 QUARTER QUARTER QUARTER QUARTER YEAR
- ---------------------------------------------------------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 49,583 $ 47,380 $ 48,354 $ 51,377 $ 196,694
Gross profit.............................................. 10,747 11,775 11,672 11,360 45,554
Income from continuing operations......................... 1,141 1,390 2,241 2,521 7,293
Net income................................................ 798 1,390 2,241 2,521 6,950
Basic earnings per share:
Income from continuing operations....................... .04 .05 .09 .10 .29
Net income.............................................. .02 .05 .09 .10 .27
Diluted earnings per share:
Income from continuing operations....................... .04 .05 .08 .09 .27
Net income.............................................. .02 .05 .08 .09 .26
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
1996 QUARTER QUARTER QUARTER QUARTER YEAR
- ---------------------------------------------------------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 35,795 $ 33,758 $ 40,006 $ 46,395 $ 155,954
Gross profit.............................................. 7,390 8,053 7,441 8,593 31,477
Income (loss) from continuing operations.................. 472 632 (524) 845 1,425
Net income (loss)......................................... (605) (532) (1,697) 617 (2,217)
Basic earnings per share:
Income (loss) from continuing operations................ .01 .02 (.03) .03 .03
Net income (loss)....................................... (.04) (.04) (.08) .02 (.14)
Diluted earnings per share:
Income (loss) from continuing operations................ .01 .02 (.03) .03 .03
Net income (loss)....................................... (.04) (.03) (.08) .02 (.14)
</TABLE>
The above financial information for each quarter reflects all normal and
recurring adjustments.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Horizons Technology, Inc.:
We have audited the accompanying consolidated balance sheets of HORIZONS
TECHNOLOGY, INC. (A Delaware corporation) and subsidiaries as of January 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended January 31, 1998. 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 my
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 Horizons
Technology, Inc. and subsidiaries as of January 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses and has a net
capital deficiency that raises substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
San Diego, California
March 9, 1998
F-24
<PAGE>
HORIZONS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 523 $ 416
Accounts receivable, net............................................................... 6,064 7,276
Net assets of discontinued operation................................................... -- 358
Prepaid expenses and other current assets.............................................. 238 126
--------- ---------
Total current assets............................................................. 6,825 8,176
--------- ---------
PROPERTY AND EQUIPMENT, NET.............................................................. 305 700
OTHER ASSETS............................................................................. -- 79
NET ASSETS OF DISCONTINUED OPERATION..................................................... -- 1,141
--------- ---------
Total assets..................................................................... $ 7,130 $ 10,096
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable....................................................................... $ 1,403 $ 2,246
Line of credit......................................................................... 5,327 5,855
Accrued compensation................................................................... 2,561 1,395
Other accrued liabilities.............................................................. 119 1,945
Net liabilities of discontinued operation.............................................. 3,277 --
--------- ---------
Total current liabilities........................................................ 12,687 11,441
--------- ---------
LONG-TERM DEBT, LESS CURRENT PORTION..................................................... 184 146
OTHER NON-CURRENT LIABILITIES............................................................ 266 295
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, par value $.01 per share:
Authorized shares--2,500,000
Issued and outstanding shares--500,000 (aggregate liquidation value $3,500,000)...... 5 5
Common stock, par value $.01 per share:
Authorized shares--12,000,000
Issued and outstanding shares--7,496,953............................................. 75 75
Paid-in capital........................................................................ 3,762 3,762
Retained deficit....................................................................... (9,849) (5,628)
--------- ---------
Total stockholders' deficit...................................................... (6,007) (1,786)
--------- ---------
Total liabilities and stockholders' deficit.............................................. $ 7,130 $ 10,096
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-25
<PAGE>
HORIZONS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES......................................................................... $ 26,281 $ 29,551 $ 26,491
--------- --------- ---------
COSTS AND EXPENSES:
Cost of revenues............................................................... 18,335 20,008 17,931
Selling, general and administrative expense.................................... 4,699 4,114 3,921
Research and development expense............................................... 81 105 49
--------- --------- ---------
Total costs and expenses................................................... 23,115 24,227 21,901
--------- --------- ---------
OPERATING PROFIT................................................................. 3,166 5,324 4,590
Interest expense................................................................. (519) (592) (546)
--------- --------- ---------
Income from continuing operations before income taxes............................ 2,647 4,732 4,044
Income tax provision............................................................. 1,006 1,798 1,537
--------- --------- ---------
Income from continuing operations.......................................... 1,641 2,934 2,507
Loss from discontinued operations, net of taxes.................................. (5,862) (1,990) (7,676)
--------- --------- ---------
Net income (loss)................................................................ $ (4,221) $ 944 $ (5,169)
--------- --------- ---------
--------- --------- ---------
Basic earnings per share
Income from continuing operations.............................................. $ 0.22 $ 0.39 $ 0.33
Loss from discontinued operation............................................... $ (0.78) $ (0.26) $ (1.03)
--------- --------- ---------
Net income....................................................................... $ (0.56) $ 0.13 $ (0.70)
--------- --------- ---------
--------- --------- ---------
Weighted average shares........................................................ 7,497 7,497 7,424
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share
Income from continuing operations.............................................. $ 0.22 $ 0.39 $ 0.33
Loss from discontinued operation............................................... $ (0.78) $ (0.26) $ (1.02)
--------- --------- ---------
Net income....................................................................... $ (0.56) $ 0.13 $ (0.69)
--------- --------- ---------
--------- --------- ---------
Weighted average shares........................................................ 7,510 7,542 7,542
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
HORIZONS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------------ ----------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- ------------- ---------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1995........ 500,000 $ 5 7,367,544 $ 74 $ 3,603 $ (1,404) $ 2,278
Issuance of common stock under
Stock Option
Plan......................... -- -- 129,409 1 159 -- 160
Net loss....................... -- -- -- -- -- (5,168) (5,168)
--
--------- ---------- --- ----------- --------- ------------
Balance, January 31, 1996........ 500,000 5 7,496,953 75 3,762 (6,572) (2,730)
Net income..................... -- -- -- -- -- 944 944
--
--------- ---------- --- ----------- --------- ------------
Balance, January 31, 1997........ 500,000 5 7,496,953 75 3,762 (5,628) (1,786)
Net loss....................... -- -- -- -- -- (4,221) (4,221)
--
--------- ---------- --- ----------- --------- ------------
Balance, January 31, 1998........ 500,000 $ 5 7,496,953 $ 75 $ 3,762 $ (9,849) $ (6,007)
--
--
--------- ---------- --- ----------- --------- ------------
--------- ---------- --- ----------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
HORIZONS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations............................................ $ 1,641 $ 2,934 $ 2,507
Adjustments to reconcile income from continuing operations to net cash
provided by continuing operations:
Depreciation and amortization.............................................. 134 264 102
Changes in operating assets and liabilities, net of effects of sale of
division:
Accounts receivable...................................................... 1,212 (885) (2,168)
Prepaid expenses and other assets........................................ 33 282 (148)
Accounts payable......................................................... (843) (191) 810
Accrued compensation..................................................... 1,166 (425) (87)
Other liabilities........................................................ (1,559) (172) 133
--------- --------- ---------
Net cash provided by continuing operations..................................... 1,784 1,807 1,149
--------- --------- ---------
Loss from discontinued operations.............................................. (5,862) (1,990) (7,676)
Changes in net assets of discontinued operation................................ 4,776 3,423 511
--------- --------- ---------
Net cash used for discontinued operation....................................... (1,086) 1,433 (7,165)
--------- --------- ---------
Net cash provided by (used for) operating activities........................... 698 3,240 (6,016)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements....................................... (52) (39) (395)
--------- --------- ---------
Net cash provided by (used for) investing activities................... (52) (39) (395)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments on) line of credit............................. (528) (1,933) 6,388
Proceeds from long-term debt................................................. -- -- 1,000
Repayments of long-term debt................................................. (11) (1,031) (1,358)
Issuance of common stock..................................................... -- -- 160
--------- --------- ---------
Net cash provided by (used for) financing activities................... (539) (2,964) 6,190
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............................... 107 237 (221)
Cash and cash equivalents, beginning of year................................... 416 179 400
--------- --------- ---------
Cash and cash equivalents, end of year......................................... $ 523 $ 416 $ 179
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes refunded........................................................ $ 5 $ 4 $ 30
--------- --------- ---------
--------- --------- ---------
Income taxes paid............................................................ $ 120 $ 35 $ 7
--------- --------- ---------
--------- --------- ---------
Interest paid................................................................ $ 520 $ 593 $ 553
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment financed under capital lease obligations........................... $ -- $ -- $ 213
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Horizons Technology, Inc. ("Horizons" or "the Company") provides systems
integration, research and engineering analysis, and technical services primarily
for the U.S. government. During fiscal years 1998, 1997 and 1996, respectively,
substantially all revenues were derived under prime contracts with the federal
government, or under subcontracts issued under federal prime contracts with
other companies.
RISKS AND UNCERTAINTIES
The Company has incurred net losses of approximately $4,200 and $5,200 for
the years ended January 31, 1998 and 1996, respectively. Pro forma net loss for
the year ended January 31, 1997 was approximately $2,100 after excluding the
one-time gain of $3,050 on sale of certain assets of a discontinued operation
(Note 2). At January 31, 1998, the Company had negative working capital of
approximately $5,900. Management recognizes the need to generate positive cash
flows in future periods and/or to acquire additional capital from various
sources. Management has undertaken to discontinue its commercial software
business in order to reduce or eliminate future losses from operations related
to this business (Note 2). There can be no guarantee that the Company's
remaining government business will be successful in generating significant
revenues and/or sufficient cash flows in future periods to enable the Company to
meet its ongoing obligations. Furthermore, the Company presently is highly
dependent on its ability to find additional sources of funding in the form of
debt financing or equity issuances. Management is currently engaged in a merger
transaction ("Merger") with The Titan Corporation ("Titan") (Note 10); however,
there is no assurance that the Company will be able to complete this transaction
on terms favorable to the Company. For a more complete listing of these factors
see "Risk Factors" in Titan's Registration Statement on Form S-4 filed with
respect to the Merger. All of these factors create a substantial doubt about the
Company's ability to continue as a going concern.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Horizons and
its wholly-owned subsidiaries, Horizons Services Company, Inc., Horizons
Technology International, Ltd. and Horizons Technology Australia Pty Limited.
All material intercompany transactions and balances have been eliminated in
consolidation.
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.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with original
maturities of three months or less.
F-29
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and Equipment, consist principally of computer equipment, and is
stated at cost. Depreciation is provided principally using the straight-line
method in amounts sufficient to amortize the cost of such assets over their
estimated useful lives, generally from three to ten years.
IMPAIRMENT OF LONG-LIVED ASSETS
In February 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121). This 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 adoption of this statement had no material effect on the
Company's financial statements.
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 Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and
related interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options of a non-public entity.
REVENUE RECOGNITION
Substantially all of the Company's revenue is derived from contract services
performed for the U.S. Government or for other contractors engaged in performing
services for the U.S. Government under a variety of contracts. Revenues on time
and material contracts are recorded on the basis of hours delivered plus other
direct costs as incurred. Revenues on cost-type contracts are recorded on the
basis of recoverable costs incurred and fees earned. Revenues on fixed price
contracts are recorded as services are performed, using the
percentage-of-completion method of accounting, primarily based on contract costs
incurred to date compared to total estimated costs at completion. Estimated
contract losses are fully charged to operations when identified.
RESEARCH AND DEVELOPMENT
Costs associated with research and development activities are expensed as
incurred.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which
requires the use of the liability method of accounting for deferred income
taxes. Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax bases of assets and
liabilities and their
F-30
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FISCAL YEAR
For presentation purposes, the Company has indicated its fiscal year as
ending on January 31; whereas in fact the Company operates and reports on a
52-53 week fiscal year ending on the Friday nearest of January 31 based upon
business days. The fiscal years ended January 31, 1998 and 1997 contained 52
weeks; the fiscal year ended January 31, 1996 contained 53 weeks.
NEW ACCOUNTING STANDARD
PER SHARE INFORMATION. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accountings Standards No. 128 "Earnings Per
Share" (SFAS 128), which has been adopted by Horizons. The statement specifies
the computation, presentation, and disclosure requirements for earnings per
share ("EPS"), and is effective for periods ending after December 15, 1997.
Prior year per share information is presented in accordance with the statement.
The following data summarize information relating to the per share computations
for 1998:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JANUARY 31, 1998
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
------------- --------------- -----------
<S> <C> <C> <C>
Basic EPS:
Income from continuing operations
Available to common stockholders....................................... $ 1,641 7,497 $ .22
Effect of dilutive securities:
Stock options.......................................................... -- 13 (.00)
------ ----- -----------
Diluted EPS:
Income from continuing operations
Available to common stockholders plus assumed conversions.............. $ 1,641 7,510 $ .22
------ ----- -----------
------ ----- -----------
</TABLE>
F-31
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JANUARY 31, 1997
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
------------- --------------- -----------
<S> <C> <C> <C>
Basic EPS:
Income from continuing operations
Available to common stockholders....................................... $ 2,934 7,497 $ .39
Effect of dilutive securities:
Stock options.......................................................... -- 45 (.00)
------ ----- -----------
Diluted EPS:
Income from continuing operations
Available to common stockholders plus assumed conversions.............. $ 2,934 7,542 $ .39
------ ----- -----------
------ ----- -----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JANUARY 31, 1996
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
------------- --------------- -----------
<S> <C> <C> <C>
Basic EPS:
Income from continuing operations
Available to common stockholders....................................... $ 2,507 7,424 $ .34
Effect of dilutive securities:
Stock options.......................................................... -- 118 (.01)
------ ----- -----------
Diluted EPS:
Income from continuing operations
Available to common stockholders plus assumed conversions.............. $ 2,507 7,542 $ .33
------ ----- -----------
------ ----- -----------
</TABLE>
In 1998, warrants to purchase 158,000 shares of common stock at $3.07 per
share were not included in the computation of diluted EPS for 1998, because the
warrants exercise price was greater than the average market price of the common
shares. In 1998 500,000 shares of common stock that would result from the
conversion of convertible preferred stock were not included in the computation
of diluted EPS, as the effect would be anti-dilutive.
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 non-owner 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.
F-32
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
2. DISCONTINUED OPERATIONS
In December 1997, the Company's Board of Directors adopted a plan to wind
down and exit its commercial software business (Information Systems segment), in
order to focus the Company's resources entirely on its profitable government
information technologies business or Systems Engineering segment. Accordingly,
the Information Systems segment has been accounted for as a discontinued
operation for all periods presented in accordance with Accounting Principles
Board Opinion No. 30 (APB 30), which among other provisions, anticipates that
the plan of disposal will be carried out within one year.
Revenues for the ISG business were $2,737, $3,225 and $5,660 for the years
ended January 31, 1998, 1997 and 1996, respectively. Included in the loss from
discontinued operations is a tax benefit of $911, $2,791 and $2,694 for the
years ended January 31, 1998, 1997 and 1996, respectively. During fiscal 1998,
the Company recorded a charge of approximately $3,600 for costs to be incurred
in future periods in connection with the winding down of this operation. Net
current liabilities of discontinued operations consist primarily of accrued
facility costs, warranties, and anticipated operating losses from the date of
discontinuance until the estimated disposal date net of certain accounts
receivable balances. Prior year consolidated financial statements have been
restated to present the ISG business as a discontinued operation.
On May 6, 1996, the Company sold substantially all of the net assets of its
Advanced Systems Group and the assets of its Australian subsidiary (collectively
"ASG") for cash of $4,311, which resulted in a gain of approximately $3,050. The
disposal of this business has been accounted for as a discontinued operation for
all periods presented, in accordance with APB 30. This gain has been included in
the net loss from discontinued operations. Revenues for the ASG business were
$2,128 and $10,890 for the years ended January 31, 1997 and 1996, respectively.
In connection with the disposal of this business, the Company did not record a
charge for costs incurred in connection with the winding down of this operation,
as such costs were insignificant.
The ASG sales agreement also provides for payments to the Company of up to a
total of $2,900 through April 1999, contingent upon certain specified growth in
sales of ASG, future sales of certain products, and the grant of a specified
contract. These payments are to be made in cash, up to the maximum of $2,900.
The maximum will be reduced by 50% (not to exceed a $2.0 million-reduction) of
the amount of contracts awarded to the Company for purchases of products and
services by the acquirer of ASG. No significant contingent payments have been
received, through January 31, 1998.
Included in the loss from discontinued operations is a tax benefit of $911,
$1,731 and $2,179 for the years ended January 31, 1998, 1997 and 1996,
respectively.
3. SALE OF TECHNOLOGY
On January 19, 1997, the Company sold its Network product technology in
exchange for a $1,300 receivable, and warrants to purchase 1,000 shares of
International Data Systems Limited stock. The warrants are exercisable through
February 28, 2002, at prices from $0.50 to $3.00 per share, with an average
exercise price of $1.90. The Company has assigned a zero value to these
warrants. During fiscal 1998, the Company received payments totaling $110 in
cash from the buyer and converted the remaining receivable balance of $1,190
into a promissory note due monthly in various amounts, plus interest at 8%,
through November 1997. Due to management's uncertainty regarding the ultimate
recoverability of this
F-33
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
3. SALE OF TECHNOLOGY (CONTINUED)
receivable, the Company has provided a reserve against this receivable
representing the possible gain on the transaction. This gain will be recognized
if and when the cash is received.
4. ACCOUNTS RECEIVABLE AND CREDIT RISK
Accounts receivable, net of allowance for doubtful accounts of $150 and
$1,095 at January 31, 1998 and 1997, respectively, relates primarily to
government contracts and consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Billed..................................................................... $ 5,423 $ 6,064
Unbilled................................................................... 360 1,020
Retentions................................................................. 281 192
--------- ---------
$ 6,064 $ 7,276
--------- ---------
--------- ---------
</TABLE>
Unbilled accounts receivable consist primarily of costs and fees billable
upon contract completion or other specific events, such as the right to bill
under existing contract provisions. Unbilled accounts receivable also include
costs incurred on projects for which the Company has been requested by the
customer to begin work or extend the work under a present contract, but for
which final contract negotiations or formal contract extensions had not taken
place by year end. It is expected that such receivables will be billed during
fiscal 1999. The retention balances are expected to become due and payable as
follows: fiscal 1999--$84; years after fiscal 1999--$197.
5. LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Notes payable to a bank, collateralized by substantially all of the Company's
assets. Monthly payments of $7.00, including interest at 10.5% payable
through December 2000....................................................... $ 196 --
Obligation under capital leases............................................... 70 182
--------- ---------
266 182
Less current portion.......................................................... (82) (36)
--------- ---------
$ 184 $ 146
--------- ---------
--------- ---------
</TABLE>
In January 1996, in connection with the $1,000 note payable, the Company
issued warrants to the bank to purchase 17,985 shares of Common Stock at $5.56
per share (Note 7) that expire in January 1999.
As of January 31, 1998, the Company has a revolving line of credit agreement
with a bank for $7,000 which expires in May 1998. Under the terms of the bank
credit agreement, borrowings are limited to qualifying receivables. Advances
under the line bear interest at the prime rate (8.5% at January 31, 1998) plus
2.0%. There are no compensating cash balance requirements. Borrowings
outstanding at January 31, 1998 totaled $5,327 and are collateralized by
substantially all the Company's assets. The underlying bank
F-34
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
5. LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
credit agreement for the revolving line of credit provides for certain
restrictive covenants which include, among other provisions, maintenance of
specified liquidity and debt ratios, limitations on certain capital asset
balances, and minimum profitability levels. As of January 31, 1998, the Company
was not in compliance with these covenants, and has not received a waiver from
the bank. Accordingly, all of the outstanding balance as of January 31, 1998 is
classified as currently payable. The current bank agreement otherwise expires in
May 1998.
In connection with the line of credit agreement, the Company issued warrants
to the bank to purchase 71,942 shares of Common Stock at $5.56 per share (Note
7). The warrants are exercisable in the event of an initial public offering of
the Company's Common Stock and expire on April 1, 1998.
6. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancellable
operating leases. Certain of the leases provide for annual costs of living
adjustments and in some cases require the Company to pay taxes, insurance,
maintenance and other operating expenses. Certain of the leases include renewal
options for periods ranging from one to five years. Rent expense totaled $1,085,
$1,744 and $2,187 in fiscal years 1998, 1997 and 1996, respectively.
The Company leases certain equipment under capital lease obligations. Cost
and accumulated amortization of the equipment under capital leases are as
follows at January 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cost of equipment under capital leases........................................ $ 107 $ 213
Accumulated amortization...................................................... (32) (31)
--------- ---------
Net book value of equipment under capital leases.............................. $ 75 $ 182
--------- ---------
--------- ---------
</TABLE>
Annual future minimum lease payments under operating and capital leases as
of January 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR LEASES LEASES
- ------------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
1999.................................................................... $ 1,100 $ 27
2000.................................................................... 692 27
2001.................................................................... 713 27
2002.................................................................... 225 --
2003.................................................................... 57 --
----------- ---------
Total minimum lease payments............................................ $ 2,787 81
----------- ---------
----------- ---------
Less amounts representing interest...................................... (11)
---------
70
Less amounts due in one year............................................ (21)
---------
Long-term portion of obligations under capital leases................... $ 49
---------
---------
</TABLE>
F-35
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
7. STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
During fiscal 1995, the Company sold 500,000 shares of Series A Preferred
Stock at $5.00 to $5.25 per share. The holders of the Preferred Stock may be
entitled to receive quarterly dividends commencing July 1995, at a quarterly
rate of $.15 per share. Dividends will be paid if and when declared by the
Company's board of directors, and are cumulative and shall accrue, whether or
not declared, commencing July 1995. Cumulative unpaid dividends at January 31,
1998 and 1997 totaled $750,000 and $450,000, respectively. The Preferred Stock
is convertible at any time at the option of the holder into an equal number of
shares of Common Stock. The conversion ratio of Common for Preferred shares may
increase in certain circumstances based upon future sale of shares of Common
Stock.
The holders of Preferred Stock and Common Stock vote together as a class on
all matters to be voted on by the stockholders of the Company, with each holder
of Preferred Stock entitled to one vote for each share of Common Stock which
would be deliverable upon conversion. Holders of Preferred Stock have a
liquidation preference of $7.00 per share less any dividends previously paid.
The Company's 401(k) retirement plan purchased 300,000 shares of the Series A
Preferred Stock.
STOCK OPTIONS
The Company has a stock option plan under which incentive or nonqualified
stock options may be granted to the Company's employees, consultants and
directors. Options are granted at no less than the fair market value of the
Common Stock on the date of grant. The options become exercisable over various
terms and expire over three or four years.
The weighted average exercise price of all options outstanding at January
31, 1998 is $2.35; the weighted-average price of options canceled during the
year was $2.13; the outstanding options expire at various dates through April
1999. At January 31, 1998, 13,700 options are exercisable through October
F-36
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
1998 and 1,225,760 shares are available for future grant. The following table
summarizes stock option activity for the three years ended January 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
----------- -----------------
<S> <C> <C>
Outstanding at January 31, 1994................................ 594,474 $ 1.30
Granted...................................................... 188,200 2.33
Exercised.................................................... (144,132) 1.54
Canceled or expired.......................................... (128,612) 1.54
----------- -----
Outstanding at January 31, 1995................................ 509,930 1.54
Granted...................................................... 139,000 2.45
Exercised.................................................... (129,409) 1.74
Canceled or expired.......................................... (213,021) 1.74
----------- -----
Outstanding at January 31, 1996................................ 306,500 1.74
Canceled or expired.......................................... (230,990) 1.74
----------- -----
Outstanding at January 31, 1997................................ 75,510 1.72
Canceled or expired.......................................... (47,810) 1.74
----------- -----
Outstanding at January 31, 1998................................ 27,700 $ 1.70
----------- -----
----------- -----
</TABLE>
STOCK PURCHASE WARRANTS
The Company has issued warrants to purchase shares of Common Stock to
employees and directors. The warrants are exercisable in the event of an initial
public offering of the Company's Common Stock and expire three years from the
date of grant. The following summarizes warrant activity for the three years
ended January 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
----------- -----------------
<S> <C> <C>
Outstanding at January 31, 1994................................. 77,000 $ 1.61
----------- -----
Outstanding at January 31, 1995................................. 77,000 1.61
Granted....................................................... 120,430 4.01
Forfeited..................................................... (14,400) 3.07
----------- -----
Outstanding at January 31, 1996................................. 183,030 3.07
Forfeited..................................................... (16,000) 3.07
----------- -----
Outstanding at January 31, 1997................................. 167,030 3.07
Forfeited..................................................... (8,666) 3.07
----------- -----
Outstanding at January 31, 1998................................. 158,364 $ 3.07
----------- -----
----------- -----
</TABLE>
F-37
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
At January 31, 1998, the Company has reserved 686,064 shares of Common Stock
for issuance upon the exercise of stock options and warrants and conversion of
the Preferred Stock.
Adjusted pro forma information regarding net loss is required by SFAS 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using the minimum value method for
option pricing with the following weighted-average assumptions for 1998:
risk-free interest rates of 5.29%; dividend yields of 0%; and a weighted-average
expected life of the option of four years. The effect of applying the minimum
value method of SFAS 123 to options granted to employees in 1998 did not result
in pro forma net loss and loss per share amounts that are materially different
from historical amounts reported. Therefore, such pro forma information is not
presented herein. Future pro forma results of operations under SFAS 123 may be
materially different from the amounts in the current year.
8. INCOME TAXES
Income tax expense from continuing operations consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal..................................................... $ 821 $ 1,530 $ 1,853
State....................................................... 157 265 333
Foreign..................................................... 28 3 --
--------- --------- ---------
$ 1,006 $ 1,798 $ 2,186
Deferred:
Federal..................................................... -- -- (619)
State....................................................... -- -- (30)
--------- --------- ---------
-- -- (649)
--------- --------- ---------
Total income tax expense (credit)............................. $ 1,006 $ 1,798 $ 1,537
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the provision for income taxes from continuing
operations to the amount computed by applying the statutory federal income tax
rate to income before income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate.................................................... 35.0% 35.0% 35.0%
Research and development.......................................... -- (0.4) --
Meals and entertainment disallowance.............................. 2.0 3.0 0.5
Foreign income.................................................... 5.0 -- 0.5
Decrease in valuation allowance................................... (4.0) 2.8 4.8
Other, net........................................................ -- (2.4) (2.8)
--- --- ---
38.0% 38.0% 38.0%
--- --- ---
--- --- ---
</TABLE>
F-38
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets at January 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Recognition of revenue on unbilled receivables and contract
retentions........................................................... $ 869 $ 869
Depreciation expense................................................... 119 69
Gain on sale of technology............................................. -- 321
--------- ---------
Total deferred tax liabilities................................... 988 1,259
--------- ---------
Deferred tax assets:
Net operating loss carryforward........................................ 3,271 2,670
Research and development credit carryforward........................... 438 438
Capitalized research and development................................... 359 359
Employee benefits...................................................... 107 279
Rent expense........................................................... 103 118
Computer software costs................................................ 1,322 1,278
Other.................................................................. 415 415
--------- ---------
Total deferred tax assets........................................ 6,015 5,557
Valuation allowance.............................................. (5,027) (4,298)
--------- ---------
Net deferred tax asset........................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
At January 31, 1998, the Company has federal and state net operating loss
carryforwards of approximately $9,347 and $1,144, respectively. The difference
between the federal and state tax loss-carryforwards is attributable to the
limitations on net operating loss carrybacks and carryforwards for state tax
purposes. The federal and state tax loss carryforwards will begin expiring in
2009 and 1999, respectively, unless previously utilized.
The Company also has federal and California research and development tax
credit carryforwards of approximately $300 and $211, respectively, which will
begin to expire in 2009.
9. EMPLOYEE RETIREMENT PLANS
The Company has a 401(k) defined contribution retirement plan covering
substantially all employees. The Plan provides for voluntary employee salary
deferrals whereby employees may elect to defer and invest a certain percentage
of their base annual compensation. Employee deferrals of 1% or 2% are matched at
a 50% rate and employee deferrals of 3% of each such participating employee's
compensation are matched dollar for dollar. The Plan also provides for
additional Company contributions to be funded at the discretion of the Board of
Directors. Participants vest in Company contributions over 6 years at a rate of
10% in each of the first two years and 20% for each remaining year of service.
The Company's matching
F-39
<PAGE>
HORIZONS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
9. EMPLOYEE RETIREMENT PLANS (CONTINUED)
contributions under this Plan amounted to approximately $303, $412 and $540 for
fiscal 1998, 1997 and 1996, respectively.
Effective January 1, 1992, the Company established an Employee Stock
Ownership Plan for substantially all employees. The Company may, at the
discretion of the Board of Directors, make contributions to the Plan in cash, in
Common Stock of the Company, or in a combination of cash and stock. Participants
vest in Company contributions after 5 years of service. The Company's
contributions under this plan amounted to approximately $82, $20 and $25 for
fiscal years 1998, 1997 and 1996, respectively. During fiscal 1996, the plan
purchased 41,000 shares of Common Stock from existing shareholders. At January
31, 1998, the Plan held 321,322 shares of the Company's Common Stock.
10. SUBSEQUENT EVENT
On February 26, 1998, the Company signed a definitive merger agreement with
The Titan Corporation ("Titan") in which Titan will acquire all of the
outstanding shares of the Company in exchange for approximately $19 million of
Titan common stock in a tax-free exchange. Approval by the Stockholders of the
Company is required in order for the merger to be consummated.
F-40
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
among:
THE TITAN CORPORATION,
a Delaware corporation;
SUNRISE ACQUISITION SUB, INC.
a Delaware corporation;
HORIZONS TECHNOLOGY, INC.,
a Delaware corporation;
and
CERTAIN STOCKHOLDERS OF HORIZONS TECHNOLOGY, INC.
------------------------
DATED AS OF FEBRUARY 26, 1998
------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
SECTION 1. DESCRIPTION OF TRANSACTION................................................................ 2
1.1 Merger of Merger Sub into the Company..................................................... 2
1.2 Effect of the Merger...................................................................... 2
1.3 Closing; Effective Time................................................................... 2
1.4 Certificate of Incorporation and Bylaws; Directors and Officers........................... 2
1.5 Payment and Conversion of Shares.......................................................... 3
1.6 Employee Stock Options and Company Warrants............................................... 4
1.7 Closing of the Company's Transfer Books................................................... 5
1.8 Exchange of Certificates.................................................................. 5
1.9 Dissenting Shares......................................................................... 6
1.10 Tax Consequences.......................................................................... 7
1.11 Accounting Treatment...................................................................... 7
1.12 Further Action............................................................................ 7
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................. 7
2.1 Due Organization; Subsidiaries; Etc....................................................... 7
2.2 Certificate of Incorporation and Bylaws; Records.......................................... 8
2.3 Capitalization, Etc....................................................................... 9
2.4 Financial Statements...................................................................... 10
2.5 Absence of Changes........................................................................ 11
2.6 Title to Assets........................................................................... 11
2.7 Bank Accounts; Receivables................................................................ 11
2.8 Equipment; Leasehold...................................................................... 11
2.9 Proprietary Assets........................................................................ 12
2.10 Contracts................................................................................. 13
2.11 Liabilities............................................................................... 17
2.12 Compliance with Legal Requirements........................................................ 17
2.13 Governmental Authorizations............................................................... 17
2.14 Tax Matters............................................................................... 18
2.15 Employee and Labor Matters; Benefit Plans................................................. 19
2.16 Environmental Matters..................................................................... 21
2.17 ESOP Matters.............................................................................. 22
2.18 Insurance................................................................................. 23
2.19 Related Party Transactions................................................................ 23
2.20 Legal Proceedings; Orders................................................................. 24
2.21 Authority; Binding Nature of Agreement.................................................... 24
2.22 Non-Contravention; Consents............................................................... 24
2.23 Full Disclosure........................................................................... 25
2.24 Accounting Matters........................................................................ 26
2.25 Brokers................................................................................... 26
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE DESIGNATED STOCKHOLDERS............................. 26
3.1 Representations and Warranties............................................................ 26
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB................................... 27
4.1 Due Organization; Etc..................................................................... 27
4.2 Certificate of Incorporation and By-Laws.................................................. 27
4.3 Capitalization, Etc....................................................................... 28
4.4 SEC Filings; Financial Statements......................................................... 28
4.5 Absence of Certain Changes or Events...................................................... 29
4.6 Compliance with Legal Requirements........................................................ 29
4.7 Governmental Authorizations............................................................... 29
</TABLE>
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
4.8 Legal Proceedings; Orders................................................................. 29
4.9 Authority; Binding Nature of Agreement.................................................... 30
4.10 Valid Issuance............................................................................ 30
4.11 Non-Contravention; Consents............................................................... 30
4.12 Full Disclosure........................................................................... 31
4.13 Government Contracts; Government Bids..................................................... 32
4.14 Accounting Matters........................................................................ 32
4.15 Brokers................................................................................... 32
SECTION 5. CERTAIN COVENANTS OF THE COMPANY AND THE DESIGNATED STOCKHOLDERS.......................... 32
5.1 Access and Investigation.................................................................. 32
5.2 Operation of the Company's Business....................................................... 33
5.3 Notification; Updates to Company Disclosure Schedule...................................... 35
5.4 No Negotiation............................................................................ 35
5.5 ESOP Covenants............................................................................ 36
SECTION 6. CERTAIN COVENANTS OF PARENT............................................................... 37
6.1 Access and Investigation.................................................................. 37
6.2 Notification; Updates to Parent Disclosure Schedule....................................... 37
SECTION 7. ADDITIONAL COVENANTS OF THE COMPANY AND PARENT............................................ 38
7.1 Filings and Consents...................................................................... 38
7.2 Company Stockholders' Meeting............................................................. 38
7.3 Public Announcements...................................................................... 38
7.4 Pooling of Interests...................................................................... 38
7.5 Affiliate Agreements...................................................................... 38
7.6 Best Efforts.............................................................................. 39
7.7 Registration Statement; Proxy Statement................................................... 39
7.8 Regulatory Approvals...................................................................... 39
7.9 Tax Matters............................................................................... 40
7.10 FIRPTA Matters............................................................................ 40
7.11 Release................................................................................... 40
7.12 Treatment of Employee Plans and Benefits.................................................. 40
7.13 "Post-Closing" Insurance.................................................................. 40
7.14 Directors' and Officers' Indemnification and Insurance.................................... 41
7.15 Earnings Release.......................................................................... 41
SECTION 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB.............................. 41
8.1 Accuracy of Representations............................................................... 41
8.2 Performance of Covenants.................................................................. 42
8.3 Stockholder Approval...................................................................... 42
8.4 Consents.................................................................................. 42
8.5 Agreements and Documents.................................................................. 42
8.6 FIRPTA Compliance......................................................................... 43
8.7 Compliance With the Securities Act........................................................ 43
8.8 Listing................................................................................... 43
8.9 No Restraints............................................................................. 43
8.10 Effectiveness of Registration Statement................................................... 43
8.11 No Legal Proceedings...................................................................... 43
8.12 HSR Act................................................................................... 44
8.13 Average Sales Price....................................................................... 44
8.14 Stock Voting Agreement.................................................................... 44
</TABLE>
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
8.15 Tax Representation Letters................................................................ 44
8.16 Representation and Warranty Insurance..................................................... 44
SECTION 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY........................................ 44
9.1 Accuracy of Representations............................................................... 44
9.2 Performance of Covenants.................................................................. 44
9.3 Documents................................................................................. 45
9.4 Listing................................................................................... 45
9.5 No Restraints............................................................................. 45
9.6 Effectiveness of Registration Statement................................................... 45
9.7 HSR Act................................................................................... 45
9.8 Average Sales Price....................................................................... 45
SECTION 10. TERMINATION............................................................................... 46
10.1 Termination Events........................................................................ 46
10.2 Termination Procedures.................................................................... 46
10.3 Termination Fees.......................................................................... 47
10.4 Effect of Termination..................................................................... 47
SECTION 11. SURVIVAL OF REPRESENTATIONS, ETC.; INDEMNIFICATION, ETC................................... 47
11.1 Survival of Representations, Etc.......................................................... 47
11.2 Indemnification........................................................................... 48
11.3 Limits on Indemnification and Liability................................................... 48
11.4 Interest.................................................................................. 48
11.5 Defense of Third Party Claims............................................................. 49
11.6 Exercise of Remedies by Indemnitees Other Than Parent..................................... 49
SECTION 12. MISCELLANEOUS PROVISIONS.................................................................. 49
12.1 Further Assurances........................................................................ 49
12.2 Fees and Expenses......................................................................... 49
12.3 Attorneys' Fees........................................................................... 50
12.4 Notices................................................................................... 50
12.5 Confidentiality........................................................................... 51
12.6 Time of the Essence....................................................................... 51
12.7 Headings.................................................................................. 51
12.8 Counterparts.............................................................................. 51
12.9 Governing Law............................................................................. 51
12.10 Successors and Assigns.................................................................... 52
12.11 Remedies Cumulative; Specific Performance................................................. 52
12.12 Waiver.................................................................................... 52
12.13 Amendments................................................................................ 52
12.14 Severability.............................................................................. 53
12.15 Parties in Interest....................................................................... 53
12.16 Entire Agreement.......................................................................... 53
12.17 Construction.............................................................................. 53
</TABLE>
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
LIST OF EXHIBITS:
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBIT A -- DESIGNATED STOCKHOLDERS
EXHIBIT B -- CERTAIN DEFINITIONS
EXHIBIT C -- DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
EXHIBIT D-1 -- FORM OF AFFILIATE AGREEMENT
EXHIBIT D-2 -- PERSONS TO EXECUTE AFFILIATE AGREEMENTS
-- FORM OF TAX REPRESENTATION LETTER OF COOLEY GODWARD LLP
EXHIBIT E
-- FORM OF TAX REPRESENTATION LETTER OF JENKENS &
GILCHRIST, P.C.
EXHIBIT F
EXHIBIT G -- FORM OF RELEASE
EXHIBIT H -- FORM OF LEGAL OPINION OF JENKENS & GILCHRIST, P.C.
EXHIBIT I -- FORM OF LEGAL OPINION OF COOLEY GODWARD LLP
</TABLE>
<PAGE>
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of February 26, 1998, by and among: THE TITAN CORPORATION, a
Delaware corporation ("Parent"); SUNRISE ACQUISITION SUB, INC., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"); HORIZONS
TECHNOLOGY, INC., a Delaware corporation (the "Company"); and the parties
identified on Exhibit A (the "Designated Stockholders"). Certain capitalized
terms used in this Agreement are defined in Exhibit B.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company in accordance with this Agreement and the Delaware General
Corporation Law (the "Merger"). Upon consummation of the Merger, Merger Sub will
cease to exist, and the Company will become a wholly owned subsidiary of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For accounting purposes, it is intended that the Merger be
treated as a "pooling of interests."
C. This Agreement has been approved by the respective boards of directors
of Parent, Merger Sub and the Company.
D. The Designated Stockholders own a total of 5,172,500 shares of the Common
Stock (with par value $.01) of the Company ("Company Common Stock") and no other
shares of capital stock of the Company. Each Designated Stockholder has executed
and delivered to Parent a Stock Voting Agreement dated on or about the date
hereof (the "Stock Voting Agreement").
AGREEMENT
The parties to this Agreement agree as follows:
Section 1. DESCRIPTION OF TRANSACTION
1.1 MERGER OF MERGER SUB INTO THE COMPANY. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation").
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the Delaware General
Corporation Law.
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Parent, 3033 Science Park Road, San Diego, California 92121, on March 31,
1998, or at such other time and date as the Parties agree, but in no event later
than the second business day after the date that all of the conditions set forth
in Sections 8 and 9 have been satisfied or waived (the "Closing Date" and,
unless and until the Closing has occurred, the "Scheduled Closing Time").
Contemporaneously with or as promptly as practicable after the Closing, a
properly executed Certificate of Merger conforming to the requirements of the
Delaware General Corporation Law shall be filed with the Secretary of State of
the State of Delaware. The Merger shall become effective at the time such
Certificate of Merger is filed with and accepted by the Secretary of State of
the State of Delaware (the "Effective Time").
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND
OFFICERS. Unless otherwise determined by Parent and the Company prior to the
Effective Time:
1
<PAGE>
(a) the Certificate of Incorporation of Merger Sub in effect immediately
prior to the Effective Time shall be the Certificate of Incorporation of the
Surviving Corporation as of the Effective Time;
(b) the Bylaws of Merger Sub in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation as of the
Effective Time; and
(c) the directors and officers of the Surviving Corporation immediately
after the Effective Time shall be the individuals identified on Exhibit C.
1.5 PAYMENT AND CONVERSION OF SHARES.
(a) Subject to Sections 1.8(d) and 1.9, at the Effective Time, by virtue
of the Merger and without any further action on the part of Parent, Merger
Sub, the Company or any stockholder of the Company:
(i) each share of Company Common Stock outstanding immediately prior
to the Effective Time shall be converted into the right to receive the
"Applicable Fraction" (as defined in Section 1.5(b)(i)) of a share of the
common stock (par value $.01 per share) of Parent ("Parent Common
Stock");
(ii) each share of the Company's Series A Preferred Stock (with par
value $.01) (the "Series A Preferred Stock"), if any, outstanding
immediately prior to the Effective Time shall be converted into the right
to receive the fraction of a share of Parent Common Stock (A) having a
numerator equal to $5.00 and (B) having a denominator equal to the
Designated Parent Stock Price (as defined in Section 1.5(b)(iv)); and
(iii) each share of the common stock (with par value $.01) of Merger
Sub outstanding immediately prior to the Effective Time shall be
converted into one share of common stock of the Surviving Corporation.
(b) For purposes of this Agreement:
(i) The "Applicable Fraction" shall be the fraction: (A) having a
numerator equal to the amount by which (x) $23,850,000, minus the
"Balance Sheet Deduction," plus $65,240 (which the Company represents to
be a good faith estimate of the aggregate exercise prices of all of the
Company Options), exceeds (y) the "Aggregate Preferred Stock Valuation"
and (B) having a denominator equal to the amount determined by
multiplying (1) the "Adjusted Company Share Amount" by (2) the
"Designated Parent Stock Price".
(ii) The "Aggregate Preferred Stock Valuation" shall be the amount
determined by multiplying (A) $5.00 by (B) the aggregate number of shares
of Series A Preferred Stock outstanding immediately prior to the
Effective Time.
(iii) The "Adjusted Company Share Amount" shall be the sum of (A) the
aggregate number of shares of Company Common Stock outstanding
immediately prior to the Effective Time (including any such shares that
are subject to a repurchase option or risk of forfeiture under any
restricted stock purchase agreement or other agreement), and (B) the
aggregate number of shares of Company Common Stock purchasable under or
otherwise subject to all Company Options outstanding immediately prior to
the Effective Time (including all shares of Company Common Stock that may
ultimately be purchased under Company Options that are unvested or are
otherwise not then exercisable).
(iv) The "Designated Parent Stock Price" shall be (A) the average of
the closing sale prices of a share of Parent Common Stock as reported on
the New York Stock Exchange for each of the twenty consecutive trading
days immediately preceding the Closing Date (the "Average Sales Price"),
if the Average Sales Price is less than or equal to $8.00 per share and
greater than or
2
<PAGE>
equal to $6.00 per share; (B) $8.00 if the Average Sales Price is greater
than $8.00 per share; or (C) $6.00 if the Average Sales Price is less
than $6.00 per share.
(v) The "Balance Sheet Deduction" shall be (A) $4,500,000 plus or
minus, as described below, (B) the amount by which the Company's Working
Capital (determined prior to the Closing as set forth in Section 1.5(c)
below) is less than (in which case such amount shall be added to the
amount determined in (A) above) or greater than (in which case such
amount shall be subtracted from the amount determined in (A) above)
negative $2,150,000; provided, however, no such adjustment shall be made
unless the Company's Working Capital is at least $200,000 less than or
greater than, as the case may be, negative $2,150,000 (and in such case
such adjustment shall be made with respect to the entire amount less than
or greater than, as appropriate, negative $2,150,000).
(c) As soon as practicable, and prior to March 15, 1998, or at such
other time as the parties may agree, the Company shall provide to Parent a
certificate (the "Estimated Deduction Certificate") executed by the
Company's Chief Executive Officer, which shall set forth the Company's good
faith best estimate of the Balance Sheet Deduction (determined using the
Company's unaudited balance sheet as of January 31, 1998, and as provided in
Section 1.5(b)(v) above), and such estimate shall be used for purposes of
determining the Applicable Fraction; provided, however, that if Parent
determines that the Estimated Deduction Certificate underestimates the
Balance Sheet Deduction (as determined by the Parent's audit of the
Company's records to be completed within 15 days following delivery of such
Estimated Deduction Certificate), Parent and the Company shall cooperate to
mutually determine the appropriate Applicable Fraction consistent with the
foregoing provisions (and any disagreement between them shall be resolved
via arbitration).
1.6 EMPLOYEE STOCK OPTIONS AND COMPANY WARRANTS. At the Effective Time,
each stock option that is then outstanding under the Company's 1988 Amended
Stock Option Plan, whether vested or unvested (a "Company Option"), and each
warrant to purchase shares of Company Common Stock ("Company Warrants") that
does not by its terms terminate in connection with the Merger, shall be assumed
(or substituted in the case of Company Warrants) by Parent in accordance with
the terms (as in effect as of the date of this Agreement) of the Company's 1988
Amended Stock Option Plan and the stock option agreement by which such Company
Option is evidenced, or the Company Warrant (as applicable). All rights with
respect to Company Common Stock under outstanding Company Options and such
surviving Company Warrants shall thereupon be converted into rights with respect
to Parent Common Stock. Accordingly, from and after the Effective Time, (a) each
Company Option and Company Warrant assumed (as substituted in the case of
Company Warrants) by Parent may be exercised solely for shares of Parent Common
Stock, (b) the number of shares of Parent Common Stock subject to each such
assumed Company Option and Company Warrant shall be equal to the number of
shares of Company Common Stock that were subject to such Company Option or
Company Warrant (as applicable) immediately prior to the Effective Time
multiplied by the Applicable Fraction, rounded down to the nearest whole number
of shares of Parent Common Stock, (c) the per share exercise price for the
Parent Common Stock issuable upon exercise of each such assumed Company Option
and Company Warrant shall be determined by dividing the exercise price per share
of Company Common Stock subject to such Company Option or Company Warrant (as
applicable), as in effect immediately prior to the Effective Time, by the
Applicable Fraction, and rounding the resulting exercise price up to the nearest
whole cent, and (d) all restrictions on the exercise of each such assumed
Company Option and Company Warrant shall continue in full force and effect, and
the term, exercisability, vesting schedule and other provisions of such Company
Option or Company Warrant (as applicable) shall otherwise remain unchanged;
provided, however, that each such assumed Company Option and Company Warrant
shall, in accordance with its terms, be subject to further adjustment as
appropriate to reflect any stock split, reverse stock split, stock dividend,
recapitalization or other similar transaction effected by Parent after the
Effective Time. The Company and Parent shall take all action that may be
necessary (under the Company's 1988 Amended Stock Option Plan and otherwise)
3
<PAGE>
to effectuate the provisions of this Section 1.6. Following the Closing, Parent
will send to each holder of an assumed Company Option a written notice setting
forth (i) the number of shares of Parent Common Stock subject to such assumed
Company Option, and (ii) the exercise price per share of Parent Common Stock
issuable upon exercise of such assumed Company Option.
1.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time,
holders of certificates representing shares of the Company's capital stock that
were outstanding immediately prior to the Effective Time shall cease to have any
rights as stockholders of the Company, and the stock transfer books of the
Company shall be closed with respect to all shares of such capital stock
outstanding immediately prior to the Effective Time. No further transfer of any
such shares of the Company's capital stock shall be made on such stock transfer
books after the Effective Time. If, after the Effective Time, a valid
certificate previously representing any of such shares of the Company's capital
stock (a "Company Stock Certificate") is presented to the Surviving Corporation
or Parent, such Company Stock Certificate shall be canceled and shall be
exchanged as provided in Section 1.8.
1.8 EXCHANGE OF CERTIFICATES.
(a) At or as soon as practicable after the Effective Time, Parent, or a
transfer agent designated by Parent (the "Transfer Agent") will send to the
holders of Company Stock Certificates (i) a letter of transmittal in
customary form and containing such provisions as Parent may reasonably
specify, and (ii) instructions for use in effecting the surrender of Company
Stock Certificates in exchange for certificates representing Parent Common
Stock. Upon surrender of a Company Stock Certificate to Parent for exchange,
together with a duly executed letter of transmittal and such other documents
as may be reasonably required by Parent or the Transfer Agent, the holder of
such Company Stock Certificate shall be entitled to receive in exchange
therefor a certificate representing the number of whole shares of Parent
Common Stock that such holder has the right to receive pursuant to the
provisions of this Section 1, and the Company Stock Certificate so
surrendered shall be canceled. Until surrendered as contemplated by this
Section 1.8, each Company Stock Certificate shall be deemed, from and after
the Effective Time, to represent only the right to receive upon such
surrender a certificate representing shares of Parent Common Stock (and cash
in lieu of any fractional share of Parent Common Stock) as contemplated by
this Section 1. If any Company Stock Certificate shall have been lost,
stolen or destroyed, Parent may, in its discretion and as a condition
precedent to the issuance of any certificate representing Parent Common
Stock, require the owner of such lost, stolen or destroyed Company Stock
Certificate to provide an appropriate affidavit and to deliver a bond (in
such sum as Parent may reasonably direct) as indemnity against any claim
that may be made against Parent or the Surviving Corporation with respect to
such Company Stock Certificate.
(b) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Company Stock Certificate with
respect to the shares of Parent Common Stock represented thereby, and no
cash payment in lieu of any fractional share shall be paid to any such
holder, until such holder surrenders such Company Stock Certificate in
accordance with this Section 1.8 (at which time such holder shall be
entitled to receive all such dividends and distributions and such cash
payment).
(c) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional
shares shall be issued. In lieu of such fractional shares, any holder of
capital stock of the Company who would otherwise be entitled to receive a
fraction of a share of Parent Common Stock (after aggregating all fractional
shares of Parent Common Stock issuable to such holder) shall, upon surrender
of such holder's Company Stock Certificate(s), be paid in cash the dollar
amount (rounded to the nearest whole cent), without interest, determined by
multiplying such fraction by the Designated Parent Stock Price.
(d) Parent and the Surviving Corporation (or the Transfer Agent on their
behalf) shall be entitled to deduct and withhold from any consideration
payable or otherwise deliverable to any holder
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or former holder of capital stock of the Company pursuant to this Agreement
such amounts as Parent or the Surviving Corporation may be required to
deduct or withhold therefrom under the Code or under any provision of state,
local or foreign tax law (or, in the alternative, Parent or the Transfer
Agent, at Parent's option may request tax information and other
documentation to ensure no withholding is necessary). To the extent such
amounts are so deducted or withheld, such amounts shall be treated for all
purposes under this Agreement as having been paid to the Person to whom such
amounts would otherwise have been paid.
(e) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of capital stock of the Company for any shares of
Parent Common Stock (or dividends or distributions with respect thereto), or
for any cash amounts, delivered to any public official pursuant to any
applicable abandoned property, escheat or similar law.
1.9 DISSENTING SHARES.
(a) Notwithstanding anything to the contrary contained in this
Agreement, any shares of capital stock of the Company that, as of the
Effective Time, are or may become "dissenting shares" within the meaning of
applicable law, shall not be converted into or represent the right to
receive Parent Common Stock in accordance with Section 1.5 (or cash in lieu
of fractional shares in accordance with Section 1.8(c)), and the holder or
holders of such shares shall be entitled only to such rights as may be
granted to such holder or holders pursuant to applicable law; provided,
however, that if the status of any such shares as "dissenting shares" shall
not be perfected, or if any such shares shall lose their status as
"dissenting shares," then, as of the later of the Effective Time or the time
of the failure to perfect such status or the loss of such status, such
shares shall automatically be converted into and shall represent only the
right to receive (upon the surrender of the certificate or certificates
representing such shares) Parent Common Stock in accordance with Section 1.5
(and cash in lieu of fractional shares in accordance with Section 1.8(c)).
(b) The Company shall give Parent (i) prompt notice of any written
demand received by the Company prior to the Effective Time to require the
Company to purchase shares of capital stock of the Company pursuant to
applicable law and of any other demand, notice or instrument delivered to
the Company prior to the Effective Time pursuant to applicable law, and (ii)
the opportunity to participate in all negotiations and proceedings with
respect to any such demand, notice or instrument. The Company shall not make
any payment or settlement offer prior to the Effective Time with respect to
any such demand unless Parent shall have consented in writing to such
payment or settlement offer.
1.10 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.11 ACCOUNTING TREATMENT. For accounting purposes, the Merger is intended
to be treated as a "pooling of interests."
1.12 FURTHER ACTION. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation or Parent with
full right, title and possession of and to all rights and property of Merger Sub
and the Company, the officers and directors of the Surviving Corporation and
Parent shall be fully authorized (in the name of Merger Sub, in the name of the
Company and otherwise) to take such action.
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Section 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub that, except as
set forth in the disclosure schedule prepared by the Company and delivered by
the Company to Parent on the date of this Agreement (the "Company Disclosure
Schedule"):
2.1 DUE ORGANIZATION; SUBSIDIARIES; ETC.
(a) Each of the Company and its majority-owned subsidiaries (including
any subsidiaries of such subsidiaries) (each of the Company and such
subsidiaries is individually referred to herein as "Acquired Corporation"
and collectively as the "Acquired Corporations") is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has all necessary power and authority: (i) to conduct its
business in the manner in which its business is currently being conducted;
(ii) to own and use its assets in the manner in which its assets are
currently owned and used; and (iii) to perform its obligations under all
Company Contracts. For purposes of this Agreement, a company's
"subsidiaries" shall mean and include all Entities in which such company
owns a majority interest or has the power to vote a majority of the
interests.
(b) Since January 1, 1993, except as set forth in Part 2.1 of the
Company Disclosure Schedule, the Company has not conducted any business
under or otherwise used, for any purpose or in any jurisdiction, any
fictitious name, assumed name or other name, other than the name "Horizons
Technology, Inc."
(c) Each of the Acquired Corporations is qualified, authorized,
registered or licensed to do business as a foreign corporation in any
jurisdiction where so required under applicable law, except where the
failure to be so qualified, authorized, registered or licensed has not had
and will not have a Material Adverse Effect on the Acquired Corporation.
Each of the Acquired Corporations is in good standing as a foreign
corporation in each of such jurisdictions.
(d) Part 2.1 of the Company Disclosure Schedule accurately sets forth
(i) the names of each of the Acquired Corporations, (ii) the names of the
members of each of the Acquired Corporations' board of directors, (iii) the
names of the members of each committee of each of the Acquired Corporations'
board of directors, and (iv) the names and titles of each of the Acquired
Corporations' officers.
(e) Except for the equity interests identified in Part 2.1 of the
Company Disclosure Schedule, each of the Acquired Corporations does not own,
beneficially or otherwise, any shares or other securities of, or any direct
or indirect equity interest in, any Entity. Each of the Acquired
Corporations has not agreed and is not obligated to make any future
investment in or capital contribution to any Entity. Each of the Acquired
Corporations has not guaranteed and is not responsible or liable for any
obligation of any of the Entities in which it owns any equity interest.
2.2 CERTIFICATE OF INCORPORATION AND BYLAWS; RECORDS. The Company has
delivered or made available to Parent accurate and complete copies of: (1) the
Company's Certificate of Incorporation and bylaws, including all amendments
thereto, and all charter documents and bylaws and amendments thereto relating to
the other Acquired Corporations; (2) the stock records of each of the Acquired
Corporations, and (3) the minutes and other records of the meetings and other
proceedings (including any actions taken by written consent) of the stockholders
of each of the Acquired Corporations, the board of directors of each of the
Acquired Corporations and all committees of the board of directors of each of
the Acquired Corporations. There have been no formal meetings (or other
proceedings required under applicable law to be reflected in the Company's
minute book) of the stockholders of any of the Acquired Corporations, the board
of directors of any of the Acquired Corporations or any committee of the board
of directors of any of the Acquired Corporations that are not accurately
reflected in such minutes or other records. There has not been any violation of
any of the provisions of the Certificate of Incorporation or bylaws or other
charter documents of any of the Acquired Corporations, and each of the Acquired
Corporations has not
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taken any action that is inconsistent in any material respect with any
resolution adopted by the its stockholders, its board of directors or any
committee of its board of directors. The stock records and minute books of the
Acquired Corporations are accurate, up-to-date and complete in all material
respects.
2.3 CAPITALIZATION, ETC.
(a) The authorized capital stock of the Company consists of: (i)
12,000,000 shares of Common Stock (with par value $.01), of which 7,496,953
shares have been issued and are outstanding as of the date of this
Agreement; and (ii) 2,500,000 shares of Preferred Stock (with par value
$.01), all of which have been designated "Series A Preferred Stock," of
which 500,000 shares have been issued and are outstanding as of the date of
this Agreement. Except as set forth in Part 2.3 of Company Disclosure
Schedule, each outstanding share of Series A Preferred Stock is convertible
into one share of Company Common Stock. All of the outstanding shares of
Company Common Stock and Series A Preferred Stock have been duly authorized
and validly issued, and are fully paid and non-assessable. The Company has
made available to Parent an accurate and complete description of the terms
of each repurchase option which is held by the Company and to which any of
such shares is subject as well as any obligation by the Company to pay
dividends on any of its stock.
(b) The Company has reserved 1,225,760 shares of Company Common Stock
for issuance under its 1988 Amended Stock Option Plan, of which options to
purchase 27,700 shares are outstanding as of the date of this Agreement. The
Company has reserved 158,364 shares of Company Common Stock for issuance
under outstanding warrants to purchase Company Common Stock. Part 2.3 of the
Company Disclosure Schedule accurately sets forth, with respect to each
Company Option and Company Warrant that is outstanding as of the date of
this Agreement: (i) the name of the holder of such Company Option or Company
Warrant; (ii) the total number of shares of Company Common Stock that are
subject to such Company Option or Company Warrant and the number of shares
of Company Common Stock with respect to which such Company Option or Company
Warrant is immediately exercisable; (iii) the date on which such Company
Option or Company Warrant was granted and the term of such Company Option or
Company Warrant; (iv) the exercise schedule or period, as applicable, for
such Company Option or Company Warrant; (v) the exercise price per share of
Company Common Stock purchasable under such Company Option or Company
Warrant; and (vi) whether such Company Option has been designated an
"incentive stock option" as defined in Section 422 of the Code. Except as
set forth above and in Part 2.3 of the Company Disclosure Schedule, there is
no: (i) outstanding subscription, option, call, warrant or right (whether or
not currently exercisable) to acquire any shares of the capital stock or
other securities of the Company; (ii) outstanding security, instrument or
obligation that is or may become convertible into or exchangeable for any
shares of the capital stock or other securities of the Company; (iii)
Contract under which the Company is or may become obligated to sell or
otherwise issue any shares of its capital stock or any other securities; or
(iv) to the best of the knowledge (as defined in Exhibit B hereto) of the
Company, condition or circumstance that may give rise to or provide a basis
for the assertion of a claim by any Person to the effect that such Person is
entitled to acquire or receive any shares of capital stock or other
securities of the Company. All of the Company Warrants except the Company
Warrants issued to Imperial Bank shall terminate and be of no further force
and effect as of the Closing.
(c) All outstanding shares of Company Common Stock and Series A
Preferred Stock, and all outstanding Company Options and Company Warrants,
have been issued and granted in compliance with (i) all applicable
securities laws and other applicable Legal Requirements, and (ii) all
requirements set forth in applicable Contracts.
(d) Except as set forth in Part 2.3 of the Company Disclosure Schedule,
since January 31, 1993, the Company has never repurchased, redeemed or
otherwise reacquired any shares of capital stock or other securities of the
Company. All securities so reacquired by the Company were reacquired in
compliance with (i) the applicable provisions of the Delaware General
Corporation Law and all other
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applicable Legal Requirements, and (ii) all requirements set forth in
applicable restricted stock purchase agreements and other applicable
Contracts.
(i) 321,322 shares of the Company Common Stock, and no other
securities of the Company, have been issued to and are held by the
Company's Employee Stock Ownership Plan and Trust (the "Company ESOP")
and 300,000 Shares of the Company's Series A Preferred Stock, and no
other securities of the Company, have been issued and are held by the
Company's Retirement Plan.
(ii) All of the outstanding shares of capital stock of each of the
subsidiaries of the Company are validly issued (in compliance with all
applicable securities laws and other Legal Requirements and applicable
Company Contracts), fully paid and nonassessable and are owned
beneficially and of record by the Company, free and clear of any
Encumbrance.
2.4 FINANCIAL STATEMENTS
(a) The Company has delivered or made available to Parent the following
financial statements and notes (collectively, the "Company Financial
Statements"):
(i) the balance sheets of the Company as of January 31, 1997 and
1996, and the related statements of operations, statements of
stockholders' equity and statements of cash flows of the Company for the
years then ended, together with the notes thereto.
(ii) the unaudited balance sheet of the Company as of January 2,
1998 (the "Unaudited Interim Balance Sheet"), and the related unaudited
income statement of the Company for the eleven months then ended.
(b) The Company Financial Statements are accurate and complete in all
material respects except as adjusted per agreement with Parent and present
fairly the financial position of the Company and the other Acquired
Corporations as of the respective dates thereof and the results of
operations and (in the case of the financial statements referred to in
Section 2.4(a)(i)) cash flows of the Company and the other Acquired
Corporations for the periods covered thereby. The Company Financial
Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
covered (except that the financial statements referred to in Section
2.4(a)(ii) do not contain footnotes).
2.5 ABSENCE OF CHANGES. Since December 31, 1997 there has not been (a) any
change, or any development or combination of developments that has had or would
reasonably be expected to have a Material Adverse Effect on the Company, or (b)
any material damage, destruction or loss, whether or not covered by insurance,
that has had or would reasonably be expected to have a Material Adverse Effect
on the Company.
2.6 TITLE TO ASSETS
(a) Each of the Acquired Corporations owns, and has good, valid and
marketable title to, all assets purported to be owned by it, including: (i)
all assets reflected on the Unaudited Interim Balance Sheet; (ii) all assets
referred to in Parts 2.1, 2.7(b) and 2.9 of the Company Disclosure Schedule
and all of its rights under the Contracts identified in Part 2.10 of the
Company Disclosure Schedule; and (iii) all other assets reflected in its
books and records as being owned by such Acquired Corporation. Except as set
forth in Part 2.6 of the Company Disclosure Schedule, all of said assets are
owned by the Acquired Corporations free and clear of any liens or other
Encumbrances, except for any lien for current taxes not yet due and payable.
(b) Part 2.6 of the Company Disclosure Schedule identifies all material
assets that are material to the business of the Acquired Corporations and
that are being leased or licensed to any of the Acquired Corporations.
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2.7 BANK ACCOUNTS; RECEIVABLES
(a) The Company has provided to Parent accurate records for each account
(including account numbers) maintained by or for the benefit of any of the
Acquired Corporations at any bank or other financial institution.
(b) The Company has provided to Parent accurate records reflecting a
breakdown and aging of all accounts receivable, notes receivable and other
receivables of the Acquired Corporations as of December 31, 1997. Except as
set forth in Part 2.7(b) of the Company Disclosure Schedule, all existing
accounts receivable of the Acquired Corporations (including those accounts
receivable reflected on the Unaudited Interim Balance Sheet that have not
yet been collected and those accounts receivable that have arisen since
December 31, 1997 and have not yet been collected) (i) represent valid
obligations of customers of the Acquired Corporations arising from bona fide
transactions entered into in the ordinary course of business, and (ii) are
current and to the best knowledge of the Company will be collected in full
when due, without any counterclaim or set off (net of a reasonable allowance
for doubtful accounts).
2.8 EQUIPMENT; LEASEHOLD
(a) All material items of equipment and other tangible assets owned by
or leased to the Acquired Corporations are adequate for the uses to which
they are being put, are in good condition and repair (ordinary wear and tear
excepted) and are adequate for the conduct of the Acquired Corporations'
businesses, in the manner in which such businesses are currently being
conducted.
(b) None of the Acquired Corporations own any real property or any
interest in real property, except for the leasehold created under the real
property leases identified in Part 2.10 of the Company Disclosure Schedule.
2.9 PROPRIETARY ASSETS
(a) Part 2.9(a)(i) of the Company Disclosure Schedule sets forth, with
respect to each Company Proprietary Asset registered with any Governmental
Body or for which an application has been filed with any Governmental Body,
(i) a brief description of such Proprietary Asset, and (ii) the names of the
jurisdictions covered by the applicable registration or application. Part
2.9(a)(ii) of the Company Disclosure Schedule identifies and provides a
brief description of all other material Company Proprietary Assets owned by
the Company or any other Acquired Corporation. Part 2.9(a)(iii) of the
Company Disclosure Schedule identifies and provides a brief description of
each material Proprietary Asset licensed to the Company or any other
Acquired Corporation by any Person (except for any Proprietary Asset that is
licensed to the Company or any other Acquired Corporation under any third
party software license generally available to the public at a cost of less
than $10,000), and identifies the license agreement under which such
Proprietary Asset is being licensed to the Company or any other Acquired
Corporation. Except as set forth in Part 2.9(a)(iv) of the Company
Disclosure Schedule the Company (or any other Acquired Corporation, as
appropriate) has good, valid and marketable title to all of the Company
Proprietary Assets identified in Parts 2.9(a)(i) and 2.9(a)(ii) of the
Company Disclosure Schedule, free and clear of all liens and other
Encumbrances, and has a valid right (contractual or otherwise) to use all
Proprietary Assets identified in Part 2.9(a)(iii) of the Company Disclosure
Schedule. Except as set forth in Part 2.9(a)(v) of the Company Disclosure
Schedule, no Acquired Corporation is obligated to make any payment to any
Person for the use of any Company Proprietary Asset. Except as set forth in
Part 2.9(a)(vi) of the Company Disclosure Schedule, no Acquired Corporation
has developed jointly with any other Person any Company Proprietary Asset
with respect to which such other Person has any rights.
(b) The Acquired Corporations have taken all measures and precautions
reasonably necessary to protect and maintain the confidentiality and secrecy
of all Company Proprietary Assets (except
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Company Proprietary Assets whose value would be unimpaired by public
disclosure) and otherwise to maintain and protect the value of all Company
Proprietary Assets.
(c) None of the Company Proprietary Assets infringes or conflicts with
any Proprietary Asset owned or used by any other Person. None of the
Acquired Corporations is infringing, misappropriating or making any unlawful
use of, and the Acquired Corporations have not at any time infringed,
misappropriated or made any unlawful use of, or received any notice or other
communication (in writing or otherwise) of any actual, alleged, possible or
potential infringement, misappropriation or unlawful use of, any Proprietary
Asset owned or used by any other Person. To the best of the knowledge of the
Company, no other Person is infringing, misappropriating or making any
unlawful use of, and no Proprietary Asset owned or used by any other Person
infringes or conflicts with, any Company Proprietary Asset.
(d) Except as set forth in Part 2.9(d) of the Company Disclosure
Schedule: (i) each Company Proprietary Asset conforms in all material
respects with any specification, documentation and performance standard
provided with respect thereto by or on behalf of any Acquired Corporation;
and (ii) there has not been any material claim by any customer or other
Person alleging that any Company Proprietary Asset does not conform in all
material respects with any specification, documentation, performance
standard, representation or statement made or provided by or on behalf of
any Acquired Corporation, and, to the best of the knowledge of the Company,
there is no basis for any such claim. The Company has established adequate
reserves on the Unaudited Interim Balance Sheet to cover all costs
associated with any obligations that the Acquired Corporations may have with
respect to the correction or repair of programming errors or other defects
in the Company Proprietary Assets.
(e) The Company Proprietary Assets constitute all the Proprietary Assets
reasonably necessary to enable the Acquired Corporations to conduct their
businesses in the manner in which such businesses have been and are being
conducted. Except as set forth in Part 2.9(e) of the Company Disclosure
Schedule, (i) the Acquired Corporations have not licensed any of the Company
Proprietary Assets to any Person on an exclusive basis, and (ii) the
Acquired Corporations have not entered into any covenant not to compete or
Contract limiting the ability to exploit fully any Proprietary Assets or to
transact business in any market or geographical area or with any Person.
(f) Except as set forth in Part 2.9(f) of the Company Disclosure
Schedule, (i) all current and former employees of the Acquired Corporations
have executed and delivered to the Acquired Corporations an agreement that
is substantially identical to the standard form of Confidential Information
and Invention Assignment Agreement or similar agreement used by the Company
and previously delivered to Parent, and (ii) all current and former
consultants and independent contractors to the Acquired Corporations have
executed and delivered to the Acquired Corporations an agreement that is
substantially identical to the standard form of Consultant Confidential
Information and Invention Assignment Agreement or similar agreement used by
the Company and previously delivered to Parent.
2.10 CONTRACTS
(a) Part 2.10 of the Company Disclosure Schedule identifies each
Contract of the Company or any of the other Acquired Corporations material
to the Acquired Corporations, considered as a whole (each a "Material
Company Contract"), including the following (to the extent material):
(i) each Company Contract relating to the employment of, or the
performance of services by, any employee, consultant or independent
contractor;
(ii) each Company Contract relating to the acquisition, transfer,
use, development, sharing or license of any Proprietary Asset;
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(iii) each Company Contract imposing any material restriction on any
Acquired Corporation's right or ability (A) to compete with any other
Person, (B) to acquire any product or other asset or any services from
any other Person, to sell any product or other asset to or perform any
services for any other Person or to transact business with any other
Person, or (C) develop or distribute any technology;
(iv) each Company Contract creating or involving any agency
relationship, distribution arrangement or franchise relationship;
(v) each Company Contract relating to the creation of any
Encumbrance with respect to any asset of any of the Acquired
Corporations;
(vi) each Company Contract involving or incorporating any guaranty,
any pledge, any performance or completion bond, any indemnity or any
surety arrangement;
(vii) each Company Contract creating or relating to any partnership
or joint venture or any sharing of revenues, profits, losses, costs or
liabilities;
(viii) each Company Contract relating to the purchase or sale of any
product or other asset by or to, or the performance of any services by or
for, any Related Party (as defined in Section 2.19);
(ix) any other Company Contract that was entered into by any
Acquired Corporation outside the ordinary course of business or was
inconsistent with any such Acquired Corporation's past practices;
(b) The Acquired Corporations have delivered or made available to Parent
accurate and complete copies of all written Contracts identified in Part
2.10 of the Company Disclosure Schedule, including all amendments thereto.
Each Contract identified in Part 2.10 of the Company Disclosure Schedule is
valid and in full force and effect, and, to the best of the knowledge of the
Company, is enforceable by the Acquired Corporations in accordance with its
terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing
specific performance, injunctive relief and other equitable remedies.
(c) Except as set forth in Part 2.10 of the Company Disclosure Schedule:
(i) none of the Acquired Corporations has materially violated or
breached, or committed any material default under, any Company Contract,
and, to the best of the knowledge of the Company, no other Person has
materially violated or breached, or committed any material default under,
any Company Contract;
(ii) to the best of the knowledge of the Company, no event has
occurred, and no circumstance or condition exists, that (with or without
notice or lapse of time) will, or would reasonably be expected to, (A)
result in a material violation or breach of any of the provisions of any
Material Company Contract, (B) give any Person the right to declare a
default or exercise any remedy under any Material Company Contract, (C)
give any Person the right to accelerate the maturity or performance of
any Material Company Contract, or (D) give any Person the right to
cancel, terminate or modify any Material Company Contract;
(iii) since January 31, 1997, none of the Acquired Corporations has
received any notice or other communication regarding any material
violation or breach of, or default under, any Company Contract; and
(iv) none of the Acquired Corporations has waived any of its
material rights under any Material Company Contract.
(d) No Person is renegotiating any amount paid or payable to the Company
under any Material Company Contract or any other material term or provision
of any Material Company Contract.
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(e) The Contracts identified in Part 2.10 of the Company Disclosure
Schedule collectively constitute all of the Contracts reasonably necessary
to enable the Acquired Corporations to conduct their businesses in the
manner in which they are currently being conducted.
(f) The Company has made available to Parent all material documentation
regarding any bid, offer, award, written proposal or term sheet which has
been submitted or received by the Acquired Corporations since January 31,
1997.
(g) The Company has made available to Parent all material documentation
regarding the Acquired Corporations' current backlog under Company
Contracts.
(h) Since January 1, 1992, except as set forth in Part 2.10(h) of the
Company Disclosure Schedule:
(i) none of the Acquired Corporations has had any determination of
noncompliance or entered into any consent order;
(ii) each of the Acquired Corporations has complied in all material
respects with all Legal Requirements with respect to all Government
Contracts and Government Bids;
(iii) none of the Acquired Corporations has, in obtaining or
performing any Government Contract, violated (A) the Truth in
Negotiations Act of 1962, as amended, (B) the Service Contract Act of
1963, as amended, (C) the Contract Disputes Act of 1978, as amended, (D)
the Office of Federal Procurement Policy Act, as amended, (E) the Federal
Acquisition Regulations (the "FAR") or any applicable agency supplement
thereto, (F) the Cost Accounting Standards, (G) the Defense Industrial
Security Manual (DOD 5220.22-M), (H) the Defense Industrial Security
Regulation (DOD 5220.22-R) or any related security regulations, or (I)
any other applicable procurement law or regulation or other Legal
Requirement;
(iv) all facts set forth in or acknowledged by any of the Acquired
Corporations in any certification, representation or disclosure statement
submitted by it with respect to any Government Contract or Government Bid
were current, accurate and complete as of the date of submission;
(v) neither the Acquired Corporations nor any of their current
employees (while, or to the best of the Company's knowledge, prior to
becoming an employee) has been debarred or suspended from doing business
with any Governmental Body, and, to the best of the knowledge of the
Company, no circumstances exist that would sustain a debarment or
suspension of any of the Acquired Corporations or any employee of any of
the Acquired Corporations;
(vi) no negative determinations of responsibility have been issued
against any of the Acquired Corporations in connection with any
Government Contract or Government Bid;
(vii) no material direct or indirect costs incurred by any Acquired
Corporation have been questioned (by written document or formal
proceeding) or disallowed as a result of a finding or determination of
any kind by any Governmental Body;
(viii) Since January 1, 1997, no Governmental Body, and no prime
contractor or higher-tier subcontractor of any Governmental Body, has
withheld or set off, or threatened to withhold or set off, any amount due
to any Acquired Corporation under any Government Contract;
(ix) none of the Acquired Corporations is undergoing or has
undergone any audit, and the Company has no knowledge of any basis for
any impending audit, arising under or relating to any Government Contract
(other than normal routine audits conducted in the ordinary course of
business);
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(x) except as set forth in Part 2.10 of the Company Disclosure
Schedule none of the Acquired Corporations has entered into any financing
arrangement with respect to the performance of any Government Contract;
(xi) no payment has been made by any Acquired Corporation, or to the
best knowledge of the Company, to any Person (other than to any bona fide
employee or agent (as defined in subpart 3.4 of the FAR) of the Company)
which is or was contingent upon the award of any Government Contract or
which would otherwise be in violation of any applicable procurement law
or regulation or any other Legal Requirement;
(xii) each of the Acquired Corporations' cost accounting system has
not been determined by any Governmental Body not to be in compliance with
any Legal Requirement;
(xiii) each of the Acquired Corporations has complied with all
applicable regulations and other Legal Requirements and with all
applicable contractual requirements relating to the placement of legends
or restrictive markings on technical data, computer software and other
Proprietary Assets, except where any failure to do so has not and would
not reasonably be expected to have a Material Adverse Effect on the
Company;
(xiv) in each case in which any Acquired Corporation has delivered or
otherwise provided any technical data, computer software or Company
Proprietary Asset to any Governmental Body in connection with any
Government Contract, such Acquired Corporation has taken reasonable
measures to mark such technical data, computer software or Company
Proprietary Asset with all markings and legends (including any
"restricted rights" legend and any "government purpose license rights"
legend) necessary (under the FAR or other applicable Legal Requirements)
to ensure that no Governmental Body or other Person is able to acquire
any unlimited rights with respect to such technical data, computer
software or Company Proprietary Asset;
(xv) each of the Acquired Corporations has reached agreement with the
cognizant government representatives approving and "closing" all indirect
costs charged to Government Contracts for 1991, 1992, and 1993, and those
years are closed;
(xvi) none of the Acquired Corporations is nor will they be required
to make any filing with or give any notice to, or to obtain any Consent
from, any Governmental Body under or in connection with any Government
Contract or Government Bid as a result of or by virtue of (A) the
execution, delivery of performance of this Agreement or any of the other
agreements referred to in this Agreement, or (B) the consummation of the
Merger or any of the other transactions contemplated by this Agreement.
2.11 LIABILITIES. Each of the Acquired Corporations has no material
accrued, contingent or other liabilities of any nature, either matured or
unmatured (whether or not required to be reflected in financial statements in
accordance with generally accepted accounting principles, and whether due or to
become due), not otherwise reflected in the Company Financial Statements or
provided in the Company Disclosure Schedule.
2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. Each of the Acquired Corporations
is, and has at all times since December 31, 1993 been, in compliance with all
applicable Legal Requirements, except where the failure to comply with such
Legal Requirements has not had and will not have a Material Adverse Effect on
the Company. Except as set forth in Part 2.12 of the Company Disclosure
Schedule, since December 31, 1993, each of the Acquired Corporations has not
received any notice or other communication from any Governmental Body regarding
any actual or possible violation of, or failure to comply with, any Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company.
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2.13 GOVERNMENTAL AUTHORIZATIONS. Part 2.13 of the Company Disclosure
Schedule identifies each material Governmental Authorization held by each of the
Acquired Corporations. The Governmental Authorizations identified in Part 2.13
of the Company Disclosure Schedule are valid and in full force and effect, and
collectively constitute all Governmental Authorizations necessary to enable each
of the Acquired Corporations to conduct its business in the manner in which its
business is currently being conducted except where any failure to have such
Governmental Authorizations has not had and will not have a Material Adverse
Effect on the Company. Each of the Acquired Corporations is, and at all times
since December 31, 1993 has been, in substantial compliance with the terms and
requirements of the respective Governmental Authorizations identified in Part
2.13 of the Company Disclosure Schedule. Since December 31, 1993, the Company
has not received any notice or other communication from any Governmental Body
regarding (a) any actual or possible violation of or failure to comply with any
term or requirement of any Governmental Authorization, or (b) any actual or
possible revocation, withdrawal, suspension, cancellation, termination or
modification of any Governmental Authorization.
2.14 TAX MATTERS
(a) All Tax Returns required to be filed by or on behalf of any Acquired
Corporation with any Governmental Body with respect to any taxable period
ending on or before the Closing Date (the "Company Returns") (i) have been
or will be filed on or before the applicable due date (including any
extensions of such due date), and (ii) have been, or will be when filed,
prepared in all material respects in compliance with all applicable Legal
Requirements. All amounts shown on the Company Returns to be due on or
before the Closing Date have been or will be paid on or before the Closing
Date. The Company has delivered or made available to Parent accurate and
complete copies of all Company Returns filed since December 31, 1990 which
have been requested by Parent.
(b) The Company Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with generally accepted accounting principles.
(c) Except as set forth in Part 2.14 of the Company Disclosure Schedule,
there have been no examinations or audits of any Company Return since
December 31, 1990. The Company has delivered to Parent accurate and complete
copies of all audit reports and similar documents (to which it has access)
relating to the Company Returns. Except as set forth in Part 2.14 of the
Company Disclosure Schedule, no extension or waiver of the limitation period
applicable to any of the Company Returns has been granted and no such
extension or waiver has been requested from any Acquired Corporation.
(d) Except as set forth in Part 2.14 of the Company Disclosure Schedule,
since January 31, 1993 no material claim or Proceeding is pending or has
been threatened against or with respect to any Acquired Corporation in
respect of any Tax. There are no unsatisfied liabilities for Taxes
(including liabilities for interest, additions to tax and penalties thereon
and related expenses) with respect to any notice of deficiency or similar
document received by any Acquired Corporation with respect to any Tax (other
than liabilities for Taxes asserted under any such notice of deficiency or
similar document which are being contested in good faith by any such
Acquired Corporation and with respect to which adequate reserves for payment
have been established). There are no liens for Taxes upon any of the assets
of any Acquired Corporation except liens for current Taxes not yet due and
payable. Each of the Acquired Corporations has not entered into or become
bound by any agreement or consent pursuant to Section 341(f) of the Code.
Each of the Acquired Corporations has not been, and will not be, required to
include any adjustment in taxable income for any tax period (or portion
thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions or
events occurring, or accounting methods employed, prior to the Closing.
(e) There is no agreement, plan, arrangement or other Contract covering
any employee or independent contractor or former employee or independent
contractor of any Acquired Corporation
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that, considered individually or considered collectively with any other such
Contracts, will, or could reasonably be expected to, give rise directly or
indirectly to the payment of any amount that would not be deductible
pursuant to Section 280G or Section 162 of the Code. Each of the Acquired
Corporations is not, and has never been, a party to or bound by any tax
indemnity agreement, tax sharing agreement, tax allocation agreement or
similar Contract.
2.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS
(a) Part 2.15(a) of the Company Disclosure Schedule identifies each
salary, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, severance pay, or termination pay plan
(collectively, the "Compensation Plans"), and each hospitalization, medical,
life or other insurance, supplemental unemployment benefits, profit-sharing,
pension or retirement plan, program or agreement (collectively, including
the Company ESOP, the "Plans") sponsored, maintained, contributed to or
required to be contributed to by any Acquired Corporation for the benefit of
any employee of any Acquired Corporation ("Employee"), except for Plans
which would not require the Acquired Corporations to make payments or
provide benefits having a value in excess of $25,000 in the aggregate.
(b) Except as set forth in Part 2.15(a) of the Company Disclosure
Schedule, the Acquired Corporations do not maintain, sponsor or contribute
to, and, to the best of the knowledge of Company, have not at any time in
the past maintained, sponsored or contributed to, any employee pension
benefit plan (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), whether or not excluded from
coverage under specific Titles or Merger Subtitles of ERISA) for the benefit
of Employees or former Employees (a "Pension Plan").
(c) Each of the Acquired Corporations maintains, sponsors or contributes
only to those employee welfare benefit plans (as defined in Section 3(1) of
ERISA, whether or not excluded from coverage under specific Titles or Merger
Subtitles of ERISA) for the benefit of Employees or former Employees which
are described in Part 2.15(c) of the Company Disclosure Schedule (the
"Welfare Plans"), none of which is a multiemployer plan (within the meaning
of Section 3(37) of ERISA).
(d) With respect to each Plan, the Company has delivered to Parent:
(i) an accurate and complete copy of such Plan (including all
amendments thereto);
(ii) an accurate and complete copy of the annual report, if required
under ERISA, with respect to such Plan for the last two years;
(iii) an accurate and complete copy of the most recent summary plan
description, together with each Summary of Material Modifications, if
required under ERISA, with respect to such Plan, and all material
employee communications relating to such Plan;
(iv) if such Plan is funded through a trust or any third party
funding vehicle, an accurate and complete copy of the trust or other
funding agreement (including all amendments thereto) and accurate and
complete copies the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to such
Plan, including service provider agreements, insurance contracts, minimum
premium contracts, stop-loss agreements, investment management
agreements, subscription and participation agreements and record keeping
agreements; and
(vi) an accurate and complete copy of the most recent determination
letter received from the Internal Revenue Service with respect to such
Plan (if such Plan is intended to be qualified under Section 401(a) of
the Code).
(e) No Acquired Corporation is required to be, and, to the best of the
knowledge of the Company, has ever been required to be, treated as a single
employer with any other Person under
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Section 4001(b)(1) of ERISA or Section 414(b), (c), (m) or (o) of the Code.
No Acquired Corporation has ever been a member of an "affiliated service
group" within the meaning of Section 414(m) of the Code. To the best of the
knowledge of the Company, the Acquired Corporations have never made a
complete or partial withdrawal from a multiemployer plan, as such term is
defined in Section 3(37) of ERISA, resulting in "withdrawal liability," as
such term is defined in Section 4201 of ERISA (without regard to subsequent
reduction or waiver of such liability under either Section 4207 or 4208 of
ERISA).
(f) The Acquired Corporations do not have any plan or commitment to
create any additional Welfare Plan or any Pension Plan, or to modify or
change any existing Welfare Plan or Pension Plan (other than to comply with
applicable law) in a manner that would affect any Employee.
(g) Except as set forth in Part 2.15(g) of the Company Disclosure
Schedule, no Welfare Plan provides death, medical or health benefits
(whether or not insured) with respect to any current or former Employee
after any such Employee's termination of service (other than (i) benefit
coverage mandated by applicable law, including coverage provided pursuant to
Section 4980B of the Code, (ii) deferred compensation benefits accrued as
liabilities on the Unaudited Interim Balance Sheet, and (iii) benefits the
full cost of which are borne by current or former Employees (or the
Employees' beneficiaries)).
(h) With respect to each of the Welfare Plans constituting a group
health plan within the meaning of Section 4980B(g)(2) of the Code, the
provisions of Section 4980B of the Code ("COBRA") have been complied with in
all material respects.
(i) Each of the Compensation Plans and the Plans has been operated and
administered in all material respects in accordance with applicable Legal
Requirements, including but not limited to ERISA and the Code.
(j) Each of the Compensation Plans and the Plans intended to be
qualified under Section 401(a) of the Code has received a favorable
determination from the Internal Revenue Service, the Company is not aware of
any reason why any such determination letter should be revoked.
(k) Except as set forth in Part 2.15(k) of the Company Disclosure
Schedule, neither the execution, delivery or performance of this Agreement,
nor the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will result in any payment (including any
bonus, golden parachute or severance payment) to any current or former
Employee or director of any Acquired Corporation (whether or not under any
Plan), or materially increase the benefits payable under any Compensation
Plan or Plan, or result in any acceleration of the time of payment or
vesting of any such benefits.
(l) The Company has provided to Parent documentation showing all
salaried employees of the Acquired Corporations, and correctly reflecting,
in all material respects, their salaries, any other compensation payable to
them (including compensation payable pursuant to bonus, deferred
compensation or commission arrangements), their dates of employment and
their positions. The Acquired Corporations are not a party to any collective
bargaining contract or other Contract with a labor union involving any of
its Employees. All of the Company's employees are "at will" employees.
(m) Part 2.15(m) of the Company Disclosure Schedule identifies each
Employee who is not fully available to perform work because of disability or
other leave and sets forth the basis of such leave and the anticipated date
of return to full service.
(n) Each of the Acquired Corporations is in compliance in all material
respects with all applicable Legal Requirements and Contracts relating to
employment, employment practices, wages, bonuses and terms and conditions of
employment, including employee compensation matters.
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(o) Except as set forth in Part 2.15(o) of the Company Disclosure
Schedule, each of the Acquired Corporations has good labor relations, and
the Company has no reason to believe that (i) the consummation of the Merger
or any of the other transactions contemplated by this Agreement will have a
material adverse effect on any Acquired Corporation's labor relations, or
(ii) any Acquired Corporation's employee(s) intend(s) to terminate his or
her employment with the Acquired Corporation
2.16 ENVIRONMENTAL MATTERS. Each of the Acquired Corporations is in
compliance in all material respects with all applicable Environmental Laws,
which compliance includes the possession by each of the Acquired Corporations of
all permits and other Governmental Authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof. Each
of the Acquired Corporations has not received any notice or other communication
(in writing or otherwise), whether from a Governmental Body or citizens group,
that alleges that any of the Acquired Corporations is not in compliance with any
Environmental Law, and, to the best of the knowledge of the Company, there are
no circumstances that may prevent or interfere with the Acquired Corporations'
compliance with any Environmental Law in the future. To the best of the
knowledge of the Company, no current or prior owner of any property leased or
controlled by any of the Acquired Corporations has received any notice or other
communication (in writing or otherwise), whether from a Government Body,
citizens group, employee or otherwise, that alleges that such current or prior
owner or any of the Acquired Corporations is not in compliance with any
Environmental Law. All Governmental Authorizations currently held by each of the
Acquired Corporations pursuant to Environmental Laws are identified in Part 2.16
of the Company Disclosure Schedule. (For purposes of this Section 2.16: (i)
"Environmental Law" means any federal, state, local or foreign Legal Requirement
relating to pollution or protection of human health or the environment
(including ambient air, surface water, ground water, land surface or subsurface
strata), including any law or regulation relating to emissions, discharges,
releases or threatened releases of Materials of Environmental Concern, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environmental Concern;
and (ii) "Materials of Environmental Concern" include chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products and any
other substance that is now or hereafter regulated by any Environmental Law or
that is otherwise a danger to health, reproduction or the environment.)
2.17 ESOP MATTERS
(a) The Company ESOP is duly organized and existing under applicable
law, is a stock bonus plan qualified under Section 401(a) of the Code and is
an "employee stock ownership plan" as defined in Section 4975(e)(7) of the
Code. The Company ESOP was formed and is, and at all times has been,
maintained primarily for the benefit of the Company ESOP participants and
beneficiaries, within the meaning of Section 4975(d)(3)(A) of the Code,
Treasury Regulations Section 54.4975-7 and Section 408(b)(3) of ERISA. The
shares of each Acquired Corporation's stock held by the Company ESOP (the
"ESOP Shares") constitute "employer securities" within the meaning of
Section 409(l) of the Code. The Company has heretofore delivered to Parent
accurate and complete copies of all documents (and all amendments,
modifications and supplements thereto) material to the creation of the
Company ESOP and ESOP Trust and the ESOP Transactions, including, but not
limited to, (a) the Company ESOP plan document and trust agreement, (b) each
request heretofore filed with the IRS requesting the issuance of a favorable
determination letter with respect to the qualified status or continuing
qualified status of the Company ESOP, including all supporting documentation
filed herewith, (c) any request filed with the IRS under the Voluntary
Compliance Resolution Program ("VCR") or the Closing Agreement Program
("CAP"), (d) documentation of any correction of Company ESOP defects under
the IRS' Administrative Program Regarding Self Correction ("APRSC").
(b) Except as set forth in Part 2.17(b) of the Company Disclosure
Schedule, (a) as of the Closing Date, no ESOP Transaction has occurred and
no ESOP Loan exists with respect to the Company
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ESOP and (b) as of the Closing Date no ESOP Loan or ESOP Transaction is
under negotiation and neither the Company nor any Acquired Corporation have
any plan or commitment to enter into an ESOP Transaction or an ESOP Loan. No
ESOP Transaction was, or has resulted in, or will result in a prohibited
transaction under Section 4975(c) of the Code, Sections 406 or 407 of ERISA,
or the regulations thereunder. Any ESOP Loans and any related guarantees
constitutes an "exempt loan" under Treasury Regulation Section
54.4975-7(b)(1)(iii). The use of the proceeds of any ESOP Loans by the
Acquired Corporations and the Company ESOP, respectively, and the pledge of
the ESOP Shares as security for the ESOP Loans, did not and does not
constitute or result in a violation of the provisions of the Code or ERISA
or any regulations thereunder.
(c) All ESOP Loans have been fully paid, and no further amounts are due
thereunder. Neither any of the Acquired Corporations nor the Company ESOP is
or has been in breach or violation of any ESOP Transaction Document, there
are no remaining unperformed obligations of the Acquired Corporations or the
Company ESOP under any ESOP Transaction Document, and there are no amounts
as to which any Acquired Corporation or the Company ESOP are or may be
liable under any ESOP Transaction Documents.
(d) At the Closing Date, there have been no transactions under Internal
Revenue Code Section 1042 with respect to the Company ESOP.
(e) All Legal Requirements applicable to any Acquired Corporation and/or
to the ESOP Trustee requiring prudence of fiduciaries, including, without
limitation, as to valuation matters and other similar matters relating to
discretionary judgments not involving legal judgments, have been complied
with, and the Acquired Corporations are not and shall not be subject to any
liability as a fiduciary or co-fiduciary under ERISA with respect to matters
arising prior to and through the Closing Date in connection with the Company
ESOP. Neither the execution and delivery of this Agreement nor the
consummation of the transactions described herein or any other agreement
between or among the parties to this Agreement, or the performance of the
terms hereof or thereof, will conflict with, violate, or result in a breach
of the Company ESOP plan document, any ESOP Transaction Documents or any
agreement or other instrument by which the Acquired Corporations, the
Company ESOP, the ESOP Trustee or the ESOP Trust may be bound, and will not
constitute a breach by any Person acting as a fiduciary, within the meaning
of ERISA, with respect to the Company ESOP of any fiduciary responsibility
or similar duty or obligation owed by such Person to the participants of the
Company ESOP under ERISA or otherwise.
2.18 INSURANCE. Part 2.18 of the Company Disclosure Schedule identifies
all insurance policies maintained by, at the expense of or for the benefit of
the Acquired Corporations and identifies any material claims made thereunder,
and the Company has delivered or made available to Parent accurate and complete
copies of the insurance policies identified on Part 2.18 of the Company
Disclosure Schedule. Each of the insurance policies identified in Part 2.18 of
the Company Disclosure Schedule is in full force and effect. Since January 31,
1993, each of the Acquired Corporations has not received any notice or other
communication regarding any actual or possible (a) cancellation or invalidation
of any insurance policy, (b) refusal of any coverage or rejection of any claim
under any insurance policy, or (c) material adjustment in the amount of the
premiums payable with respect to any insurance policy.
2.19 RELATED PARTY TRANSACTIONS. Except as set forth in Part 2.19 of the
Company Disclosure Schedule: (a) no Related Party has, and no Related Party has
at any time since January 31, 1995 had, any direct or indirect interest in any
material asset used in or otherwise relating to the businesses of the Acquired
Corporations; (b) no Related Party is, or has at any time since January 31, 1995
been, indebted to any of the Acquired Corporations; (c) since January 31, 1995,
no Related Party has entered into, or has had any direct or indirect financial
interest in, any Material Company Contract, transaction or business dealing
involving any of the Acquired Corporations; (d) no Related Party is competing,
or has at any time since January 31, 1995 competed, directly or indirectly, with
any of the Acquired Corporations; and (e) no
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Related Party has any claim or right against any of the Acquired Corporations
(other than rights under Company Options or Company Warrants and rights to
receive compensation for services performed as an employee of any of the
Acquired Corporations). (For purposes of this Section 2.19 each of the following
shall be deemed to be a "Related Party": (i) each of the Designated
Stockholders; (ii) each individual who is, or who has at any time since January
31, 1995 been, an officer any of the Acquired Corporations; (iii) each member of
the immediate family of each of the individuals referred to in clauses "(i)" and
"(ii)" above; and (iv) any trust or other Entity (other than the Acquired
Corporations) in which any one of the individuals referred to in clauses "(i)",
"(ii)" and "(iii)" above holds (or in which more than one of such individuals
collectively hold), beneficially or otherwise, a material voting, proprietary or
equity interest. No Related Party shall have any liability or obligation to
Parent with respect to this Section 2.19.)
2.20 LEGAL PROCEEDINGS; ORDERS
(a) Except as set forth in Part 2.20 of the Company Disclosure Schedule,
there is no pending Legal Proceeding, and (to the best of the knowledge of
the Company) no Person has threatened to commence any Legal Proceeding: (i)
that involves any of the Acquired Corporations or any of the assets owned or
used by any of the Acquired Corporations or (to the best knowledge of the
Company) any Person whose liability any of the Acquired Corporations has or
may have retained or assumed, either contractually or by operation of law;
or (ii) that challenges, or that may have the effect of preventing,
delaying, making illegal or otherwise interfering with, the Merger or any of
the other transactions contemplated by this Agreement. To the best of the
knowledge of the Company, except as set forth in Part 2.20 of the Company
Disclosure Schedule, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that will, or that could reasonably be
expected to, give rise to or serve as a basis for the commencement of any
such Legal Proceeding.
(b) Except as set forth in Part 2.20 of the Company Disclosure Schedule,
no material Legal Proceeding has been commenced by or has been pending
against any of the Acquired Corporations since January 1, 1997.
(c) There is no order, writ, injunction, judgment or decree to which any
of the Acquired Corporations, or any of the assets owned or used by any of
the Acquired Corporations, is subject. To the best of the knowledge of the
Company, no officer or other employee of any of the Acquired Corporations is
subject to any order, writ, injunction, judgment or decree that prohibits
such officer or other employee from engaging in or continuing any conduct,
activity or practice relating to any such Acquired Corporation's business.
2.21 AUTHORITY; BINDING NATURE OF AGREEMENT. Subject to the approval of
the stockholders of the Company, the Company has the absolute and unrestricted
right and authority to enter into and to perform its obligations under this
Agreement; and the execution, delivery and performance by the Company of this
Agreement have been duly authorized by all necessary action on the part of the
Company and its board of directors. This Agreement constitutes the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
2.22 NON-CONTRAVENTION; CONSENTS. Except as set forth in Part 2.22 of the
Company Disclosure Schedule, neither (1) the execution, delivery or performance
of this Agreement or any of the other agreements referred to in this Agreement,
nor (2) the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will directly or indirectly (with or without
notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of the Company's Certificate of Incorporation or bylaws, or (ii)
any resolution adopted by the Company's stockholders, the Company's board of
directors or any committee of each of the Company's board of directors;
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(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the
transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any material Legal Requirement or any order, writ,
injunction, judgment or decree to which the Company, or any of the assets
owned or used by any of the Acquired Corporations, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any material Governmental
Authorization that is held by any of the Acquired Corporations or that
otherwise relates to any of the Acquired Corporations' business or to any of
the assets owned or used by any of the Acquired Corporations;
(d) contravene, conflict with or result in a violation or breach of, or
result in a default under, any provision of any Company Contract that is or
would constitute a Material Company Contract, or give any Person the right
to (i) declare a default or exercise any remedy under any such Company
Contract, (ii) accelerate the maturity or performance of any such Company
Contract, or (iii) cancel, terminate or modify any such Company Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by any of the
Acquired Corporations (except for minor liens that will not, in any case or
in the aggregate, materially detract from the value of the assets subject
thereto or materially impair the operations of any such Acquired
Corporation).
Except as set forth in Part 2.22 of the Company Disclosure Schedule, the
Acquired Corporations are not and will not be required to make any filing with
or give any notice to, or to obtain any Consent from, any Person in connection
with (x) the execution, delivery or performance of this Agreement or any of the
other agreements referred to in this Agreement, or (y) the consummation of the
Merger or any of the other transactions contemplated by this Agreement.
2.23 FULL DISCLOSURE
(a) This Agreement (including the Company Disclosure Schedule) does not
(i) contain any representation, warranty or information that is false or
misleading with respect to any material fact, or (ii) omit to state any
material fact or necessary in order to make the representations, warranties
and information contained and to be contained herein and therein (in the
light of the circumstances under which such representations, warranties and
information were or will be made or provided) not false or misleading.
(b) The information supplied by the Company for inclusion in the S-4
Registration Statement (as defined in Section 7.7) will not, as of the date
the S-4 Registration Statement becomes effective or as of the date of the
Company Stockholders' Meeting (as defined in Section 7.2), (i) contain any
statement that is inaccurate or misleading with respect to any material
fact, or (ii) omit to state any material fact necessary in order to make
such information (in the light of the circumstances under which it is
provided) not false or misleading.
2.24 ACCOUNTING MATTERS To the knowledge of the Company, neither the
Company nor any of its affiliates has taken or agreed to, or plans to, take any
action that would prevent Parent from accounting for the business combination to
be effected by the Merger as a "pooling of interests."
2.25 BROKERS. No broker, finder or financial adviser retained by the
Company is entitled to any brokerage, finder's or other fee or commission from
the Company in connection with the transactions contemplated by this Agreement;
except the Company has retained the Slavitt Ellington Group to give fairness
opinions and valuations in connection with the Merger for a fee not to exceed
$50,000.
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Section 3. REPRESENTATIONS AND WARRANTIES OF THE DESIGNATED STOCKHOLDERS.
3.1 REPRESENTATIONS AND WARRANTIES. The Designated Stockholders represent
and warrant to and for the benefit of the Parent that to the best of their
actual knowledge, and based upon review of relevant information and records of
the Company as deemed appropriate by the Designated Stockholders, the
representations and warranties of the Company contained herein (as qualified by
the Company Disclosure Schedule) are true and correct in all material respects,
and do not set forth facts that are false or misleading in any material respect,
nor do they omit to set forth facts the absence of which would make such
representations and warranties materially false or misleading. Notwithstanding
the generality of the foregoing, the Designated Stockholders represent and
warrant to the best of their actual knowledge, and based upon review of relevant
information and records of the Company as deemed appropriate by the Designated
Stockholders, as follows:
(a) The Company has made available to Parent the Company Financial
Statements and the Company Financial Statements are accurate and complete in
all material respects and present fairly the financial position of the
Company and the other Acquired Corporations as of the respective dates
thereof and the results of operations and (in the case of the financial
statements referred to in Section 2.4(a)(i)) cash flows of the Company and
the other Acquired Corporations for the periods covered thereby. The Company
Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered (except that the financial statements referred to in Section
2.4(a)(ii) do not contain footnotes and are subject to normal and recurring
year-end audit adjustments, which will not, individually or in the
aggregate, be material in magnitude).
(b) Except as set forth in Part 2.12 of the Company Disclosure Schedule,
to the best knowledge of the Designated Stockholders, each of the Acquired
Corporations is, and has at all times since January 31, 1993 been in
compliance with all applicable Legal Requirements, except where the failure
to comply with such Legal Requirements has not had and will not have a
Material Adverse Effect on the Company.
(c) Except as would not have a Material Adverse Effect on the Company,
each of the Acquired Corporations owns, and has good, valid and marketable
title to, all assets purported to be owned by it, including: (i) all assets
reflected on the Unaudited Interim Balance Sheet; (ii) all assets referred
to in Parts 2.1, 2.7(b) and 2.9 of the Company Disclosure Schedule and all
of its rights under the Contracts identified in Part 2.10 of the Company
Disclosure Schedule; and (iii) all other assets reflected in its books and
records as being owned by such Acquired Corporation. Except as set forth in
Part 2.6 of the Company Disclosure Schedule, all of said assets are owned by
the Acquired Corporations free and clear of any liens or other Encumbrances,
except for any lien for current taxes not yet due and payable.
(d) None of the Acquired Corporations has materially violated or
breached or committed any material default under, any Material Company
Contract.
Section 4. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub (each of the Parent and Merger Sub is individually
referred to herein as "Acquiring Corporation" and collectively as the "Acquiring
Corporations") jointly and severally represent and warrant to the Company that,
except as set forth in the disclosure schedule prepared by the Parent and
delivered by the Parent to the Company on the date of this Agreement (the
"Parent Disclosure Schedule"):
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4.1 DUE ORGANIZATION; ETC
(a) Each of the Acquiring Corporations is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and has all necessary power and authority: (i) to conduct its
business in the manner in which its business is currently being conducted;
(ii) to own and use its assets in the manner in which its assets are
currently owned and used; and (iii) to perform its obligations under all
Material Company Contracts by which it is bound.
(b) Each of the Acquiring Corporations is qualified, authorized,
registered or licensed to do business as a foreign corporation in any
jurisdiction where so required under applicable law, except where the
failure to be so qualified, authorized, registered or licensed has not had
and will not have a Material Adverse Effect on the Acquiring Corporation.
Each of the Acquiring Corporations is in good standing as a foreign
corporation in each of such jurisdictions.
4.2 CERTIFICATE OF INCORPORATION AND BY-LAWS. True, correct and complete
copies of the Certificates of Incorporation and By-laws, each as amended to
date, of Parent and Merger Sub have been made available to the Company. The
Certificates of Incorporation and By-laws of Parent and each of the other
Acquiring Corporations are in full force and effect. Neither Parent nor any of
the other Acquiring Corporations is in violation of any provision of its
Certificate of Incorporation or By-laws.
4.3 CAPITALIZATION, ETC. The authorized capital stock of Parent consists
of: (i) 45,000,000 shares of Common Stock, $.01 par value per share, 16,725,179
shares were issued and are outstanding as of January 30, 1998, and (ii)
2,500,000 shares of Preferred Stock, (A) 250,000 shares of which have been
designated as Series A Junior Participating Preferred Stock, none of which has
been issued, (B) 1,068,102 shares of which have been designated as $1.00
Cumulative Convertible Preferred Stock, $1.00 par value per share, 694,872 of
which were issued and are outstanding as of January 30, 1998, and (C) 500,000
shares of which have been designated as Series B Cumulative Convertible
Redeemable Preferred Stock, all of which were issued as of January 30, 1998.
Each outstanding share of $1.00 Cumulative Convertible Preferred Stock is
convertible at any time into two-thirds (2/3) of a share of Parent's common
stock. The Series B Preferred Stock is convertible at the holder's option into
shares of Parent's common stock at a conversion price of $9.00 per share. In
November 1996, Parent issued $34,500,000 of convertible subordinated debentures.
The debentures are convertible into common stock at a conversion price of $3.50
per share. All of the outstanding shares of Parent capital stock have been duly
authorized and validly issued, and are fully paid and nonassessable, and none of
such shares is subject to any repurchase option or restriction on transfer other
than restrictions imposed by federal or state securities laws. All outstanding
shares of Parent capital stock have been issued in compliance with all
applicable securities laws and other applicable Legal Requirements, and all
requirements set forth in applicable Contracts. All of the outstanding shares of
capital stock of Merger Sub are owned beneficially and of record by Parent, free
and clear of any Encumbrances and were issued in compliance with all applicable
securities laws and other applicable Legal Requirements. Parent has outstanding
options to purchase 1,860,598 shares of common stock as of the date hereof, with
exercise prices ranging between $2.625 to $9.50. In addition, Parent has issued
100,000 warrants to acquire common stock at an exercise price of $3.50 per
share. The shares of Parent Common Stock to be issued to the Company's
shareholders in the Merger, when issued by Parent in accordance with the terms
of this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, will be issued in compliance with applicable federal and state
securities laws and, except for the restrictions imposed by applicable federal
and state securities laws, will be free and clear of any Encumbrances created or
imposed, directly or indirectly, by Parent (subject to the terms of Affiliate
Agreements entered into as contemplated by this Agreement).
4.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Parent has delivered or made available to the Company accurate and
complete copies (excluding copies of exhibits) of each report, registration
statement (on a form other than Form S-8) and definitive proxy statement
filed by Parent with the SEC between January 1, 1997 and the date of
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this Agreement (the "Parent SEC Documents"). As of the time it was filed
with the SEC (or, if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing): (i) each of the Parent SEC
Documents complied in all material respects with the applicable requirements
of the Securities Act or the Exchange Act (as the case may be); and (ii)
none of the Parent SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the
published rules and regulations of the SEC applicable thereto; (ii) were
prepared in accordance with generally accepted accounting principles applied
on a consistent basis throughout the periods covered, except as may be
indicated in the notes to such financial statements and (in the case of
unaudited statements) as permitted by Form 10-Q of the SEC, and except that
unaudited financial statements may not contain footnotes and are subject to
year-end audit adjustments; and (iii) fairly present the consolidated
financial position of Parent and its subsidiaries as of the respective dates
thereof and the consolidated results of operations of Parent and its
subsidiaries for the periods covered thereby.
4.5 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997, there
has not been (a) any change, or any development or combination of developments,
that has had or would reasonably be expected to have a Material Adverse Effect
on Parent, or (b) any damage, destruction or loss, whether or not covered by
insurance, that has had or would reasonably be expected to have a Material
Adverse Effect on Parent.
4.6 COMPLIANCE WITH LEGAL REQUIREMENTS. Each of the Acquiring Corporations
is, and has at all times since December 31, 1993 been, in compliance with all
applicable Legal Requirements, except where the failure to comply with such
Legal Requirements has not had and will not have a Material Adverse Effect on
Parent. Except as set forth in Part 4.6 of the Parent Disclosure Schedule, since
December 31, 1993, each of the Acquiring Corporations has not received any
notice or other communication from any Governmental Body regarding any actual or
possible violation of, or failure to comply with, any Legal Requirements, except
where the failure to comply with such Legal Requirements has not had and will
not have a Material Adverse Effect on Parent.
4.7 GOVERNMENTAL AUTHORIZATIONS. The Governmental Authorizations held by
the Acquiring Corporations are valid and in full force and effect, and
collectively constitute all Governmental Authorizations necessary to enable each
of the Acquiring Corporations to conduct its business in the manner in which its
business is currently being conducted except where any failure to have such
Governmental Authorizations has not had and will not have a Material Adverse
Effect on Parent. Each of the Acquiring Corporations is in substantial
compliance with the terms and requirements of such Governmental Authorizations.
4.8 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in Part 4.8 of the Parent Disclosure Schedule,
there is no pending Legal Proceeding, and (to the best of the knowledge of
the Acquiring Corporations) no Person has threatened to commence any Legal
Proceeding that has had or would reasonably be expected to have a Material
Adverse Effect on Parent: (i) that involves any of the Acquiring
Corporations or any of the assets owned or used by any of the Acquiring
Corporations or (to the best knowledge of the Company) any Person whose
liability any of the Acquiring Corporations has or may have retained or
assumed, either contractually or by operation of law; or (ii) that
challenges, or that may have the effect of preventing, delaying, making
illegal or otherwise interfering with, the Merger or any of the other
transactions contemplated by this Agreement. To the best of the knowledge of
the Company, except as set forth in Part 4.8 of the Parent Disclosure
Schedule, no event has occurred, and no claim, dispute or other condition or
circumstance exists, that will, or that could reasonably be expected to,
give rise to or serve as a basis for the commencement of any such Legal
Proceeding.
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(b) Except as set forth in Part 4.8 of the Parent Disclosure Schedule,
no material Legal Proceeding has ever been commenced by or has ever been
pending against any of the Acquiring Corporations since January 1, 1997.
(c) There is no order, writ, injunction, judgment or decree to which any
of the Acquiring Corporations, or any of the assets owned or used by any of
the Acquiring Corporations, is subject. To the best of the knowledge of the
Company, no officer or other employee of any of the Acquiring Corporations
is subject to any order, writ, injunction, judgment or decree that prohibits
such officer or other employee from engaging in or continuing any conduct,
activity or practice relating to any such Acquiring Corporation's business.
4.9 AUTHORITY; BINDING NATURE OF AGREEMENT. Parent and Merger Sub have the
absolute and unrestricted right and authority to perform their obligations under
this Agreement; and the execution, delivery and performance by Parent and Merger
Sub of this Agreement (including the contemplated issuance of Parent Common
Stock in the Merger in accordance with this Agreement) have been duly authorized
by all necessary action on the part of Parent and Merger Sub and their
respective boards of directors. No vote of Parent's stockholders is needed to
approve the Merger. This Agreement constitutes the legal, valid and binding
obligation of Parent and Merger Sub, enforceable against them in accordance with
its terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
4.10 VALID ISSUANCE. The Parent Common Stock to be issued in the Merger
will, when issued in accordance with the provisions of this Agreement, be
validly issued, fully paid and nonassessable, as described herein.
4.11 NON-CONTRAVENTION; CONSENTS. Except as set forth in 4.11 of the
Parent Disclosure Schedule, neither (1) the execution, delivery or performance
of this Agreement or any of the other agreements referred to in this Agreement,
nor (2) the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will directly or indirectly (with or without
notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of the Acquiring Corporations' Certificates of Incorporation or
bylaws, or (ii) any resolution adopted by either Acquiring Corporations'
stockholders, board of directors or any committee of either of the Acquiring
Corporation's board of directors;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the
transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any material Legal Requirement or any order, writ,
injunction, judgment or decree to which the Company, or any of the assets
owned or used by any of the Acquiring Corporations, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any material Governmental
Authorization that is held by any of the Acquiring Corporations or that
otherwise relates to any of the Acquiring Corporations' business or to any
of the assets owned or used by any of the Acquiring Corporations;
(d) contravene, conflict with or result in a violation or breach of, or
result in a default under, any provision of any Contract material to the
Acquiring Corporations, or give any Person the right to (i) declare a
default or exercise any remedy under any such Contract, (ii) accelerate the
maturity or performance of any such Contract, or (iii) cancel, terminate or
modify any such Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by any of the
Acquiring Corporations (except for minor liens that will not, in
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any case or in the aggregate, materially detract from the value of the
assets subject thereto or materially impair the operations of any such
Acquiring Corporation). Except as set forth in Part 4.11 of the Parent
Disclosure Schedule, and except as may be required by the Securities Act,
the Exchange Act, state securities or "blue sky" laws, the HSR Act and the
New York Stock Exchange Rules and Regulations, the Acquiring Corporations
are not and will not be required to make any filing with or give any notice
to, or to obtain any Consent from, any Person in connection with (x) the
execution, delivery or performance of this Agreement or any of the other
agreements referred to in this Agreement, or (y) the consummation of the
Merger or any of the other transactions contemplated by this Agreement.
4.12 FULL DISCLOSURE.
(a) This Agreement (including the Parent Disclosure Schedule) does not
(i) contain any representation, warranty or information that is false or
misleading with respect to any material fact, or (ii) omit to state any
material fact or necessary in order to make the representations, warranties
and information contained and to be contained herein and therein (in the
light of the circumstances under which such representations, warranties and
information were or will be made or provided) not false or misleading.
(b) The information supplied by the Acquiring Corporations for inclusion
in the S-4 Registration Statement (as defined in Section 7.7) will not, as
of the date the S-4 Registration Statement becomes effective, (i) contain
any statement that is inaccurate or misleading with respect to any material
fact, or (ii) omit to state any material fact necessary in order to make
such information (in the light of the circumstances under which it is
provided) not false or misleading.
4.13 GOVERNMENT CONTRACTS; GOVERNMENT BIDS. Except as set forth in Part
4.13 of the Parent Disclosure Schedule:
(a) None of the Acquiring Corporations have had any determination of
noncompliance or entered into any consent order;
(b) the Acquiring Corporations have complied in all material respects
with all Legal Requirements with respect to all Government Contracts and
Government Bids;
(c) the Acquiring Corporations have not, in obtaining or performing any
Government Contract, violated (A) the Truth in Negotiations Act of 1962, as
amended, (B) the Service Contract Act of 1963, as amended, (C) the Contract
Disputes Act of 1978, as amended, (D) the Office of Federal Procurement
Policy Act, as amended, (E) the FAR or any applicable agency supplement
thereto, (F) the Cost Accounting Standards, (G) the Defense Industrial
Security Manual (DOD 5220.22-M), (H) the Defense Industrial Security
Regulation (DOD 5220.22-R) or any related security regulations, or (I) any
other applicable procurement law or regulation or other Legal Requirement;
(d) neither the Acquiring Corporations nor any of their current
respective employees (while, or to the best of Parent's knowledge prior to
becoming an employee) have been debarred or suspended from doing business
with any Governmental Body, and, to the best of the knowledge of Parent, no
circumstances exist that would sustain a debarment or suspension of any
Acquiring Corporation or any employee of any Acquiring Corporation; and
4.14 ACCOUNTING MATTERS. To the knowledge of Parent, Parent has not taken
and has not agreed, and does not plan, and will not take any action that would
prevent Parent from accounting for the business combination to be effected by
the Merger as a "pooling of interest."
4.15 BROKERS. No broker, finder or financial adviser retained by Parent
and Merger Sub is entitled to any brokerage, finder's or other fee or commission
from Parent and Merger Sub in connection with the transactions contemplated by
this Agreement.
Section 5. CERTAIN COVENANTS OF THE COMPANY AND THE DESIGNATED STOCKHOLDERS
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5.1 ACCESS AND INVESTIGATION. During the period from the date of this
Agreement through the Effective Time (the "Pre-Closing Period"), the Company
shall, and shall cause its Representatives to: (a) provide Parent and Parent's
Representatives with reasonable access to the Company's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to the Company; and (b)
provide Parent and Parent's Representatives with copies of such existing books,
records, Tax Returns, work papers and other documents and information relating
to the Company, and with such additional financial, operating and other data and
information regarding the Company, as Parent may reasonably request.
5.2 OPERATION OF THE COMPANY'S BUSINESS. During the Pre-Closing Period,
except pursuant to prior written consent of Parent, the Company shall, and shall
cause each of the other Acquired Corporations to:
(a) conduct its business and operations in the ordinary course and in
substantially the same manner as such business and operations have been
conducted prior to the date of this Agreement;
(b) in each case, in all material respects use reasonable efforts to
preserve intact its current business organization, keep available the
services of its current officers and employees and maintain its relations
and good will with all suppliers, customers, landlords, creditors, employees
and other Persons having business relationships with it;
(c) use reasonable efforts to keep in full force all insurance policies
identified in Part 2.18 of the Company Disclosure Schedule;
(d) not declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, and shall not
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities (except that the Company may repurchase Company Common
Stock from former employees pursuant to the terms of existing restricted
stock purchase agreements);
(e) not sell, issue or authorize the issuance of (i) any capital stock
or other security, (ii) any option or right to acquire any capital stock or
other security, or (iii) any instrument convertible into or exchangeable for
any capital stock or other security (except that the Company shall be
permitted (x) to grant stock options to employees in accordance with its
past practices, (y) to issue Company Common Stock to employees upon the
exercise of outstanding Company Options or Company Warrants, and (z) to
issue shares of Company Common Stock upon the conversion of shares of Series
A Preferred Stock);
(f) not amend or waive any of its rights under, or permit the
acceleration of vesting under, (i) any provision of the Company's 1988
Amended Stock Plan, (ii) any provision of any agreement evidencing any
outstanding Company Option or Company Warrants, or (iii) any provision of
any restricted stock purchase agreement;
(g) except as otherwise provided herein, not amend or permit the
adoption of any amendment to the Company's Certificate of Incorporation or
bylaws, or effect or permit the Company to become a party to any Acquisition
Transaction, recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction; to which each of the Designated
Stockholders also covenants;
(h) not form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(i) not make any capital expenditure, except for capital expenditures
that, when added to all other capital expenditures made on behalf of the
Acquired Corporations during the Pre-Closing Period, do not exceed $150,000
in the aggregate;
(j) not (i) enter into, or permit any of the assets owned or used by it
to become bound by, any Contract that is or would constitute a Material
Company Contract, or (ii) amend or prematurely terminate, or waive any
material right or remedy under, any such Material Company Contract;
(k) except in compliance with the limits of subsection (i) above, not
(i) acquire, lease or license any right or other asset from any other
Person, (ii) sell or otherwise dispose of, or lease or license, any
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right or other asset to any other Person, or (iii) waive or relinquish any
right, except for assets acquired, leased, licensed or disposed of by the
Acquired Corporations pursuant to Contracts that are not Material Company
Contracts;
(l) not (i) lend money to any Person or (ii) incur or guarantee any
indebtedness for borrowed money (except that the Company may make routine
borrowings in the ordinary course of business under its line of credit with
Imperial Bank);
(m) except as set forth in the Company Disclosure Schedule, not (i)
establish, adopt or amend any Employee Benefit Plan, (ii) pay any bonus or
make any profit-sharing payment, cash incentive payment or similar payment
to, or increase the amount of the wages, salary, commissions, fringe
benefits or other compensation or remuneration payable to, any of its
directors, officers or employees, except for items accrued and approved by
Parent or pursuant to agreements in effect on the date hereof, or in
accordance with the Company's past practices, or (iii) hire any new indirect
employee whose aggregate annual compensation from the Company is expected to
exceed $40,000;
(n) not change any of its methods of accounting or accounting practices
in any material respect; and, with respect to determinations of Working
Capital, not change any of its methods of accounting or accounting practices
whatsoever, except the Company shall change its methods of accounting or
accounting practices with respect to determinations of Working Capital to
the extent reasonably requested by Parent to ensure compliance with
Generally Accepted Accounting Principles, consistently applied ("GAAP");
(o) not make any Tax election;
(p) not commence or settle any material Legal Proceeding; and
(q) not agree or commit to take any of the actions described in clauses
"(d)" through "(p)" above.
5.3 NOTIFICATION; UPDATES TO COMPANY DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, the Company shall promptly notify
Parent in writing of:
(i) the discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes an inaccuracy in or breach of
any representation or warranty made by the Company or any of the
Designated Stockholders in this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises
or exists after the date of this Agreement and that would cause or
constitute an inaccuracy in or breach of any representation or warranty
made by the Company or any of the Designated Stockholders in this
Agreement if (A) such representation or warranty had been made as of the
time of the occurrence, existence or discovery of such event, condition,
fact or circumstance, or (B) such event, condition, fact or circumstance
had occurred, arisen or existed on or prior to the date of this
Agreement;
(iii) any breach of any covenant or obligation of the Company (and
each Designated Stockholder shall promptly notify Parent in writing of
any breach of any covenant or obligation of such Designated Stockholder
set forth herein); and
(iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 8 or
Section 9 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 5.3(a) requires any change in the Company
Disclosure Schedule, or if any such event, condition, fact or circumstance
would require such a change assuming the Company Disclosure Schedule were
dated as of the date of the occurrence, existence or discovery of such
event, condition, fact or circumstance, then the Company shall promptly
deliver to Parent an update to the Company Disclosure Schedule specifying
such change. No such update shall be deemed to supplement or amend
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the Company Disclosure Schedule for the purpose of (i) determining the
accuracy of any of the representations and warranties made by the Company or
any of the Designated Stockholders in this Agreement, or (ii) determining
whether any of the conditions set forth in Section 8 has been satisfied;
provided, however, that if Closing occurs, the Company Disclosure Schedule
shall be deemed to be modified at such time by such update.
5.4 NO NEGOTIATION. During the Pre-Closing Period, neither the Company nor
any of the Designated Stockholders shall, directly or indirectly:
(a) solicit or encourage the initiation of any inquiry, proposal or
offer from any Person (other than Parent) relating to a possible Acquisition
Transaction;
(b) participate in any discussions or negotiations or enter into any
agreement with, or provide any non-public information or afford access to
the properties, books or records of Company to any Person (other than
Parent) relating to or in connection with a possible Acquisition
Transaction; or
(c) consider, entertain or accept (subject to Section 10.1(e)) any
proposal or offer from any Person (other than Parent) relating to a possible
Acquisition Transaction.
The parties acknowledge that any breach of the foregoing provisions by any
officer, director or agent (including any employee of the Company acting as
agent) of any of the Acquired Corporations shall be deemed a breach by the
Company.
This Section 5.4 does not prohibit the Company from furnishing information
regarding the Company or entering into discussions with any Person in response
to an unsolicited bona fide written proposal or offer relating to a possible
Acquisition Transaction submitted by such Person if the Board of Directors of
the Company concludes in good faith, after consultation with outside legal
counsel, that such action is required in order for the Board of Directors of the
Company to comply with its fiduciary obligations to the Company's stockholders
under applicable law.
The Company shall promptly notify Parent in writing of any material inquiry,
proposal or offer relating to a possible Acquisition Transaction that is
received by the Company or any of the Designated Stockholders during the
Pre-Closing Period.
5.5 ESOP COVENANTS
(a) The Company shall take such action as is necessary to ensure that
the requirements of Section 409(e) of the Code and the fiduciary provisions
of ERISA are satisfied in connection with the voting of the ESOP Shares upon
the Merger at the Company Stockholders' Meeting.
(b) The Company agrees to take, during the Pre-Closing Period and
thereafter, such actions, if any, as Parent deems reasonably necessary in
Parent's discretion to obtain assurances satisfactory to Parent as to (i)
the qualification of the Company ESOP under Section 401(a) and 4975(e)(7) of
the Code and (ii) the compliance by the Company, the Company ESOP and the
ESOP Trust with applicable Legal Requirements, including ERISA and the Code,
in connection with the establishment, operation and maintenance of the
Company ESOP and the availability of the intended benefits and consequences
associated with the Company ESOP and the ESOP Transactions. No such actions
taken by Parent or the Company shall in any way limit or diminish the rights
of any Indemnitees under this Agreement to recover or be indemnified for
Indemnitee Damages, as defined herein.
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Section 6. CERTAIN COVENANTS OF PARENT
6.1 ACCESS AND INVESTIGATION. During the pre-closing period, Parent shall,
and shall cause its Representatives to: (a) provide the Company and the
Company's Representatives with reasonable access to Parent's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to Parent; and (b) provide
the Company and the Company's Representatives with copies of such existing
books, records, Tax Returns, work papers and other documents and information
relating to Parent, and with such additional financial, operating and other data
and information regarding Parent, as the Company may reasonably request.
6.2 NOTIFICATION; UPDATES TO PARENT DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, Parent shall promptly notify the
Company in writing of:
(i) the discovery by Parent of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes an inaccuracy in or breach of
any representation or warranty made by Parent in this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises
or exists after the date of this Agreement and that would cause or
constitute an inaccuracy in or breach of any representation or warranty
made by Parent in this Agreement if (A) such representation or warranty
had been made as of the time of the occurrence, existence or discovery of
such event, condition, fact or circumstance, or (B) such event,
condition, fact or circumstance had occurred, arisen or existed on or
prior to the date of this Agreement;
(iii) any breach of any covenant or obligation of Parent; and
(iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 8 or
Section 9 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 6.2(a) requires any change in the Parent
Disclosure Schedule, or if any such event, condition, fact or circumstance
would require such a change assuming the Parent Disclosure Schedule were
dated as of the date of the occurrence, existence or discovery of such
event, condition, fact or circumstance, then Parent shall promptly deliver
to the Company an update to the Parent Disclosure Schedule specifying such
change. No such update shall be deemed to supplement or amend the Parent
Disclosure Schedule for the purpose of (i) determining the accuracy of any
of the representations and warranties made by Parent in this Agreement, or
(ii) determining whether any of the conditions set forth in Section 9 has
been satisfied.
Section 7. ADDITIONAL COVENANTS OF THE COMPANY AND PARENT
7.1 FILINGS AND CONSENTS. As promptly as practicable after the execution
of this Agreement, each party to this Agreement (a) shall make all filings (if
any) and give all notices (if any) required to be made and given by such party
in connection with the Merger and the other transactions contemplated by this
Agreement, and (b) shall use all commercially reasonable efforts to obtain all
Consents (if any) required to be obtained (pursuant to any applicable Legal
Requirement or Contract, or otherwise) by such party in connection with the
Merger and the other transactions contemplated by this Agreement. The Company
shall (upon request) promptly deliver to Parent a copy of each such filing made,
each such notice given and each such Consent obtained by the Company during the
Pre-Closing Period.
7.2 COMPANY STOCKHOLDERS' MEETING. The Company shall, in accordance with
its Certificate of Incorporation and By-laws, the applicable requirements of the
Delaware General Corporation Law and SEC requirements with respect to
preparation and mailing of the Prospectus/Proxy Statement, call and hold a
special meeting of its stockholders (or if agreed upon by the Company and
Parent, solicit the vote of its stockholders by way of written consent) as
promptly as practicable for the purpose of permitting them to
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consider and to vote upon and approve the Merger and this Agreement (for
purposes of this Agreement, such meeting, or the time at which the Company shall
have received such written consent from the stockholders of the Company shall be
referred to as the "Company Stockholders' Meeting"). As soon as permissible
under the rules of the Delaware General Corporation Law, the Company shall
solicit the vote of its stockholders with respect to the Merger and the
transactions contemplated hereby.
7.3 PUBLIC ANNOUNCEMENTS. During the Pre-Closing Period, (a) neither the
Company nor any of the Designated Stockholders shall (and the Company shall not
permit any of its Representatives to) issue any press release or make any public
statement regarding this Agreement or the Merger, or regarding any of the other
transactions contemplated by this Agreement, without Parent's prior written
consent, which shall not be unreasonably withheld, and (b) Parent will use
reasonable efforts to consult with the Company prior to issuing any press
release or making any public statement regarding the Merger.
7.4 POOLING OF INTERESTS. During the Pre-Closing Period, no party to this
Agreement shall take any action that could reasonably be expected to have an
adverse effect on the ability of Parent to account for the Merger as a "pooling
of interests."
7.5 AFFILIATE AGREEMENTS. Each Designated Stockholder shall execute and
deliver to Parent, and the Company shall use all commercially reasonable efforts
to cause each other Person identified on Exhibit D-2 (and any other Person that
could reasonably be deemed to be an "affiliate" of the Company for purposes of
the Securities Act), to execute and deliver to Parent, as promptly as
practicable after the execution of this Agreement, an Affiliate Agreement in the
form of Exhibit D-1.
7.6 BEST EFFORTS. During the Pre-Closing Period, (a) the Company and the
Designated Stockholders shall use their best efforts to cause the conditions set
forth in Section 8 to be satisfied on a timely basis, and (b) Parent and Merger
Sub shall use their best efforts to cause the conditions set forth in Section 9
to be satisfied on a timely basis.
7.7 REGISTRATION STATEMENT; PROXY STATEMENT.
(a) As promptly as practicable after the date of this Agreement, Parent
and the Company shall prepare and cause to be filed with the SEC a
registration statement on Form S-4 covering the Parent Common Stock to be
issued to the Company stockholders in the Merger (the "S-4 Registration
Statement"), in which a Prospectus/Proxy Statement will be included as a
prospectus (the "Prospectus/ Proxy Statement"), and any other documents
required by the Securities Act or the Exchange Act in connection with the
Merger. Each of Parent and the Company shall use all reasonable efforts to
cause the S-4 Registration Statement (including the Prospectus/Proxy
Statement) to comply with the rules and regulations promulgated by the SEC,
to respond promptly to any comments of the SEC or its staff and to have the
S-4 Registration Statement declared effective under the Securities Act as
promptly as practicable after it is filed with the SEC. The Company will use
all reasonable efforts to cause the Prospectus/Proxy Statement to be mailed
to the Company's stockholders, as promptly as practicable after the S-4
Registration Statement is declared effective under the Securities Act. The
Company shall promptly furnish to Parent all information concerning the
Acquired Corporations and the Company's stockholders that may be required or
reasonably requested in connection with any action contemplated by this
Section 7.7. If any event relating to any of the Acquired Corporations
occurs, or if the Company becomes aware of any information, that should be
set forth in an amendment or supplement to the S-4 Registration Statement or
the Prospectus/Proxy Statement, then the Company shall promptly inform
Parent thereof and shall cooperate with Parent in filing such amendment or
supplement with the SEC and, if appropriate, in mailing such amendment or
supplement to the stockholders of the Company.
(b) Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common
Stock to be issued in the Merger will be registered or qualified under the
securities law of every jurisdiction of the United States in which any
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registered holder of Company Common Stock has an address of record on the
record date for determining the stockholders entitled to notice of and to
vote upon this Agreement and the Merger as provided herein; PROVIDED,
HOWEVER, that Parent shall not be required (i) to qualify to do business as
a foreign corporation in any jurisdiction in which it is not now qualified
or (ii) to file a general consent to service of process in any jurisdiction.
7.8 REGULATORY APPROVALS. In addition to the obligations of the parties
set forth in the preceding section, the Company and Parent shall use all
reasonable efforts to file, as soon as practicable after the date of this
Agreement, all notices, reports and other documents required to be filed with
any Governmental Body with respect to the Merger and the other transactions
contemplated by this Agreement, and to submit promptly any additional
information requested by any such Governmental Body. Without limiting the
generality of the foregoing, the Company and Parent shall, promptly after the
date of this Agreement, prepare and file the notifications, if any, required
under the HSR Act in connection with the Merger. The Company and Parent shall
respond as promptly as practicable to (i) any inquiries or requests received
from the Federal Trade Commission or the Department of Justice for additional
information or documentation and (ii) any inquiries or requests received from
any state attorney general or other Governmental Body in connection with
antitrust or related matters. Each of the Company and Parent shall (1) give the
other party prompt notice of the commencement of any Legal Proceeding by or
before any Governmental Body with respect to the Merger or any of the other
transactions contemplated by this Agreement, (2) keep the other party informed
as to the status of any Legal Proceeding, and (3) promptly inform the other
party of any communication to or from the Federal Trade Commission, the
Department of Justice or any other Governmental Body regarding the Merger. The
Company and Parent will consult and cooperate with one another, and will
consider in good faith the views of one another, in connection with any
analysis, appearance, presentation, memorandum, brief, argument, opinion or
proposal made or submitted in connection with any Legal Proceeding under or
relating to the HSR Act or any other federal or state antitrust or fair trade
law. In addition, except as may be prohibited by any Governmental Body or by any
Legal Requirement, in connection with any Legal Proceeding under or relating to
the HSR Act or any other federal or state antitrust or fair trade law or any
other similar Legal Proceeding, each of the Company and Parent agrees to permit
authorized Representatives of the other party to be present at each meeting or
conference relating to any such Legal Proceeding and to have access to and be
consulted in connection with any document, opinion or proposal made or submitted
to any Governmental Body in connection with any such Legal Proceeding.
7.9 TAX MATTERS. Prior to Closing and prior to the filing of the S-4
Registration Statement, and as soon as practicable after the execution of this
Agreement, Parent and the Company shall execute and deliver, to Cooley Godward
LLP and to Jenkens & Gilchrist, P.C., tax representation letters in
substantially the form of Exhibit E and Exhibit F, respectively (which will be
relied upon in connection with the legal opinions contemplated by Sections
8.5(e) and 9.3(b)).
7.10 FIRPTA MATTERS. At the Closing (a) the Company shall deliver to
Parent a statement (in such form as may be reasonably requested by counsel to
Parent) conforming to the requirements of Section 1.897-2(h)(l)(i) of the United
States Treasury Regulations, and (b) the Company may deliver to the Internal
Revenue Service the notification required under Section 1.897-2(h)(2) of the
United States Treasury Regulations.
7.11 RELEASE. At the Closing, each of the Designated Stockholders shall
execute and deliver to the Company a Release in the form of Exhibit G.
7.12 TREATMENT OF EMPLOYEE PLANS AND BENEFITS. Except as otherwise agreed
to by Parent and the Company, Parent shall ensure that upon the Closing, the
benefit plans and benefit arrangements of employees of the Company will remain
unchanged. By year end, benefits will be reviewed in consonance with Parent
benefit plans and arrangements, applicable law and marketplace factors.
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7.13 "POST-CLOSING" INSURANCE. The parties hereto will cooperate and
otherwise use best efforts to ensure that, prior to the Closing, either Company,
Parent or Merger Sub shall obtain a one (1) year (subject to the timing
requirements of Section 10 and 11 hereof) insurance policy (with an aggregate
coverage limit in excess of $5 million) effective no later than the Effective
Time, covering, pursuant to terms reasonably acceptable to Parent and the
Designated Stockholders, the representations and warranties of the Designated
Stockholders set forth in Section 4 hereof (the "Representation and Warranty
Insurance"). The parties hereto agree to comply with the provisions of the
Representation and Warranty Insurance and to not take action that would limit
its availability or effectiveness.
7.14 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE.
(a) Parent and the Company agree to provide indemnification in favor of
any director or officer of the Company and its Subsidiaries (the
"Indemnified Parties"), as currently provided in their respective
certificates of incorporation or by-laws, or in an agreement between an
Indemnified Party and the Company or one of its Subsidiaries set forth in
Part 7.15 of the Company Disclosure Schedule, and rights to indemnification
shall survive the Merger and shall continue in full force and effect for a
period of six years after the Effective Time; provided that in the event any
claim or claims are asserted or made within such six-year period, all rights
to indemnification in respect to any such claim shall continue until final
disposition of such claim.
(b) Parent agrees that from and after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect for one year after the
Effective Time a policy of directors' and officers' liability insurance
covering the directors and officers of the Company (as of immediately prior
to the Effective Time) in their capacity as such; and Parent shall secure
such policy prior to the Closing.
7.15 EARNINGS RELEASE. Parent shall use best efforts to, as soon as
practicable following the Closing, issue a press release disclosing, or
otherwise publish as contemplated by applicable rules and regulations relating
to "pooling of interests" accounting, thirty days' operations of the Surviving
Corporation; which disclosure shall be no later than the time of filing of
Parent's report on Form 10-Q for the quarter next ended following the date that
is 30 days following the Closing.
Section 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB.
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
8.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties made by the Company and the Designated Stockholders in this Agreement
and in each of the other agreements and instruments delivered to Parent in
connection with the transactions contemplated by this Agreement shall have been
accurate in all material respects as of the date of this Agreement (without
giving double effect to any "Material Adverse Effect" or other materiality
qualifications, or any similar qualifications, contained or incorporated
directly or indirectly in such representations and warranties), and shall be
accurate in all material respects as of the Scheduled Closing Time as if made at
the Scheduled Closing Time (without giving double effect to any update to the
Company Disclosure Schedule not consented to in writing by Parent, and without
giving effect to any "Material Adverse Effect" or other materiality
qualifications, or any similar qualifications, contained or incorporated
directly or indirectly in such representations and warranties).
8.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that
the Company and the Designated Stockholders are required to comply with or to
perform at or prior to the Closing shall have been complied with and performed
in all respects at or prior to Closing.
8.3 STOCKHOLDER APPROVAL. The principal terms of the Merger shall have
been duly approved at the Company Stockholders' Meeting as necessary for
approval under the Delaware General Corporation Law
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(at least a majority of the Company Common Stock, voting as a class, and
two-thirds (2/3) of the Series A Preferred Stock, voting as a class); and the
holders of not more than 10% of the outstanding shares of the Company shall have
exercised dissenters rights as described in Section 1.9.
8.4 CONSENTS. All material Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement
(including the Consents identified in Part 2.22 of the Company Disclosure
Schedule) shall have been obtained and shall be in full force and effect.
8.5 AGREEMENTS AND DOCUMENTS. Parent and the Company, as provided herein,
shall have received the following agreements and documents, each of which shall
be in full force and effect:
(a) Affiliate's Agreements in the form of Exhibit D-1 executed by any
Person who could reasonably be deemed to be an "affiliate" of the Company
for purposes of the Securities Act;
(b) a Release in the form of Exhibit G, executed by the Designated
Stockholders;
(c) to the extent reasonably requested by Parent, confidential invention
and assignment agreements, reasonably satisfactory in form and content to
Parent, executed by all employees of the Company and by all consultants and
independent contractors to the Company who have not already signed such
agreements (including the individuals identified in Part 2.9(f) of the
Company Disclosure Schedule);
(d) a legal opinion of Jenkens & Gilchrist, P.C., dated as of the
Closing Date, in the form of Exhibit H;
(e) a legal opinion of Cooley Godward LLP dated as of the Closing Date,
to the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code (it being understood that, in rendering
such opinion, such counsel may rely upon the tax representation letters
referred to in Section 7.9);
(f) a letter from Arthur Andersen LLP, dated as of the Closing Date,
confirming that no transaction entered into by the Company, and no other
fact or circumstance relating to the Company, will prevent Parent from
accounting for the Merger as a "pooling of interests" in accordance with
generally accepted principles, Accounting Principles Board Opinion No. 16
and all published rules, regulations and policies of the SEC;
(g) a certificate executed by the Company's Chief Executive Officer
(solely in his capacity as such and not in his capacity as a Designated
Stockholder) and containing the representation and warranty that each of the
representations and warranties set forth in Section 2 is accurate in all
respects as of the Closing Date as if made on the Closing Date and that the
conditions set forth in Sections 8.1, 8.2, 8.3 and 8.4 have been duly
satisfied (the "Company Closing Certificate"); and
(h) if requested by Parent, written resignations of all officers and
directors of the Acquired Corporations and the Company ESOP Trustees and
401(k) Trustees, effective as of the Effective Time, except as otherwise
provided herein or otherwise agreed by Parent and the Company.
8.6 FIRPTA COMPLIANCE. The Company shall have filed with the Internal
Revenue Service the notification referred to in Section 7.10(b).
8.7 COMPLIANCE WITH THE SECURITIES ACT. All applicable requirements of the
Securities Act and state securities laws shall have been satisfied.
8.8 LISTING. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the New
York Stock Exchange.
8.9 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent
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jurisdiction and remain in effect, and there shall not be any Legal Requirement
enacted or deemed applicable to the Merger that makes consummation of the Merger
illegal.
8.10 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued or threatened by the
SEC with respect to the S-4 Registration Statement.
8.11 NO LEGAL PROCEEDINGS. No Person shall have commenced or threatened to
commence any Legal Proceeding challenging or seeking the recovery of a material
amount of damages in connection with the Merger or seeking to prohibit or limit
the exercise by Parent of any material right pertaining to its ownership of
stock of the Surviving Corporation.
8.12 HSR ACT. The waiting period applicable to the consummation of the
Merger under the HSR Act (if applicable) shall have expired or been terminated.
8.13 AVERAGE SALES PRICE. The Average Sales Price shall be less than or
equal to $8.75 per share.
8.14 STOCK VOTING AGREEMENT. The Stock Voting Agreement shall be in full
force and effect and enforceable against each Designated Stockholder.
8.15 TAX REPRESENTATION LETTERS. Each of Parent and the Company shall have
executed and delivered a tax representation letter as set forth in Section 7.9.
8.16 REPRESENTATION AND WARRANTY INSURANCE. The Representation and
Warranty Insurance shall have been purchased and shall be in full force and
effect.
Section 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY.
The obligations of the Company to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions:
9.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties made by Parent and Merger Sub in this Agreement and in each of the
other agreements and instruments delivered to Company in connection herewith,
shall have been accurate in all material respects as of the date of this
Agreement (without giving effect to any "Materially Adverse Effect" or other
materiality qualifications, or any similar qualifications, contained or
incorporated directly or indirectly in such representations and warranties), and
shall be accurate in all material respects as of the Scheduled Closing Time as
if made at the Scheduled Closing Time (without giving effect to any "Material
Adverse Effect" or other materiality qualifications, or any similar
qualifications, contained in such representations and warranties).
9.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that
Parent and Merger Sub are required to comply with or to perform at or prior to
the Closing shall have been complied with and performed in all respects.
9.3 DOCUMENTS. The Company shall have received the following documents:
(a) a legal opinion of Cooley Godward LLP, dated as of the Closing Date,
in the form of Exhibit I;
(b) a legal opinion of Jenkens & Gilchrist, P.C., dated as of the
Closing Date, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368 of the Code (it being understood that, in
rendering such opinion, such counsel may rely upon the tax representation
letters referred to in Section 7.9); provided, however, that if such counsel
does not render such opinion, this condition shall nonetheless be deemed
satisfied with respect to the Company if Cooley Godward LLP renders such
opinion to the Company; and
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(c) a certificate executed by Parent's Chief Executive Officer and
containing the representation and warranty that each of the representations
and warranties set forth in Section 4 is accurate in all respects as of the
Closing Date as if made on the Closing Date and that the conditions set
forth in Sections 9.1 and 9.2 have been duly satisfied (the "Parent Closing
Certificate"); and
9.4 LISTING. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the New
York Stock Exchange.
9.5 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
9.6 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
9.7 HSR ACT. The waiting period applicable to the consummation of the
Merger under the HSR Act (if applicable) shall have expired or been terminated.
9.8 AVERAGE SALES PRICE. The Average Sales Price shall be greater than or
equal to $5.25 per share.
Section 10. TERMINATION
10.1 TERMINATION EVENTS. This Agreement may be terminated prior to the
Closing without either party (except as provided in Section 10.1(e)) incurring
any termination fee:
(a) by Parent if Parent reasonably determines that the timely
satisfaction of any condition set forth in Section 8 (other than as related
to the Company Stockholders' Meeting covered by Section 7.2) has become
impossible (other than as a result of any failure on the part of Parent or
Merger Sub to comply with or perform any covenant or obligation of Parent or
Merger Sub set forth in this Agreement);
(b) by the Company if the Company reasonably determines that the timely
satisfaction of any condition set forth in Section 9 has become impossible
(other than as a result of any failure on the part of the Company or any of
the Designated Stockholders to comply with or perform any covenant or
obligation set forth in this Agreement or in any other agreement or
instrument delivered to Parent);
(c) by Parent if the Closing has not taken place on or before June 30,
1998 (other than as a result of any failure on the part of Parent to comply
with or perform any covenant or obligation of Parent set forth in this
Agreement);
(d) by the Company if the Closing has not taken place on or before June
30, 1998 (other than as a result of the failure on the part of the Company
or any of the Designated Stockholders to comply with or perform any covenant
or obligation set forth in this Agreement or in any other agreement or
instrument delivered to Parent);
(e) by the Company (at any time prior to stockholder approval of this
Agreement, the Merger and the transactions contemplated hereby) if, pursuant
to and in compliance with Section 5.4, the Company and its Board of
Directors conclude in good faith that the Company must accept an unsolicited
bona fide written proposed Acquisition Transaction which could reasonably be
expected to result in a transaction that is more favorable to the Company's
stockholders than the Merger (any such more favorable proposed Acquisition
Transaction being referred to in this Agreement as a "Superior Proposal");
PROVIDED, HOWEVER, that if this Agreement is terminated pursuant to this
Section 10.1(e), the Company shall pay to Parent a nonrefundable fee of
$250,000 in cash (and no additional fee will be required under Section 10.3)
upon the Company's (or its Board of Directors') election to
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accept such Superior Proposal. In reaching such conclusion, the Board of
Directors shall consult with outside legal counsel(and other advisors as
appropriate);
(f) by the mutual consent of Parent and the Company; or
(g) by Parent as provided in Section 10.3.
10.2 TERMINATION PROCEDURES. If Parent wishes to terminate this Agreement
pursuant to Section 10.1(a), Section 10.1(c) or Section 10.1(f), Parent shall
deliver to the Company prompt written notice stating that Parent is terminating
this Agreement and setting forth a brief description of the basis on which
Parent is terminating this Agreement. If the Company wishes to terminate this
Agreement pursuant to Section 10.1(b), Section 10.1(d) or Section 10.1(e), the
Company shall deliver to Parent prompt written notice stating that the Company
is terminating this Agreement and setting forth a brief description of the basis
on which the Company is terminating this Agreement.
10.3 TERMINATION FEES.
(a) Parent may terminate this Agreement immediately (unless already
terminated as provided in subsection (iii) below) and the Company shall pay
to Parent a termination fee of $250,000, payable upon termination of this
Agreement, if (i) at any time prior to the Closing Date, Company accepts a
third party proposal or offer relating to a possible Acquisition Transaction
that it determines is more favorable than the proposal or offer by Parent;
(ii) the Company fails to complete the Company Stockholders' Meeting as
required herein or if the stockholders of the Company fail to approve the
Merger and this Agreement at the Company Stockholders' Meeting; or (iii) the
Company terminates this Agreement other than pursuant to Section 10.1.
(b) Parent shall pay to the Company a termination fee of $250,000,
payable upon termination of this Agreement, if Parent terminates this
Agreement other than pursuant to Section 10.1 or this Section 10.3.
10.4 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 10.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that: (a) neither the Company nor Parent shall be
relieved of any obligation or liability arising from any prior breach by such
party of any provision of this Agreement or any obligation to pay a termination
fee as set forth in Section 10.3; (b) the parties shall, in all events, remain
bound by and continue to be subject to the provisions set forth in Section 12;
and (c) the Company shall, in all events, remain bound by and continue to be
subject to Section 7.3.
Section 11. SURVIVAL OF REPRESENTATIONS, ETC.; INDEMNIFICATION, ETC.
11.1 SURVIVAL OF REPRESENTATIONS, ETC.
(a) Subject to the indemnification limitations set forth in Section
11.2, the representations and warranties made by the Designated Stockholders
in Section 3 shall survive the Closing and shall expire on the first
anniversary of the Closing Date (the "Claim Deadline"); provided, however,
that if, at any time prior to the first anniversary of the Closing Date, any
Indemnitee (acting in good faith) delivers to any of the Designated
Stockholders or the appropriate Person under the terms of the Representation
and Warranty Insurance, a written notice asserting a claim for recovery
under Section 11.2, then the claim asserted in such notice shall survive the
first anniversary of the Closing until such time as such claim is fully and
finally resolved. All representations and warranties made by Parent, Merger
Sub and the Company shall terminate and expire as of the Effective Time, and
any liability of Parent, Merger Sub, or Company with respect to such
representations and warranties shall thereupon cease.
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(b) The representations, warranties, covenants and obligations of the
parties hereto, and (except as provided herein) the rights and remedies that
may be exercised pursuant hereto, shall not be limited or otherwise affected
by or as a result of any information furnished to or any investigation made
by or knowledge of (except as provided herein or in the Company Disclosure
Schedule), any of the parties or any of their Representatives.
(c) For purposes of this Agreement, each statement or other item of
information set forth in the Company Disclosure Schedule or in any update to
the Company Disclosure Schedule shall be deemed to be a representation and
warranty made by the Company in this Agreement.
11.2 INDEMNIFICATION.
(a) From and after the Effective Time (but subject to Section 10.1(a)),
Indemnitees shall be held harmless and indemnified under the terms of the
Representation and Warranty Insurance from and against, and shall be
compensated and reimbursed out of the Representation and Warranty Insurance
for, any Damages which are directly or indirectly suffered or incurred by
any of the Indemnitees or to which any of the Indemnitees may otherwise
become subject (regardless of whether or not such Damages relate to any
third-party claim) and which arise from or as a result of, or are directly
or indirectly connected with: (i) any inaccuracy in or breach of any
representation or warranty of the Designated Stockholders set forth in
Section 3; (ii) any Legal Proceeding relating to any inaccuracy or breach of
the type referred to in clause "(i)" above (including any Legal Proceeding
commenced by any Indemnitee for the purpose of enforcing any of its rights
under this Section 11.
(b) The Parties acknowledge and agree that, if the Surviving Corporation
suffers, incurs or otherwise becomes subject to any Damages as a result of
or in connection with any inaccuracy in or breach of any representation,
warranty, covenant or obligation of the Designated Stockholders set forth in
Section 3, then (without limiting any of the rights of the Surviving
Corporation as an Indemnitee) Parent shall also be deemed, by virtue of its
ownership of the stock of the Surviving Corporation, to have incurred
Damages as a result of and in connection with such inaccuracy or breach.
11.3 LIMITS ON INDEMNIFICATION AND LIABILITY. The only liability of the
Designated Stockholders under Sections 11.2, 11.4 and 11.5 shall be limited to
the amount actually recovered by the Indemnitee(s) under the Representation and
Warranty Insurance.
11.4 INTEREST. Any Indemnitee provided indemnification pursuant to this
Section 11 with respect to any Damages shall also be entitled to receive
interest on the amount of such Damages (for the period commencing as of the date
of a claim for recovery by such Indemnitee and ending on the date on which the
liability to such Indemnitee is fully satisfied pursuant hereto) at a floating
rate equal to the rate of interest publicly announced by Bank of America, N.T. &
S.A. from time to time as its prime, base or reference rate.
11.5 DEFENSE OF THIRD PARTY CLAIMS. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against the
Surviving Corporation, against Parent or against any other Person) with respect
to which any Indemnitee may be entitled to payment pursuant to this Section 11,
Parent shall have the right, at its election, to proceed with the defense of
such claim or Legal Proceeding on its own. If Parent so proceeds with the
defense of any such claim or Legal Proceeding:
(a) all reasonable expenses relating to the defense of such claim or
Legal Proceeding shall be borne and paid exclusively out of the
Representation and Warranty Insurance;
(b) the parties shall use reasonable efforts to make available to Parent
any documents and materials in their possession or control that may be
necessary to the defense of such claim or Legal Proceeding; and
(c) Parent shall have the right to settle, adjust or compromise such
claim or Legal Proceeding as permitted under the terms of the Representation
and Warranty Insurance.
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11.6 EXERCISE OF REMEDIES BY INDEMNITEES OTHER THAN PARENT. No Indemnitee
(other than Parent or any successor thereto or assign thereof) shall be
permitted to assert any indemnification claim or exercise any other remedy under
this Agreement unless Parent (or any successor thereto or assign thereof) shall
have consented to the assertion of such indemnification claim or the exercise of
such other remedy.
Section 12. MISCELLANEOUS PROVISIONS.
12.1 FURTHER ASSURANCES. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the transactions contemplated by this Agreement.
12.2 FEES AND EXPENSES. Each party to this Agreement shall bear and pay
all fees, costs and expenses (including legal fees and accounting fees) that
have been incurred or that are incurred by such party in connection with the
transactions contemplated by this Agreement, including all fees, costs and
expenses incurred by such party in connection with or by virtue of (a) the
investigation and review conducted by Parent and its Representatives with
respect to the Company's business (and the furnishing of information to Parent
and its Representatives in connection with such investigation and review), (b)
the negotiation, preparation and review of this Agreement (including the Company
Disclosure Schedule) and all agreements, certificates, opinions and other
instruments and documents delivered or to be delivered in connection with the
transactions contemplated by this Agreement, (c) the preparation and submission
of any filing or notice required to be made or given in connection with any of
the transactions contemplated by this Agreement, and the obtaining of any
Consent required to be obtained in connection with any of such transactions, and
(d) the consummation of the Merger; provided, and Parent shall bear the filing
fees associated with the printing and filing of the S-4 Registration Statement
and forms and notifications required to be filed by the Company or Parent under
the HSR Act; provided, further, that any fees associated with the filing of any
notifications required to be filed by any Company stockholder under the HSR Act
shall be borne exclusively by the Company.
12.3 ATTORNEYS' FEES. If any action or proceeding relating to this
Agreement or the enforcement of any provision of this Agreement is brought
against any party hereto, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled.
12.4 NOTICES. Any notice or other communication required or permitted to
be delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Parent:
The Titan Corporation
Attn: Legal Department
3033 Science Park Road
San Diego, CA 92121
Telephone: (619) 552-9500
Facsimile: (619) 552-9759
with a copy to:
Cooley Godward LLP
Attn: M. Wainwright Fishburn, Esq.
4365 Executive Drive, Suite 1100
38
<PAGE>
San Diego, California 92121
Telephone: (619) 550-6000
Facsimile: (619) 453-3555
if to the Company:
Horizons Technology, Inc.
Attn: Chief Executive Officer
3990 Ruffin Road
San Diego, CA 92123
Telephone: (619) 292-8331
Facsimile: (619) 292-9439
with a copy to:
Jenkens & Gilchrist, P.C.
Attn: Donald M. Barnes
Andrew L. Lynch
1919 Pennsylvania Avenue, N.W., Ste. 600
Washington, D.C. 20006-3404
Telephone: (202) 326-1500
Facsimile: (202) 326-1555
if to the Designated Stockholders (respectively):
J.P. (Pat) Boyce
111 West Quince Street
San Diego, CA 92103
Dr. James T. Palmer
6157 Calle Vera Cruz
La Jolla, CA 92037
Earl A. Pontius
444 Old Stonebrook
Nagog Woods, MA 01718
12.5 CONFIDENTIALITY. Without limiting the generality of anything
contained in Section 7.3, on and at all times after the Closing Date, each
Designated Stockholder shall keep confidential, and shall not use or disclose to
any other Person, any non-public document or other non-public information in
such Designated Stockholder's possession that relates to the business of the
Company or Parent; provided, however, agreement among the parties with respect
to confidentiality and proprietary information shall remain in full force and
effect, unaffected by the execution of this Agreement or by the Merger.
12.6 TIME OF THE ESSENCE. Time is of the essence of this Agreement.
12.7 HEADINGS. The underlined headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
12.8 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
12.9 GOVERNING LAW. This Agreement shall be construed in accordance with,
and governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws), except to the extent
the Delaware General Corporation Law governs.
39
<PAGE>
12.10 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon: the
Company and its successors and assigns (if any); the Designated Stockholders and
their respective personal representatives, executors, administrators, estates,
heirs, successors and assigns (if any); Parent and its successors and assigns
(if any); and Merger Sub and its successors and assigns (if any). This Agreement
shall inure to the benefit of: the Company; the Company's stockholders (to the
extent set forth in Section 1.5); the holders of assumed Company Options and
Company Warrants (to the extent set forth in Section 1.6); the Designated
Stockholders; Parent; Merger Sub; the other Indemnitees (subject to Section
11.2); and the respective successors and assigns (if any) of the foregoing.
Parent may not assign any or all of its rights under this Agreement to an
unrelated Entity, in whole or in part, without obtaining the prior written
consent of the Company; and neither the Company nor any Designated Stockholder
may assign any or all of its rights hereunder, in whole or in part, without
obtaining the prior written consent of Parent.
12.11 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE. The rights and remedies
of the parties hereto shall be cumulative (and not alternative). The parties to
this Agreement agree that, in the event of any breach or threatened breach by
any party to this Agreement of any covenant, obligation or other provision set
forth in this Agreement for the benefit of any other party to this Agreement,
such other party shall be entitled (in addition to any other remedy that may be
available to it) to (a) a decree or order of specific performance or mandamus to
enforce the observance and performance of such covenant, obligation or other
provision, and (b) an injunction restraining such breach or threatened breach.
12.12 WAIVER.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right,
privilege or remedy shall preclude any other or further exercise thereof or
of any other power, right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out of
this Agreement, or any power, right, privilege or remedy under this
Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such Person; and any such waiver shall not be
applicable or have any effect except in the specific instance in which it is
given.
12.13 AMENDMENTS. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto.
12.14 SEVERABILITY. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
12.15 PARTIES IN INTEREST. Except for the provisions of Sections 1.5, 1.6
and 11, none of the provisions of this Agreement is intended to provide any
rights or remedies to any Person other than the parties hereto and their
respective successors and assigns (if any).
12.16 ENTIRE AGREEMENT. This Agreement and the other agreements referred
to herein set forth the entire understanding of the parties hereto relating to
the subject matter hereof and thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter hereof and thereof; provided, however, that any agreement with respect to
confidentiality or proprietary information executed on behalf of Parent and the
Company prior to the date hereof shall not be superseded by this Agreement and
shall remain in effect in accordance with its terms and until the earlier
40
<PAGE>
of (a) the Effective Time, or (b) the date on which such agreement is terminated
in accordance with its terms.
12.17 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this
Agreement and Exhibits to this Agreement.
41
<PAGE>
The parties hereto have caused this Agreement to be executed and delivered
as of February 26, 1998.
THE TITAN CORPORATION,
A DELAWARE CORPORATION
By: /s/ ERIC M. DEMARCO
-----------------------------------------
Eric M. DeMarco,
CHIEF FINANCIAL OFFICER
SUNRISE ACQUISITION SUB, INC,
A DELAWARE CORPORATION
By: /s/ CHERYL F. BARR, SECRETARY
-----------------------------------------
-----------------------------------------
[Print Name and Title]
HORIZONS TECHNOLOGY, INC.,
A DELAWARE CORPORATION
By: /s/ JAMES T. PALMER, CEO
-----------------------------------------
-----------------------------------------
[Print Name and Title]
The Designated Stockholders:
/s/ J.P. (PAT) BOYCE
-----------------------------------------
J.P. (Pat) Boyce
/s/ DR. JAMES T. PALMER
-----------------------------------------
Dr. James T. Palmer
/s/ EARL A. PONTIUS
-----------------------------------------
Earl A. Pontius
42
<PAGE>
EXHIBIT B
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit B):
ACQUIRED CORPORATION. "Acquired Corporation" and "Acquired Corporations"{
shall have the meanings set forth in Section 2.1.
ACQUIRED CORPORATION CONTRACT. "Acquired Corporation Contract" shall mean
any material Contract: (a) to which the Company or any other Acquired
Corporation is a party; (b) by which the Company or any other Acquired
Corporation or any assets of any of them is or may become bound or under which
the Company or any other Acquired Corporation has, or may become subject to, any
obligation; or (c) under which the Company or any other Acquired Corporation has
or may acquire any right or interest.
ACQUISITION TRANSACTION. "Acquisition Transaction" shall mean any
transaction involving:
(a) the sale, license, disposition or acquisition of all or a material
portion of the Company's business or assets;
(b) the issuance, disposition or acquisition of (i) any capital stock or
other equity security of the Company (other than common stock issued to
employees of the Company, upon exercise of Company Options or otherwise, in
routine transactions in accordance with the Company's past practices), (ii)
any option, call, warrant or right (whether or not immediately exercisable)
to acquire any capital stock or other equity security of the Company (other
than stock options granted to employees of the Company in routine
transactions in accordance with the Company's past practices), or (iii) any
security, instrument or obligation that is or may become convertible into or
exchangeable for any capital stock or other equity security of the Company;
or
(c) any merger, consolidation, business combination, reorganization or
similar transaction involving the Company.
AGREEMENT. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit B is attached (including the Company
Disclosure Schedule), as it may be amended from time to time.
COMMERCIAL CONTRACT. "Commercial Contract" shall mean any customer Contract
[relating to the Company's commercial division] entered into by the Company that
contemplates or includes (A) the payment or delivery of cash or other
consideration in an amount of having a value in excess of $10,000 in the
aggregate, or (B) the performance of services having a value in excess of
$10,000 in the aggregate.
COMPANY DISCLOSURE SCHEDULE. "Company Disclosure Schedule" shall mean the
schedule (dated as of the date of the Agreement) delivered to Parent on behalf
of the Company.
COMPANY PROPRIETARY ASSET. "Company Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to the Company or any other Acquired
Corporation or otherwise used by the Company or any other Acquired Corporation.
COMPANY STOCKHOLDERS' MEETING. "Company Stockholders' Meeting" shall have
the meaning set forth in Section 7.2.
CONSENT. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
CONTRACT. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan or legally binding commitment or undertaking of
any nature.
B-1
<PAGE>
DAMAGES. "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, liability, claim, demand, settlement, judgment, award,
fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation) or expense of any nature.
ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
ENTITY. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
ESOP LENDER. "ESOP Lender" shall mean the lender with respect to any loan
arrangement by and between the Company and such ESOP Lender ("ESOP Outside Loan
Agreement").
ESOP LOANS. "ESOP Loans" shall mean any loan from an ESOP Lender to the
Company pursuant to an ESOP Outside Loan Agreement and any loan from the Company
to the Company ESOP ("ESOP Inside Loan Agreement").
ESOP SHARES. "ESOP Shares" shall mean any equity securities of any Acquired
Corporation held beneficially or of record by the Company ESOP.
ESOP STOCK PURCHASE AGREEMENT. "ESOP Stock Purchase Agreement" shall any
stock agreement relating to the ESOP Shares.
ESOP TRANSACTION DOCUMENTS. "ESOP Transaction Documents" shall mean any and
all of the ESOP Stock Purchase Agreement, ESOP Outside Loan Agreement, ESOP
Inside Loan Agreement and such other agreements entered into in connection with
the transactions contemplated thereby or the consummation thereof or performance
thereunder, and all amendments, modifications and supplements thereto.
ESOP TRANSACTIONS. "ESOP Transactions" shall mean the transactions
contemplated by the ESOP Transaction Documents and such other transactions
entered into in connection with the consummation thereof or performance
thereunder.
ESOP TRUST. "ESOP Trust" shall mean the trust established pursuant to the
Company ESOP to hold the assets of the Company ESOP.
ESOP TRUSTEE. "ESOP Trustee" shall mean the trustee(s) of the ESOP Trust
pursuant to the Company ESOP.
EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
GOVERNMENT BID. "Government Bid" shall mean any quotation, bid or proposal
submitted to any Governmental Body or any proposed prime contractor or
higher-tier subcontractor of any Governmental Body.
GOVERNMENT CONTRACT. "Government Contract" shall mean any prime contract,
subcontract, letter contract, purchase order or delivery order executed or
submitted to or on behalf of any Governmental Body or any prime contractor or
higher-tier subcontractor, or under which any Governmental Body or any such
prime contractor or subcontractor otherwise has or may acquire any right or
interest; and shall constitute a Contract as determined herein.
B-2
<PAGE>
GOVERNMENTAL AUTHORIZATION. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
GOVERNMENTAL BODY. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
HSR ACT. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
INDEMNITEES. "Indemnitees" shall mean Parent and any other insured party
under the Representation and Warranty Insurance.
KNOWLEDGE. An individual will be deemed to have "knowledge" of a particular
fact or other matter if:
(a) such individual is actually aware of such fact or other matter; or
(b) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of conducting a
reasonably comprehensive investigation concerning the existence of such fact
or other matter.
A Person (other than an individual) will be deemed to have "knowledge" of a
particular fact or other matter if any individual who is serving as a director,
officer, partner, executor, or trustee of such Person (or in any similar
capacity) has knowledge of such fact or other matter.
LEGAL PROCEEDING. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
MATERIAL ADVERSE EFFECT. A violation or other matter will be deemed to have
a "Material Adverse Effect" on the Company if such violation or other matter
(considered together with all other matters that would constitute exceptions to
the representations and warranties set forth in the Agreement or in the Company
Closing Certificate but for the presence of "Material Adverse Effect" or other
materiality qualifications, or any similar qualifications, in such
representations and warranties) would have a material adverse effect on the
business, condition, assets, liabilities, operations, financial performance or
prospects of the Acquired Corporations, considered as a whole.
MATERIAL COMPANY CONTRACT. "Material Company Contract" shall have the
meaning set forth in Section 2.10(a).
NYSE. "NYSE" shall mean the New York Stock Exchange.
PERSON. "Person" shall mean any individual, Entity or Governmental Body.
PROPRIETARY ASSET. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service
B-3
<PAGE>
mark (whether registered or unregistered), service mark application, copyright
(whether registered or unregistered), copyright application, maskwork,
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, invention, design, blueprint, engineering drawing,
proprietary product, technology, proprietary right or other intellectual
property right or intangible asset; or (b) right to use or exploit any of the
foregoing.
REPRESENTATIVES. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
RELATED PARTY. "Related Party" shall mean (i) each of the Designated
Stockholders; (ii) each individual who is, or who has at any time since January
31, 1995 been, an officer any of the Acquired Corporations; (iii) each member of
the immediate family of each of the individuals referred to in clauses "(i)" and
"(ii)" above; and (iv) any trust or other Entity (other than the Acquired
Corporations) in which any one of the individuals referred to in clauses "(i)",
"(ii)" and "(iii)" above holds (or in which more than one of such individuals
collectively hold), beneficially or otherwise, a material voting, proprietary or
equity interest.
S-4 REGISTRATION STATEMENT. "S-4 Registration Statement" shall have the
meaning set forth in Section 7.7(a).
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933, as
amended.
STOCKHOLDERS. "Stockholders" shall mean all stockholders of the Company
immediately prior to the Closing whose shares of Company Common Stock are
converted into shares of Parent Common Stock at the Closing as a result of the
Merger, and shall include the Designated Stockholders.
SUPERIOR PROPOSAL. "Superior Proposal" shall have the meaning set forth in
Section 10.1(e).
TAX. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
TAX RETURN. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
WORKING CAPITAL. "Working Capital" shall mean tangible current assets less
current liabilities, excluding any intercompany payables and receivables,
prepaid salaries and notes receivable from affiliated parties, as determined in
accordance with GAAP; provided, however, that, consistent with the Company's
presentation with respect to working capital set forth in Appendix 2.4(a)(ii) to
the Company Disclosure Schedule, current liabilities shall not include accrued
rent for any period subsequent to January 31, 1998, "reserves" of $100,000 or up
to $175,000 of costs and expenses ("Merger Expenses") of the Company associated
with the Merger. Notwithstanding the foregoing, the Merger Expenses shall
include financial advisor costs and expenses not in excess of $25,000. Further,
$50,000 in premiums for insurance policies obtained pursuant to the terms of
this Agreement shall be included as current liabilities as part of the Working
Capital calculation.
B-4
<PAGE>
EXHIBIT C
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
<TABLE>
<CAPTION>
DIRECTORS
- -----------------
<S> <C>
Earl A. Pontius
Gene W. Ray
John L. Slack
J. S. Webb
</TABLE>
<TABLE>
<S> <C>
OFFICERS TITLE
- ------------------------ ----------------------------------------------------------------------------------------
J. S. Webb Chief Executive Officer
Earl A. Pontius President, Chief Operating Officer
Eugene B. Haignere Vice President
David C. Clapp Vice President
Richard G. Galloway Vice President
William A. Hillmer Assistant Treasurer
Lisabeth A. Marinelli Assistant Vice President
Judy F. McLaughlin Assistant Vice President, Corporate Secretary
John E. Pettigrew Vice President
Rick J. Pope Vice President
Robert L. Vaughan Vice President/Group Controller
Gunars Vinkels Vice President
Sue E. Wood Assistant Secretary
</TABLE>
C-1
<PAGE>
EXHIBIT D-1
AFFILIATE AGREEMENT
This Affiliate Agreement (this "Agreement") is entered into as of
, 1998, by and between THE TITAN CORPORATION, a Delaware corporation
("Parent"), and the undersigned officer ("Officer") of HORIZONS TECHNOLOGY,
INC., a Delaware corporation (the "Company").
A. Pursuant to that certain Agreement and Plan of Merger and Reorganization
(the "Merger Agreement"), dated as of February , 1998, by and among Parent;
SUNRISE ACQUISITION SUB, INC. ("Merger Sub"), a Delaware corporation and a
wholly-owned subsidiary of Parent; the Company; and certain stockholders of the
Company; Merger Sub will merge with and into the Company (the "Merger").
B. As a result of the Merger and certain related transactions, the
stockholders of the Company will receive shares (the "Shares") of Parent Common
Stock (as defined in the Merger Agreement). Officer understands the definitions
of an "affiliate" of the Company as such term is defined in paragraphs (c) and
(d) of Rule 145 ("Rule 145") under the Securities Act of 1933, as amended (the
"Act"), and the Securities and Exchange Commission Accounting Series Release
Nos. 130 and 135 (the "Pooling Rules"), as amended.
C. Officer understands that the representations, warranties and covenants
set forth herein will be relied upon by Parent, Merger Sub and the Company, and
their respective counsel and accounting firms.
NOW, THEREFORE, Officer hereby certifies and agrees as follows:
1. Capitalized terms used in this Agreement and not otherwise defined shall
have the meanings given them in the Merger Agreement.
2. Officer certifies and agrees that:
1.1 Officer has full power and capacity to execute and deliver this
Agreement.
1.2 Officer has discussed with counsel the requirements, limitations and
restrictions on his ability to sell, transfer or otherwise dispose of the Shares
he may receive and understands the requirements, limitations and restrictions
this Agreement places upon Officer's ability to transfer, sell or otherwise
dispose of such Shares.
1.3 Officer will not, publicly or privately, sell, transfer or otherwise
dispose of, or reduce Officer's interest in or risk relating to, any Shares held
by Officer until such time as the financial results covering at least 30 days of
post-Closing combined operations of the Company and Parent have been published
by Parent (within the meaning of the Pooling Rules).
1.4 Until the earlier of (i) the Closing Date or (ii) the termination of the
Merger Agreement, Officer will not sell, transfer or otherwise dispose of, or
reduce Officer's interest in or risk relating to, any Company Common Stock
and/or Series A Preferred Stock held by Officer.
1.5 Subject to Section 2(c) above, Officer will not sell, pledge, transfer
or otherwise dispose of any of the Shares held by Officer unless at such time as
such transfer shall be in conformity with the provisions of Rule 145(d) (or any
successor rule then in effect), to the extent such Rule is applicable to
Officer.
3. Officer further certifies that he is the beneficial owner of the Company
Common Stock and/or Series A Preferred Stock set forth below, or, if not set
forth below, that he is not the beneficial owner of any Company Common Stock
and/or Series A Preferred Stock.
4. Each party hereto acknowledges that (i) it will be impossible to measure
in money the damage to Parent if Officer fails to comply with any of the
obligations imposed by this Agreement, (ii) every such obligation is material
and (iii) in the event of any such failure, Parent will not have an adequate
remedy at law or damages and, accordingly, each party hereto agrees that
injunctive relief or other equitable remedy,
D-1
<PAGE>
in addition to remedies at law or damages, is an appropriate remedy for any such
failure; provided however, each party shall use reasonable efforts to notify the
other in the event of a breach of this Agreement.
5. This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of
California.
6. This Agreement shall be binding upon, enforceable by and inure to the
benefit of the parties named herein and their respective successors; this
Agreement may not be assigned by any party without the prior written consent of
Parent. Any attempted assignment not in compliance with this Section 7 shall be
void and have no effect.
7. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
THE TITAN CORPORATION
By:
--------------------------------------
--------------------------------------
[Print Name and Title]
OFFICER
--------------------------------------
--------------------------------------
[Print Name]
Address:
-------------------------------------------------------------------------------
--------------------------------------
--------------------------------------
Shares of Company Common Stock
Beneficially Owned:
Shares of Series A Preferred Stock
Beneficially Owned:
D-2
<PAGE>
EXHIBIT D-2
PERSONS TO EXECUTE AFFILIATE AGREEMENTS
James T. Palmer
J. Patrick Boyce
Earl A. Pontius
D-3
<PAGE>
EXHIBIT E
FORM OF TAX REPRESENTATION LETTER
TO BE EXECUTED BY PARENT AND MERGER SUB
<TABLE>
<CAPTION>
Cooley Godward, LLP Jenkens & Gilchrist, P.C.
<S> <C>
One Maritime Plaza, 20th Fl. 1919 Pennsylvania Ave. N.W., Ste. 600
San Francisco, California 94111-3580 Washington, D.C. 20006-3404
</TABLE>
RE: MERGER PURSUANT TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (THE
"REORGANIZATION AGREEMENT") DATED FEBRUARY , 1998, AMONG THE TITAN
CORPORATION, A DELAWARE CORPORATION ("PARENT"), SUNRISE ACQUISITION SUB,
INC., A DELAWARE CORPORATION AND A WHOLLY OWNED SUBSIDIARY OF PARENT
("MERGER SUB"), HORIZONS TECHNOLOGY, INC., A DELAWARE CORPORATION (THE
"COMPANY"), AND CERTAIN STOCKHOLDERS OF THE COMPANY AND THE RELATED
CERTIFICATE OF MERGER BETWEEN MERGER SUB AND THE COMPANY (THE "CERTIFICATE
OF MERGER").
Gentlemen:
This letter is supplied to you in connection with your rendering of opinions
regarding certain federal income tax consequences of the Merger. Unless
otherwise indicated, capitalized terms not defined herein have the meanings set
forth in the Reorganization Agreement. The Reorganization Agreement and the
Certificate of Merger, including exhibits and schedules attached thereto, are
collectively referred to as the "AGREEMENTS."
After consulting with their counsel and auditors regarding the meaning of
and factual support for the following representations, the undersigned hereby
certify and represent that the following facts are now true and will continue to
be true as of the Effective Time of the Merger and thereafter where relevant:
1. Pursuant to the Merger, Merger Sub will merge with and into the Company,
and the Company will acquire all of the assets and liabilities of Merger Sub.
Specifically, the assets transferred to the Company pursuant to the Merger will
represent at least ninety percent (90%) of the fair market value of the net
assets and at least seventy percent (70%) of the fair market value of the gross
assets held by Merger Sub immediately prior to the Merger. In addition, at least
ninety percent (90%) of the fair market value of the net assets and at least
seventy percent (70%) of the fair market value of the gross assets held by the
Company immediately prior to the Merger will continue to be held by the Company
immediately after the Merger. For the purpose of determining the percentage of
the Company's and Merger Sub's net and gross assets held by the Company
immediately following the Merger, the following assets will be treated as
property held by Merger Sub or the Company, as the case may be, immediately
prior but not subsequent to the Merger: (i) assets disposed of by the Company or
Merger Sub (other than assets transferred from Merger Sub to the Company in the
Merger) prior to or subsequent to the Merger and in contemplation thereof
(including without limitation any asset disposed of by the Company, other than
in the ordinary course of business, pursuant to a plan or intent existing during
the period ending at the Effective Time of the Merger and beginning with the
commencement of negotiations (whether formal or informal) with Parent regarding
the Merger (the "PRE-MERGER PERIOD"); (ii) assets used by the Company or Merger
Sub to pay stockholders perfecting appraisal rights or other expenses or
liabilities incurred in connection with the Merger; and (iii) assets used to
make distribution, redemption or other payments in respect of stock of the
Company or rights to acquire such stock (including payments treated as such for
tax purposes) that are made in contemplation of the Merger or that are related
thereto;
2. Parent's principal reasons for participating in the Merger are bona fide
business purposes not related to taxes;
3. Prior to the Merger, Parent will be in "CONTROL" of Merger Sub. As used
in this letter, "CONTROL" shall consist of direct ownership of shares of stock
possessing at least eighty percent (80%) of the total
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combined voting power of all classes of stock entitled to vote and at least
eighty percent (80%) of the total number of shares of all other classes of stock
of the corporation. For purposes of determining Control, a person shall not be
considered to own shares of voting stock if rights to vote such shares (or to
restrict or otherwise control the voting of such shares) are held by a third
party (including a voting trust) other than an agent of such person;
4. In the Merger, shares of stock of the Company representing Control of
the Company will be exchanged solely for shares of Parent Common Stock. For
purposes of this paragraph, shares of stock of the Company exchanged in the
Merger for cash and other property (including, without limitation, cash paid to
stockholders of the Company perfecting appraisal rights, if any, or in lieu of
fractional shares of Parent Common Stock) will be treated as shares of stock of
the Company outstanding on the date of the Merger but not exchanged for shares
of Parent Common Stock;
5. Parent has no plan or intention to cause the Company to issue additional
shares of stock after the Merger, or take any other action, that would result in
Parent losing Control of the Company;
6. Parent has no plan or intention to reacquire any of its stock issued
pursuant to the Merger;
7. Except for transfers described in both Section 368(a)(2)(C) of the Code
and Treasury Regulation Section 1.368-2(j)(4), Parent has no plan or intention
to: (a) liquidate the Company; (b) merge the Company with or into another
corporation including Parent or its affiliates; (c) sell, distribute or
otherwise dispose of the stock of the Company, to cause the Company to sell or
otherwise dispose of the stock of the Company; or (d) cause the Company to sell
or otherwise dispose of any of its assets or of any assets acquired from Merger
Sub, except for dispositions made in the ordinary course of business or payment
of expenses incurred by the Company pursuant to the Merger;
8. In the Merger, Merger Sub will have no liabilities assumed by the
Company and will not transfer to the Company any assets subject to liabilities,
except to the extent incurred in connection with the transactions contemplated
by the Agreements;
9. Parent intends that, following the Merger, the Company will continue its
historic business or use a significant portion of its historic business assets
in a business;
10. During the past five (5) years, none of the outstanding shares of
capital stock of the Company, including the right to acquire or vote any such
shares have, directly or indirectly, been owned by Parent or affiliates of
Parent;
11. Parent is not an investment Company within the meaning of Section
368(a)(F)(iii) and (iv) of the Code;
12. No stockholder of the Company is acting as agent for Parent in
connection with the Merger or the approval thereof; Parent will not reimburse
any stockholder of the Company for any stock of the Company such stockholder may
have purchased or for other obligations such stockholder may have incurred;
13. Neither Parent nor Merger Sub is, or will be at the Effective Time of
the Merger, under the jurisdiction of a court in a Title 11 or similar case
within the meaning of Section 368(a)(3)(A) of the Code;
14. Except for repurchases or redemptions of Parent Common Stock that are
consistent with past practices and pursuant to pre-existing purchase programs
that were not created or modified in connection with the Merger, neither Merger
Sub nor Parent nor any "RELATED PERSON" of Merger Sub or Parent (as such term is
defined by Treasury Regulation Section 1.368-1(e)(3)) will repurchase or redeem
any of the Parent Common Stock to be issued to the stockholders of the Company
in connection with the Merger;
15. Except with respect to (i) payments of cash to stockholders of the
Company perfecting appraisal rights and (ii) payments of cash to stockholders of
the Company in lieu of fractional shares of Parent Common Stock, one hundred
percent (100%) of the stock of the Company outstanding immediately prior
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to the Merger will be exchanged solely for Parent Common Stock. Thus, except as
set forth in the preceding sentence, Merger Sub and Parent intend that no
consideration be paid or received (directly or indirectly, actually or
constructively) for stock of the Company other than Parent Common Stock;
16. The total fair market value of all consideration other than Parent
Common Stock received by stockholders of the Company in the Merger (including,
without limitation, cash paid to stockholders of the Company perfecting
appraisal rights) will be less than ten percent (10%) of the aggregate fair
market value of stock of the Company outstanding immediately prior to the
Merger;
17. The fair market value of the Parent Common Stock received by each
stockholder of the Company will be approximately equal to the fair market value
of the stock of the Company surrendered in exchange therefor, and the aggregate
consideration received by stockholders of the Company in exchange for their
stock of the Company will be approximately equal to the fair market value of all
of the outstanding shares of stock of the Company immediately prior to the
Merger;
18. Each of Merger Sub, Parent, the Company and each stockholder of the
Company will each pay separately his, her or its own expenses relating to the
Merger;
19. There is no intercorporate indebtedness existing between Parent and the
Company or between Merger Sub and the Company that was issued, acquired or will
be settled at a discount as a result of the Merger, and Parent will assume no
liabilities of the Company or any stockholder of the Company in connection with
the Merger;
20. The terms of the Reorganization Agreement and the agreements related
thereto are the product of arm's length negotiations;
21. None of the compensation received by any stockholder-employee of the
Company will be separate consideration for, or allocable to, any of their shares
of stock of the Company; none of the shares of Parent Common Stock received by
any stockholder-employee of the Company will be separate consideration for, or
allocable to, any employment agreement or any covenants not to compete; and the
compensation paid to any stockholder-employee of the Company will be for
services actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services;
22. The payment of cash in lieu of fractional shares of Parent Common Stock
is solely for the purpose of avoiding the expense and inconvenience to Parent of
issuing fractional shares and does not represent separately bargained-for
consideration. The total cash consideration that will be paid in the transaction
to the Company stockholders instead of issuing fractional shares of Parent
Common Stock will not exceed one percent (1%) of the total consideration that
will be issued in the transaction to the Company stockholders in exchange for
their shares of Company capital stock. The fractional share interests of each
Company stockholder will be aggregated, and no Company stockholder will receive
cash in an amount equal to or greater than the value of one full share of Parent
Common Stock;
23. With respect to each instance, if any, in which shares of stock of the
Company have been purchased by a stockholder of Parent (a "STOCKHOLDER") during
the Pre-Merger Period (a "STOCK PURCHASE"): (i) the Stock Purchase was made by
such Stockholder on its own behalf and not as a representative, or for the
benefit, of Parent; (ii) the purchase price paid by such Stockholder pursuant to
the Stock Purchase was the product of arm's length negotiations, was funded by
such Stockholder's own assets, was not advanced, and will not be reimbursed,
either directly or indirectly, by Parent; (iii) at no time was such Stockholder
or any other party required or obligated to surrender to Parent the Company
capital stock acquired in the Stock Purchase, and neither such Stockholder nor
any other party will be required to surrender to Parent the Parent Common Stock
for which such shares of stock of the Company will be exchanged in the Merger;
and (iv) the Stock Purchase was not a formal or informal condition to
consummation of the Merger and was entered into solely to satisfy the separate
interests of such Stockholder and the seller; and
24. Parent and Merger Sub are authorized to make all of the representations
set forth herein.
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The undersigned recognize that (i) your opinions will be based on the
representations set forth herein and on the statements contained in the
Agreements and documents related thereto, and (ii) your opinions will be subject
to certain limitations and qualifications including that they may not be relied
upon if any such representations are not accurate in all material respects.
The undersigned recognize that your opinions will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinions.
Very truly yours,
THE TITAN CORPORATION,
a Delaware corporation
By:
--------------------------------------
Title:
--------------------------------------
SUNRISE ACQUISITION SUB, INC.,
a Delaware corporation
By:
--------------------------------------
Title:
--------------------------------------
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EXHIBIT F
FORM OF TAX REPRESENTATION LETTER
TO BE EXECUTED BY THE COMPANY
<TABLE>
<CAPTION>
Cooley Godward LLP Jenkens & Gilchrist, P.C.
<S> <C>
One Maritime Plaza, 20th Fl. 1919 Pennsylvania Ave. N.W., Suite 600
San Francisco, California CA 94111-3580 Washington, D.C. 20006-3404
</TABLE>
RE: MERGER PURSUANT TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (THE
"REORGANIZATION AGREEMENT") DATED FEBRUARY , 1998, AMONG THE TITAN
CORPORATION, A DELAWARE CORPORATION ("PARENT"), SUNRISE ACQUISITION SUB,
INC., A DELAWARE CORPORATION AND A WHOLLY OWNED SUBSIDIARY OF PARENT
("MERGER SUB"), HORIZONS TECHNOLOGY, INC., A DELAWARE CORPORATION (THE
"COMPANY"), AND CERTAIN STOCKHOLDERS OF THE COMPANY AND THE RELATED
CERTIFICATE OF MERGER BETWEEN MERGER SUB AND THE COMPANY (THE "CERTIFICATE
OF MERGER").
Gentlemen:
This letter is supplied to you in connection with your rendering of opinions
regarding certain federal income tax consequences of the Merger. Unless
otherwise indicated, capitalized terms not defined herein have the meanings set
forth in the Reorganization Agreement or the Certificate of Merger. The
Reorganization Agreement and the Certificate of Merger, including exhibits and
schedules attached thereto, are collectively referred to as the "AGREEMENTS."
After consulting with its counsel and auditors regarding the meaning of and
factual support for the following representations, the undersigned hereby
certifies and represents that the following facts are now true and will continue
to be true as of the Effective Time of the Merger and thereafter where relevant:
1. Pursuant to the Merger, Merger Sub will merge with and into the Company,
and the Company will acquire all of the assets and liabilities of Merger Sub.
Specifically, the assets transferred to the Company pursuant to the Merger will
represent at least ninety percent (90%) of the fair market value of the net
assets and at least seventy percent (70%) of the fair market value of the gross
assets held by Merger Sub immediately prior to the Merger. In addition, at least
ninety percent (90%) of the fair market value of the net assets and at least
seventy percent (70%) of the fair market value of the gross assets held by the
Company immediately prior to the Merger will continue to be held by the Company
immediately after the Merger. For the purpose of determining the percentage of
the Company's and Merger Sub's net and gross assets held by the Company
immediately following the Merger, the following assets will be treated as
property held by Merger Sub or the Company, as the case may be, immediately
prior but not subsequent to the Merger: (i) assets disposed of by the Company or
Merger Sub (other than assets transferred from Merger Sub to the Company in the
Merger) prior to or subsequent to the Merger and in contemplation thereof
(including without limitation any asset disposed of by the Company, other than
in the ordinary course of business, pursuant to a plan or intent existing during
the period ending on the Effective Time of the Merger and beginning with the
commencement of negotiations (whether formal or informal) with Parent regarding
the Merger (the "PRE-MERGER PERIOD"); (ii) assets used by the Company or Merger
Sub to pay stockholders perfecting appraisal rights or other expenses or
liabilities incurred in connection with the Merger; and (iii) assets used to
make distribution, redemption or other payments in respect of stock of the
Company or rights to acquire such stock (including payments treated as such for
tax purposes) that are made in contemplation of the Merger or that are related
thereto;
2. Other than in the ordinary course of business or pursuant to its
obligations under the Agreements, the Company has made no transfer of any of its
assets (including any distribution of assets with respect to, or in redemption
of, stock) in contemplation of the Merger or during the Pre-Merger Period;
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<PAGE>
3. The Company's principal reasons for participating in the Merger are bona
fide business purposes unrelated to taxes;
4. On the Effective Time of the Merger, the Company will have no
outstanding equity interests other than those disclosed in Section 2.3 of the
Reorganization Agreement. At the time of the Merger, except as specified in the
Reorganization Agreement, the Company will have no outstanding warrants,
options, or convertible securities or any other type of right outstanding
pursuant to which any person could acquire shares of the Company capital stock
or any other equity interest in the Company, other than those disclosed in
Section 2.3 of the Reorganization Agreement or the Disclosure Schedule with
respect thereto;
5. In the Merger, shares of stock of the Company representing "CONTROL" of
the Company will be exchanged solely for shares of voting stock of Parent. At
the Effective Time of the Merger, there will exist no rights to acquire the
Company capital stock or to vote (or restrict or otherwise control the vote of)
shares of stock of the Company which, if exercised, would affect Parent's
acquisition and retention of control of the Company. For purposes of this
paragraph, shares of the stock of Company exchanged in the Merger for cash and
other property (including, without limitation, cash paid to stockholders of the
Company perfecting appraisal rights, if any, or in lieu of fractional shares of
Parent Common Stock) will be treated as shares of stock of the Company
outstanding on the date of the Merger but not exchanged for shares of voting
stock of Parent. As used in this letter, "CONTROL" shall consist of direct
ownership of shares of stock possessing at least eighty percent (80%) of the
total combined voting power of shares of all classes of stock entitled to vote
and at least eighty percent (80%) of the total number of shares of all other
classes of stock of the corporation. For purposes of determining Control, a
person shall not be considered to own shares of voting stock if rights to vote
such shares (or to restrict or otherwise control the voting of such shares) are
held by a third party (including a voting trust) other than an agent of such
person;
6. The total fair market value of all consideration other than shares of
Parent Common Stock received by stockholders of the Company in the Merger
(including, without limitation, cash paid to Company stockholders perfecting
appraisal rights or in lieu of fractional shares of Parent Common Stock) will be
less than ten percent (10%) of the aggregate fair market value of shares of
stock of the Company outstanding immediately prior to the Merger;
7. The Company has no plan or intention to issue additional shares of stock
after the Merger, or take any other action, that would result in Parent losing
Control of the Company;
8. Except for transfers described in both Section 368(a)(2)(C) of the Code
and Treasury Regulation Section 1.368-2(j)(4), the Company has no plan or
intention to sell or otherwise dispose of any of its assets or of any of the
assets acquired from Merger Sub in the Merger except for dispositions made in
the ordinary course of business or to pay expenses incurred by the Company
pursuant to the Merger;
9. The Company intends to continue its historic business or use a
significant portion of its historic business assets in a business following the
Merger;
10. The liabilities of the Company have been incurred by the Company in the
ordinary course of its business;
11. The fair market value of the Company's assets will, on the Effective
Time of the Merger, exceed the aggregate liabilities of the Company plus the
amount of liabilities, if any, to which such assets are subject;
12. The Company is not and will not be on the Effective Time of the Merger
an "INVESTMENT COMPANY" within the meaning of Section 368(a)(2)(F)(iii) and (iv)
of the Code;
13. The Company is not and will not be on the Effective Time of the Merger
under the jurisdiction of a court in a Title 11 or similar case within the
meaning of Section 368(a)(3)(A) of the Code;
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<PAGE>
14. The Company has made no extraordinary distributions within the meaning
of Temporary Federal Treasury Regulation Section 1.368-1T(e) with respect to its
stock, prior to and in connection with the Merger;
15. The Company has not redeemed and no "RELATED PERSON" with respect to the
Company, as such term is defined by Treasury Regulation Section 1.368-1(e)(3),
(without regard to Section 1.368-1(e)(3)(i)(a)), has purchased any Company
capital stock prior to and in connection with the Merger;
16. Except with respect to (i) payments of cash to stockholders of the
Company in lieu of fractional shares of Parent Common Stock, and (ii) payments
of cash to stockholders of the Company perfecting appraisal rights, one hundred
percent (100%) of the shares of stock of the Company outstanding immediately
prior to the Merger will be exchanged solely for shares of Parent Common Stock.
Thus, except as set forth in the preceding sentence, the Company intends that no
consideration be paid or received (directly or indirectly, actually or
constructively) for shares of stock of the Company other than shares of Parent
Common Stock;
17. The fair market value of the shares of Parent Common Stock received by
each stockholder of the Company will be approximately equal to the fair market
value of the shares of stock of the Company surrendered in exchange therefor and
the aggregate consideration received by stockholders of the Company in exchange
for their shares of stock of the Company will be approximately equal to the fair
market value of all of the outstanding shares of stock of the Company
immediately prior to the Merger;
18. Each of Merger Sub, Parent, the Company and each stockholder of the
Company will each pay separately his, her or its own expenses relating to the
Merger;
19. There is no intercorporate indebtedness existing between Parent and the
Company or between Merger Sub and the Company that was issued, acquired, or will
be settled at a discount as a result of the Merger; Parent will assume no
liabilities of the Company or any stockholder of the Company in connection with
the Merger;
20. The terms of the Reorganization Agreement and the other agreements
relating thereto are the product of arm's length negotiations;
21. None of the compensation received by any stockholder-employees of the
Company will be separate consideration for, or allocable to, any of their shares
of stock of the Company; none of the shares of Parent Common Stock received by
any stockholder-employees of the Company will be separate consideration for, or
allocable to, any employment agreement or any covenants not to compete; and the
compensation paid to any stockholder-employees of the Company will be for
services actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services;
22. With respect to each instance, if any, in which shares of stock of the
Company have been purchased by a stockholder of Parent (a "STOCKHOLDER") during
the Pre-Merger period (a "STOCK PURCHASE"): (i) to the best knowledge of the
Company, (A) the Stock Purchase was made by such Stockholder on its own behalf,
rather than as a representative, or for the benefit, of Parent, (B) the Stock
Purchase was entered into solely to satisfy the separate interests of such
Stockholder and the seller, and (C) the purchase price paid by such Stockholder
pursuant to the Stock Purchase was the product of arm's length negotiations; and
(ii) the Stock Purchase was not a formal or informal condition to consummation
of the Merger; and
23. The Company is authorized to make all of the representations set forth
herein.
The undersigned recognizes that (i) your opinions will be based on the
representations set forth herein and on the statements contained in the
Agreements and documents related thereto, and (ii) your opinions will be subject
to certain limitations and qualifications including that they may not be relied
upon if any such representations are not accurate in all material respects.
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<PAGE>
Notwithstanding anything herein to the contrary, the undersigned makes no
representations regarding any actions or conduct of the Company pursuant to
Parent's exercise of control over the Company after the Merger.
The undersigned recognizes that your opinions will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinions.
Very truly yours,
HORIZONS TECHNOLOGY, INC.,
a Delaware corporation
By:
--------------------------------------
Title:
--------------------------------------
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EXHIBIT G
ACKNOWLEDGMENT AND RELEASE
THIS ACKNOWLEDGMENT AND RELEASE ("Release") is being executed and delivered
as of , 1998, by ("Releasor") in favor of, and for the
benefit of, HORIZONS TECHNOLOGY, INC., a Delaware corporation (the
"Corporation"), THE TITAN CORPORATION, a Delaware corporation ("Parent"), and
the other Releasees (as defined in Section 2).
RECITALS
A. Contemporaneously with the execution and delivery of this Release,
pursuant to an Agreement and Plan of Merger and Reorganization, dated as of
February , 1998, among the Corporation, Parent, Sunrise Acquisition Sub.,
Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger
Sub"), and certain other stockholders of the Corporation (the "Merger
Agreement"), Merger Sub is merging into the Corporation (the merger of Merger
Sub into the Corporation being referred to in this Release as the "Merger"). As
a result of the Merger, the Corporation's stockholders are receiving shares of
common stock of Parent in exchange for their shares of common stock of the
Corporation, and the Corporation will survive as a wholly owned subsidiary of
Parent.
B. Parent has required, as a condition to consummating the Merger and the
other transactions contemplated by the Merger Agreement, that Releasor execute
and deliver this Release.
AGREEMENT
In order to induce Parent to consummate the transactions contemplated by the
Merger Agreement, and for other valuable consideration (the receipt and
sufficiency of which are hereby acknowledged by Releasor), Releasor hereby
covenants and agrees as follows:
1. RELEASE. Releasor, for himself and for each of his Associated Parties
(as defined in Section 2), hereby generally, irrevocably, unconditionally and
completely releases and forever discharges each of the Releasees (as defined in
Section 2) from, and hereby irrevocably, unconditionally and completely waives
and relinquishes, each of the Released Claims (as defined in Section 2).
2. DEFINITIONS.
(a) The term "Associated Parties," when used herein with respect to
Releasor, shall mean and include: (i) Releasor's predecessors, successors,
executors, administrators, assigns, heirs and estate; and (ii) each entity of
which Releasor owns, at least 50% of the outstanding voting interests.
(b) The term "Releasees" shall mean and include: (i) Parent; (ii) the
Corporation; (iii) each of the subsidiaries of Parent; and (iv) the past and
present directors, officers, employees, agents, attorneys and representatives of
the respective entities identified or otherwise referred to in clauses "(i)"
through "(iii)" of this sentence, other than Releasor.
(c) The term "Released Claims" shall mean and include each and every claim
that has arisen or arises out of any circumstance, agreement, activity, action,
omission, event or matter occurring or existing on or prior to the date of this
Release PROVIDED, HOWEVER, that the Released Claims shall not include:
(i) Releasor's rights, if any, against Parent under the Merger
Agreement;
(ii) Releasor's rights against the Corporation under any other agreement
being entered into by Releasor and the Corporation contemporaneously with
the execution and delivery of this Release; or based upon obligations of the
Corporation to make payments under existing compensation or benefit plans or
as required under applicable law; or
G-1
<PAGE>
(iii) any right of indemnification Releasor may have against the
Corporation under the Corporation's Certificate of Incorporation or
otherwise in his capacity as an officer or director of the Corporation as
such rights shall survive the Merger as expressly set forth in the Merger
Agreement.
3. REPRESENTATIONS AND WARRANTIES. Releasor represents and warrants that:
(a) Releasor has not assigned, transferred, conveyed or otherwise disposed
of any claim against any of the Releasees, or any direct or indirect interest in
any such claim, in whole or in part;
(b) to the best of Releasor's knowledge, no other person or entity has any
interest in any of the Released Claims;
(c) this Release has been duly and validly executed and delivered by
Releasor;
(d) this Release is a valid and binding obligation of Releasor and
Releasor's Associated Parties, and is enforceable against Releasor and each of
his Associated Parties in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or
other similar laws affecting creditors' rights, and subject to general equity
principles and to limitations on availability of equitable relief, including
specific performance;
(e) neither the execution and delivery of this Release nor the performance
hereof will result in any violation or breach of any agreement or other
instrument to which Releasor is a party or by which Releasor is bound;
4. NOTICES. Any notice or other communication required or permitted to be
delivered to Releasor, the Corporation or Parent under this Release shall be in
writing and shall be deemed properly delivered, given and received when
delivered (by hand, by registered mail, by courier or express delivery service
or by facsimile) to the address or facsimile telephone number of the party to
receive the notice.
5. SEVERABILITY. If any provision of this Release or any part of any such
provision is held under any circumstances to be invalid or unenforceable in any
jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible extent
and (b) the invalidity or unenforceability of such provision or part thereof
shall not affect the validity or enforceability of the remainder of such
provision or the validity or enforceability of any other provision of this
Release. Each provision of this Release is separable from every other provision
of this Release, and each part of each provision of this Release is separable
from every other part of such provision.
6. GOVERNING LAW; WAIVER OF SECTION 1542 AND RELATED STATUTES. This
Release shall be construed in accordance with, and governed in all respects by,
the laws of the State of California (without giving effect to principles of
conflicts of laws). Notwithstanding the foregoing, Releasor expressly waives and
relinquishes all rights and benefits that may be afforded by Section 1542 of the
Civil Code of the State of California and any similar statute applicable to this
Release (including, without limitation, any applicable statute, rule or
regulation of the State of Minnesota), and does so understanding and
acknowledging the significance of this specific waiver of such statute(s).
Section 1542 of the Civil Code of the State of California states as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor.
7. WAIVER. No failure on the part of any Releasee to exercise any power,
right, privilege or remedy under this Release, and no delay on the part of any
Releasee in exercising any power, right, privilege or remedy under this Release,
shall operate as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power, right,
privilege or remedy. No Releasee shall be deemed to have waived any claim
arising out of this Release, or any power, right, privilege or remedy under this
Release,
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unless the waiver of such claim, power, right, privilege or remedy is expressly
set forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
8. CAPTIONS. The captions contained in this Release are for convenience of
reference only, shall not be deemed to be a part of this Release and shall not
be referred to in connection with the construction or interpretation of this
Release.
9. ENTIRE AGREEMENT. This Release sets forth the entire understanding of
the parties relating to the subject matter hereof and supersedes all prior
agreements and understandings between the parties relating to the subject matter
hereof.
10. AMENDMENTS. This Release may not be amended, modified, altered, or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Releasor, Parent and the Corporation.
11. BINDING NATURE. This Release will be binding upon Releasor and
Releasor's Associated Parties and will inure to the benefit of each of the
Releasees.
12. CONSTRUCTION.
(a) For purposes of this Release, whenever the context requires: the
singular number shall include the plural, and vice versa.
(b) As used in this Release, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(c) Except as otherwise indicated, all references in this Release to
"Sections" are intended to refer to Sections of this Release.
Releasor has executed this Release as of the date first above written.
______________________________________
[Releasor]
Name:_________________________________
Address:______________________________
___________________
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EXHIBIT H
SUBSTANTIVE PROVISIONS OF THE OPINION OF
JENKENS & GILCHRIST, P.C.
[Capitalized terms defined as in the Merger Agreement]
13. Each of the Acquired Corporations is a corporation duly organized,
validly existing and in good standing under the laws of its respective
jurisdiction of incorporation. Each of the Acquired Corporations has the
corporate power and authority to own, lease and operate its properties and to
carry on its business as now conducted. Each of the Acquired Corporations is
qualified as a foreign corporation to do business and is in good standing in
each jurisdiction in the United States in which the ownership of its property or
the conduct of its business requires such qualification except for such
jurisdictions where the failure to be so qualified would not have a Material
Adverse Effect on the Acquired Corporations.
14. The authorized capital stock of the Company consists (i) 12,000,000
shares of Common Stock, $.01 par value, of which [7,996,953] shares have been
issued and are outstanding as of the date hereof and (ii) 2,500,000 shares of
Preferred Stock (with par value $.01, all of which have been designated "Series
A Preferred Stock"), of which 500,000 shares have been issued and are
outstanding as of the date hereof. All of the outstanding shares of Company
Common Stock and Series A Preferred Stock have been duly authorized and validly
issued, and are fully paid and nonassessable. All of the outstanding shares of
capital stock or other securities of the Acquired Corporations have been duly
authorized and validly issued, are fully paid and nonassessable and are owned by
the Company.
15. To the best of our knowledge, there are no options, warrants, calls,
rights, commitments, conversion rights or agreements of any character to which
the Company or any Acquired Corporation is a party or by which the Company or
any Acquired Corporation is bound obligating the Company or any Acquired
Corporation to issue, deliver or sell, or cause to be issued, delivered or sold,
any shares of capital stock of the Company or any Acquired Corporation or
securities convertible into or exchangeable for shares of capital stock of the
Company or any Acquired Corporation, or obligating the Company or any Acquired
Corporation to grant, extend or enter into any such option, warrant, call,
right, commitment, conversion right or agreement, other than as described in the
Merger Agreement or the Company Disclosure Schedule.
16. The Company has the requisite corporate power and authority to perform
its obligations under the Merger Agreement and documents executed by the Company
in connection therewith (collectively, the "Agreements"). The execution,
delivery and performance of the Agreements by the Company have been duly
authorized by all necessary action on the part of the Company's stockholders and
board of directors. The Agreements have been duly and validly executed and
delivered by the Company. The Company Agreements constitute the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with their terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium or other similar laws affecting
creditors' rights, and subject to (i) general equity principles and limitations
on availability of equitable relief, including specific performance, and (ii)
limitations on the availability of indemnity under applicable laws.
17. Neither the execution and delivery of the Agreements by the Company nor
the consummation by the Company of the transactions provided for therein
(including, without limitation, the Merger) nor the performance by the Company
of its obligations thereunder, will (a) conflict with or result in any breach or
violation of any provision of the Certificate of Incorporation or Bylaws of the
Company, (b) constitute a material default (or with the provision of notice or
the passage of time would constitute a material default) under the provisions of
any material agreement to which the Company is a party or by which it is bound
(as set forth in the Company Disclosure Schedule), or (c) violate any
governmental statute, rule or regulation applicable to the Company, order, writ,
injunction, decree or arbitration award applicable to the Company
H-1
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or its assets, excluding in the case of subclauses (b) and (c) such defaults and
violations (A) which would not have a Material Adverse Effect on the Acquired
Corporations and (B) would not adversely affect the ability of the Company to
consummate the transactions contemplated by the Merger Agreement.
18. No governmental consent, approval, authorization, registration,
declaration or filing, or any other Governmental Authorization, is required for
the execution and delivery of the Merger Agreement on behalf of the Company or
for the Merger except for such consents, approvals or filings where the failure
to obtain such consent or approval or make such filing (A) would not have a
Material Adverse Effect on the Acquired Corporations and (B) would not adversely
affect the ability of the Company to consummate the transactions contemplated by
the Merger Agreement.
19. To the best of our knowledge, there is no action, proceeding or
investigation pending or threatened against the Company before any court or
administrative agency that challenges or seeks to prohibit the consummation of
the transactions contemplated in the Agreements or that, if determined adversely
to the Company, may reasonably be expected to have a Material Adverse Effect on
the Acquired Corporations.
20. Assuming that all necessary corporate actions in respect of the Merger
have been duly and validly taken by Parent and Merger Sub, then upon the
consummation of the transactions contemplated by the Merger Agreement and the
filing of the Certificate of Merger with the Secretary of State of the State of
Delaware as contemplated by the Merger Agreement, the Merger will have been
validly effected in accordance with Delaware Law.
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EXHIBIT I
, 1998
Ladies and Gentlemen:
We have acted as counsel for The Titan Corporation, a Delaware corporation
("Parent"), in connection with the merger of Sunrise Acquisition Sub, Inc.
("Merger Sub"), a Delaware corporation and a wholly-owned subsidiary of Parent,
with and into Horizon Technology, Inc., a Delaware corporation (the "Company"),
pursuant to an Agreement and Plan of Merger and Reorganization, amended as of
February , 1998 among Parent, Merger Sub and the Company (the "Merger
Agreement"). We are rendering this opinion pursuant to Section 8.5(f) of the
Merger Agreement. Capitalized terms used but not defined herein have the
respective meanings given to them in the Merger Agreement.
In connection with this opinion, we have examined and relied upon the
representations and warranties as to factual matters contained in and made
pursuant to the Merger Agreement and the agreements entered into in connection
therewith (collectively, the "Agreements") by the various parties, and originals
or copies certified to our satisfaction of such records, documents,
certificates, opinions, memoranda and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinion expressed below.
In rendering this opinion, we have assumed: the genuineness and authenticity
of all signatures on original documents; the authenticity of all documents
submitted to us as originals; the conformity to originals of all documents
submitted to us as copies; the accuracy, completeness and authenticity of
certificates of public officials; and the due authorization, execution and
delivery of all documents (except the due authorization, execution and delivery
by Parent and Merger Sub of the Agreements) where authorization, execution and
delivery are prerequisites to the effectiveness of such documents. We have also
assumed: that all individuals executing and delivering documents had the legal
capacity to execute and deliver such documents; that the Company has received
all documents that the Company was to receive under the Agreements; that the
Agreements are binding upon the Company; that the Company has filed any required
state franchise or income tax returns and has paid any required state franchise
or income taxes; and that there are no extrinsic agreements or understandings
among any of the parties to the Agreements that would modify or interpret the
terms of the Agreements or the respective rights or obligations of the parties
thereunder.
Our opinion is expressed only with respect to the federal laws of the United
States of America and the laws of the State of California and the General
Corporation Law of the State of Delaware. We express no opinion as to whether
the laws of any particular jurisdiction apply, and no opinion to the extent that
the laws of any jurisdiction other than those identified above are applicable to
the subject matter hereof. We are not rendering any opinion: (i) as to
compliance with, or the effects upon obligations arising under the Agreements
of, any law, rule or regulation relating to securities or to the sale or
issuance thereof; (ii) as to compliance with, or the effects upon obligations
arising under the Agreements of, any law, rule or regulation relating to
antitrust, trade regulation or unfair competition; or (iii) as to the
enforceability of any of the agreements attached as exhibits to the Merger
Agreement.
With regard to our opinion in paragraph 4 below, our opinion is expressed
only with respect to the General Corporation Law of the State of Delaware and
the laws of the State of California; with respect to our opinion regarding the
violation of any order, writ, injunction, decree or arbitration award applicable
to Parent or Merger Sub, we have relied solely upon inquiries of officers of
Parent and Merger Sub and have made no further investigation.
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<PAGE>
On the basis of the foregoing, in reliance thereon and with the foregoing
qualifications, we are of the opinion that:
1. Each of Parent and Merger Sub is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware.
2. Each of Parent and Merger Sub has the requisite corporate power and
authority to perform its obligations under the Merger Agreement. The execution,
delivery and performance of the Merger Agreement by Parent have been duly
authorized by all necessary action on the part of Parent's stockholders and
Parent's board of directors. The execution, delivery and performance of the
Merger Agreement by Merger Sub have been duly authorized by all necessary action
on the part of Merger Sub's sole director and stockholder. The Merger Agreement
has been duly and validly executed and delivered by each of Parent and Merger
Sub.
3. The Merger Agreement constitutes the legal, valid and binding obligation
of Parent and Merger Sub, enforceable against Parent and Merger Sub in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
affecting creditors' rights, and subject to (i) general equity principles and
limitations on availability of equitable relief, including specific performance,
and (ii) limitations on the availability of indemnity under applicable laws.
4. Neither the execution and delivery of the Agreements by Parent and
Merger Sub, as applicable, nor the consummation by Parent and Merger Sub, as
applicable, of the transactions provided for therein nor the performance by
Parent and Merger Sub, as applicable, of their respective obligations
thereunder, will (a) conflict with or result in any breach or violation of any
provision of the Certificate of Incorporation or Bylaws of Parent or the
Certificate of Incorporation or Bylaws of Merger Sub, or (b) to our knowledge
violate any governmental statute, rule or regulation applicable to Parent,
order, writ, injunction, decree or arbitration award applicable to Parent or
Merger Sub or their respective assets, excluding in the case of subclause (b)
such defaults and violations (A) which would not have a Material Adverse Effect
on Parent or Merger Sub and (B) would not adversely effect the ability of Parent
or Merger Sub to consummate the transactions contemplated by the Merger
Agreements.
5. The Parent Common Stock to be issued in connection with the Merger will
be, upon issuance pursuant to the terms of the Merger Agreement, validly issued,
fully paid and nonassessable.
This opinion letter and the opinions expressed herein are intended for your
benefit and are not to be made available to or be relied upon by any other
person, firm or entity without our prior written consent.
Very truly yours,
COOLEY GODWARD LLP
I-2
<PAGE>
APPENDIX B
February 26, 1998
The Board of Directors of Horizons Technology, Inc.
c/o Mr. Pat Boyce, Senior Vice President
Horizons Technology, Inc.
3990 Ruffin Road
San Diego, California 92123-1826
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of the common shares and the Series A Preferred Shares
(collectively the "Shareholders") of Horizons Technology, Inc. ("HTI" or the
"Company"), of the consideration to be received in connection with a merger
between the Company and The Titan Corporation ("Titan"). We have not been
requested to opine as to, and our opinion does not in any manner address, the
Company's underlying business decision to proceed with or effect the plan of
merger ("Proposed Transaction").
We understand that under the Proposed Transaction, HTI will merge with and
into Titan and each issued and outstanding share of HTI common stock and HTI
preferred stock will be exchanged for Titan common stock. The number of shares
of Titan common stock to be received by the Shareholders will based upon the
Applicable Fraction, as defined in the merger agreement dated February 26, 1998,
by and among HTI and Titan (the "Merger Agreement").
The Applicable Fraction pertaining to each preferred share shall be the
fraction having the numerator equal to $5.00 per share and the denominator equal
to the "Designated Parent Stock Price," as defined in the Merger Agreement.
The Applicable Fraction pertaining to HTI common stock shall be the fraction
(A) having the numerator equal to the amount by which (x) $23,850,000 minus the
"Balance Sheet Deduction" plus $65,240 exceeds (y) the Average Preferred Stock
Valuation and (B) having a denominator equal to the amount determined by
multiplying (1) the "Adjusted Company Share Amount" by (2) the Designated Parent
Stock Price.
The "Balance Sheet Deduction" shall be (A) $4,500,000 plus or minus, as
described below, (B) the amount by which the Company's Working Capital
(determined prior to the Closing as set forth in the Merger Agreement) is less
than (in which case such amount shall be added to the amount determined in (A)
above) or greater than (in which case such amount shall be subtracted from the
amount determined in (A) above) negative $2,150,000; provided, however, no such
adjustment shall be made unless the Company's Working Capital is at least
$200,000 less than or greater than, as the case may be, negative $2,150,000 (and
in such case such adjustment shall be made with respect to the entire amount
less than or greater than, as appropriate, negative $2,150,000).
The terms and conditions of the Proposed Transaction are set forth in more
detail in the Merger Agreement.
In connection with this opinion, we have, among other things:
- Reviewed the Merger Agreement and related documents;
- Reviewed certain publicly available information concerning Titan which we
believe to be relevant to our analysis;
- Reviewed certain internal financial statements and other financial and
operating data concerning the Company prepared by the management of the
Company;
- Analyzed certain financial assumptions prepared by the Company;
<PAGE>
- Conducted discussions with members of management of the Company and Titan
concerning current and future business operations;
- Reviewed the reported prices and trading activity for the common stock of
Titan;
- Reviewed the historical market prices and trading activity for Titan's
shares and compared them with those of certain publicly traded companies
which we deemed to be reasonably similar to the Company and Titan;
- Compared the results of operations and present financial condition of the
Company and Titan with those of certain publicly traded companies which we
deemed to be reasonably similar to the Company and Titan, respectively;
- Performed certain financial analyses with respect to the Company's
projected future operating performance, including discounted cash flow
analyses;
- Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we deemed
necessary.
In preparing our opinion, THE SLAVITT ELLINGTON GROUP has assumed and relied
upon, without independent verification, the accuracy and completeness of all
financial and other information publicly available or that was supplied or
otherwise made available to us by the Company and Titan. We have not been
engaged to, and therefore we have not, verified the accuracy or completeness of
any such information.
With respect to the financial forecasts for the years 1998 through 2002, we
have assumed that the assumptions provided by management have been reasonably
prepared and reflect the best currently available estimates and judgment of the
Company's management. In arriving at our opinion, we have not conducted an
extensive physical inspection of the properties or facilities of the Company or
Titan. We have not made or obtained any evaluations or appraisals of the assets
or liabilities of the Company or Titan. Our opinion is necessarily based upon
market, economic and other conditions as they exist and can only be evaluated as
of the date of this letter.
In performing its analyses, THE SLAVITT ELLINGTON GROUP made numerous
assumptions with respect to the defense communications and information
technology industry, the various commercial industries in which the Company and
Titan operate, general business and economic conditions and government
regulations, which are beyond the control of the Company. The analyses performed
by THE SLAVITT ELLINGTON GROUP are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of THE
SLAVITT ELLINGTON GROUP'S analysis of the fairness, from a financial point of
view, to the Shareholders, of the consideration paid pursuant to the Agreement.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the Company
or any of its assets.
In rendering our opinion, THE SLAVITT ELLINGTON GROUP assumed the planned
initial public offering of Linkabit Wireless, Inc., a wholly-owned subsidiary of
Titan, would be completed at terms which are fair to Titan's shareholders and
therefore would not materially impact the Titan's intrinsic or stock market
valuation. Given the assumed fairness of pricing and the inherent uncertainty of
the prospects for completion of the offering as well as the pricing thereof, the
pro forma impact of the offering was not included in our financial analysis.
In rendering our opinion, THE SLAVITT ELLINGTON GROUP has also assumed that
the Proposed Transaction will be accounted for as a "pooling-of-interests"
business combination in accordance with Generally Accepted Accounting Principles
and that the Proposed Transaction will be consummated on the terms contained in
the Merger Agreement, without any waiver of any material terms or conditions by
the Company.
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<PAGE>
Our opinion is necessary based on economic, market and other conditions in
effect on, and the information made available to us as of the date of our
opinion. Our opinion as expressed herein, in any event, is limited to the
fairness, from a financial point of view, to the Shareholders, of the
consideration to be received by the Shareholders pursuant to the Merger
Agreement. We have received a fee for the analysis supporting our opinion of
fairness which is not contingent on our findings, or the consummation of the
transaction. We have performed valuations of the Company in prior years for a
different purpose. We have considered those prior valuations in connection with
this opinion.
It is understood that this letter is for the information of the Board of
Directors of the Company and does not constitute a recommendation as to how the
Shareholders should vote with respect to the Proposed Transaction. This opinion
may not be summarized, excerpted from or otherwise publicly referred to without
our prior written consent, except that this opinion may be included in its
entirety in the proxy materials to be distributed to the Shareholders regarding
the Proposed Transaction.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that the consideration to be received for the Company pursuant to
the Merger Agreement is fair, from a financial point of view, to the
Shareholders.
This opinion is for the use and benefit of the Board of Directors of the
Company and may not be used for any other purpose without our prior written
consent. We hereby consent, however, to the inclusion of this opinion as an
exhibit to any proxy statement distributed in connection with the Merger.
Very truly yours,
THE SLAVITT ELLINGTON GROUP
By: /s/ CHRISTOPHER A. KRAMER
------------------------------------
Christopher A. Kramer
Managing Director
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STATEMENT OF LIMITING CONDITIONS
In accordance with recognized professional ethics, the fee for this service
is not contingent upon our opinion, and neither THE SLAVITT ELLINGTON GROUP nor
any of its employees has a present or intended financial interest in the Company
or Titan.
We have relied upon the Company's audited and internally prepared interim
financial statements and other information provided by Management or its
representatives in the course of this investigation, without further independent
verification, as correctly reflecting the Company's business conditions and
operating results for the respective periods.
We have relied upon the Company's audited financial statements prepared by
the Company's Certified Public Accountants and on their opinion, without further
independent verification, that the consolidated financial statements of the
Company present fairly in all material respects the financial position of the
Company and subsidiaries as of January 31, 1998, and that the results of their
operations and their cash flows for the year then ended are in conformity with
generally accepted accounting principles. Additionally, we have had been
provided with an internally generated forecast summary that was prepared by the
management of Titan and we have relied upon management's representation as to
its accuracy without further verification.
We have relied upon the Company management's representation that since
January 31, 1998, there has been no material, adverse change in the assets or
liabilities, or in the business or condition, financial or otherwise, or in the
operating results of the Company, and that to the Company's management's
knowledge there is no fact relating to the Company which would reasonably be
expected to result in a material, adverse effect upon the Company that has not
already been disclosed to us.
We have relied upon Titan's SEC filed financial statements prepared by
Titan's Certified Public Accountants and on their opinion, without further
independent verification, that the consolidated financial statements of Titan
present fairly in all material respects the financial position of Titan and
subsidiaries as of the last filing date (September 30, 1997), and that the
results of their operations and their cash flows for the quarter then ended are
in conformity with generally accepted accounting principles.
We have relied upon management's representation that since September 30,
1997, there has been no material, adverse change in the assets or liabilities,
or in the business or condition, financial or otherwise, or in the operating
results of the Titan, and that to the Company's management's knowledge there is
no fact relating to Titan which would reasonably be expected to result in a
material, adverse effect upon the Company that has not already been disclosed to
us.
All public financial and statistical information used is from sources we
deem reliable. We make no representation as to our sources' accuracy or
completeness and have accepted their information without further independent
verification. We have had no access to the management of companies other than
the Company and Titan, and have based our comparisons and evaluations of these
other companies on information available to the public, without further
verification.
The conclusions are based upon the assumption that present Company
management and Titan management would continue to maintain the character and
integrity of the enterprise throughout any sale, reorganization, or reduction of
the owner's equity interest, and that Titan will continue to be operated as a
going concern after any sale, reorganization, or reduction of the owner's equity
interest in connection with the Company.
Our opinion is valid only for the stated purpose and date of this fairness
opinion. It is our understanding that this opinion will be used by the Board to
access the fairness, from a financial point of view, to the shareholders of the
Company, of the consideration to be received in connection with a merger between
the Company and Titan. The fairness opinion, as determined within our opinion
letter, shall not be used for any other purposes. Though some similarities may
exist between the opinion as set forth for
4
<PAGE>
this purpose and others, it would be incorrect to use this opinion for any other
purpose due to specific timing, performance, and marketability issues that arise
in evaluation of a company. Accordingly, any use of the opinion as determined
within this opinion letter for other purposes would be inaccurate and possibly
misleading.
Our opinion does not constitute a recommendation to any Shareholder as to
how the Shareholder should vote on the Proposed Transaction. SEG has not
expressed an opinion as to the prices at which any security of Titan might trade
in the future.
Future services regarding the subject matter of our opinion, including, but
not limited to, testimony or attendance in court shall not be required of THE
SLAVITT ELLINGTON GROUP unless further arrangements have been made in writing.
Neither all nor any part of the contents of this opinion letter shall be
conveyed to the public through advertising, public relations, news, sales, mail,
direct transmittal, or other media without the prior written consent and
approval of THE SLAVITT ELLINGTON GROUP.
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APPENDIX C
February 26, 1998
The Board of Directors of Horizons Technology, Inc.
c/o Mr. Pat Boyce, Senior Vice President]el Horizons Technology, Inc.
3990 Ruffin Road
San Diego, California 92123-1826
Ladies and Gentlemen:
In accordance with your instructions, we have made a determination of the
fair market value of the Series A Preferred Shares of Horizons Technology, Inc.
(the "Company") as of February 26, 1998. It is our understanding that this
appraisal will be used by the Board of Directors of Horizons Technology, Inc.
(the "Board") in connection with a propsed merger between the Company and the
Titan Corporation. The fair market value, as determined within our opinion,
shall not be used for any other purposes.
The term "fair market value" is defined as the amount at which the capital
stock of a business enterprise would change hands between a willing buyer and a
willing seller when the former is not under any compulsion to buy and the latter
is not under any compulsion to sell, and both parties are able, as well as
willing, to trade and are well informed about the business enterprise and its
surrounding market.
The scope of our engagement included discussions with Management regarding
the history and nature of the business enterprise, its expected future
operations, a review of financial statements bearing upon historical operations,
and the review of all other factors that we deemed necessary under the
circumstances.
All financial statements and other records and documents were provided by
and are the responsibility of the Company. This information has been accepted,
without additional verification, as correctly reflecting the history and nature
of the business enterprise and the results of operations and financial condition
of the Company.
Based upon our investigation, premises and analyses performed, and subject
to the attached Statement of Limiting Conditions, it is our opinion that the
fair market value of the Series A Preferred Shares of Horizons Technology, Inc.
as of February 26, 1998, is reasonably stated in the amount of:
FIVE AND 00/100 DOLLARS ($5.00) PER SHARE.
We retain a copy of this letter in our files, together with field data from
which it was prepared. These records are considered confidential by us, and will
not be released except as appropriate in the performance of this engagement or
as required by law or legal process.
Respectfully submitted,
THE SLAVITT ELLINGTON GROUP
<PAGE>
STATEMENT OF LIMITING CONDITIONS
In accordance with recognized professional ethics, the fee for this service
is not contingent upon our conclusion of value, and neither THE SLAVITT
ELLINGTON GROUP nor any of its employees has a present or intended financial
interest in the Company.
We have relied upon the Company's audited and internally prepared interim
financial statements and other information provided by Management or its
representatives in the course of this investigation, without further independent
verification, as correctly reflecting the Company's business conditions and
operating results for the respective periods.
We have relied upon the Company's audited financial statements prepared by
the Company's Certified Public Accountants and on their opinion, without further
independent verification, that the consolidated financial statements of the
Company present fairly in all material respects the financial position of the
Company and subsidiaries as of January 31, 1998, and that the results of their
operations and their cash flows for the year then ended are in conformity with
generally accepted accounting principles.
We have relied upon the Company's management's representation that since
January 31, 1998, there has been no material, adverse change in the assets or
liabilities, or in the business or condition, financial or otherwise, or in the
operating results of the Company, and that to the Company's management's
knowledge there is no fact relating to the Company which would reasonably be
expected to result in a material, adverse effect upon the Company that has not
already been disclosed to us.
All public financial and statistical information used is from sources we
deem reliable. We make no representation as to our sources' accuracy or
completeness and have accepted their information without further independent
verification.
The conclusions are based upon the assumption that present Management would
continue to maintain the character and integrity of the enterprise throughout
any sale, reorganization, or reduction of the owner's equity interest, and that
the Company will continue to be operated as a going concern.
Our opinion of value in this opinion letter is valid only for the stated
purpose and date of the appraisal. It is our understanding that this appraisal
will be used by the Board to meet the requirement of a qualified plan and for
general corporate planning purposes. The fair market value, as determined within
our opinion, shall not be used for any other purposes. Though some similarities
may exist between value as set forth for this purpose and others, it would be
incorrect to use the price per share as determined within our opinion for any
other purpose due to specific timing, performance, and marketability issues that
arise in evaluating the fair market value of a company. Accordingly, any use of
the value as determined within this opinion for other purposes would be
inaccurate and possibly misleading.
Our determination of fair market value as reported herein does not represent
investment advice of any kind to any person and does not constitute a
recommendation as to the purchase or sale of shares of the Company or as to any
other course of action.
Future services regarding the subject matter of our opinion, including, but
not limited to, testimony or attendance in court shall not be required of THE
SLAVITT ELLINGTON GROUP unless further arrangements have been made in writing.
Neither all nor any part of the contents of this opinion letter shall be
conveyed to the public through advertising, public relations, news, sales, mail,
direct transmittal, or other media without the prior written consent and
approval of THE SLAVITT ELLINGTON GROUP.
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APPENDIX D
DELAWARE CODE ANNOTATED
COPYRIGHT (C) 1975-1997 BY THE STATE OF DELAWARE
ALL RIGHTS RESERVED.
*** THIS SECTION IS CURRENT THROUGH THE 1997 SUPPLEMENT ***
*** (1997 REGULAR SESSION OF THE 139TH GENERAL ASSEMBLY) ***
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
8 DEL. C. SECTION 262 (1997)
Section 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange
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or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of his shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A proxy
or vote against the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective date
of such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who has
complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock
of such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the effective
date of the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the effective
date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or series
of
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stock of such constituent corporation that are entitled to appraisal rights
of the effective date of the merger or consolidation or (ii) the surviving
or resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the corporation
that is required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors,
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including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may proceed to
trial upon the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the list filed
by the surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted his certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings until it
is finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement of such action, suit or proceeding, provided that
such officer or director acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the corporation's best interest,
and, for criminal proceedings, had no reasonable cause to believe his or her
conduct was illegal. A Delaware corporation may indemnify officers and directors
against expenses (including attorney's fees) in connection with the defense or
settlement of an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him or
her against the expenses which such officer or director actually and reasonably
incurred.
The Bylaws of Titan contain a provision to limit the personal liability of
the directors of Titan for violations of their fiduciary duty, except to the
extent such limitation of liability is prohibited by the Delaware Law. This
provision eliminates each director's liability to Titan or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
Titan or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The Bylaws of Titan provide that Titan shall indemnify directors and
officers to the fullest extent permitted by law. The effect of these provisions
is to eliminate the personal liability of directors for monetary damages for
actions involving a breach of their fiduciary duty of care, including any such
actions involving gross negligence.
In addition, Titan has entered into indemnity agreements with its executive
officers and directors whereby Titan obligates itself to indemnify such officers
and directors from any amounts which the officer or director becomes obligated
to pay because of any claim made against him or her arising out of any act or
omission committed while he or she is acting in his or her capacity as a
director and/or officer of Titan.
Titan maintains directors and officers liability insurance coverage that
insures its officers and directors against certain losses that may arise out of
their positions with Titan and insures Titan for liabilities it may incur to
indemnify its officers and directors.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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NUMBER DESCRIPTION OF DOCUMENT
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2.1 Agreement and Plan of Merger and Reorganization by and among the
Registrant, Sunrise Acquisition Sub, Inc. (Sunrise Sub) and Horizons
Technology, Inc. (Horizons), dated as of February 26, 1998.*(1)
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NUMBER DESCRIPTION OF DOCUMENT
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3.1 Titan's Restated Certificate of Incorporation dated as of November 6,
1986, which was Exhibit 3.1 to Registrant's 1987 Annual Report on Form
10-K is incorporated herein by this reference. Titan's Certificate of
Amendment of Restated Certificate of Incorporation dated as of June 30,
1987, which was Exhibit 3.2 to Registrant's 1987 Annual Report on Form
10-K is incorporated herein by this reference.
3.2 Titan's By-laws, as amended, which was Exhibit 6(a)(3) to Registrant's
Quarterly Report on Form 10-Q dated November 13, 1995, is incorporated
herein by this reference.
3.3 Certificate of Incorporation of Sunrise Sub.(1)
3.4 Bylaws of Sunrise Sub.(1)
3.5 Certificate of Incorporation of Horizons.(1)
3.6 Bylaws of Horizons.(1)
4.1 Warrant to Purchase Common Stock of Registrant issued to Corporate
Property Associates 9, L.P., a Delaware limited partnership, which was
Exhibit 4.1 to Registrant's Form 8-K dated July 11, 1991, is
incorporated herein by this reference.
4.2 Amendment to Warrant dated December 3, 1996, between the Registrant and
Corporate Property Associates 9, L.P. which was Exhibit 4.2 to
Registrant's 1996 Annual Report on Form 10-K, is incorporated herein by
this reference.
4.3 Warrant to Purchase Common Stock of Registrant issued to Corporate
Property Associates 10 Incorporated, a Maryland corporation, which was
Exhibit 4.2 to Registrant's Form 8-K dated July 11, 1991, is
incorporated herein by this reference.
4.4 Amendment to Warrant dated December 3, 1996, between the Registrant and
Corporate Property Associates 10, Incorporated which was Exhibit 4.4 to
Registrant's 1996 Annual Report on Form 10-K, is incorporated herein by
this reference.
4.5 Rights Amendment, dated as of August 21, 1995, between The Titan
Corporation and American Stock Transfer and Trust Company, which was
Exhibit 1 to Registrant's Form 8-A dated September 5, 1995, is
incorporated herein by this reference.
4.6 Certificate of Designations of Series B Cumulative Convertible Redeemable
Preferred Stock which was Exhibit 4.1 to Registrant's Registration
Statement on Form S-3 (No. 333-10919) is incorporated herein by this
reference.
4.7 Registration Rights Agreement, dated May 24, 1996, which was Exhibit 2 to
Schedule 13D filed on behalf of Mr. Jack D. Witt on June 5, 1996, is
incorporated herein by this reference.
4.8 Stockholders Agreement, dated May 24, 1996, which was Exhibit 1 to
Schedule 13D filed on behalf of Mr. Jack D. Witt on June 5, 1996, is
incorporated herein by this reference.
4.9 Form of Indenture relating to the Registrant's 8 1/4% Convertible
Subordinated Debentures due November 1, 2003, which was Exhibit 4.1 to
Amendment No. 1 to Registrant's Registration Statement on Form S-3 (No.
333-10695) is incorporated herein by this reference.
5.1 Opinion of Cooley Godward LLP (to be filed by amendment).
8.1 Tax Opinion of Cooley Godward LLP.
8.2 Tax Opinion of Jenkens & Gilchrist, a Professional Corporation.
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10.1 Stock Option Plan of 1983, as amended though January 1, 1987, which was
Exhibit 10.2 to Registrant's 1987 Annual Report on Form 10-K is
incorporated herein by this reference.
10.2 Stock Option Plan of 1986, as amended through January 1, 1987, which was
Exhibit 10.3 to Registrant's 1987 Annual Report on Form 10-K is
incorporated herein by this reference.
10.3 Stock Option Plan of 1990, which was filed in the 1990 definitive proxy
statement and was Exhibit 10.11 to Registrant's 1989 Annual Report on
Form 10-K is incorporated herein by this reference.
10.4 Stock Option Plan of 1994, which was filed in the 1994 definitive proxy
statement and was Exhibit 10.17 to Registrant's 1993 Annual Report on
Form 10-K is incorporated herein by this reference.
10.5 1989 Directors' Stock Option Plan which was filed in the 1990 definitive
proxy statement and was Exhibit 10.12 to Registrant's 1989 Annual Report
on Form 10-K is incorporated herein by this reference.
10.6 1992 Directors' Stock Option Plan which was filed in the 1993 definitive
proxy statement and was Exhibit 10.14 to Registrant's 1992 Annual Report
on Form 10-K is incorporated herein by this reference.
10.7 1996 Directors' Stock Option and Equity Participation Plan which was filed
in the 1996 definitive proxy statement and was Exhibit 10.7 to
Registrant's 1995 Annual Report on Form 10-K is incorporated herein by
this reference.
10.8 Supplemental Retirement Plan for Key Executives which was filed in the
1990 definitive proxy statement and was Exhibit 10.13 to Registrant's
1989 Annual Report on Form 10-K is incorporated herein by this
reference.
10.9 1995 Employee Stock Purchase Plan, which was Exhibit 4 to Registrant's
Form S-8 dated December 18, 1995, is incorporated herein by this
reference.
10.10 Lease Agreement dated as of July 9, 1991, by and between Torrey Pines
Limited Partnership, a California limited partnership, as landlord, and
Registrant, as tenant, which was Exhibit 10.1 to Registrant's Form 8-K
dated July 11, 1991 is incorporated herein by this reference.
10.11 Agreement and Plan of Reorganization of Eldyne, Inc. dated as of April 19,
1996, by and among Eldyne, Inc., Jack Witt, ELD Acquisition Sub, Inc.
and Registrant, which was Exhibit 2.1 to Registrant's Form 8-K dated May
24, 1996, is incorporated herein by this reference.
10.12 Agreement and Plan of Reorganization of Unidyne Corporation dated as of
April 19, 1996, by and among Unidyne Corporation, Jack Witt, UNI
Acquisition Sub, Inc. and Registrant, which was Exhibit 2.2 to
Registrant's Form 8-K dated May 24, 1996, is incorporated herein by this
reference.
10.13 Asset Purchase Agreement as of March 5, 1994, by and between Registrant
and Cubic Corporation which was Exhibit 2 to Registrant's Form 8-K dated
March 5, 1994, is incorporated herein by this reference.
10.14 Line of Credit Agreement dated as of August 8, 1994, by and between
Sumitomo Bank of California and Registrant, which was Exhibit 10.16 to
Registrant's 1994 Annual Report on Form 10-K, is incorporated herein by
this reference.
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10.15 Executive Severance Plan entered into by Titan with Gene W. Ray, Eric M.
DeMarco, Philip J. Englund, Ronald B. Gorda, Cornelius L. Hensel,
Frederick L. Judge and Ira Frazer, which was Exhibit 6(a)(10) to
Registrant's Quarterly Report on Form 10-Q dated November 13, 1995, is
incorporated herein by this reference.
10.16 First Amendment to Commercial Loan Agreement dated May 25, 1995, by and
between Registrant and Sumitomo Bank of California, which was Exhibit
10.15 to Registrant's 1995 Annual Report on Form 10-K, is incorporated
herein by this reference.
10.17 Second Amendment to Commercial Loan Agreement dated December 29, 1995, by
and between Registrant and Sumitomo Bank of California, which was
Exhibit 10.16 to Registrant's 1995 Annual Report on Form 10-K, is
incorporated herein by this reference.
10.18 Third Amendment to Commercial Loan Agreement dated May 9, 1996, by and
between Registrant and Sumitomo Bank of California which was Exhibit
10.18 to Registrant's 1996 Annual Report on Form 10-K, is incorporated
herein by this reference.
10.19 Fourth Amendment to Commercial Loan Agreement dated September 6, 1996, by
and between Registrant and The Sumitomo Bank of California, which was
Exhibit 10.1 to Titan's Registration Statement on Form S-3/A No.
333-10919, is incorporated herein by this reference.
10.20 Security Agreement dated September 6, 1996, made by Registrant in favor of
The Sumitomo Bank of California, which was Exhibit 10.19 to Titan's
Registration Statement on Form S-3/A No. 333-10919, is incorporated
herein by this reference.
10.21 Pledge Agreement executed as of September 6, 1996, by Registrant in favor
of The Sumitomo Bank of California, which was Exhibit 10.3 to Titan's
Registration Statement on Form S-3/A No. 333-10919, is incorporated
herein by this reference.
10.22 Patent Collateral Assignment made and entered into as of September 6,
1996, by Registrant in favor of The Sumitomo Bank of California, which
was Exhibit 10.4 to Titan's Registration Statement on Form S-3/A No.
333-10919, is incorporated herein by this reference.
10.23 Security Agreement dated as of September 6, 1996, made by Titan
Information Systems Corporation in favor of The Sumitomo Bank of
California, which was Exhibit 10.5 to Titan's Registration Statement on
Form S-3/A No. 333-10919, is incorporated herein by this reference.
10.24 Patent Collateral Assignment made and entered into as of September 6,
1996, by Titan Information Systems Corporation in favor of The Sumitomo
Bank of California, which was Exhibit 10.6 to Titan's Registration
Statement on Form S-3/A No. 333-10919, is incorporated herein by this
reference.
10.25 Continuing Guaranty executed as of September 6, 1996, by Titan Information
Systems Corporation in favor of The Sumitomo Bank of California, which
was Exhibit 10.7 to Titan's Registration Statement on Form S-3/A No.
333-10919, is incorporated herein by this reference.
10.26 Fifth Amendment to Commercial Loan Agreement dated October 18, 1996, by
and between Registrant and Sumitomo Bank of California which was Exhibit
10.26 to Registrant's 1996 Annual Report on Form 10-K, is incorporated
herein by this reference.
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NUMBER DESCRIPTION OF DOCUMENT
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10.27 Loan and Security Agreement, dated December 29, 1995, by and between
Registrant and Capital Associates International, Inc., which was Exhibit
10.17 to Registrant's 1995 Annual Report on Form 10-K, is incorporated
herein by this reference.
10.28 Rider dated August 13, 1996, to Loan and Security Agreement dated December
29, 1995 by and between Registrant and Capital Associates International,
Inc. which was Exhibit 10.28 to Registrant's 1996 Annual Report on Form
10-K, is incorporated herein by this reference.
10.29 Loan and Security Agreement dated January 31, 1996, by and between
Registrant and Sanwa General Equipment Leasing, a division of Sanwa
Business Credit Corporation, which was Exhibit 10.18 to Registrant's
1995 Annual Report on Form 10-K, is incorporated herein by this
reference.
10.30 Amended and Restated Loan and Security Agreement dated May 24, 1996, by
and between Crestar Bank and Eldyne, Inc., Unidyne Corporation and DCS
Acquisition Sub, Inc. which was Exhibit 10.28 to Registrant's 1996
Annual Report on Form 10- K, is incorporated herein by this reference.
10.31 Formal modification dated December 23, 1996, of the Amended and Restated
Loan and Security Agreement dated May 24, 1996, by and between Crestar
Bank and Eldyne, Inc., Unidyne Corporation and DCS Acquisition Sub, Inc.
which was Exhibit 10.31 to Registrant's 1996 Annual Report on Form 10-K,
is incorporated herein by this reference.
10.32 Lease dated July 22, 1994 between Horizons and Ruffin Tech Center Ltd.(1)
21.1 Subsidiaries of Registrant.(1)
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.3 Consent of The Slavitt Ellington Group. (The relevant consent of The
Slavitt Ellington Group with respect to its opinion regarding the
fairness, from a financial point of view, of the consideration to be
received in the Merger, to the stockholders of Horizons, is set forth in
the last paragraph of that consent, which is included as Appendix B to
the Prospectus/Proxy Statement).(1)
24.1 Power of Attorney (included in Part II of the Registration Statement).
99.1 Form of Proxy Card for Horizons Meeting--Holders of Horizons Common Stock.
99.2 Form of Proxy Card for Horizons Meeting--Holders of Horizons Series A
Preferred Stock.
99.3 Form of Proxy Card for Horizons Meeting--Participants of the Horizons
ESOP.
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* Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the
Commission supplementally upon request.
(1) Previously filed with the Registrant's Registration Statement on Form S-4
(File No. 333-45719) dated March 10, 1998.
II-5
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, PROVIDED, that
the registrant includes in the prospectus, by means of a post-effective
amendments financial statements required pursuant to this paragraph (a)(4) and
other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on Form
F-3, a post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the Act or Rule 3-19
of this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Form F-3."
(g) (1) The Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 ("the Act")
and is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration Statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Act, each such post-effective
II-6
<PAGE>
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference to the Prospectus/Proxy Statement pursuant to
Items 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of such
request and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
(4) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Act, as may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the Certificate of Incorporation and the Bylaws of the Registrant
and the Delaware General Corporation Law, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in a
successful defense of any action, such 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
question has been settled by controlling precedent, submit to a court of
approximate jurisdiction the question of whether such indemnification by it is
against public policy, as expressed in the Act, and will be governed by the
final adjudication of such issue.
(6) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (that is incorporated by reference in the Registration Statement) shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, The
Titan Corporation has duly caused this Amendment No. 1 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 April 16, 1998.
THE TITAN CORPORATION
By: /s/ ERIC M. DEMARCO
-----------------------------------------
Eric M. DeMarco,
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
/s/ J.S. WEBB*
- ------------------------------ Chairman of the Board of April 16, 1998
J.S. Webb Directors
President and Chief
/s/ GENE W. RAY* Executive Officer
- ------------------------------ (Principal Executive April 16, 1998
Gene W. Ray Officer) and Director
Senior Vice President and
/s/ ERIC M. DEMARCO* Chief Financial Officer
- ------------------------------ (Principal Financial and April 16, 1998
Eric M. DeMarco Accounting Officer)
/s/ CHARLES R. ALLEN*
- ------------------------------ Director April 16, 1998
Charles R. Allen
/s/ JOSEPH F. CALIGIURI*
- ------------------------------ Director April 16, 1998
Joseph F. Caligiuri
/s/ DANIEL J. FINK*
- ------------------------------ Director April 16, 1998
Daniel J. Fink
/s/ ROBERT E. LA BLANC*
- ------------------------------ Director April 16, 1998
Robert E. La Blanc
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
/s/ THOMAS G. POWNALL*
- ------------------------------ Director April 16, 1998
Thomas G. Pownall
</TABLE>
*By: /s/ IRA FRAZER
-------------------------
Ira Frazer
Attorney-in-Fact
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization by and among the
Registrant, Sunrise Acquisition Sub, Inc. (Sunrise Sub) and Horizons
Technology, Inc. (Horizons), dated as of February 26, 1998.(1)
3.1 Titan's Restated Certificate of Incorporation dated as of November 6,
1986, which was Exhibit 3.1 to Registrant's 1987 Annual Report on Form
10-K is incorporated herein by this reference. Titan's Certificate of
Amendment of Restated Certificate of Incorporation dated as of June 30,
1987, which was Exhibit 3.2 to Registrant's 1987 Annual Report on Form
10-K is incorporated herein by this reference.
3.2 Titan's By-laws, as amended, which was Exhibit 6(a)(3) to Registrant's
Quarterly Report on Form 10-Q dated November 13, 1995, is incorporated
herein by this reference.
3.3 Certificate of Incorporation of Sunrise Sub.(1)
3.4 Bylaws of Sunrise Sub.(1)
3.5 Certificate of Incorporation of Horizons.(1)
3.6 Bylaws of Horizons.(1)
4.1 Warrant to Purchase Common Stock of Registrant issued to Corporate
Property Associates 9, L.P., a Delaware limited partnership, which was
Exhibit 4.1 to Registrant's Form 8-K dated July 11, 1991, is
incorporated herein by this reference.
4.2 Amendment to Warrant dated December 3, 1996, between the Registrant and
Corporate Property Associates 9, L.P. which was Exhibit 4.2 to
Registrant's 1996 Annual Report on Form 10-K, is incorporated herein by
this reference.
4.3 Warrant to Purchase Common Stock of Registrant issued to Corporate
Property Associates 10 Incorporated, a Maryland corporation, which was
Exhibit 4.2 to Registrant's Form 8-K dated July 11, 1991, is
incorporated herein by this reference.
4.4 Amendment to Warrant dated December 3, 1996, between the Registrant and
Corporate Property Associates 10, Incorporated which was Exhibit 4.4 to
Registrant's 1996 Annual Report on Form 10-K, is incorporated herein by
this reference.
4.5 Rights Amendment, dated as of August 21, 1995, between The Titan
Corporation and American Stock Transfer and Trust Company, which was
Exhibit 1 to Registrant's Form 8-A dated September 5, 1995, is
incorporated herein by this reference.
4.6 Certificate of Designations of Series B Cumulative Convertible Redeemable
Preferred Stock which was Exhibit 4.1 to Registrant's Registration
Statement on Form S-3 (No. 333-10919) is incorporated herein by this
reference.
4.7 Registration Rights Agreement, dated May 24, 1996, which was Exhibit 2 to
Schedule 13D filed on behalf of Mr. Jack D. Witt on June 5, 1996, is
incorporated herein by this reference.
4.8 Stockholders Agreement, dated May 24, 1996, which was Exhibit 1 to
Schedule 13D filed on behalf of Mr. Jack D. Witt on June 5, 1996, is
incorporated herein by this reference.
4.9 Form of Indenture relating to the Registrant's 8 1/4% Convertible
Subordinated Debentures due November 1, 2003, which was Exhibit 4.1 to
Amendment No. 1 to Registrant's Registration Statement on Form S-3 (No.
333-10695) is incorporated herein by this reference.
5.1 Opinion of Cooley Godward LLP (to be filed by amendment).
8.1 Tax Opinion of Cooley Godward LLP.
8.2 Tax Opinion of Jenkens & Gilchrist, a Professional Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------
<C> <S>
10.1 Stock Option Plan of 1983, as amended though January 1, 1987, which was
Exhibit 10.2 to Registrant's 1987 Annual Report on Form 10-K is
incorporated herein by this reference.
10.2 Stock Option Plan of 1986, as amended through January 1, 1987, which was
Exhibit 10.3 to Registrant's 1987 Annual Report on Form 10-K is
incorporated herein by this reference.
10.3 Stock Option Plan of 1990, which was filed in the 1990 definitive proxy
statement and was Exhibit 10.11 to Registrant's 1989 Annual Report on
Form 10-K is incorporated herein by this reference.
10.4 Stock Option Plan of 1994, which was filed in the 1994 definitive proxy
statement and was Exhibit 10.17 to Registrant's 1993 Annual Report on
Form 10-K is incorporated herein by this reference.
10.5 1989 Directors' Stock Option Plan which was filed in the 1990 definitive
proxy statement and was Exhibit 10.12 to Registrant's 1989 Annual Report
on Form 10-K is incorporated herein by this reference.
10.6 1992 Directors' Stock Option Plan which was filed in the 1993 definitive
proxy statement and was Exhibit 10.14 to Registrant's 1992 Annual Report
on Form 10-K is incorporated herein by this reference.
10.7 1996 Directors' Stock Option and Equity Participation Plan which was filed
in the 1996 definitive proxy statement and was Exhibit 10.7 to
Registrant's 1995 Annual Report on Form 10-K is incorporated herein by
this reference.
10.8 Supplemental Retirement Plan for Key Executives which was filed in the
1990 definitive proxy statement and was Exhibit 10.13 to Registrant's
1989 Annual Report on Form 10-K is incorporated herein by this
reference.
10.9 1995 Employee Stock Purchase Plan, which was Exhibit 4 to Registrant's
Form S-8 dated December 18, 1995, is incorporated herein by this
reference.
10.10 Lease Agreement dated as of July 9, 1991, by and between Torrey Pines
Limited Partnership, a California limited partnership, as landlord, and
Registrant, as tenant, which was Exhibit 10.1 to Registrant's Form 8-K
dated July 11, 1991 is incorporated herein by this reference.
10.11 Agreement and Plan of Reorganization of Eldyne, Inc. dated as of April 19,
1996, by and among Eldyne, Inc., Jack Witt, ELD Acquisition Sub, Inc.
and Registrant, which was Exhibit 2.1 to Registrant's Form 8-K dated May
24, 1996, is incorporated herein by this reference.
10.12 Agreement and Plan of Reorganization of Unidyne Corporation dated as of
April 19, 1996, by and among Unidyne Corporation, Jack Witt, UNI
Acquisition Sub, Inc. and Registrant, which was Exhibit 2.2 to
Registrant's Form 8-K dated May 24, 1996, is incorporated herein by this
reference.
10.13 Asset Purchase Agreement as of March 5, 1994, by and between Registrant
and Cubic Corporation which was Exhibit 2 to Registrant's Form 8-K dated
March 5, 1994, is incorporated herein by this reference.
10.14 Line of Credit Agreement dated as of August 8, 1994, by and between
Sumitomo Bank of California and Registrant, which was Exhibit 10.16 to
Registrant's 1994 Annual Report on Form 10-K, is incorporated herein by
this reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------
<C> <S>
10.15 Executive Severance Plan entered into by Titan with Gene W. Ray, Eric M.
DeMarco, Philip J. Englund, Ronald B. Gorda, Cornelius L. Hensel,
Frederick L. Judge and Ira Frazer, which was Exhibit 6(a)(10) to
Registrant's Quarterly Report on Form 10-Q dated November 13, 1995, is
incorporated herein by this reference.
10.16 First Amendment to Commercial Loan Agreement dated May 25, 1995, by and
between Registrant and Sumitomo Bank of California, which was Exhibit
10.15 to Registrant's 1995 Annual Report on Form 10-K, is incorporated
herein by this reference.
10.17 Second Amendment to Commercial Loan Agreement dated December 29, 1995, by
and between Registrant and Sumitomo Bank of California, which was
Exhibit 10.16 to Registrant's 1995 Annual Report on Form 10-K, is
incorporated herein by this reference.
10.18 Third Amendment to Commercial Loan Agreement dated May 9, 1996, by and
between Registrant and Sumitomo Bank of California which was Exhibit
10.18 to Registrant's 1996 Annual Report on Form 10-K, is incorporated
herein by this reference.
10.19 Fourth Amendment to Commercial Loan Agreement dated September 6, 1996, by
and between Registrant and The Sumitomo Bank of California, which was
Exhibit 10.1 to Titan's Registration Statement on Form S-3/A No.
333-10919, is incorporated herein by this reference.
10.20 Security Agreement dated September 6, 1996, made by Registrant in favor of
The Sumitomo Bank of California, which was Exhibit 10.19 to Titan's
Registration Statement on Form S-3/A No. 333-10919, is incorporated
herein by this reference.
10.21 Pledge Agreement executed as of September 6, 1996, by Registrant in favor
of The Sumitomo Bank of California, which was Exhibit 10.3 to Titan's
Registration Statement on Form S-3/A No. 333-10919, is incorporated
herein by this reference.
10.22 Patent Collateral Assignment made and entered into as of September 6,
1996, by Registrant in favor of The Sumitomo Bank of California, which
was Exhibit 10.4 to Titan's Registration Statement on Form S-3/A No.
333-10919, is incorporated herein by this reference.
10.23 Security Agreement dated as of September 6, 1996, made by Titan
Information Systems Corporation in favor of The Sumitomo Bank of
California, which was Exhibit 10.5 to Titan's Registration Statement on
Form S-3/A No. 333-10919, is incorporated herein by this reference.
10.24 Patent Collateral Assignment made and entered into as of September 6,
1996, by Titan Information Systems Corporation in favor of The Sumitomo
Bank of California, which was Exhibit 10.6 to Titan's Registration
Statement on Form S-3/A No. 333-10919, is incorporated herein by this
reference.
10.25 Continuing Guaranty executed as of September 6, 1996, by Titan Information
Systems Corporation in favor of The Sumitomo Bank of California, which
was Exhibit 10.7 to Titan's Registration Statement on Form S-3/A No.
333-10919, is incorporated herein by this reference.
10.26 Fifth Amendment to Commercial Loan Agreement dated October 18, 1996, by
and between Registrant and Sumitomo Bank of California which was Exhibit
10.26 to Registrant's 1996 Annual Report on Form 10-K, is incorporated
herein by this reference.
10.27 Loan and Security Agreement, dated December 29, 1995, by and between
Registrant and Capital Associates International, Inc., which was Exhibit
10.17 to Registrant's 1995 Annual Report on Form 10-K, is incorporated
herein by this reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------
<C> <S>
10.28 Rider dated August 13, 1996, to Loan and Security Agreement dated December
29, 1995 by and between Registrant and Capital Associates International,
Inc. which was Exhibit 10.28 to Registrant's 1996 Annual Report on Form
10-K, is incorporated herein by this reference.
10.29 Loan and Security Agreement dated January 31, 1996, by and between
Registrant and Sanwa General Equipment Leasing, a division of Sanwa
Business Credit Corporation, which was Exhibit 10.18 to Registrant's
1995 Annual Report on Form 10-K, is incorporated herein by this
reference.
10.30 Amended and Restated Loan and Security Agreement dated May 24, 1996, by
and between Crestar Bank and Eldyne, Inc., Unidyne Corporation and DCS
Acquisition Sub, Inc. which was Exhibit 10.28 to Registrant's 1996
Annual Report on Form 10- K, is incorporated herein by this reference.
10.31 Formal modification dated December 23, 1996, of the Amended and Restated
Loan and Security Agreement dated May 24, 1996, by and between Crestar
Bank and Eldyne, Inc., Unidyne Corporation and DCS Acquisition Sub, Inc.
which was Exhibit 10.31 to Registrant's 1996 Annual Report on Form 10-K,
is incorporated herein by this reference.
10.32 Lease dated July 22, 1994 between Horizons and Ruffin Tech Center Ltd.(1)
21.1 Subsidiaries of Registrant.(1)
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.3 Consent of The Slavitt Ellington Group. (The relevant consent of The
Slavitt Ellington Group with respect to its opinion regarding the
fairness, from a financial point of view, of the consideration to be
received in the Merger, to the stockholders of Horizons, is set forth in
the last paragraph of that consent, which is included as Appendix B to
the Prospectus/Proxy Statement).(1)
24.1 Power of Attorney (included in Part II of the Registration Statement).(1)
99.1 Form of Proxy Card for Horizons Meeting--Holders of Horizons Common Stock.
99.2 Form of Proxy Card for Horizons Meeting--Holders of Horizons Series A
Preferred Stock.
99.3 Form of Proxy Card for Horizons Meeting--Participants of the Horizons
ESOP.
</TABLE>
- ------------------------
(1) Previously filed with the Registrant's Registration Statement on Form S-4
(File No. 333-45119) dated March 10, 1998.
<PAGE>
[LETTERHEAD]
April 16, 1998
The Titan Corporation
3033 Science Park Road
San Diego, CA 92121
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger and Reorganization dated as of February 26, 1998
(the "Reorganization Agreement") by and among The Titan Corporation, a
Delaware corporation ("Parent"), Sunrise Acquisition Sub, Inc., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger Sub"), Horizons
Technology, Inc., a Delaware corporation (the "Company"), and certain
stockholders of the Company.
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All
section references, unless otherwise indicated, are to the Internal Revenue
Code of 1986, as amended (the "Code").
We have acted as counsel to Parent and Merger Sub in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have
examined, and are relying upon (without any independent investigation or
review thereof) the truth and accuracy, at all relevant times, of the
statements, covenants, representations and warranties contained in, the
following documents (including all exhibits and schedules attached thereto):
(a) the Reorganization Agreement;
(b) those certain tax representation letters dated March 9, 1998
delivered to us by Parent, Merger Sub and the Company containing certain
representations of Parent, Merger Sub and the Company (the "Tax Representation
Letters"); and
(c) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and related to
the consummation of the Merger and the other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
<PAGE>
The Titan Corporation
April 16, 1998
Page 2
(a) Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Time) duly and validly executed and delivered where due execution and delivery
are a prerequisite to the effectiveness thereof;
(b) All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and stockholders in connection with the Merger, including, but not
limited to, those set forth in the Reorganization Agreement (including the
exhibits thereto) and the Tax Representation Letters are true and accurate at
all relevant times;
(c) All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof; and
(d) Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368(a)(1) of the Code.
- No gain or loss will be recognized for federal income tax
purposes by the holders of Company Common Stock and Company Series A
Preferred Stock upon the receipt of Parent Common Stock solely in
exchange for such Company Common Stock and Company Series A Preferred
Stock in the Merger (except to the extent, if any, that (i) cash is
received in lieu of fractional shares, or (ii) Parent Common Stock
received by a Parent Series A Preferred Stock holder is attributable
to any dividends in arrears.
- The aggregate tax basis of the Parent Common Stock so received
by Company stockholders in the Merger (including any fractional
shares of Parent Common Stock and Company Series A Preferred Stock
not actually received) will be the same as the aggregate tax basis of
the Company Common Stock and Company Series A Preferred Stock
surrendered in exchange therefor.
- The holding period of the Parent Common Stock so received by
each Company stockholder in the Merger will include the holding
period of the shares of Company Common Stock and Company Series A
Preferred Stock surrendered in exchange therefor.
<PAGE>
The Titan Corporation
April 16, 1998
Page 3
- Cash payments received by holders of Company Common Stock and
Company Series A Preferred Stock in lieu of fractional shares of
Parent Common Stock will be treated as if such fractional shares had
been issued in the Merger and then redeemed by Parent. A Company
stockholder receiving such cash will recognize gain or loss upon such
payment, measured by the difference (if any) between the amount of
cash received and the basis allocated to such fractional share. The
gain or loss should be capital gain or loss, provided that each such
fractional share of Parent Common Stock was held as a capital asset
at the Effective Time of the Merger.
- A holder of Company Common Stock and Company Series A Preferred
Stock who exercises appraisal rights with respect to a share of
Company Common Stock or Company Series A Preferred Stock and receives
a cash payment for such shares generally should recognize capital
gain or loss (if such share was held as a capital asset at the
Effective Time of the Merger) measured by the difference between the
stockholder's basis in such share and the amount of cash received,
provided that such payment is not "essentially equivalent to a
dividend" " within the meaning of Section 302 of the Code nor has the
effect of a distribution of a dividend within the meaning of
Section 356(a)(2) of the Code after giving effect to the constructive
ownership rules of the Code (collectively, "a Dividend Equivalent
Transaction"). A sale of shares pursuant to an exercise of appraisal
rights generally will not be a Dividend Equivalent Transaction if, as
a result of such exercise, the stockholder exercising the appraisal
rights owns no shares of capital stock of Parent (either actually or
constructively within the meaning of Section 318 of the Code)
immediately after the Merger. For non-corporate holders, any such
capital gain will be taxed at a maximum federal income tax rate of
39.6% if the holder's holding period in the shares is 1 year or less,
at a maximum federal tax rate of 28% if the holder's holding period
in the shares is more than 1 year but not more than 18 months and at
a maximum federal income tax rate of 20% if the holder's holding
period in the shares is more than 18 months. For corporate holders,
capital gain will continue to be subject to tax at the ordinary
income tax rates applicable to corporations.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income
tax issues contained in the Registration Statement. We have reviewed the
discussion entitled "Certain Federal Income Tax Matters" contained in the
Registration Statement and believe that, insofar as it relates to statements of
law and legal conclusions, is correct in all material respects.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In
<PAGE>
The Titan Corporation
April 16, 1998
Page 4
addition, no opinion is expressed as to any federal income tax consequence of
the Merger or the other transactions contemplated by the Reorganization
Agreement except as specifically set forth herein, and this opinion may not
be relied upon except with respect to the consequences specifically discussed
herein. Furthermore, this opinion only relates to the holders of Company
capital stock who hold such stock as a capital asset. No opinion is
expressed as to the federal income tax treatment that may be relevant to a
particular investor in light of personal circumstances or to certain types of
investors subject to special treatment under the federal income tax laws (for
example, life insurance companies, dealers in securities, taxpayers subject
to the alternative minimum tax, banks, tax-exempt organizations, non-United
States persons, and stockholders who acquired their shares of Company capital
stock pursuant to the exercise of options or otherwise as compensation or who
hold their Company capital stock as part of a straddle or risk reduction
transaction). Further, no opinion is expressed as to the federal income tax
treatment with respect to holders of warrants for Company capital stock.
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement, or as to any other transaction
whatsoever, including the Merger, if all of the transactions described in the
Reorganization Agreement are not consummated in accordance with the terms of
the Reorganization Agreement and without waiver of any material provision
thereof. To the extent that any of the representations, warranties, statements
and assumptions material to our opinion and upon which we have relied are not
accurate and complete in all material respects at all relevant times, our
opinion would be adversely affected and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service
or any court of law, tribunal, administrative agency or other governmental
body. The conclusions are based on the Code, existing judicial decisions,
administration regulations and published rulings. No assurance can be given
that future legislative, judicial or administrative changes or interpretations
would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion is being delivered solely in connection with the Registration
Statement. It is intended for the benefit of Parent and Merger Sub and may not
be relied upon or utilized for any other purpose or by any other person and may
not be made available to any other person without our prior written consent.
<PAGE>
The Titan Corporation
April 16, 1998
Page 5
We consent to the reference to our firm under the caption "Federal Income Tax
Matters" in the Proxy Statement included in the Registration Statement and to
the reproduction and filing of this opinion as an exhibit to the Proxy
Statement and to the Registration Statement.
Sincerely,
Susan Cooper Philpot
SCP:dp
<PAGE>
[LETTERHEAD]
April 16, 1998
Horizons Technology, Inc.
3990 Ruffin Road
San Diego, CA 92123-1826
RE: FEDERAL INCOME TAX OPINION REQUIRED UNDER SECTION 9.3(b) OF THAT
CERTAIN AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (THE
"REORGANIZATION AGREEMENT") DATED FEBRUARY 26, 1998, BY AND AMONG THE
TITAN CORPORATION, A DELAWARE CORPORATION ("PARENT"), SUNRISE
ACQUISITION SUB, INC., A DELAWARE CORPORATION ("MERGER SUB"), HORIZONS
TECHNOLOGY, INC., A DELAWARE CORPORATION (THE "COMPANY"), AND CERTAIN
STOCKHOLDERS OF THE COMPANY.
Gentlemen:
Parent filed on March 9, 1998 with the Securities and Exchange Commission
(the "Commission") a registration statement (the "Registration Statement") on
Form S-4 under the Securities Act of 1933, as amended (the "Securities Act").
The Registration Statement was filed in connection with issuance of 3,270,000
shares of the common stock of Parent pursuant to the merger of the Merger Sub
with and into the Company (the "Merger"). Except as otherwise indicated,
capitalized terms used herein shall have the meanings assigned to them in the
Registration Statement.
Jenkens & Gilchrist, a Professional Corporation (the "Firm"), has acted as
counsel to the Company in connection with the Merger. You have requested the
opinions set forth in Section I hereof regarding the material federal income tax
consequences to the stockholders of the Company anticipated to result from the
Merger. Section I of this letter (the "Opinion Letter") contains the Firm's
opinion. Section II of this Opinion Letter contains limitations on the opinion.
<PAGE>
Horizons Technology, Inc.
April 16, 1998
Page 2
I. OPINION
Based upon our analysis of the applicable authorities and subject to the
limitations set forth in Section II, the Firm is of the opinion that for federal
income tax purposes, the Merger will be a reorganization within the meaning of
Section 368(a) of the Code and the following federal income tax consequences
will result:
1. No gain or loss will be recognized for federal income tax purposes by
the holders of Company Common Stock and Company Series A Preferred
Stock upon the receipt of the Parent Common Stock solely in exchange
for such Company Common Stock and Company Series A Preferred Stock in
the Merger (except to the extent, if any, that (i) cash is received in
lieu of fractional shares, or (ii) Parent Common Stock received by a
Company Series A Preferred Stock holder is attributable to any
dividends in arrears.)
2. The aggregate tax basis of the Parent Common Stock received by
Company stockholders in the Merger (including any fractional shares of
Parent Common Stock and Company Series A Preferred Stock not actually
received) will be the same as the aggregate tax basis of the Company
Common Stock and Company Series A Preferred Stock surrendered in
exchange therefor.
4. The holding period of the Parent Common Stock received by each
Company stockholder in the Merger will include the holding period of
the shares of Company Common Stock and Company Series A Preferred
Stock surrendered in exchange therefor.
5. Cash payments received by the holders of Company Common Stock and
Company Series A Preferred Stock in lieu of fractional shares of
Parent Common Stock will be treated as if such fractional shares had
been issued in the Merger and then redeemed by Parent. A Company
stockholder receiving such cash will recognize gain or loss upon such
payment, measured by the difference (if any) between the amount of
cash received and the basis allocated to such fractional share. The
gain or loss should be capital gain or loss, provided that each such
fractional share of Parent Common Stock was held as a capital asset at
the Effective Time of the Merger.
6. A holder of Company Common Stock and Company Series A Preferred Stock
who exercises appraisal rights with respect to a share of Company
Common Stock or Company Series A Preferred Stock and receives a cash
payment for such share
<PAGE>
Horizons Technology, Inc.
April 16, 1998
Page 3
generally should recognize capital gain or loss (if such shares was
held as a capital asset at the Effective Time of the Merger)
measured by the difference between the stockholder's basis in such
shares and the amount of cash received, provided that such payment
is not "essentially equivalent to a dividend" within the meaning of
Section 302 of the Code nor has the effect of a distribution of a
dividend within the meaning of Section 356(a)(2) of the Code after
giving effect to the constructive ownership rules of the Code
(collectively, a "Dividend Equivalent Transaction"). A sale of
shares pursuant to an exercise of appraisal rights generally will
not be a Dividend Equivalent Transaction if, as a result of such
exercise, the stockholder exercising the appraisal rights owns no
shares of capital stock of Parent (either actually or
constructively within the meaning of Section 318 of the Code)
immediately after the Merger. For non-corporate holders, any such
capital gain, will be taxed at a maximum federal income tax rate of
39.6% if the holder's holding period in the shares is 1 year or
less, at a maximum federal income tax rate of 28% if the holder's
holding period in the shares is more than 1 year but not more than
18 months and at a maximum federal income tax rate of 20% if the
holder's holding period in the shares is more than 18 months. For
corporate holders, capital gain will continue to be subject to tax
at the ordinary income tax rates applicable to corporations.
In addition, to your request for our opinion on this specific matter of
federal income tax law, you have asked us to review the discussion of federal
income tax issues contained in the Registration Statement. We have reviewed the
discussion entitled "Federal Income Tax Matters" contained in the Registration
Statement and believe that, insofar as it relates to statements of law and legal
conclusions, is correct in all material respects.
II. LIMITATIONS
1. Except as otherwise indicated, the opinions set forth in Section I are
based upon the Code and its legislative history, the regulations promulgated
thereunder, judicial decisions and current administrative rulings and practices
of the Internal Revenue Service, all as in effect on the date of this Opinion
Letter. These authorities may be amended or revoked at any time. Any such
changes may or may not be retroactive with respect to transactions entered into
or contemplated prior to such changes and could significantly alter the
conclusions reached in this Opinion Letter. There is no assurance that
legislative, judicial or administrative changes will not occur in the future.
The Firm assumes no obligation to update or modify this Opinion Letter to
reflect any developments that may occur after the date of this Opinion Letter.
<PAGE>
Horizons Technology, Inc.
April 16, 1998
Page 4
2. The opinions set forth in Section I are not binding on the Internal
Revenue Service or the courts. Additionally, the Firm's opinions set forth
herein are dependent upon the accuracy of the representations contained in the
Certificates signed by officers of Parent, Merger Sub and the Company and
attached hereto as Exhibit "A." The Firm has relied upon those representations
and any inaccuracy in the representations could adversely affect the opinions
stated in Section I.
3. In connection with this Opinion Letter, the Firm has examined and is
familiar with originals or copies, certified or otherwise identified, of such
documents and records and such statutes, regulations and other instruments as it
deemed necessary or advisable for the purposes of the opinions set forth herein,
including (i) the Registration Statement and (ii) the Reorganization Agreement.
The Firm has assumed that all signatures on all documents presented to it are
genuine, that all documents submitted to it as originals are accurate originals
thereof, that all information submitted to it was accurate and complete, and
that all persons executing and delivering originals or copies of documents
examined by it were competent to execute and deliver such documents.
4. The Firm is expressing its opinions only as to those matters expressly
set forth in Section I. No opinion should be inferred as to any other matters.
In addition, no opinion is expressed as to any other transaction, including the
Merger, if all of the transactions described in the Reorganization Agreement are
not consummated in accordance with the terms of the Reorganization Agreement and
without waiver of any material provision thereof. To the extent that any of the
representations, warranties, statements and assumptions material to the Firm's
opinion and upon which the Firm has relied are not accurate and complete in all
material respects at all relevant times, the Firm's opinion would be adversely
affected and should not be relied upon.
5. This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect to
the consequences specifically discussed herein. Furthermore, this opinion only
relates to the holders of Company capital stock who hold such stock as a capital
asset. No opinion is expressed as to the federal income tax treatment that may
be relevant to a particular investor in light of personal circumstances or to
certain types of investors subject to special treatment under the federal income
tax laws (for example, life insurance companies, dealers in securities,
taxpayers subject to the alternative minimum tax, banks, tax-exempt
organizations, non-United States persons, and stockholders who acquired their
shares of Company capital stock pursuant to the exercise of options or otherwise
as compensation or who hold their Company capital stock as part of a
<PAGE>
Horizons Technology, Inc.
April 16, 1998
Page 5
straddle or risk reduction transaction). Further, no opinion is expressed as
to the federal income tax treatment with respect to holders of warrants for
Company capital stock.
6. This Opinion Letter is issued for your benefit and the stockholders of
the Company and no other person or entity may rely hereon without the express
written consent of the Firm. This Opinion Letter may be filed as an exhibit to
the Registration Statement. Consent also is given to the reference to this firm
under the caption "Legal Matters" in the Registration Statement as having
rendered the opinion in the "Federal Income Tax Matters" section of such
Registration Statement. In giving this consent, the Firm does not thereby admit
that it comes into the category of persons whose consent is required under
section 7 of the Securities Act or the rules and regulations of the Commission
promulgated thereunder.
Respectfully submitted,
Jenkens & Gilchrist,
A Professional Corporation
By:
-------------------------------------------
William P. Bowers, for the Firm
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
San Diego, California
April 16, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
San Diego, California
April 16, 1998
<PAGE>
EXHIBIT 23.3
[LETTERHEAD]
March 4, 1998
Mr. Donald M. Barnes
Jenkins & Gilchrist
1919 Pennsylvania Avenue, NW
Suite 600
Washington, D.C. 20006-3404
Dear Mr. Barnes:
Please reference our opinion letter dated February 26, 1998 to The Board of
Directors of Horizons Technology, Inc. The purpose of that opinion was to
determine the fair market value of the Series A Preferred Sharesminority of
Horizons Technology, Inc. as of February 26, 19984/20/95. It is our
understanding that the Board of Directors of Horizons Technology, Inc. will
use this appraisal in connection with a proposed merger between Horizons
Technology, Inc. and the Titan Corporation ("the Merger").
In that opinion we expressly restricted its use in the section titled
"STATEMENT OF LIMITING CONDITIONS" with the following language: "Neither all
nor any part of the contents of this opinion letter shall be conveyed to the
public through advertising, public relations, news, sales, mail, direct
transmittal, or other media without the prior written consent and approval of
THE SLAVITT ELLINGTON GROUP."
We hereby consent, however, to the inclusion of the above referenced opinion
as an exhibit to any proxy statement distributed in connection with the
Merger. Additionally, we consent to the use of our corporate name in the
proxy statement distributed in connection with the Merger.
Very truly yours,
THE SLAVITT ELLINGTON GROUP
Michael T. Ellington
Managing Director
<PAGE>
COMMON STOCK
EXHIBIT 99.1
HORIZONS TECHNOLOGY, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 31, 1998
The undersigned hereby appoints Earl A. Pontius, James T. Palmer and
J.P. (Pat) Boyce, and each of them, as attorneys and proxies of the
undersigned, with full power of substitution, to vote all of the shares of
stock of Horizons Technology, Inc. which the undersigned may be entitled to
vote at a Special Meeting of Stockholders of Horizons Technology, Inc.
("Horizons") to be held at Horizons' offices at 3990 Ruffin Road, San Diego,
California, on Tuesday, March 31, 1998 at 9:00 a.m., local time, and at any
and all postponements, continuations and adjournments thereof (the "Special
Meeting"), with all powers that the undersigned would possess if personally
present, upon and in respect of the following matters and in accordance with
the following instructions, with discretionary authority as to any and all
other matters that may properly come before the Special Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. UNLESS A CONTRARY DIRECTION IS
INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1, AS MORE SPECIFICALLY
DESCRIBED IN THE PROSPECTUS/PROXY STATEMENT TRANSMITTED IN CONNECTION WITH
THE SPECIAL MEETING. ANY HOLDER WHO WISHES TO WITHHOLD THE DISCRETIONARY
AUTHORITY REFERRED TO IN PROPOSAL 2 BELOW SHOULD MARK A LINE THROUGH THE
ENTIRE PROPOSAL; AND FAILURE TO DO SO WILL BE DEEMED APPROVAL OF PROPOSAL 2.
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
PROPOSAL 1 To (i) approve and adopt an Agreement and Plan of Merger and
Reorganization dated February 26, 1998, among Horizons, The Titan
Corporation, a Delaware corporation ("Titan"), Sunrise Acquisition
Sub, Inc. ("Titan Sub"), a newly formed, wholly owned Delaware
subsidiary of Titan, and certain stockholders of Horizons, which is
attached as Appendix A to the Prospectus/Proxy Statement that has
been transmitted in connection with the Special Meeting, and
(ii) approve and consent to the merger of Titan Sub with and into
Horizons, pursuant to which, among other things, Titan Sub will
cease to exist and Horizons will survive as a wholly owned
subsidiary of Titan, all as described in said Prospectus/ Proxy
Statement.
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL 2 In their discretion, to act upon any matters incidental to the
foregoing and such other business as may properly come before the
Special Meeting.
Receipt of the Prospectus/Proxy Statement dated March 11, 1998 is hereby
acknowledged.
Dated _______________, 1998 _______________________________________
_______________________________________
SIGNATURE(S)
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS
HEREON. IF THE STOCK IS REGISTERED IN
THE NAMES OF TWO OR MORE PERSONS, EACH
SHOULD SIGN. EXECUTORS, ADMINISTRATORS,
TRUSTEES, GUARDIANS AND ATTORNEYS-IN-FACT
SHOULD ADD THEIR TITLES. IF SIGNER IS A
CORPORATION, PLEASE GIVE FULL CORPORATE
NAME AND HAVE A DULY AUTHORIZED OFFICER
SIGN, STATING TITLE. IF SIGNER IS A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP
NAME BY AN AUTHORIZED PERSON.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
DO NOT SEND IN YOUR STOCK CERTIFICATE WITH THIS PROXY. CERTIFICATES SHOULD
NOT BE SURRENDERED BY THE HOLDERS OF HORIZONS COMMON STOCK OR HORIZONS SERIES
A PREFERRED STOCK UNLESS THE MERGER IS APPROVED AND SUCH HOLDERS RECEIVE THE
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE
WITH THE TERMS OF SUCH LETTER OR TRANSMITTAL.
<PAGE>
PREFERRED STOCK
EXHIBIT 99.2
HORIZONS TECHNOLOGY, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 31, 1998
The undersigned hereby appoints Earl A. Pontius, James T. Palmer and
J.P. (Pat) Boyce, and each of them, as attorneys and proxies of the
undersigned, with full power of substitution, to vote all of the shares of
stock of Horizons Technology, Inc. which the undersigned may be entitled to
vote at a Special Meeting of Stockholders of Horizons Technology, Inc.
("Horizons") to be held at Horizons' offices at 3990 Ruffin Road, San Diego,
California, on Tuesday, March 31, 1998 at 9:00 a.m., local time, and at any
and all postponements, continuations and adjournments thereof (the "Special
Meeting"), with all powers that the undersigned would possess if personally
present, upon and in respect of the following matters and in accordance with
the following instructions, with discretionary authority as to any and all
other matters that may properly come before the Special Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. UNLESS A CONTRARY DIRECTION IS
INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1, AS MORE SPECIFICALLY
DESCRIBED IN THE PROSPECTUS/PROXY STATEMENT TRANSMITTED IN CONNECTION WITH
THE SPECIAL MEETING. ANY HOLDER WHO WISHES TO WITHHOLD THE DISCRETIONARY
AUTHORITY REFERRED TO IN PROPOSAL 2 BELOW SHOULD MARK A LINE THROUGH THE
ENTIRE PROPOSAL; AND FAILURE TO DO SO WILL BE DEEMED APPROVAL OF PROPOSAL 2.
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
PROPOSAL 1 To (i) approve and adopt an Agreement and Plan of Merger and
Reorganization dated February 26, 1998, among Horizons, The Titan
Corporation, a Delaware corporation ("Titan"), Sunrise Acquisition
Sub, Inc. ("Titan Sub"), a newly formed, wholly owned Delaware
subsidiary of Titan, and certain stockholders of Horizons, which is
attached as Appendix A to the Prospectus/Proxy Statement that has
been transmitted in connection with the Special Meeting, and
(ii) approve and consent to the merger of Titan Sub with and into
Horizons, pursuant to which, among other things, Titan Sub will
cease to exist and Horizons will survive as a wholly owned
subsidiary of Titan, all as described in said Prospectus/ Proxy
Statement.
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL 2 In their discretion, to act upon any matters incidental to the
foregoing and such other business as may properly come before the
Special Meeting.
Receipt of the Prospectus/Proxy Statement dated March 11, 1998 is hereby
acknowledged.
Dated _______________, 1998 _______________________________________
_______________________________________
SIGNATURE(S)
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS
HEREON. IF THE STOCK IS REGISTERED IN
THE NAMES OF TWO OR MORE PERSONS, EACH
SHOULD SIGN. EXECUTORS, ADMINISTRATORS,
TRUSTEES, GUARDIANS AND ATTORNEYS-IN-FACT
SHOULD ADD THEIR TITLES. IF SIGNER IS A
CORPORATION, PLEASE GIVE FULL CORPORATE
NAME AND HAVE A DULY AUTHORIZED OFFICER
SIGN, STATING TITLE. IF SIGNER IS A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP
NAME BY AN AUTHORIZED PERSON.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
DO NOT SEND IN YOUR STOCK CERTIFICATE WITH THIS PROXY. CERTIFICATES SHOULD
NOT BE SURRENDERED BY THE HOLDERS OF HORIZONS COMMON STOCK OR HORIZONS SERIES
A PREFERRED STOCK UNLESS THE MERGER IS APPROVED AND SUCH HOLDERS RECEIVE THE
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE
WITH THE TERMS OF SUCH LETTER OR TRANSMITTAL.
<PAGE>
EXHIBIT 99.3
HORIZONS TECHNOLOGY, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 31, 1998
Beneficial owners of shares of Common Stock (the "Horizons Common Stock")
of Horizons Technology, Inc. ("Horizons") held by Horizons' Employee Stock
Ownership Plan (the "ESOP") must submit an executed and completed proxy to the
North American Trust Company (the "Trustees") appointed herein as attorney and
proxy of the undersigned, in order to direct the Trustees as to the manner in
which the shares of Horizons Common Stock that they beneficially own will be
voted. IF INSTRUCTIONS ARE NOT RECEIVED BY THE TRUSTEES WITH RESPECT TO ANY
ALLOCATED SHARES OF HORIZONS COMMON STOCK PRIOR TO THREE (3) BUSINESS DAYS
BEFORE THE HORIZONS MEETING, THE TRUSTEES SHALL VOTE SUCH SHARES IN THE SAME
PROPORTIONS AS THE TRUSTEES ARE INSTRUCTED TO VOTE WITH RESPECT TO THE ALLOCATED
SHARES OF HORIZONS COMMON STOCK FOR WHICH INSTRUCTIONS ARE RECEIVED.
The undersigned hereby appoints the North American Trust Company as
attorney and proxy of the undersigned, with full power of substitution, to vote
all of the shares of stock of Horizons which the undersigned may be entitled to
vote at a Special Meeting of Stockholders of Horizons to be held at Horizons'
offices at 3990 Ruffin Road, San Diego, California, on Tuesday, March 31, 1998
at 8:00 a.m., local time, and at any and all postponements, continuations and
adjournments thereof (the "Special Meeting"), with all powers that the
undersigned would possess if personally present, upon and in respect of the
following matters and in accordance with the following instructions, with
discretionary authority as to any and all other matters that may properly come
before the Special Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. UNLESS A CONTRARY DIRECTION IS
INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1, AS MORE SPECIFICALLY
DESCRIBED IN THE PROSPECTUS/PROXY STATEMENT TRANSMITTED IN CONNECTION WITH THE
SPECIAL MEETING. ANY HOLDER WHO WISHES TO WITHHOLD THE DISCRETIONARY AUTHORITY
REFERRED TO IN PROPOSAL 2 BELOW SHOULD MARK A LINE THROUGH THE ENTIRE PROPOSAL;
AND FAILURE TO DO SO WILL BE DEEMED APPROVAL OF PROPOSAL 2.
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
PROPOSAL 1 To (i) approve and adopt an Agreement and Plan of Merger and
Reorganization dated February 26, 1998, among Horizons, The Titan
Corporation, a Delaware corporation ("Titan"), Sunrise
Acquisition Sub, Inc. ("Titan Sub"), a newly formed, wholly owned
Delaware subsidiary of Titan, and certain stockholders of
Horizons, which is attached as Appendix A to the Prospectus/Proxy
Statement that has been transmitted in connection with the
Special Meeting, and (ii) approve and consent to the merger of
Titan Sub with and into Horizons, pursuant to which, among other
things, Titan Sub will cease to exist and Horizons will survive
as a wholly owned subsidiary of Titan, all as described in said
Prospectus/ Proxy Statement.
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL 2 In their discretion, to act upon any matters incidental to the
foregoing and such other business as may properly come before the
Special Meeting.
Receipt of the Prospectus/Proxy Statement dated March 11, 1998 is hereby
acknowledged.
Dated , 1998
-------------- ----------------------------------------
----------------------------------------
SIGNATURE(S)
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON.
IF THE STOCK IS REGISTERED IN THE NAMES OF TWO OR
MORE PERSONS, EACH SHOULD SIGN. EXECUTORS,
ADMINISTRATORS, TRUSTEES, GUARDIANS AND
ATTORNEYS-IN-FACT SHOULD ADD THEIR TITLES. IF
SIGNER IS A CORPORATION, PLEASE GIVE FULL
CORPORATE NAME AND HAVE A DULY AUTHORIZED OFFICER
SIGN, STATING TITLE. IF SIGNER IS A PARTNERSHIP,
PLEASE SIGN IN PARTNERSHIP NAME BY AN AUTHORIZED
PERSON.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE
WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
DO NOT SEND IN YOUR STOCK CERTIFICATE WITH THIS PROXY. CERTIFICATES SHOULD NOT
BE SURRENDERED BY THE HOLDERS OF HORIZONS COMMON STOCK OR HORIZONS SERIES A
PREFERRED STOCK UNLESS THE MERGER IS APPROVED AND SUCH HOLDERS RECEIVE THE
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH
THE TERMS OF SUCH LETTER OF TRANSMITTAL.
